All items drawn on members of the clearing house in the federal reserve city or branch city and received in time for clear ing are immediately credited at par by that city's federal reserve bank and are at once available as reserve or to pay checks drawn.
For all other items immediate credit entry at par is given, but such credit is not available as reserve or to pay checks drawn until the proper period indicated on the par list schedule has elapsed. These periods are based on the mail time required to reach the paying bank plus the mail time for the paying bank to get remittance to the federal reserve bank. All points of the country are grouped on this basis of average mail time into divi sions of I, 2, 4, and 8 days. The sending bank sorts the items into these divisions.
The paying bank may remit to the federal reserve bank in one or more of several forms: I. Currency may be shipped at the expense of the federal reserve bank.
2. Remittance may be made out of the proceeds, when avail able, of items sent by the paying bank to the federal reserve bank for collection. The Federal Reserve Act intended that the member should be enabled to re-establish reserves by such deposits and by rediscounts. This makes the reserve very mobile, elastic, and useful.
3. The federal reserve banks will accept exchange on the clearing house banks of the federal reserve city; for instance, the Boston bank will accept either Boston or New York funds; the New York bank will accept New York funds; etc.
The Federal Reserve Act provides penalties against the in fringement of reserves required with the federal reserve bank; the member bank reports monthly the average reserve required to be kept, and the federal reserve bank compares this figure with the average actual reserve shown on its books and imposes a certain penalty if deficiencies are found; the Federal Reserve Board has fixed this penalty at a rate of interest on the average impairment equal to 2 per cent above the discount rate for go-day paper. By consulting the schedules of deferred credit, the sending bank can guard against deficiencies of reserve and the imposition of penalties.
Since June, 1918, the federal reserve banks have absorbed the expense of conducting their transit departments, an expense which up to that date had been assessed upon the member banks on a per-item basis as a "service charge." They also absorb the
cost of telegraphic transfers; thus a bank anywhere in the United States can secure an instantaneous transfer to any one of the 12 federal reserve cities or 20 branch cities without any expense whatsoever, and the sum total of these transfers is settled daily through the gold settlement fund.
Non-Transit Items Collectible Under System The collection of non-transit items was begun by some of the federal reserve banks in 1918. The regulations of the collection department of the Federal Reserve Bank of New York' may be taken for illustrative purposes.
The classes of items received for collection include all time items; sight and demand drafts with or without securities, bill of lading, or other documents attached; drafts on savings banks; matured bonds and coupons; and other forms of collection items. Bankers' acceptances payable at New York clearing house banks and bonds and coupons payable in New York City are not re ceived from clearing house members. The assumption is that these will be collected through the clearing house.
Procedure in Making Collections Each member bank lists its collection items in a separate letter and, in describing the respective items, gives the member bank's collection number, the name of the payer, instructions to protest or not to protest or other special instructions, and the date, maturity, and amount of each item sent.
Upon receiving payment of collection items, advice of pay ment is given by the reserve bank to the member bank originally forwarding such items, and its reserve account is credited. Ad vice is also given such member bank if the item is returned unpaid, and if so returned, whether protest has been made. When pay ment is made in New York or other exchange, credit is given sub ject to final payment.
By arrangements made with all the other federal reserve banks the proceeds of bankers' acceptances payable in federal reserve cities or branch cities arc available, subject to payment, on the day of maturity. Proceeds of bankers' acceptances payable else where are available, subject to payment, one or more days after maturity, in accordance with a published schedule.