frsbog_mim_v21_0833.pdf

X-U22S

( C O P Y )

Federal Reserve Board, Washington, D. C.

Gentlemen:

Brief of American Bankers Association Committee on Collection of Non-Cash Items by Federal Re-serve Banks.

Complying with request made by the Federal Reserve Board at the time of the recent hearing before you on the question of the handling of Non-Cash Items fo r col lect ion by Federal Reserve Banks, I hereby submit on behalf of the American Bankers Association Committee a summary of the Com-mi t t ee ' s observations and analysis on th is subject , with i t s recommendations.

1. ORIGIN AND ACTIVITIES OF COMMITTEE

(a) Pr ior to the spring meeting of the Council of the American Bankers Association a t Rye, New York, in April , 1923« bankers in cer ta in sec-t ions of the United States had indicated t h e i r disapproval of the Federal Re-serve Banks being in the col lec t ion business, and the Clearing House Associa-t ion of Minneapolis, Minn., had adopted a resolut ion (copy of which wa,s f o r -warded to the Federal Reserve Board) urging tha t the Federal Reserve Banks discontinue the service,

(b) Acting upon th i s question which arose in the manner ai'Creaaid, the American Bankers Association Council in session at Rye, New York, appoint-ed a Conmittee, designated as a Committee on Non-Cash Items, to make an in-vest igat ion of t h i s a c t i v i t y on the par t of Federal Reserve Banks and report a t a l a t e r meeting with recommendations,

(c) At the meeting of the Council in Atlantic City in September, 1923, the Committee reported that they had not completed the i r analysis; that the Federal Reserve Board had appointed a Committee of Governors on the same matter , who had not a t that time completed the i r invest igat ion. Therefore, the Committee requested that i t be continued as an Invest igat ing Committee, which was granted.

(d) The Committee next reported a t the Spring meeting of the Coun-c i l at Augusta, Georgia, in Apri l , 1924. (Copy of which report i s hereto a t -tached, marked Exhibit "A")- Af ter some discussion of the Committee's report from the f loor and the exchange of several questions and answers on the sub-j e c t , the report was unanimously approved, and a special committee of three appointed to confer with the Federal Reserve Board, with author i ty to urge tha t the col lec t ion of Non-Cash Items by Federal Reserve Baraks be discontinued.

(e) At the General Convention of the American Bankers Association held in Chicago, September l a s t , the action of the Council a t i t s Spring meet-ing in Augusta, Georgia, in the appointment of the Special Committee with au-thor i ty to urge t h a t the co l lec t ion of Non-Cash Items by Federal Reserve Banks

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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be discontinued, was reported to the Convention in session, and 9-pprcved. without any object ion.

( f ) P r io r to the hearing before the Board accorded our Committee on December 5» 1924, we endeavored to get a recent cross section of opinion from bankers on t h i s question, and accordingly sent out a. questionaire (copy of which i s hereto attached, marked Exhibit "B"). This l e t t e r was sent to e ighty-f ive bankers in a,ll pa r t s of the United Sta tes , who were selected with-out regard to whether thei r bank was located in a. c i ty in which there was a Federal Reserve Bank or Branch. F i f ty - four repl ies 'were received up to the date of the hearing, of which for ty - four expressed their opinion that the col lec t ion of Non-Cash Items by Federal Reserve Banks should be discontinued. Ten r ep l i e s indicated that they were in favor of continuing the present ser-vice (These l e t t e r s are attached hereto for your perusal and considerat ion).

