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FEDERAL RESERVE SYSTEM -CHECK CLEARANCE FLOAT

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3///Z- H E A R IN G

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON

GOVERNMENT OPERATIONS

HOUSE OF REPRESENTATIVES

EIGHTY-NINTH CONGRESS

SECOND SESSION

KSU LIBRA

RIES

F E B R U A R Y 9, 1966

P rinted fo r the use of the

Committee on Government Operations

54-E08

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1966
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COMMITTEE ON GOVERNMENT OPERATIONS

WILLIAM L. DAWSON, Illinois, Chairman

CH ET H OLIFIELD, California

JACK BROOKS, Texas

L. H. FOUNTAIN, North Carolina

PORTER H ARDY, Jb., Virginia

JOHN A. BLATNIK, Minnesota

ROBERT E. JONES, Alabama

EDWARD A. GARMATZ, Maryland

JOHN E. MOSS, California

DANTE B. FASCELL, Florida

H EN R Y S. REUSS, Wisconsin

JOHN S. MONA GAN, Connecticut

TORBER T H. M ACDONALD, Massachusetts

J. EDWARD ROUSH, Indiana

WILLIAM S. MOORHEAD, Pennsylvania

CORNELIUS E. GALLAGH ER, New Jersey

WILLIAM J. RANDALL, Missouri

BENJAMIN S. ROSENTHAL, New York

JIM WRIGHT, Texas

FERNAND J. ST GERMAIN, Rhode Island

DAVID S. KING, Utah

JOHN G. DOW, New York

H EN RY HELSTOSKI, New Jersey

FLO R EN CE P. DW YER, New Jersey

RO BER T P. GRIFFIN, Michigan

OGDEN R. REID, New York

F R A N K J. HORTON, New York

DONALD RUMSFELD, Illinois

WILLIAM L. DICKINSON, Alabama

JOHN N. ERLENBORN, Illinois

HOWARD H. CALLAW AY, Georgia

JOHN W. W YDLER, New York

ROBERT DOLE, Kansas

CLA R EN CE J. BROWN, Jr., Ohio

Christine Ray Davis, Staff Director

James A. Lanigan, General Counsel

Miles Q. Romney, Associate General Counsel

J. P. Carlson, Minority Counsel

William Copenhaver, Minority Professional Staff

L egal and M onetary A ffa irs S ubcom m ittee

DANTE B. FASCELL, Florida, Chairman

TO RBER T H. M ACDONALD, Massachusetts DONALD RUMSFELD,'Illinois

CORNELIUS E. GALLAGH ER, New Jersey ROBERT DOLE, Kansas

JOHN G. DOW, New York

M. Joseph Matan, Staff Administrator

Charles Rothenrerg, Counsel

Millicent Y . Myers, Clerk

U
C O N T E N T S

Statement of George W. Mitchell, member, Board of Governors of the

Federal Reserve System; accompanied by John R. Farrell, Director, Page

Division of Bank Operations, Federal Reserve System______________ 2

APPENDIXES

Appendix A—Correspondence between Legal and Monetary Affairs Subcommittee and the Federal Reserve Board________________________ 37

Appendix B—Documents referred to in the hearing__________________ 55

h i

FEDERAL RESERVE SYSTEM— CHECK CLEARANCE

FLOAT

WEDNESDAY, FEBRUARY 9, 1966

H ouse of R epresen ta tiv es,

L egal and M onetary A ffairs S ubcommittee

of the C ommittee on G overnment Opera tio n s,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2203, Rayburn House Office Building, Representative Fascell (chairman of the subcommittee) presiding.

Present: Representatives Fascell, Gallagher, and Dow.

Also present: M. Joseph Matan, staff administrator; Charles

Rothenberg, counsel; Millicent Y. Myers, clerk; and William Copenhaver, minority counsel.

Mr. F ascell. The subcommittee will please come to order.

The float that arises from the Federal Reserve System’s check

clearance and collections procedures is a subject on which discussions

have been had in communications with the Federal Reserve Board

from time to time since 1961. Because it was believed that hearings

on the float, and its implications, would result in better general

understanding of the subject, and certainly in better understanding

by this subcommittee, these hearings have been called.

