Exchange Rates and Collection Charges To protect themselves the members of the clearing houses of the reserve cities joined in an agreement to fix minimum ex change rates and time schedules for deferring credit. The New York Clearing House, for instance, decreed certain points to be "discretionary points"; the charges on items payable at these points were at the discretion of the collecting bank; these items included: I. Items collected for the accounts of or in dealings with the governments of the United States, and of New York State and City.
2. Items payable in certain specified cities near New York, known as "par points." 3. Items payable only at institutions which had agreed to remit in New York funds at par on the day of receipt thereof for all cash items drawn on it and sent by the members of the New York Clearing House or by the clearing house country department.
The New York Clearing House fixed certain minimum ex change rates on all other points, grouping them in two groups, based on the time it took to get receipts from collections, and charging for the first group a minimum rate of i/io per cent and for the second group 1/4 per cent; no charge was to be less than to cents per item, but all items received from any one person at the same time and payable at the same place might be added together and treated as one item for the purpose of fixing the amount chargeable. These rules were not to be evaded by rebatement of charges by way of interest payments or otherwise. Violation of the rules subjected the offending bank to heavy fines and possibly expulsion from membership.
The effect of such clearing house agreements was to reduce the volume of items sent to the banks of that city for collection, and to divert them to points where charges were lower. By this means out-of-town checks were repelled and the city was made less a collecting center; Philadelphia and Albany, for instance, gained as collecting centers, and it became the custom for New Jersey banks to collect through one of these cities rather than New York. The New York banks were put in the contradictory position of soliciting accounts by paying interest and doing ser vices on the one hand, and on the other of repelling the checks on these country banks by prohibitive charges. They also imposed upon their correspondents, for they enjoyed a par list for making some of their collections and they did not share this list with their correspondents; that is, when one correspondent sent checks to the New York bank drawn on another correspondent of that bank, the New York bank collected without expense by debiting it at once to the drawee's account.
Effect of Collection Charges Probably the most important effect of these local differences in charges for collection was the circuitous routing of the items. Each bank tended to send its collections to that bank and place where the charges were lowest; it put into one envelope items pay able in diverse directions and widely separate places. The col lecting bank followed the same practice, the result being that items traveled most roundabout courses before they reached their destination, often crossing and retracing their route, and the items were afloat in the mail for long periods, the total volume of this "float" being estimated as in excess of $500,000,00o.
This circuitous routing of checks became most absurd. Hal lockl describes one routing as follows: Started at Westerly, R. I., six miles from Stonington, which it reached only after many days and a thousand miles of travel by the following route: Westerly to Providence, Providence to Boston, Boston to New York, New York to Boston again but to another bank; Boston to New York again, but to another bank; New York to New Haven, New Haven to Saybrook, Saybrook to New London, and New London to Stonington. It passed through Boston twice, New York twice, and New Haven four times. It was put through nine banks, two of them in Boston and two of them in New York.
described the route of a check in 1899 as passing through the following banks successively: Second National Bank of Hoboken, Harvey Fisk and Sons of New York, Globe National Bank of Boston, First National Bank of Tonawanda, National Exchange Bank of Albany, First National Bank of Port Jefferson, National Bank of Far Rockaway, Chase National Bank of New York, It M. Reeve of Riverhead, Queens County Bank of Brook lyn, and the drawee Peconic Bank of Sag Harbor. Not all checks went so roundabout a journey, but these actual cases illustrate the absurdity of the situation that developed.