Some Phases of the New Check Collection System

• Author: Gordon B. Anderson
• DOI: 10.1177/000271621606300111
• Published date: 01 January 1916
• Date: 01 January 1916
• Subject Matter: Articles

SOME PHASES OF THE NEW CHECK COLLECTION
SYSTEM
BY GORDON B. ANDERSON, A.M.,
Instructor in Finance, Wharton School of Finance and Commerce, University of
Pennsylvania.
It is not the purpose of this article to discuss all phases of the
check collection system under the Federal Reserve Act, but to
take up several fundamental problems with which the system of
intra-district collection already inaugurated has to contend. This
subject affects not only the bankers, both large and small, but
also the business man who uses checks and drafts in the payment
and collection of accounts.
The enormous volume of checks used daily in the transaction
of business in the United States has created a problem which
bankers of the country find very difficult to solve satisfactorily.
This problem is by no means a new one but at this time the national
agitation for a remedy is more widespread. In framing the Federal
Reserve Act considerable attention was directed to this subject,
with the result that provisions were made facilitating a solution,
national in scope. The act, to a large degree, leaves the solution of
the check collection problem to the Federal Reserve Board and the
Federal reserve banks. In general, the law provides that a Federal
reserve bank may receive on deposit from its member banks not
only cash, but checks and drafts drawn upon other solvent members.
This implies that the reserve bank has the power to collect these
items. The law further provides that each reserve bank &dquo;shall
receive on deposit at par from member banks .... checks
and drafts drawn upon any of its depositors.&dquo; In other words,
the reserve bank is compelled to accept at par the checks drawn
on its members when deposited by a member. The law further
states that this does not necessarily mean free of all charge, for
&dquo;the Federal Reserve Board shall by rule, fix the charges to be
collected by the member banks from its patrons whose checks are
cleared through the Federal reserve bank and the charge which
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may be imposed for the service of clearing or collection rendered
by the Federal reserve bank.&dquo;
That the Board fully realizes the importance of the clearing
functions and its responsibility for the success of the system is
evident, for in the first annual report is found the following state-
ment : &dquo;From the beginning, the Board has regarded the organiza-
tion of these clearing functions as one of the most important re-
sponsibilities with which it is charged under the Act, as well as one
of its most difficult and intricate problems.&dquo;
The committee of experts that advised and cooperated with
the Board in preparing a plan of organization for the reserve banks
recommended in part as follows:
It is strongly believed and recommended that a complete and thorough
clearing system shall be inaugurated by every Federal reserve bank at the earliest
possible moment consistent with success. This system should further be contin-
ued and extended as rapidly as is reasonably possible until it extends to all
classes of operations and provides for the clearing of items drawn on both member
and non-member banks. The facilities of the reserve banks should be used both
locally and for out-of-town checks in the broadest possible sense and under
conditions which will place the member banks upon a satisfactory basis of com-
petition with non-members while giving to the customer of member banks
the advantage of a system of par collection wherever possible and of collection
at cost wherever charge must be made..... Having in mind the fact
that the banks cannot perform their full functions in this respect at the very
outset, it is, however, recommended that they start only with a partial system
of clearings, subsequently extending this as they become able to do so.
The matter of carrying into effect the collection departments
of the several reserve banks was left to each bank individually.
However, all systems are practically alike. For the present, the
system provides for intra-district clearings only/ that is checks
received from and drawn on member banks of the same district.
All members of the Federal reserve system are eligible to member-
ship in the collection system of their respective reserve banks.
Membership in the collection system is voluntary and it is provided
that members may withdraw upon thirty days’ notice. The reserve
bank acts as agent only, receiving and forwarding the items,
assuming no responsibility for final payment. The member bank
agrees to abide by all regulations governing the system. Members
1
Drafts on other Federal reserve banks are received on a delayed credit
basis.

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are given immediate credit
2 for items payable on demand which
are drawn on members of the collection system in their district, if
presented at the reserve bank before two o’clock (twelve o’clock
Saturday), and agree to be charged immediately for all checks
drawn on them, received at the Federal reserve bank...