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Rediscount and circulation compare with last week as follows:

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159. CLEARINGS UNDER THE NEW SYSTEM1

The provisions of the Federal Reserve Act with respect to the introduction of a system of clearings are found in section 16, where it is provided that

Every Federal Reserve Bank shall receive on deposit at par from member banks or from Federal Reserve Banks checks and drafts drawn upon any of its depositors, and when remitted by a Federal Reserve Bank, checks and drafts drawn by any depositor in any other Federal Reserve Bank or member bank upon funds to the credit of said depositor in said Reserve Bank or member bank. Nothing herein contained shall be construed as prohibiting a member bank from charging its actual expense incurred in collecting and remitting funds, or for exchange sold to its patrons. The Federal Reserve Bank shall, by rule, fix the charges to be collected by the member bank from its patrons whose checks are cleared through the Federal Reserve Bank and the charge which may be imposed for the service of clearing or collection rendered by the Federal Reserve Bank.

The Federal Reserve Board shall make and promulgate from time to time regulations governing the transfer of funds and charges therefor among Federal Reserve Banks and their branches, and may at its discretion exercise the functions of a clearing-house for such Federal Reserve Banks, or may designate a Federal Reserve Bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing-house for its member banks.

It is evident that this provision distinctly contemplates two classes of work:

a) A clearing system providing for the clearing of items among member banks which are stockholders and depositors in any Federal Reserve Bank.

b) A clearing system which shall provide for clearing the transactions of Federal Reserve Banks among themselves.

160. GOLD CLEARANCE FUND AT WASHINGTON' Provision has been made by the Federal Reserve Board for the establishment of a gold clearance fund at Washington for the purpose of effecting with as little delay and cost as possible settlements between Federal Reserve Banks. This proposed plan of interbank settlement is intended to complete and be adjusted to an intradistrict clearance system, but its operations will be independent of the latter.

1 From First Annual Report of the Federal Reserve Board, p. 135. From Federal Reserve Bulletins, May and December, 1915.

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Gold coin and currency will be shipped to Washington or to a subtreasury and turned over to the Treasurer of the United States, who will issue gold order certificates payable to the Federal Reserve Board or to any Federal Reserve Bank. The books of the gold settlement fund will show exactly how much has been paid in at the outset by each Federal Reserve Bank, and each bank will be informed of the receipt of this amount. Gold order certificates so received will be placed in a safe and this safe in turn will be placed in the main vault of the Treasury Department.

When the transfers are to be made from one bank to another as the result of change in ownership, two signatures will be necessary on the order certificates. These order certificates will be prepared in such a way as to require the signature of the governor or acting governor of the Board and one additional person, who may be either the secretary, the fiscal agent, or the supervisor of clearings.

When transfers are made by the Federal Reserve Board, the balances that accrue to the respective reserve banks may be paid by indorsement and by return to the respective banks of a like amount of such gold certificates held by the Federal Reserve Board, or by the indorsement and delivery to the Treasurer of a like amount of such certificates for which he will give in exchange bearer gold certificates, which the Board may send to the banks by insured registered mail if they want funds other than gold certificates, or in lieu of such payment the Treasurer may by wire direct payment to be made by a subtreasury office, provided that funds are held in such office available for the purpose.

The first actual clearing was on May 26, each Federal Reserve Bank at that time being required to deposit $1,000,000 in the fund and an amount in addition equal to its indebtedness to other Federal Reserve Banks.

Deposits by the Federal Reserve Banks in this fund are counted as legal reserve. On September 8, 1915, the Board authorized accounts to be opened with the 12 Federal Reserve Agents. The fund is now divided as follows: balances to the credit of Federal Reserve Banks, $69,240,000; balances to the credit of Federal Reserve Agents, $33,380,000.1

These amounts are now held by the Board in gold order certificates in denominations of $10,000. Deposits in the fund are, through the courtesy of the Treasury Department, made by Federal Reserve I November 18, 1915.

Banks through the subtreasuries. When a deposit is made at a subtreasury, advice is wired to the Treasurer of the United States at Washington, who then causes gold certificates to be issued to the Federal Reserve Board. When payments are made from the fund, the operation is of course reversed. Transfers are, however, for the most part on the books of the gold settlement fund by credits and debits between the twelve banks or between banks and the Federal Reserve Agents.

161. INTERDISTRICT COLLECTIONS

BY MILTON C. ELLIOT

Another great advantage which will accrue to the member banks as a result of the establishment of this system is the collection of foreign or out-of-town items. While the subject of clearing items for so many banks and over so large a territory is one which in itself will require most careful study in placing it in operation, and one which might be made the subject of a discussion of some length, it must be apparent to those familiar with it that the establishment of twelve distinct Federal Reserve banks, serving member banks of twelve distinct districts, will furnish a machinery which will greatly reduce the average time of making collections. To illustrate: Five banks in the city of Columbus might on the same day receive for deposit five different items drawn on the same bank in California. Under existing conditions those five items might be sent to five different correspondents and might each take a separate and distinct route in going from Columbus to California, so that the return from the items drawn on the same point might each be received at a different time.

This is manifest because one bank in Columbus might send it to its correspondent in New York, which in turn might send it to its correspondent in Chicago, which in turn might send it to its correspondent elsewhere, and the item would normally be kept in transit until it reached a bank which happened to be a correspondent of the bank on which the item was drawn or else reached the city in which the bank is located against which the item was drawn and is presented by some other bank in that city. Another bank might send its item for collection through an entirely different set of correspondent banks.

When the Federal Reserve banks have been established, however, and the machinery has been worked out for the handling of such Adapted from an address before the Ohio Bankers' Association, May, 1914. (Published in Monthly Letter of National City Bank, New York, June, 1914.)

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items, all the items from Columbus could go at once to the Federal Reserve bank of its district in Cleveland, from the Federal Reserve bank of Cleveland direct to the Federal Reserve bank of San Francisco, and assuming that they are drawn on member banks the Federal Reserve bank of San Francisco would necessarily be a correspondent of the bank in question. Consequently, the saving in the average time of collection of foreign items will unquestionably be very great and the loss of the use of funds in transit will be correspondingly reduced.

C. Relation of the System to Other Banking Institutions 162. MEMBERSHIP OF STATE BANKS IN THE FEDERAL RESERVE SYSTEM'

The Federal Reserve Board has prepared and issued regulations (Circular No. 14, 1915) relating to the membership of state banks in the federal reserve system. Provision is made for the entrance of state banks into the system at the Board's discretion, upon application, subject to various restrictions and conditions of examination. The two outstanding points in the circular are that it permits the withdrawal of state banks which may have become members, under specified conditions, and that it permits such state banks as become and continue members to exercise their statutory and charter rights after entrance into the system just as before. This means that they may continue to loan on real estate security without reference to the restrictions imposed upon such loans under the National Bank act, although the regulations provide that a state bank which becomes a member shall invest in such loans only to an extent which will not impair its liquid condition. The terms of the circular have been under consideration by the Board more or less continuously ever since the organization of the federal reserve banks, and are the outcome of many consultations with bankers and experts. Legal advice, also, has been sought in numerous quarters. While the interpretation of the provision of the Federal Reserve act concerning membership of state banks offers considerable difficulty, it is believed that the plan now proposed complies with the requirements of the law.

The question whether the admission of state banks with power to continue their real estate loans, and with permission to withdraw,

1 Adapted from "Washington Notes" in Journal of Political Economy, XXIII (July, 1915), 717-19.

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