FEDERAL RESERVE BANK CLEARINGS 1. Collection of country checks.—The methods by which banks in the United States collect out-of-town checks, that is, checks on banks in dif ferent communities, have been mentioned in the pre ceding chapter. Few people realize the deplorable waste in time, money and labor which exists under our collection system.
The writer knows of a typical example of what may happen. A young man drew a check on a bank in Newport, Tennessee, and deposited it with a bank in Ithaca, New York, asking the banker to notify him as soon as the funds became available, inasmuch as he was going to need some money within a few days. After about ten days of waiting with no re port, he went to the bank to make inquiry. Nothing had been heard of the check. He could wait no longer, and wired for funds. Several days later, when he had almost forgotten the entire matter, he was asked to come down to the bank and talk over his draft. By tracing indorsements on the back of it, he found that it had been sent to Albany, from there to New York, thence to Nashville, then to Knoxville, and finally to the drawee bank in New port. The Newport bank discovered that the draft had been filled out incorrectly in the first place and that it could not be paid. Word was sent back around the circuit, all the bookkeeping entries were corrected, and the draft was finally returned to the Ithaca bank. Approximately five weeks elapsed in the meantime. Not over forty-eight hours is required for a letter to reach Newport from Ithaca. This is not an extreme case.
Because of the time, trouble and expense involved in collecting out town checks, the use of checks on banks in one city for payments to creditors located in another city at a distance is looked upon with disfavor. The creditor who receives the check must either bear the cost of collection or load it on his bank, if he is able to do that.
Much of this difficulty could be eliminated if the United States bad a branch banking system instead of the present system, which is composed of, some 27,000 small, independent banks. If there were a hundred
banks with fifteen thousand branches, the matter would be greatly simplified. Many checks would be redeposited in another branch of the drawee bank and no collection problem would be involved. Checks on different banks could be put thru centrally located clearing houses, as they are in Canada.
2. Federal Reserve system.—The United States does not have a system of branch banks. Their Fed eral Reserve system, however, is to a limited extent comparable to a branch system. There are twelve re gional banks operating under the general supervision and control of the Federal Reserve Board at Wash ington. Each of the reserve banks may be expected to establish branches in time.
Early in 1915, the Reserve Board announced a new plan for collecting checks within the various Federal Reserve districts. In a ruling, dated May 1, 1916, the original scheme was made much more compre hensive, and the extended system was put into actual operation on July 15, of that year.
3. Federal Reserve clearing.—The Federal Re serve Act of 1913 empowers the Reserve Board to re quire each Federal Reserve bank to "exercise the func tion of a clearing house for its member banks." Under this authority the Board requires each of the twelve reserve banks to receive at par from its mem ber banks, checks drawn on all member banks whether in its own district or other districts, and also checks drawn on such nonmember banks as agree to remit for their checks at par. Each reserve bank must also receive from other reserve banks, checks on all of its own member banks and upon nonmember banks in its district whose checks it can collect at par.
Banks have been accustomed to make a charge for remitting cash in payment of checks drawn against them and presented thru the mails. The excuse for the charge is the cost and trouble of shipping cur rency. Country banks, particularly, make a consid erable revenue out of exchange charges. This is to some of them what the farmer calls his "cash crop." It furnishes ready money in the business.