The bankers' acceptance may be drawn either as a foreign or as a domestic bill. No satisfactory data are as yet available concern ing the development of the domestic accept ance, and, whatever the volume in existence may be, it is probably small. The foreign bankers' acceptance has had about two years for development, and we may roughly estimate that at the present thne the acceptances of all American banks, whether members of the Fed eral Reserve system or not, are about $250, 000,000—$300,000,000. Every member bank has the right to accept such paper up to 50 per cent of its capital stock, and the Federal Reserve Board has granted to banks the power to ac cept up to 100 per cent. While the Federal Reserve Act as originally passed gave to the Federal Reserve Board authority to define com mercial paper eligible for rediscount at Federal Reserve banks, and the Board in its initial stages desired to discriminate in favor of the two-name paper, it never went so far as to commit itself definitely in that way. Single name paper has always formed the bulk of that discounted by the Federal Reserve banks, and this has been apparently the result of necessity. The Federal Reserve Act, however, clearly intended to stimulate the °bill of exchange" whether that of the commercial enterprise or of the banker, and the Board has, therefore, very properly endeavored by favoring rates and by special regulations to encourage the development both of the commercial bill of exchange (designated by it as the °trade ac ceptance))) and of the bankers' accepted °bill of exchange." The quantity of trade accept ances or commercial bills offering in the New York market has been lately described by a practical banking authority very friendly to the acceptance as °negligible." A novel element in the Federal Reserve Act not found in any of the various banking bills by which it had been preceded was its treatment of the so-called °clearing question." In the past, small banks, the country over, had carried balances with city °correspondents,* usually of considerable amount These city correspondents were frequently members of a local clearing house and here and there coun try clearing houses had been established, but there was no nation-wide system of clearance. The country banks sent such checks on distant points as they might receive to their corre spondents and the latter collected them, cred iting the proceeds to the remitting banks. This was a wasteflal and slow method. The Federal Reserve Act sought to substitute the idea of district clearance on the books of each reserve bank and that of national clearance by creating a central clearance system for the 12 reserve banks at Washing-ton, The national system was first established, each bank depositing $1,000,000 in gold with the Board, which at once placed it with the Treasury for safe-keeping. A set of books was opened in the offices of the Board and on Wednesday night of each week every Federal Reserve bank telegraphs to Washing-ton the amount of its balance in dealings with other reserve banks. A corresponding entry is made in the books and each bank notified on Thursday of thc balance remaining to its credit. Billions of dollars of transfers are made in this way without gold shipment and practically without expense.
The introduction of the district clearance plan was not so easy, but by the middle of 1916 every reserve bank under orders from the Board had established a system of prac tically uniform character. Under this plan as modified by the Act of 21 June 1917, banks not members of the Reserve System as well as the regular members may deposit with reserve banks checks on other banks for collection. Such checks are not credited at once, but only after the lapse of a period usually two to four days, estimated to be long enough to permit collection. After that period the proceeds are credited and may be drawn upon. Banks
which receive such checks for payment must remit without deduction (at par) or else send actual money, but in the latter case the Reserve bank pays the cost of shipping the coin or currency in settlement The member bank which deposits the checks for collection is charged a small fee (P/2-2 cents) per item and may in turn make a moderate charge to its depositor if he desires immediate payment without waiting for the collection of the check to be completed. The district collection sys tem now includes some 16,000 banlcs, State and National, and is slowly increasing in numbers though it can probably never become complete until the banking system of the country has been entirely unified. Some banks continue to collect through correspondents as heretofore, although the fact that balances with corre spondents no longer (Act of 21 June 1917) count as reserve, has discouraged the practice. The new district system has tended strongly to unify exchange charges and to reduce those that were formerly unduly high, though such charges will persist where competition is absent owing to the fact that given localities contain no banks that are members of the Federal Reserve system. Taken with the gold clearing system at Washington, the district system has, however, immensely improved and simplified exchange conditions the country over.
As seen at an earlier point, the chief trouble currently recognized in the American bank note wstem prior to the passage of the F:ederal Reserve Act was °inelasticity." By this was meant that there was no way of enlarging the circulation except through the purchase and deposit of bonds, or the importation of actual money. Prior to 190f3, the national bank notes had so greatly increased in atnount as to re quire almost all of the floating or "free" supply of bonds for their protection, except those held by investors and trustees, so that the limit im posed upon their issue was almost absolute. It was currently proposed to relieve the situa tion by extending the kinds of bonds receiv able as deposits to protect note issues and the Aldrich-Vreeland Act had taken steps in that direction. As against this plan or proposal it was pointed out that both the practice of other countries and the general theory of banking indicated that the protection properly to be accorded to notes was identical with that to be given to deposits. The abstract theory of banking, moreover, indicates the liquid short term assets of banlcs as the safest and best protection for bank liabilities.
This point of view—the so-called °asset currency" theory— was accepted as the basis of the original draft of the Federal Reserve Act. Provision was accordingly made for the issue of notes based on the general assets of the reserve banks; while it was sought to protect the old note-issuing banks (the owners of the bonds held to secure the notes) by authorizing the gradual retirement and redemption of the bonds they had purchased. These bonds for the most part bore 2 .per cent interest, and as government obligations were then selling on a 3 per cent basis it was ordered that the new refunding bonds should bear 3 per cent So-called asset currency has always been the subject of criticism from a certain school of thinkers who have contended that there was serious danger in the use of such paper because of its possible unsoundness. In order to guard against any such danger the Act therefore defined °eligible* paper with great care, placing stress upon the requirements of short maturity and relation to genuine com mercial transactions. Inasmuch as it had been urged by some that the supply of two-name paper available would be too small to serve as a basis for notes it was left to the Federal Reserve Board to determine eligibility of form within the general limits laid down by the Act itself.