COMMITTEE'S OBSERVATION AND FINDINGS

(a) Our Cornr.ittee would l ike i t c l ea r ly understood that our ac t iv-i t i e s have been confined s t r i c t l y to the handling by Federal Reserve Banks of Non-Cash Items, and has no r e l a t i on to the present service by Federal Reserve Bajiks in the par clearance of checks and d r a f t s drawn on member or non-member banks. Our contention i s that any sight or time d ra f t i t h or without docu-ments attached drawn against an individual f i rm or corporation which comes in the possession of the Federal Reserve Bank without the Federal Reserve Bank having rediscounted the same for a rtiember bank i s a Non-Cash Item; therefore, a col lect ion in the i r possession. Likewise any maturing note which the Feder-a l Reserve Bank may be requested to handle for col lect ion without the Federal Reserve Bank having f i r s t rediscounted the same i s also a Non-Cash Item. Far-the r , that a l l dunning d r a f t s , e t c , in which, of course, ne i ther the member bank or the Federal Reserve Bank in pa r t i cu la r can have any invested funds are Non-Cash Items. In b r i e f , any item coming into the possession of a. Federal Reserve Bank not drawn on or payable by a. bank or t rus t company and for which Reserve Bank has not given c r ed i t in reserve account to i t s endorser i s a Non-Cash Item.

(b) That the present service of handling Non-Cash Items as herein-before described i s material ly unbalanced in i t s benef i t s tc the member banks of the system.

(c) That the Federal Reserve Banking System cannot a f fo rd the over-head expense incident to the performance of th i s service.

(d) That i t i s inconsistent for any business organization to carry on an ac t iv i ty which incurs l i a b i l i t y without remuneration, and the Federal Reserve Banks cannot be in the col lect ion business without incurring l i a b i l i -t i e s , Loss of items or secur i t i e s or documents attached, f a i l u r e to pro tes t or other accompanying ins t ruc t ions may resu l t in loss to Federal Reserve Banks handling same.

(e) That there i s no saving of time in the handling of col lect ion items by Federal Reserve Banks. In f a c t , there may be a. loss of time in rout -ing col lect ion items through Federal Reserve Banks instead of member banks routing them d i r e c t .


X-4228 33,1

( f ) That member banks could absorb the service now performed by Federal Reserve Banks in the collect ion of Non-Cash Items without any appreciable increase in the i r cost of operation, in that every col lect ion item that i s now handled by Federal Reserve Banks originates in a member bank, and that only in the t h i r t y - f i v e c i t i e s in which there i s established a. Federal Reserve Bank or Branch i s the same item presented to the party upon whom i t i s drawn without i t having to be sent to a bank by the Federal Reserve Bank in the c i ty in which i t is payable for presenta t ion . Thus, a l l the co l lec t ions handled by Federal Reserve Banks, excepting those pay-able in c i t i e s aforesaid , are handled at a duplication of service c o s t s . x

(g) That member banks maintain a. co l lec t ion department for the handling of outgoing and incoming col lect ions , and a large percentage of member banks incur costs of advert is ing of t h i s f a c t in an e f f o r t to put the i r col lect ion departments on a maintenance or p ro f i t ab l e bas i s .

(h) That the presentat ion of co l lec t ion items by Federal Re-serve Banks i s general ly unpopular with the publ ic , because of the incon-venience to the payer of items presented by Federal Reserve Banks in that in the exercise of action the Federal Reserve Bank's general p rac t i ce i s to require that the payer naist pay in cash or by a draf t of a member bank drawn against i t s Federal Reserve balance. Therefore, when a runner for a Federal Reserve Bank takes a col lect ion across torn some f i f t e e n or twenty blocks and presents i t for payment, the payer i s confronted with t h i s condition of payment by the runner, and accordingly hs.s to pay in cash, which he seldom has on hand, or go to his bank rmd arrange fo r a d r a f t in favor of the Federal Reserve Bank in payment of the item. This i s an inconvenience and annoyance to him and does not create f o r the Fed-era l Reserve Bank a f r iendly fee l ing on the par t of the publ ic , which they are at a l l times hopeful of acquiring.

( i ) We are convinced from our analysis of this service tha,t Governors of ce r t a in Federal Reserve Banks contending for the continuance of t h i s service are influenced by their immediate environments because of the benef i t s that accrue to ce r t a in in s t i t u t ions in large i ndus t r i a l and commercial centers in which ce r ta in Federal Reserve Banks are located and do not represent the a t t i t ude on th i s subject of thei r constituency as a whole.

