Member banks are not required to send in checks for clearing; they are permitted and encouraged to do so. They are required, however, to remit at par for any checks against them which the reserve bank may present thru the mails or otherwise. They bear none of the expense unless they send in checks to be cleared; when they do send in checks they are charged pro rata by the reserve bank according to the number of items (not the amounts) presented by them for clearing. The cost for the first three months ran from one to two cents per item.
Nonmember banks are not permitted to clear. Checks against them are received at par and cleared only so long as they remit at par. They are almost compelled to remit at par when member banks are doing this, because of the loss of prestige suffered if their checks are riot worth as much in other cities as are the checks of competitive member banks. Par lists of member banks and nonmember banks, on which items are received, are published from time to time.
4. When proceeds are az:ailable.—Checks are cred ited at par immediately upon receipt, subject to final payment. The funds are not available for with drawal or to be counted as a part of the minimum reserves with the reserve bank, however, until actu ally paid or until sufficient time for payment has elapsed. A schedule is published by each reserve bank showing the number of days required for collect ing on various points in the country. For example, the Federal Reserve Bank of Chicago issues a schedule containing four divisions : 1. Points on which checks are available at once.
2. Points on which checks are available in two days.
3. Points on which checks are available in four days.
4. Points on which checks are available in eight days.
A member is forbidden to allow its reserve on de posit with the reserve bank to fall below the legal limit, under penalty of a fine equal to two per cent above the ninety-day discount rate at the reserve bank.
It is proposed that all checks and drafts received shall be forwarded for collection as rapidly as pos sible. The saving from this direct routing should be considerable.
5. Member banks maintain are four ways by which a member bank, say in Chicago, can build up its balance at the reserve bank.
1. Deposit Chicago exchange.
2. Deposit out of town items.
3. Ship currency to the reserve bank, at the expense of the reserve bank.
4. Rediscount, leaving proceeds on deposit for exchange purposes.
A nonmember bank cannot remit for checks drawn on it except by sending cash. The cost of shipping
cash is borne by the reserve bank.
The clearing plan places nonmember banks at a decided disadvantage as compared to member banks. They are practically compelled to remit at par when called upon to do so, because of competition from member banks. This deprives them of the income which they formerly received thru the practice of making a deduction when remitting. At the same time they do not have access to the inexpensive re serve clearing machinery. They cannot send in items to be cleared. Moreover, they cannot maintain bal ances with the reserve banks for exchange purposes, as can member banks. They are not permitted to keep any deposit with reserve banks or to rediscount, but must remit cash for each batch of checks presented for payment.
6. Indorsement and presentation of items.—Mem hers' banks are instructed to indorse without restric tion all items forwarded to the reserve banks for clear ing. This makes the member banks liable on all items cleared. The reserve banks merely act as agents of the banks and do not assume any liability other than ordinary care and promptness in presenting items for collection.
Checks on member banks within the district are forwarded directly to them. Checks on nonmember banks are forwarded thru collection agents, pre sumably member banks. Checks on banks in another district may be sent to the reserve bank of that district.
Under the old clearing system, doubt was raised from time to time as to the legality of presenting thru the mail a check to the bank on which it is drawn. In a few states the courts have held that this procedure was improper, and that banks so doing were guilty of negligence. It is pointed out that the holder of a note would not think of mailing it to the drawer for collection, inasmuch as the drawer might tear "up the note and thus destroy all evidence of his indebted ness. From analogy it is reasoned that a check should be presented, not directly thru the mail to the drawee bank, but indirectly thru another bank in the same town. The analogy is a poor one. The destruction of a check does not alter the amount of the bank's li ability; the deposit still remains. What difference does it make whether the amount is paid to the deposi tor, who draws the check, or to the payee, who holds it? The collecting bank should be held only to a prompt and actual presentation of the check. This presenta tion can be made by sending the check thru the mail as well as in any other way.