The float, briefly, is the dollar amount of checks which are in the

process of being cleared, but which have not yet been collected.

Member banks which put the checks into the clearance mechanism

are entitled to credit the amounts of the checks to their required 

reserves accounts after waiting no longer than 2 days, regardless of

the fact that it may take longer to collect particular checks.

A seeming incongruity of the float is that despite improvements

made in transportation, communications, and automatic data processing equipment and techniques, which should speed up check

collections, daily average of float has kept increasing, at least until

recently. The daily average has been about $1.8 billion, with wide

fluctuations both below and above that figure.

The basic cause of the increase lies perhaps in the fact that checking

account use has expanded so greatly. In the past 15 years the use of

checks rose by about 500 percent.

The check-use figures are astronomical. More than 4% billion

commercial checks with a dollar value of over $1}£ trillion were run

through the Fed’s clearing operations last year. It perhaps should

not be surprising that the average daily float doubled in the past

15 years.

We expect in these hearings to examine the float with particular

reference to how it involves or affects the Federal Reserve System’s

l
2 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

operations, and whether any changes are possible or advisable in

order to contribute to the economy or efficiency of such operations. 

It may be that we are concerning ourselves with a subject which

might not be a subject much longer, as it were, because of advancing 

technological, automated and electronic processes which may rapidly

take the place of checks—or even take the place of banks. Without

checks, there would be no float.

We are privileged to have as our principal witness Gov. George W.

Mitchell, a member of the Federal Reserve Board, who is perhaps

the country’s foremost authority on what has been called a “cashless

society.”

We shall be very happy to hear from him this morning.

STATEMENT OF GEORGE W. MITCHELL, MEMBER, BOARD OF

GOVERNORS OF THE FEDERAL RESERVE SYSTEM; ACCOMPANIED BY JOHN R. FARRELL, DIRECTOR, DIVISION OF BANK

OPERATIONS, FEDERAL RESERVE SYSTEM

Mr. Mitchell. Thank you, Mr. Chairman. I have a statement

here which I would like to read, and then perhaps the subcommittee

shall ask questions when I have finished.

Mr. Fascell. Very good.

Mr. Mitchell. Mr. Chairman, your committee’s attention over

the past 5 years to the nature and implication of Federal Reserve

float is testimony to its doggedness and the diligence of its staff.

“Float” is a highly technical phenomenon in central bank operation 

and one that most “experts” in finance are content to leave to the

“technicians.”

I believe it is a phenomenon that EDP and wire transmission

technology has begun to reduce and will, in the foreseeable future,

eliminate. Further, I believe that as float decreases absolutely, the

Federal Reserve will not experience any difficulty in maintaining the

level of reserves needed to serve adequately our economy. Changes in

the Federal Reserve System’s portfolio of securities, the level of discounting by member banks, or the level of reserve requirements are

all available as methods of adjustment. These techniques will have

no greater or lesser effect on the Government’s finances, the banking 

system, or the economy generally than would occur if the purpose

were to offset gold movements—w’e had a decrease in the gold stock

of $1.5 billion last year and handled that through these techniques—or

to effect changes in any given monetary posture.

As the committee knows, the Federal Reserve presently follows

the policy of offsetting the unwanted and unsought easing or tightening 

effects of changes in float. This is done by appropriate open market

operations. As the average level of float declines in the future, the

monetary decisions made to meet the economy’s financial needs will be

taken in light of that fact along with all of the other factors supplying

or making demands on bank reserves.

It is my understanding that you would like me to review, briefly,

some background on the nature and causes of float and past System

policies with respect to it and then to turn to a discussion of the ways

in which technological change in settlement procedure will reduce

float to insignificant proportions.
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 3

As the chairman has noted, float is an inevitable part of any monetary settlement system that depends upon the physical movement of

checks from the payee to the drawee bank as the basis for making the

appropriate accounting entries. This is because it would be completely impracticable, if not impossible, to keep a record for each

individual check deposited in a bank and withhold credit to the

depositor until the funds represented by the check have been collected

from the drawee bank and were in the hands of the depositing bank.

The bookkeeping cost of such a system would be prohibitive.