( j ) We are firmly of the opinion that i t was not intended that a Federal Reserve Bank should function in any capacity that would bring i t into direct competition with any of i t s member banks, or to deal in any way direct ly with the public, as i s necessary in handling of the col lec-t ion business.

. (k) That the service of handling col lec t ion items by Federal Reserve Banks i s not needed as a. measure of saving expense or time to mem-ber banks, and the benef i t s that accrue by v i r t u e of th i s service are be-ing capi ta l ized by cer ta in member banks fo r p r o f i t to them for charges which they can make to thei r customers for handling col lect ion items that the Federal Reserve Bank handles for them without charge or i t accrues di-r e c t l y to the individual f irm or corporation who furnished no par t of the c ap i t a l upon which the Federal Reserve Bank i s operated, and, therefore , e n t i t l e d to no pa r t of i t s bene f i t s d i rec t ly .


-4 - 0 3 6 ( l ) That i t i s unfa i r to impose a discret ionary duty upon Ho-

serve Bank management by i t having to daily choose which member shal l have the col lec t ion items en a point where there are more than one member bank, a s i tua t ion which alone leads to dissension and d i s sa t i s f ac t i on , resu l t ing in the basis fo r a charge of favoritism*

(m) That many member banks receiving col lec t ion items from Fed-era l Reserve Banks now remit without charge because they are under the im-pression that any item handled for a Federal Reserve Bank cannot be charged upon. Thus through th i s fee l ing of service to and cooperation with the Fed-eral Reserve Banks they are omitting charging for a service fo r which they are j u s t l y en t i t l ed to remuneration.

(n) Quoting from l e t t e r s recently received from bankers, which are hereto attached, as aforesaid, I desire to c a l l your a t ten t ion to a l e t t e r from the F i r s t National Bank of Detroit , Michigan, as fol lows:

"As a commercial bank in te res ted in giving di rect and prompt service, we axe opposed to the Federal Reserve Banks handling Non-Cash Items for the following reasons:

1st* Loss of time in routing items d i r e c t l y . 2nd. Slow and incomplete advices of payment. 3rd. Additional time and ^rouble taken to reca l l or reduce items. 4th. D i f f i c u l t y in obtaining adjustment caused by t h e i r erroxs. 5th. More opportunity fo r special ins t ruct ions to be overlooked

or improperly passed on*"

The Fort Worth National Bank, Fort Worth, Texas, write in par t as fol lows:

"The i n s t i t u t i o n with which I am connected in one month handled more than $4cQ,000 of cotton d ra f t s through the co l lec t ion department of Federal Reserve Banks, and based on an average col lect ion charge of one-tenth of one per cent there resul ted a saving fo r th i s bank of more than $400.00. While t h i s i s a p r o f i t for th is pa r t i cu la r bank, i t was made a t the expense of several banks located in Federal Reserve Ci t ies , and a p r o f i t to which they were j u s t l y ent i t led , and which should have been paid by the drawer of the dra f t s or the deposi tor ."

lO) That the future s t a b i l i t y and popular i ty of the Federal Re-serve System must be guarded against any tendency to increase i t s cost of operation by dealing di rect ly with the public in pny jpanner or coming in competition with i t s members. Free services have bu i l t up overhead tha t has to be met by open market a c t i v i t i e s detrimental to '- i ts f u t u r e .

(p) We bel ieve that i t is universal ly recognized tha t there i s a necessi ty a t the present time of reducing the overhead, cost of the System, &iid are therefore, f i rmly of the opinion that i t would be recognized by a large majority of the membership of the System as prudent in the in t e res t of economy to eliminate from the System the handling of co l lec t ions , there-by saving the System in excess of one million dol la rs per annum, and we are convinced that such action on the pa r t of the Reserve Board would meet with


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the approval of the m j o r i t y of i t s nen'ibers and ce r t a in ly could "be done without any serious embarrassment to any member.

