If the reserve banks do not wish to hold the bonds as a basis of circulation, they may turn them over to the government. Upon application of any reserve bank, approved by the Reserve Board, the Secretary of the Treasury may issue in exchange for United States two per cent gold bonds bearing the circulation privileges but against which no circulation is outstand ing, one-year three per cent gold notes of the United States without the circulation privilege for not over one-half of the bonds presented, and thirty-year three per cent gold bonds without the circulation privilege for the remainder. The government reserves the right for a period of thirty years to sell back to a re serve bank for gold any one-year notes which it may have redeemed, not to exceed the amount issued to the bank in the first instance. Upon application of any reserve bank, approved by the Reserve Board, the Secretary of the Treasury may issue at par thirty year bonds in exchange for the one-year notes. It should be noted that the Secretary of the Treasury is not required to convert any two per cent bonds unless he wishes to do so.
National bank notes may now be retired in any of the following ways: (a) If the national banks want to sell, reserve banks may be Compelled to buy bonds to the amount of not over $25,000,000 in any one year.
(b) Reserve banks may buy bonds in the open market to any amount, whether from national banks or not. Of course, bonds in the open market do not have circulation outstanding against them, altho they bear the circulation privilege. The purchase of bonds in the open market prevents so much new issue by na tional banks. It does not retire any circulation.
(c) National banks may present their notes in any amount for cancellation.
(d) National banks may send to the Federal Treasury lawful money for the retirement of their notes, but the aggregate amount retired in this way may not exceed $9,000,000 in any one month.
It is apparent from this summary that national banks act as they like about retiring their notes, ex cept that an upper limit is set. They may issue more if they wish. Even if the notes are retired, their place may be taken by a similar bond-secured circulation issued by the Federal Reserve banks.
During the year 1916, the reserve banks bought so many bonds in the open market that they were not required to buy any thru the Federal treasury. The amount of two per cent bonds converted during the year was $30,000,000. Of this amount, $14,239,000 was converted into one-year notes, and $15,761,000 into thirty-year bonds. The Secretary of the Treas ury announced on October 28, 1916, that he would convert not more than $30,000,000 during the year 1917.
The provision of the National Banking Act which required national banks, upon organization, to pur chase and deposit with the Federal treasury a certain amount of registered United States bonds, is re pealed. National banks do not need to buy bonds now unless they wish to issue notes.
8. Reserve bank a preceding chap ter the inefficiency of our system of clearing country checks was mentioned. A plan which should relieve the situation to a great extent was put into operation by the reserve banks on July 15, 1916. The Act de dares that the Board may require each reserve bank to "exercise the function of a clearing house for its member banks." We shall outline the plan briefly.
Each reserve bank will receive at par from its mem ber banks ( and from any non-member state' banks and trust companies which maintain with the reserve bank a balance sufficient to offset the items in transit held for its account by the reserve bank) checks drawn on all member banks, whether in its own dis trict or in other districts, and checks drawn on non member banks whose checks can be collected at par.
All member banks are required to pay checks at pat- when presented. In order that all banks may know which non-member banks have agreed to pay checks at par, the Board publishes from time to time a "par list" which contains the names of all such banks. Before the establishment of the clearing sys tem banks were accustomed to make an "exchange" charge for remitting funds to redeem their checks, and many still follow the practice. The charge was explained by the cost of shipping currency, the trouble involved, etc. Member banks no longer need to ship currency except to the reserve banks. Mem ber banks are not compelled to deposit checks to be cleared. They may continue using their regular channels of collection which were developed before the clearing system was started. They are simply re quired to pay their own checks at par when presented, and it is decided that presentation may be made by mail as well as over the counter. Non-member banks which choose not to clear thru the reserve banks can make their checks pass at par thruout the country, nevertheless, by agreeing to pay them at par, for then the reserve banks everywhere will receive them from member banks at par.
The actual cost of clearing and collection is paid by the reserve banks and assessed against the "clear ing" banks in proportion to the number of items cleared for them. During the first four months of operation the cost ran from one to two cents per item. No charge can be assessed against a member bank which does not choose to clear.