Commercial banks deal with the problem by giving immediate

credit but they require service charges or the maintenance of minimum

balances and, where large amounts are involved, they prohibit withdrawals against check deposits until there is reasonable assurance

that the checks have cleared. Federal Reserve banks, in dealing

with their member banks, use a somewhat similar but more formalized

procedure. The reserves which member banks are required to keep

with their Reserve banks double as clearing accounts or as the “minimum balances” which commercial banks require of their customers,

and, in lieu of the somewhat rougher rules of thumb that the commercial banks use for determining a safe period for check clearances,

all Federal Reserve banks and branches have a formalized time schedule stating when credit will be given to member banks for checks

which they deposit with the Reserve banks for collection.

Float arises when the time actually required to transfer the funds

covered by a check differs from the time schedule that is used in

allowing credit for the check.

Federal Reserve float is the aggregate amount on any given day

of checks for which credit has been passed by Federal Reserve banks

and branches to their depositing member banks without receipt of

payment from drawee banks, less the amount of such items (if any)

for which payment has been received but credit not yet given.

Float is shown on the weekly Federal Reserve condition statement

among the items that affect Reserve bank credit; however, float does

not appear on the balance sheets of the Federal Reserve banks as a

specific item, but rather is derived in the following manner. When

a Federal Reserve bank receives a check for collection the amount

of the check is simultaneously entered in an asset account “Cash

items in process of collection” and in a liability account “Deferred

availability cash items.” The amount of the check is transferred

from the latter account to the reserve account of the depositing member bank in accordance with the established time schedule, but it

remains in the asset account “Cash items in process of collection”

until the Reserve bank has received actual payment for the check.

Thus, in an accounting sense, float is the amount by which “Cash

items in process of collection” exceeds “Deferred availability cash

items.”

On the most recent statement of condition of the Federal Reserve

banks the total amount of cash items in process of collection is $6.5

billion, and deferred availability items is $4.5 billion. So for this statement week, float was in the amount of $2 billion. This is a statement

for February 2.

Now, during the year 1965, the average daily amount of Federal

Reserve float outstanding was $1.8 billion. In the same year the

Federal Reserve banks and branches handled over 5 billion checks
4 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

and other cash items having an average daily value in excess of $7

billion, or about four times daily average float. This means that on

the average, $3 out of every $4 in checks deposited for collection in

the Federal Reserve banks and branches are collected within the time

schedules.

Last year, for the first time since 1958, average daily float declined

as against the previous year—dropping by $54 million (or about

3 percent) despite an increase in the volume of checks handled of

about 6 percent.

As of the latest statement week, total Federal Reserve bank

credit outstanding was at $43 billion, comprised of $40.7 billion of

System holdings of U.S. Government securities and acceptances—

most of this is Government securities, as you know—$1.9 billion of

float, and about $400 million of member bank borrowings. Federal

Reserve credit is also affected by the level of reserve requirements. 

The reduction in requirements needed to provide an equivalent to

the reserve credit made available at present levels of float, would be

1/2 percentage points if it were uniformly applied to demand accounts

at country and city banks. Present requirements at these banks

are 12 and 16% percent, respectively.

Federal Reserve float is a combination of various factors. The

most important of these is “time schedule” float which, according to

various studies, accounts for about two-thirds of total float. This

kind of float results from the fact that under existing time schedules

there is a maximum of 2 days’ delay between the time an item is

deposited with a Reserve bank and the time credit is given to the

depositing bank; whereas 3 days or more may be required to collect

the payment for many items.

The other important cause of float arises from checks which are

received in time to be included in the current day’s business but which

cannot be processed in time to be dispatched with that day’s business.

Inability to process all items on the day of receipt is caused mainly 

by peaks in the volume of work, particularly around weekends and 

holidays. This kind of float is called “holdover” float, and in the past

has accounted for about one-third of total float. It is in this area

that the greatest strides are being made in reducing float.

Snowstorms, floods, and other conditions—such as the recent New

York blackout—slow up the movement or processing of checks and

add to both “holdover” and “time schedule” float.

As background for more detailed discussion of Federal Reserve

time schedules, it may be helpful to mention that checks deposited

with the Reserve banks for collection fall into one of four general

groupings:

(1) OWN-DISTRICT CITY ITEMS

These are checks drawn on banks located in the same city as that

of the Federal Reserve bank or branch to which the checks have been

forwarded. For example, a check forwarded by a Providence, R.I.,

member bank to the Boston Reserve Bank and drawn on a Boston

bank would be an own-district city item.

(2) OTHER-DISTRICT CITY ITEMS

These are checks drawn on banks located in cities where there are

Federal Reserve banks or branches other than the one in which the
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 5

checks were originally deposited. For example, a check deposited by

a Providence bank in the Boston Reserve Bank and drawn on a bank

in Chicago would be an other-district city item.

(3) OW N -D ISTRICT COUNTRY ITEM S

These are checks deposited by one bank and drawn on another

bank which is in the same Federal Reserve district but which is not

located in the same city as the Federal Reserve bank or branch. For

example, a check deposited by a Providence bank in the Boston Reserve Bank and drawn on a bank in Bangor, Maine, would be an

own-district country item. It is within the Reserve district but not

in the Reserve city.

(4) O TH ER-D ISTRICT COUNTRY ITEM S

These are checks deposited by a bank in one Federal Reserve district and drawn on a bank located in a city in another Federal Reserve district where there is no Federal Reserve bank or branch. 

For example, a check deposited by a Providence bank in the Federal

Reserve Bank of Boston and drawn on a bank in Indianapolis, Ind.,

where we do not happen to have a branch would be an other-district

country item.

Present Federal Reserve time schedules provide for (a) immediate

credit for own-district city items; (6) credit deferred 1 day for certain

other items—mainly some other-district city items depending upon

distances involved; and (c) a maximum 2-day deferment for all other

items.

Most of the checks given immediate credit or 1-day deferment are

collected within the time allowed because they can b e presented by

the Federal Reserve bank or branch concerned through a local clearing house. On the other hand, most of the other-district country

items for which credit is deferred a maximum of 2 days require a

minimum of 3 days to collect. For example, a check deposited in the

Boston Reserve Bank on a Tuesday by a Providence bank and drawn

on an Indianapolis bank would be credited to the Providence bank on

Thursday. On Tuesday the Boston Reserve Bank would send the

check to the Chicago Reserve Bank where it would be received on

Wednesday and forwarded to the drawee bank in Indianapolis. The

Indianapolis bank would not get the check until Thursday and the

Chicago Reserve Bank would not get the remittance for the check

until Friday, at which time it would pay the Boston Reserve Bank. 

Since the Boston Reserve Bank gave credit to the depositing Providence bank on Thursday but did not receive payment until Friday,

it would be carrying float on the check for 1 day.

The Board and the Reserve banks have recognized for some time

that the present time schedule is unrealistic with regard to otherdistrict country items but have been reluctant to change the time

schedules for a number of reasons.

Up until 1939 the time schedules of the Reserve banks provided 

for deferment of credit for checks received for collection up to a

maximum of 8 days, depending upon the location of the drawee banks. 

This meant that member banks were required to sort the checks they

sent to Reserve banks into nine separate groupings, with a total for

54-508—66----- 2
6 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

each grouping. This was a costly burden for member banks and one

not conducive to use of the Federal Reserve check collection system

and, in fact, not inducive to membership in the Federal Reserve

System.

In 1939, after a study of the matter taking into account improvements in transportation, the maximum deferred availability period

was reduced to 3 days. This action was designed to give member

banks more prompt credit for checks deposited for collection, and to

reduce substantially the amount of work required in sorting and preparing checks for deposit with the Reserve banks. Daily average

float was $9 million in 1938 prior to the change, and increased to

$57 million in 1940, the first full year after the maximum 3-day deferment schedule had been adopted.

During the next 5 years float rose quite rapidly and in 1945 stood

at $468 million. This increase, however, was much more due to

circumstances relating to World War II than it was to the adoption

in 1939 of a maximum 3-day deferment for check credit. During

those years the number and amount of checks handled increased

greatly. In addition, the war caused irregularities and other delays

in the transportation of checks, difficulties in obtaining the additional

equipment needed to handle the heavy volume, and difficulties in

obtaining and keeping adequate personnel.

After reaching a peak of $468 million in 1945, Federal Reserve

float declined substantially in the next few years despite a continuing

increase in the volume of checks handled. In 1949 float averaged

$369 million, a reduction of 21 percent from 1945. This decrease

was made possible by greater use of air transportation, a much

improved personnel situation, and increasing availability of more

efficient processing equipment. These developments prompted a

study of the possibility of further simplifying the check collection

procedures by reducing the number of sorts required of checks deposited with the Reserve banks. After extensive consideration it was

decided that the System would be justified in changing the maximum

deferment availability period from 3 days to 2 days, and this change

was put into effect in January 1951.

At the time this change was adopted it was estimated that continued

improvement in transportation and check processing procedures

would be possible and that the change in the time schedule would not

increase float by more than about $200 million. Remember, it was

about $369 million in 1949. In fact, however, float rose much more

rapidly than had been expected; the daily average of $1 billion in 1951

was about twice that of 1950. During the next 3 years float declined

to $737 million in 1954 even though there was a continuing increase in

the number and amount of checks handled. However, during this

period wide fluctuations in the volume of float at times presented

operating problems to the Federal Open Market Committee in its

attempt to maintain bank reserve positions at agreed-upon levels.

Partly because of these developments—I guess predominantly

because of them—a special System committee was established in

1956 to study all aspects of the float problem and to suggest remedial

actions. One of the proposals resulting from the study was that

consideration be given to reverting back to the maximum 3-day deferment that was in effect before 1951, and in 1958 the Conference of

Presidents, by a 7 to 5 vote, recommended this change. By that
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 7

time float had risen close to $1 billion again and it was estimated that

the proposed change in the time schedule would reduce float by about

$400 million. The Board of Governors gave careful consideration

to this recommendation but concluded that the benefits that would

result from such a change were not clear enough or compelling enough,

at least at that time, to offset the disturbances that would probably

be caused by the change. Accordingly, the Board decided “to lay 

the matter on the table” for the time being and to give continuing 

attention to the float problem. I might add that since that decision

the question of changing the time schedule and other aspects of the

float problem have had almost continuous consideration by the Board

and the banks, partly because float has continued to increase and

partly because of new developments in the check collection area.

One of the reasons for the Board’s reluctance to change the time

schedule is the fact that “time schedule” float is the easiest kind of

float to predict and hence the easiest to offset by open market transactions. If the change to a maximum 3-day deferment were made

today the decrease in float would probably be around $800 million,

but in all probability the remaining float—due to unpredictable holdovers, transit delays, et cetera—would be subject to much the same

fluctuations as before. That is to say that, while a change of this

sort would reduce the level of float, it would not reduce the fluctuations, and the fluctuations are what cause the Open Market Committee’s manager his difficulties in operation.

The Board also was concerned that the recommendation to revert

to a 3-day maximum deferment schedule came at a time when there

were strong indications that a much more fundamental change in

check collection procedures was necessary if the whole banking 

community were to avoid being swamped by the rapidly growing

number of checks. Commercial banks, as well as Federal Reserve

banks, were hard pressed to find the space and the people to process

the checks they were receiving. Steps were being taken to develop

high-speed electronic equipment that would sort checks at the rate of

60,000 an hour as compared with a rate of about 1,500 per hour by 

previously existing procedures. One of the brighter prospects of the

new equipment was that it would cut down “holdover” float, which

had been growing more rapidly than “time schedule” float.

The Federal Reserve banks were among the first to move toward 

the use of high-speed check-processing equipment. Efficient use of

this equipment requires the cooperation of commercial banks because

they must imprint and encode their checks before they can be handled 

electronically, or the Federal Reserve banks have to do it when the

checks come to them. The Board has been urging all banks to arrange

for the electronic handling of their checks in order to speed up the

check processing procedures at the Reserve banks.

While it has taken some time for the electronic procedures to become established, the benefits of this program are now beginning to

be clearly apparent in most areas of the country. For instance, last

year 8 of the 36 Federal Reserve banks and branches were able to

use the high-speed equipment to process 90 percent or more of all the

checks they received, and 19 other offices used the high-speed equipment for between 70 and 90 percent of their check volume. The

remaining nine offices are all smaller branches; five of them as yet have

no high-speed equipment and the other four are just getting started
8 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

on the program. Because of the progress already made at the highvolume offices, the 36 Federal Reserve banks and branches combined

handled 80 percent of all checks received last year on the high-speed

equipment. There is every reason to believe that this percentage

and the accompanying benefits—including reductions in holdover

float—will continue to show gains as more and more commercial

banks move into the field of EDP, either directly or through agencies

which offer such services on a fee basis.

In my opinion, the present high-speed processing equipment is but

the first step toward much improved systems that will completely

eliminates float—and probably even eliminate the need for checks—by

utilizing the potentialities already existing in high-speed data communications facilities. The Federal Reserve System, alert to these

possibilities, is now engaged in intensive operating studies of two

developments. One involves a near-range program under which all

checks deposited for collection in Federal Reserve banks and branches

would be immediately credited to the reserve account of the depositing

bank and simultaneously charged to the reserve account or correspondent account of the drawee bank. Such an arrangement would,

of course, eliminate float.

The other study involves a longer range prospect that, in my opinion,

has much greater potential operating advantages; namely, the introduction of a giro system which would eliminate the use of the check

for the bulk of regular money settlements.

What I have been saying in my statement today is that technology

will eliminate float. This has been a theme in previous statements

by Federal Reserve representatives to your committee. It has also

been the prevailing judgment within the System for some time, based

upon firsthand operating knowledge and numerous special studies.

Up to this point technological changes have arrested the expansion

in float as transactions volume has risen but the expected absolute

decline has yet to materialize in significant degree. However, technological improvement of recent years, and near-term prospects, are

more persuasive than ever before that float will shortly be a phenomenon of the past.

I would like to mention two specific lines of technological development bearing on this problem. The first has to do with wire transfers

of funds.

The basic idea underlying wire transfers of funds is not new. In

fact, the Federal Reserve banks and branches have offered this

service to their member banks for many, many years. The service

is handled over a leased network of lines that connect each of the

36 Federal Reserve banks and branches, the Board of Governors,

and the Treasury Department with a switching center, now located 

in the Federal Reserve Bank of Richmond. The system permits

direct communication between any of the offices. Under this arrangement, when a Chicago member bank, for example, wants to increase

its balance with a New York correspondent, it merely asks the Federal

Reserve Bank of Chicago to send a telegram to the Federal Reserve

Bank of New York directing that the desired amount be credited to

the reserve account of the New York correspondent. At the same

time, the Chicago Reserve Bank will charge the reserve account of

the Chicago member bank by the amount transferred. There

obviously is no float in this transaction.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 9

I might add that the same procedure and facilities are used in

handling many transactions in Government securities. In such a case,

if a Chicago member bank wanted to sell Government securities in

New York, it would bring the securities to the Federal Reserve Bank

of Chicago with appropriate instructions. The Chicago Reserve Bank

would “retire” the securities—i.e., the actual pieces of paper—it

received from its member bank and instruct the New York Reserve

Bank to issue identical securities to the purchasing bank in New York

upon receipt of payment therefor. Upon receipt of the payment in

New York, the amount would be transferred to the Chicago Reserve

Bank for credit in the reserve account of the member bank that had

sold the securities. These are operations that take place every day in

the Federal Reserve System now.

The basic difference between what we have been doing along these

lines and what we hope to do lies in the nature of the equipment and

the range of transactions involved.

At present messages are sent and received over the leased wire

network by teletype machines, which are woefully slow even by

present-day standards. Accordingly, transfers are generally restricted

to transactions involving large amounts which come within narrowly 

prescribed rules. However, with the development of wide-band 

transmission having computer-controlled input and switching, and

microsecond speed, the volume of traffic between computers that could

be accommodated over such a system would be virtually without

limit. Every check transaction, as we know it today, could simply

become a wire transfer and this means that the bank making a transfer

on behalf of a customer charges his account, and has its account

charged at the Federal Reserve bank virtually at the same time that

the account of the payee bank at another Federal Reserve bank is

credited as is the account of that bank’s customer. There is no float

in this process.

A second development is the beginnings of a giro system in the

United States. In such a system the payor initiates the settlement

process by communicating, not with the payee, but with his own bank

notifying it directly whom to pay, how much, and when.

Most of this information will be received at the bank in machine

language; if not, it will be converted to that form, and the bank’s

computer will process the bookkeeping entries internally for amounts

drawn on it. Tf one computer handles the accounts for several banks

the operation is still almost entirely an internal one. If payment

is to an account in another bank, the information will be automatically

routed into that bank’s equipment. Bank positions will also be

adjusted frequently throughout the day by debits and credits to

member bank accounts with the Federal Reserve System. The computers will transmit printed-out confirmations to the payor and advices

to the payee at appropriate intervals. The print-outs could be transmitted by mail or telephone wire, at the option of the customer.

In the case of larger customers, the bank’s computer will communicate

directly with customer’s equipment.

This process of settlement and deposit accounting will be carried

on concurrently at or between 250 or so computer centers located

throughout the country. The number of computer centers given

is conjectural but compromises an optimum operational size and a

convenient geographical area. The very rapid growth of computer
10 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

centers recently— within the last year or so— seems to presage the

automation of all demand deposit accounting in the near future—

using checks or any other settlement media. Banks will have a

choice of their own equipment, a correspondent’s facilities, a cooperative processing organization, or a commercial service bureau.

The giro technique lends itself to still another technological development that is being adapted from earlier methods of extending convenience and installment credit. Just as vendors’ credit cards have

been replacing currency, a new device is being introduced which will

replace more currency, the present generation of credit cards and

many check uses as well. Promotion departments have yet to establish a catchword for it, but this morning I’ll simply call it a cash/credit

card. Whatever it is called, it will team up with the telephone and

the computer to take the drudgery out of paying bills and take much

of the redtape out of getting credit.

Once your bank has issued you a cash/credit card, you will be able

to pay any creditor who has a bank account simply by inserting your

card in a telephone and dialing a series of numbers. The telephone

line, hooked up to your bank’s computer, will tell the bank how you

want payment made.

Actually, using a cash/credit card, you will probably carry less cash

and get fewer bills to pay, because when you buy merchandise at a

department or grocery store you’ll use your cash/credit card in place

of cash or the old charge-a-plate. The store clerk will put it in his

telephone and do the dialing for you. The merchandise would be

paid for then and there.

But if you’d rather not pay on the spot, that will be taken care

of, too. You can name your own preference for cash, convenience

credit, or installment credit, according to the terms under which your

cash/credit card was issued. You will no longer have to fill out charge

account applications with every vendor you patronize, carry a pocketful of credit cards, or try to explain to your wife the complexities of

various credit plans.

In the modified giro system I am describing there will be no check

sorting and resorting, no shipment of checks from bank to bank or

bank to customer, no storage requirements for checks, no kited checks,

no checks returned for insufficient funds, and no float. Deferment

schedules will accompany checks into the world of yesterday, and

the technicalities we are discussing today will be found only in research

libraries for historical evaluation.

Judgments differ, of course, as to the practicality and imminency

of a new system like this. Many of those who are convinced that it

is inevitable think they will not live to see it. But I believe it will

come much sooner than many observers expect. Most of the innovations needed for the new system are now in being, or are about to be

placed in operation. For example, more and more employers are

processing their payrolls not by issuing checks but by using their

computer to instruct their bank’s computer to charge their account

and credit each employee’s account in the bank of his choice. Some

banks have already made available to their depositors the prototype

of a cash/credit card I described. In fact, individual banks throughout the country are now adopting, piecemeal, these and other elements

of a giro system. I am confident that giro is not only technically

possible, but practical from a cost standpoint, notwithstanding the

undoubted strains and pains of transition.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 11

I appreciate this opportunity to share with you my view of the

future money settlement system of the Nation, and how funds will

flow among 70 million depositors. In it there is no place for float.

Mr. F ascell. Well, Mr. Mitchell, I want to thank you for a very

informative and certainly an interesting statement.

Mr. Gallagher?

Mr. Gallagher. Thank you very much, Mr. Chairman.