REG OE-tENDAT I QTT .

Therefore, in compliance with the foregoing f a c t s and the au-thor i ty invested in t h i s Committee by the American Bankers Association, we most earnest ly urge that the Federal Reserve Board's regulat ions be so amended as to prohibi t the handling of Non-Cash Col-lecticn Items by Federal Reserve Banks.

Respectfully submitted,

(Signed) John Barton,

Chairman, Committee on Non-Cash Items, American Bankers Association

Members of Committee attending hearing December 1924:

J . W. Barton, Minneapolis, Minnesota, C. L. Brolcaw, Kansas City, Kansas, William C. White, Peoria, I l l i n o i s .


( C O P Y ) X-4228-a

Exhibit "A"

2EPORT OF COLXITTEE 021 HOH-CASH IT2LS TO 3XSCUTITE COUNCIL, A.B.A.

AUGUSTA, GEORGIA, APRIL 50,1934.

President Head: Ehe next order of business wi l l be the report of the Committee ,en Uon-Cash Items. Mr. Barton.

Mr. Barton: Mr. Chairman and Gentlemen of the Council: Many of you no doubt wi l l r e ca l l that a t the Spring Meeting of the Council in Sew York some discussion on th i s subject was had, which resul ted in the appointment of a special committee to make invest igat ion and report with recommendations.

Your Committee on Collection of Eon-Cash Items by the Federal Reserve Banks reports as follows:

We are convinced that the service of handling col lect ion items by Federal Reserve Banks i s exceedingly unbalanced in i t s benef i t s to member banks. We believe the Federal Reserve Act did not intend to put the Fed-era l Reserve banks in competition with commercial banks or that they should do business d i rec t ly with the publ ic .

We f ind based on information received from a Federal Reserve bank that only one out of twelve member banks use th is service a t the present time, and that t h i s 8$ of t he i r membership i s comprised almost en t i r e ly of the large c i ty banks, thus taking away from 92$ of the i r member banks a banking function which they f e e l they have a r ight to perform. For the Federal Re-serve banks to continue to col lect non-cash items would therefore tend to aggravate fu r the r many member banks in the country and keep others out of the Federal Reserve System, .and continue,to add to the already widespread fee l ing that there i s a tendency within the System to increase ra ther than diminish t h e i r commercial a c t i v i t i e s .

We f ind that i t costs Federal reserve banks t h i r t y times as much to co l lec t non-cash items as i t does tq col lec t cash items, f o r example:

During the quarter ending June 30, 1923, the Federal reserve banks handled 176,096,223 cash items at a t o t a l cost of $1,132,438, or a eost per item of .0064. During the same period 1, 253,281 non-cash items (ex-clusive of Government coupons) were handled a t a cost of $245,291, or a cost per item of .1957.


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X-4228-a

t o t a l Further tha t , the/cost of col lect ing non~cash items i s rapidly in-

creasing. In 1923 the cost to Federal Reserve hanks was in excess of $1,000,000 and if not discontinued wi l l soon he many times that amount.

¥e f ee l that the expenditure of more than a mil l ion dol lars by Federal Reserve hanks to col lec t non-cash items for l ess than 10$ of the members i s unjus t to the other 90$,besides taking away from a large number of member banks the col lec t ion pr iv i lege to which they f ee l they are j u s t l y entitled,.

We f ind that tne Federal Reserve banks in performing th i s service are thus made dunning agencies fo r the col lect ion of large and small accounts of varied character and descriptions a t heavy cost to them and to the det-riment of the System as a whole in the minds of the publ ic . For i l l u s t r a -t ion; In one Federal Reserve bank there was outstanding March 31, 1924, items for col lec t ion as follows:

Size Bomber Amount

Under $1.00 30 $ 16.31 $1.00 to i.SS 48 66.65

2.00 to 2.99 27 64.98 3.00 to 3.99 29 99.77 4i00 to 4.99 24 104.76 5.00 to 5.99 25 139.24 6.00 to 5.99 59 445.52

10.00 to 19.99 138 1,936.01 20.00 to 29.99 110 2,710.48 30.00 to 39.99 78 2,677.04 40.00 to 49.99 47 2,056.85 50.00 to 99.99 218 15,280.66

100.00 to 499.99 421 89,695.31 500.00 to 999.99 125 89,016.72

1000.00 to 2499.99 149 230,715.11 2500.00 to 4999.99 31 101,4-51.14 5000.00 and over 14 "89,290.83

1574 $625,967.78

of which 834 items or over half of the number of items aggregated s l igh t ly over $25,000.

Your Committee caused inquiry to be made of the Clearing House Associations in c i t i e s that have a Federal Reserve bank or a branch to de-termine the i r a t t i t u d e on the question, and desires to report that out of


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the 24 reporting, 17 were in favor of requesting that Federal Reserve "banks discontinue the col lec t ion of non-cash items, and 7 fo r continuing the service, that of the 17 for discontinuing 11 adopted resolut ions which were forwarded to the Federal Reserve Board.

Therefore, in v ier of the foregoing fac t s and a f t e r ca re fu l consid-era t ion of the subject matter &nd with a sincere regard fo r the f u l l worth of the Federal Reserve System and f u l l y appreciating the great im-portance of maintaining the Federal Reserve "banks as "banks of reserve, rediscount and issue, fo r which they were or ig ina l ly intended, we most earnest ly recommend that the col lec t ion of non-cash items "by Federal Reserve "banks "be discontinued, and fu r the r recommend that a Committee of three "bank-ers "be appointed to confer with the Federal Reserve Board with author i ty to urge that the Federal Reserve "banks discontinue the col lec t ion of non-cash items.

J . W. Barton, Chairman C. L. Brokaw D. U. Finnegan Robert F. Maddox James Ringold William C. White.

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* • »

( C O P Y ) X-4228-b 041 Exhibit "3"

Minneapolis, Minn. November 19,1924.

In 1923 a committee was appointed with ins t ruc t ions to make an invest igat ion of the p rac t ice in vogu.e "by Federal Reserve Banks in the handling of non-cash items fo r col lec t ion .

At the l a s t spring mooting of the Council of the American Bankers Association th i s committee on non-cash items reported with recommendations that the Federal Reserve Board be urged to make a rul ing requir ing Federal Reserve Banks to discontinue handling col lect ion items, such as b i l l of lad-ing d r a f t s , e t c . ,wi th the resu l t that the committee's recommendations were approved and a sub^comcittce was selected and ins t ructed to confer with the Federal Reserve Board in an e f f o r t to have the committee recommendations carr ied into e f f e c t .

This matter has been discussed from time to time with cer ta in mem-bers of the Federal Reserve Board who have shown a keen in t e re s t in the sub-j e c t . The sub-committee on non-cash items wi l l have a hearing before the Federal Reserve Board on Friday, December 5th, a t which time t h i s service being conducted a t a considerable expense to the Federal Reserve System, which unquestionably i s unbalanced in i t s benef i t s to the members of the System, wi l l be discussed.

On behalf of the committee I am writ ing for an expression of your opinion on t h i s subject . We would l ike to have you s t a t e as to wheth-er you are fo r or against the Federal Reserve Banks continuing in the col-l ec t ion business and we wi l l appreciate your reasons for the pos i t ion you take on th i s question. Similar l e t t e r s are being sent to cer ta in other bankers and i t i s an t ic ipa ted that the rep l ies wi l l be he lpfu l to the Com-mittee in the discussion of th is matter be fore ' the Federal Reserve Board.

Yours very t ru ly ,

Chairman, Committee on Non-Cash Items.

Members of Sub-Committee: Mr. Robt.F.Maddox, Atlanta, Ga. Mr. C. 1. Brokaw, Kansas City, Kansas. Mr. Wm. C. White, Peoria, 111.


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