10. Advantages and disadvantages.—The advan tages of the Federal Reserve clearing system may be summarized as follows: 1. Checks are presented promptly and directly to the drawee bank.
2. The custom which drawee banks had of deduct ing a certain amount from the face of a check when remitting to collecting banks will be gradually dis continued. All member banks now remit at par ; nonmember banks will be forced to do so by com petition of member banks.
3. The collection charge will be reduced to ap proximately what it costs the bank to collect.
4. Country banks will no longer need to main tain such large balances in the financial centers in exchange for the privilege of having miscellaneous out-of-town items received at par for collection. City banks, instead of making a charge for each item collected, have been accustomed to require country banks to maintain balances with them as compensation for collection service.
There are two • important objections to the new plan: (a) Small banks will lose the revenue which they formerly derived from the practice of deducting a certain amount when remitting for checks on them selves. This is a serious matter to some of the banks.
(b) City banks will find their relations with cor respondent banks thruout the country weakened and, in some cases, broken off altogether. The collection service will be rendered to an increasing extent by the reserve banks. Accounts will still be kept with New York banks and, to a lesser degree, with banks in other financial centers, against which the depositing banks will draw exchange. New York exchange will con tinue to be an important form of remittance between business men all over the country; but its use will be come less and less necessary as the machinery em ployed for collecting checks from the country banks is improved.
Aside from the mere loss of profit to both cor respondents, there are other reasons for regret in the breaking up or the weakening of these relationships between banks in various parts of the country. Cor respondents kept each other informed about business conditions in their respective communities. In
United States the criticism has been very frequently heard that most of our bankers are merely local money lenders and that they do not have adequate information about business conditions thruout the country. The breaking up of collection arrange ments will make them all the more provincial. This consideration is not sufficient, however, to outweigh the advantages of cheapness and convenience which will be gained from the new plan. Some other way must be found for informing our bankers about na tion-wide business conditions. The best means of doing this would be the establishment of a branch banking system.
11. Success of the new clearing sys tem grew rapidly from the very beginning. The fol lowing figures give a comparison between the business done the first month with that done during the fourth: 12. Gold Settlement Fund.—The Federal Reserve Board has exercised its power to provide a clearing house for the twelve reserve banks. The Gold Settle ment Fund has been established at Washington. Each of the reserve banks is required to maintain a balance there of at least $1,000,000 in gold or gold certificates. At the close of business every Wednes day, or Tuesday if Wednesday is a holiday, each re serve bank telegraphs to Washington the amounts of its indebtedness to each of the other reserve banks. By the simplest bookkeeping operation these amounts are offset and the proper balances transferred on the accounts of the Gold Fluid.
At the settlement of November 16, 1916, over $200, 000,000 was cleared for the reserve banks with balances aggregating only $11,755,000. Even the balances were not shipped; they were merely trans ferred on the books of the Fund. After settlement on that day, there was nearly $140,000,000 in the Fund. It is apparent that the operation of this plan results in an enormous saving thru reducing the amounts of gold shipped from one part of the country to another.