THE FEDERAL RESERVE COLLECTION SYSTEM Growth of the System The federal reserve collection system is in one sense volun tary and in another compulsory. No member bank is required to use the collection system, nor are any formalities or resolu tions required before it may be used. A member bank may send items for collection through the federal reserve bank regu larly, occasionally, or not at all; or may collect them through its correspondents as formerly, or in any other manner considered advantageous. But member banks are required to remit at par for all items properly drawn against them and presented by the federal reserve bank by mail for payment.
Among others, three facts have tended to limit this option of the banks to join the federal reserve collection system.
1. After the reserves formerly carried by country and reserve city banks with reserve city and central reserve city banks had, by the terms of the amended Federal Reserve Act, been trans ferred to the federal reserve banks, many banks did not have sufficient funds to carry reserves with the federal reserve bank and also a balance with their correspondents sufficient to warrant the correspondents in accepting the account; and since much of the collection service formerly performed by the correspondent was now done or could be done through the federal reserve bank, at less cost possibly, and since the bank could look hereafter to the federal reserve bank for accommodation in emergencies, the outlying bank did not feel as great need of retaining its former correspondents.
2. The force of competition between banks using and those not using par collections tends to force a reduction in collection charges (and profits therefrom) and, as it did in New England, tends to force all banks to join the system or at least takes away the advantages of staying outside it.
3. The federal reserve banks, knowing that the system works most efficiently if all banks belong, have undertaken in some districts to force recalcitrant banks to join by creating public sentiment, by appealing to the non-par banks to reciprocate, and by presenting items through express companies at the counters of the non-par banks for payment in currency. The result has been that the par collection system has come to include practically all the banks of the country.
Transit Items Collectible Under System The federal reserve banks stand ready to receive from member banks: i. All items drawn on member banks of all districts.
2. All items drawn on federal reserve banks.
3. All items drawn on non-member banks which are members of the clearing house situated in the federal reserve cities and branch cities.
4. All items drawn on other non-member banks which can be collected at par.
Lists of banks on which items are received are published monthly by the Federal Reserve Board.
By an amendment adopted June 21, 1917, non-member state banks and trust companies, even though too small to be eligible for membership in the federal reserve system, were permitted to avail themselves of the par collection scheme, provided they covered at par checks on themselves sent for collection by the federal reserve banks, and provided they kept a compensating balance with the federal reserve bank in an amount to be deter mined under the rules of the Federal Reserve Board. The object was to make the par collection system as universal as possible, and therefore as beneficial as possible to the member banks as well as to the public.
Routing and Clearing of Items In receiving items the federal reserve bank acts only as collec tion agent of the sending bank and assumes no responsibility other than due diligence and care in forwarding them promptly. It is also authorized to send them for payment direct to the bank on which they are drawn or to another agent for collection, at its discretion. Items drawn on member banks in the district are forwarded directly to the member. Items drawn on non-members in the district are sent to member banks where satisfactory ar rangements are made, or, at the federal bank's discretion, direct to the drawee bank for remittance. Items drawn on member and non-member banks in other districts are sent to the respective federal reserve banks of those districts for collection and settle ment. If a member bank has a sufficient volume of items on certain points or districts to warrant more direct routing of such items, special arrangements are made to meet such conditions on request, if practicable. To secure direct routing, the reserve bank will not accept any item drawn on a bank outside of the district, when the item bears the indorsement of a bank located outside the district. The routings are somewhat different when the reserve bank has branches.