To protect themselves it is common for the banks to co operate and establish minimum collection charges; this is usually done through the clearing house. The rates established may or may not provide for profits. Intercity competition and corn petition with non-clearing house institutions prevent rates that arc too high.
But in towns with one bank, or with two or more banks that abide by agreed rates, and where banking facilities are essential to the business of the area, the banks are in a position to charge collection rates that include a good profit. In fact, no small part of the livelihood of many small banks, particularly in the South and Mid-west, has come from this source. If such a bank is in a position to charge excessive rates for remitting for items payable by it or collected through it, and on the other hand enjoys a large par list and can get its items collected at par or at low rates, it profits by the situation. If rates were equal all over the country and if the collections made for it by other banks equaled those made by it for other banks, it is obvious that no net profits would accrue to any one bank, and such charges would become absurd. In any case it means that the business world would be taxed enough to support these banks whose economic service scarcely warrants their existence.
Opposition of Small Banks to Par Collection System Naturally those banks which depend upon collection profits for part of their livelihood are opposed to the introduction of a par collection system. When the Boston Clearing House estab lished its country department in 1899 it had to force many recal citrant banks into the system. Likewise the small country banks have fought the extension of the federal reserve par collec tion system. The Boston Clearing House and the federal reserve banks have employed several devices for forcing the opposing banks into the system.
I. One device is to present items on the antagonistic bank in large aggregated amounts, thus forcing it to be ready at all times to pay over its counter large amounts of cash. The keeping of such large amount of idle till money detracts from the profits made on collections. To operate this device on a bank in a town where there is no member bank, it is necessary for the clearing house or the federal reserve bank to collect items on non-par banks through express companies and bear the cost of shipping the items and the remittances. The Boston Clearing House tried this method in 1901, but the opposing banks retali ated by paying in silver. The government shipped silver free to these banks; but the clearing house had to pay the expressage from the banks to Boston. The express charges cost more than
the exchange charges, but the clearing house debited this to General Expense. The federal reserve banks in some districts have resorted to this expedient of collecting through express companies.
2. A second device is simply for the member banks to refuse to handle checks not payable by remittance at par, and return them to depositors and correspondents. Such checks would be practically protested paper. The depositors would soon bring pressure to bear upon their banks to remit at par.
3. A third device is to appeal to the banks to reciprocate and meet the par banks half-way. Most of the banks may not charge exchange, but all have the use of this free list; it is not fair that one bank should bear the exchange charges for the other; neither bank should charge or both should. In case the non-par banks refuse to comply with this appeal to fair play, the par banks should bind themselves under severe penalty to charge for col lecting checks received from non-par banks and drawn upon par banks; this would deny the non-par the use of the par list, whence come their profits.
Elements of Collection Charges Collection charges are, therefore, separable into six elements: 1. Clerical expense and postage at the collecting bank.
2. Profits to the collecting bank.
3. Clerical expense at the drawee bank.
4. Profits to the drawee bank.
S. Interest on the face of the item for the time from date of deposit for collection to date of receipt of remittance (if immediate credit and availability are given).
6. Cost of maintaining a balance at the reserve city or of shipping funds to that city.
The first four or five elements are sometimes lumped to gether and called the "service charge." The last item is strict exchange. The fifth item is obviated by deferring the credit's availability. The first and third items are reduced by the establishment of country clearing houses; and the second and fourth items are eliminated by establishment of par collec tions. The charge for the first four items should logically be quoted in cents per item, and for the last two items in per cent of face value.
Existing Exchange Charges The Committee of Twenty-five, who made an extensive study in 1917 of the prevailing charges for remitting to cover checks received through the mails from sources other than the federal reserve system, reported as follows: The minimum rates to be charged by members of the New York Clearing House for checks and drafts, under rules effective on August 12, 1918, were as follows: