Owing to the system of collections and exchange that had grown up under a banking system based on scattered reserves the introduction of a new organization of clearings was attended by numerous difficulties. These difficulties, the Board pointed out in its 1915 report, were both technical and legal. The technical difficulties grew mainly out of the objection of bankers to the withdrawal of their customary exchange charges. The Board2 recognized the fact that the clearing problem is essentially a reserve problem, hence as the Reserve Act "had granted a period of three years within which to effect the final transfer of reserves to federal reserve banks (balances with correspondents counting as reserves in the meantime)," the Board granted that "there was a certain ground for objection to the immediate introduction of complete clearance at federal reserve banks." The Board also recognized that as long as most of the state banks remain outside the system "it may be necessary for some member banks to collect and clear through their correspondents in reserve cities." The Board states that "so complex was the situation and so serious the difficulty involved in the compulsory application of any system, however carefully conceived, that a voluntary rather than a compulsory system was decided upon."

Difficulties in reorganizing clearings

1 1916 Report of Reserve Board, p. 110.

2 Ibid., p. 15.

Two of the reserve banks had instituted compulsory intra-district clearings systems before the Board promulgated its voluntary plan. Early in December, 1914, the St. Louis and the Kansas City reserve banks had started compulsory clearances. The St. Louis bank later made its system voluntary and fully 80% of the banks remained. In June, 1915, however, the voluntary system was generally introduced.

On March 4, 1915, the Reserve Board announced its determination to introduce a voluntary plan for clearances at all federal reserve banks where a clearing plan was not already in operation. The Board did not attempt to prescribe details but left the matter to the federal reserve banks. Substantially similar circulars were sent out by the reserve banks to their several member banks. The circulars announced a voluntary plan covering at first simply checks and drafts within each district. There was, however, no intention to supersede the local clearing houses.

The rules provided that each bank joining the system authorized its reserve bank to charge immediately on receipt, against its account, subject to payment by such bank at its banking house, checks and drafts drawn upon it and payable on presentation, deposited by other banks of the system. Each bank undertook to provide the funds above required reserves that might be necessary for this purpose. The reserve bank was to mail at the close of each day the items received, and the member banks were to advise the reserve banks the day of receipt and of credit for such items. Unpaid items were to be returned for credit. The reserve banks were to be authorized to send items direct to the banks on which they were drawn, or, at their discretion, for collection to other banks. Banks might withdraw from the clearing system on 30 days' notice. Lists of members of the system were to be published from time to time. No exchange charge was to be made or paid by the reserve banks because the system was regarded as reciprocal and of mutual benefit.

Plan of St. Louis and Kansas

City reserve banks

Voluntary system introduced

Rules of system

The banks did not, however, take enthusiastically to the plan. About 1,300 banks were included in the St. Louis and the Kansas City districts. About 1,150 banks in other districts joined the system. To quote from the Board's 1915 report (p. 16):

This is considerably less than 25% of the institutions eligible for membership, and the proportion has been so small as to prove a severe disappointment to those who had confidently expected that the foresight and enlightened self-interest of the member banks would speedily accomplish the desired result. . . . This slowness is largely due to the failure of jobbers and merchants to appreciate the advantages of the clearance system and to enlarge its membership by insisting that their own banks join and cooperate in the plan.

The Board then went on to say that the subject had been reopened. It stated that it was the "plain conception" of the Reserve Act "that the reserve banks should, to a very large extent, if not entirely, perform the work" being done by correspondent banks. "This means that the reserve balances to be carried in the future by the reserve banks instead of by the correspondent banks should serve as the basis for a system of clearing and collecting the exchanges of the country." The Board promised that "whatever can be done to bring about the prompt and effective use of this new system of bank settlement will be done."

System not successful

A few months later, namely, on May 1, 1916, the Board issued a circular announcing its country-wide clearing system. The salient points of this circular can be best given by quoting from the press statement prepared by the Board and reproduced in the May, 1916, Bulletin (p. 260).

(1) The federal reserve banks will accept at par all checks from member banks, whether drawn against other member banks, non-member banks, or private banks. An exception is made at the outset in the case of checks drawn against non-member banks which cannot be collected at par.

(2) All checks thus received from member banks will be given immediate credit entry, although amounts thus credited will not be counted as reserves nor become available until collected.

(3) In order to enable member banks to know how soon checks sent in for collection will be available either as reserves or for payment of checks drawn against them, time schedules, giving the minimum time for collection, will be furnished by each federal reserve bank to its member banks.