A member bank sending a letter enclosing bonds or coupons for collection, due or past due, payable in New York City, is given immediate credit in its reserve account for the face amount, sub ject to final payment, and is sent an advice of credit immediately. The proceeds of any bonds or coupons not due, sent for collec tion, or of bonds or coupons due or past due payable outside of New York City, are credited to the sending bank's account when payment is received. The reserve bank will bear the insurance charge on registered mail packages containing such bonds or coupons for collection. Maturing coupons from United States securities and British government securities, deposited a week or ten days in advance of maturity, are paid by the reserve bank at maturity, either by crediting the member bank's account or issu ing a check.
No service charge for collection of the above items is made by the reserve bank other than one of 15 cents for returned unpaid collection items payable outside the boroughs of Manhattan and Bronx which have not been protested. No charge is made on recalled items. A member bank, for presenting and remitting for collection items, may make a reasonable charge if it so desires; if made, such charge is deducted from the face amount of the item and credit is given for the actual proceeds.
Every collection item received by the reserve bank may, at its discretion, be sent for payment direct to the bank on which it is drawn, or at which it is payable, or to a bank located in the place where the item is payable, or to another agent for collection, whether or not the item is accompanied by bill of lading, securi ties, or other documents. The reserve bank assumes no responsi bility other than for due diligence and care in forwarding such items promptly, and it becomes liable only when payment of actual funds is in its possession.
Unless otherwise instructed, all unpaid items over $io are to be protested and returned immediately, with the reason for non payment; and the non-payment of items of $500 or over is to be telegraphed. Payment may be made either by advice of credit or by New York exchange.
Advantages of the Federal Reserve Collection System To the degree to which the federal reserve collection system is used, the charging of exchange is discarded. This relieves the business community, but certain banks are shorn of a source of profits. For the loss of exchange the member banks have certain compensations: they enjoy a wider par list, fewer accounts need be kept, and the legal reserves are lower.
The necessity, which previously existed, for members to keep reserve balances with city correspondents in order to get their collections made and to be assured accommodation in emer gencies, has been obviated by the federal reserve banks. The keeping of reserves in both places is expensive and may be burden some. The tendency will be to drop the correspondent exchange accounts, unless the correspondent assumes to perform new and additional services.
Under the federal reserve collection system the " float " is much reduced. Instead of the indirect routing of checks to save postage and exchange charges, the new plan substitutes direct routing, even direct to the drawee bank; the volume afloat in the mails is therefore materially reduced. The federal reserve banks also refuse to make the credits immediately available at time of deposit, but defer the availability until payment has been re ceived or time sufficient for receipt of payment has elapsed. The
float no longer constitutes part of the reserves of member banks. The new system forces the country bank and the reserve city bank to carry each its own portion of the float or to shift it, where it rightfully belongs, onto its depositors.
On balances formerly carried with the reserve correspondents, the country banks were allowed interest in most cases. The federal reserve banks pay no interest on reserve or exchange balances.
Opposition to Federal Reserve Collection System Because of the loss of exchange, the burden of the float, and the loss of interest on reserve balances, the country banks have, in part, opposed the extension of the new system. The reserve city correspondents have felt the loss of the country bank accounts. The temporary duplication of systems has been expensive to the banks. The opposition to the new system has taken organized form through the American Bankers' Association, the state bank ing associations, etc.
i. A Committee of Twenty-five, appointed by the American Bankers' Association in 1916, was directed to effect amendments to Section 16 of the Federal Reserve Act and to institute proceed ings to have the constitutionality of that section determined by the courts. This committee was continued in a Committee of Five during 1917 and 1918. The efforts of the original committee resulted in the passage of the Hardwick Amendment in 1917, which authorizes both member and non-member banks to make "reasonable charges, to be determined and regulated by the Federal Reserve Board, but in no case to exceed io cents per Sioo or fraction thereof, based on the total of checks and drafts pre sented at any one time, for collection or payment of checks and drafts and remission therefor by exchange or otherwise; but no such charges shall be made against the Federal Reserve Banks." This amendment left the control of exchange charges in the hands of the board which had stood opposed to them. Counsel for the board ruled that this amendment applied to non-member state banks that do not become depositors in the federal reserve bank and thus do not avail themselves of the facilities of the federal reserve clearing system. While the banks are still author ized to charge each other for collection service, they are prohibited from charging the federal reserve banks, which are required to receive from member banks at par all checks which are payable upon presentment. The federal reserve bank may, therefore, find itself in possession of checks drawn upon non-member banks which it cannot send by mail to the drawee banks for the reason that those banks decline to remit at par, and it becomes necessary, therefore, as the law does not provide any penalty upon non member banks for refusing to remit at par, for the reserve bank to devise other methods of collecting checks upon such non assenting banks. It has presented them through express com panies and personal agents. The legal right to collect checks in this manner cannot be disputed, for the check is by its very nature subject to payment over the counter of the drawee bank upon presentment. Hence, whether the country bank becomes a member or not, it is forced to lose exchange on items presented through the federal reserve bank, and as the system spreads the compulsion to join gains force.