Your giro system is certainly going to take the romance out of

finance. I would imagine that this would be one more step toward

the total computerized man of the future. But it certainly is an interesting concept.

Would you care to venture a guess as to when this becomes workable?

Mr. M itchell. Well, I have speculated th at it will be some time

within 5 to 10 years. It will not happen all at once, it will happen

gradually. And the way things have been going the last year leads

me to think that we are getting closer to the minimum period rather

than the maximum period. I do not mean to say that all settlements

will be by this method, but what I do mean to say is that the bulk

of settlements will be by this method. Computer technology has been

moving very, very rapidly, and wire transmission opens up so many

factors th a t I think that it is going to come quite rapidly. Plus the

fact that we have two very aggressive organizations involved in this,

the American Telephone & Telegraph Co. and IBM, to say nothing

about other computer companies which are extremely aggressive in

pushing these developments.

Mr. Gallagher. I would think that the rippling effects of this would

be rather revolutionary, too. I think it would make life a lot easier

for the Internal Revenue Service if a bell rang for every financial

transaction of every person in the United States at the same time.

Thank you very much. It is an interesting concept.

Mr. F ascell. Mr. Dow?

Mr. Dow. Yes, I want to compliment Mr. Mitchell on his ability

to make a pretty fair statement about a very difficult and complicated

subject.

I have one or two questions, and not to challenge very much of

what you said, but mostly for the purpose of illumination.

I think we noted that the average level of float was declining a little

bit in the last year; it fell off.

Mr. M itchell. That is correct.

Mr. Dow. I forget what percent is was.

Mr. M itchell. Three percent. The volume of checks rose 6

percent.

Mr. Dow. How much percent would you expect it to decline, let

us say, in the next year? In other words, what is the trend here?

Mr. Mitchell. Well, if you would let me have 2 years, I would

think most of the holdover float would be gone.

Mr. Dow. Really?

Mr. Mitchell. Yes. This is really dependent upon the system

becoming fully automated and the banks, the commercial banks,

having all of their checks imprinted, and as we say, fully qualified

for machine operation. Now, the smaller banks will be the last

ones to put the amount on the check in machine language, but there

is not any reason why every bank should not imprint its checks with

the magnetic ink which identifies the bank. There is no reason for
12 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

th a t at all. And within this period, as far as I can see, they ought

to be able to achieve at most banks, the great volume hanks, the

imprinting of the amount. This, then, qualifies the check for machine processing.

Once it is qualified for machine processing, then there is no reason

I can cite for there being a significant amount of holdover float.

Am I wrong about that?

Mr. F arrell. I think you are right.

Mr. M itchell. Mr. Farrell is with me. Mr. Farrell knows a

great deal more about this than I do.

Mr. Dow. I am amazed at your figure of 2 years. It is very

encouraging.

Mr. M itchell. We have gone very far in this. We have machine

processing at all our large volume offices, and we need only now to get

it established a little bit more widely in commercial banks. They

are finding that electronic data processing of checks is more economical

than the present system.

Mr. Dow. May I ask one or two more questions?

Mr. F ascell. Certainly, Mr. Dow. Take your time.

Mr. Dow. Do you think that, speaking of those electronic symbols

on the checks today, do you think that those devices will be replaced

by any others in the future? I know there has been a good deal of

difficulty with them because of misprinting or failure of the printer

to meet the tolerances, and so on. Will there be a better device

than that in the future?

Mr. M itchell. I think the better device is the giro system, in

which your computer advises the bank it wants somebody paid. Then

it is all computer language. You are not going to have a computer

in your home, but you are going to have a telephone, and attached to

the telephone will be a little keyboard, and that is the point at which

it will go into computer language right there.

Mr. Dow. I was going to ask you a question about that telephone.

Does this mean w'e shall have to revolutionize telephone stations all

over the United States by substituting------

Mr. M itchell. This installation is actually in being at the Bank

of Delaware. I think it is in operation now.

Is it not?

Mr. F arrell. I think it is, or about to be.

Mr. M itchell. The last annual report of the Bank of Delaware

describes this system and gives you a picture of it. I think a check

is an intermediate document, if that is the question. The check

itself is an intermediate document, and I think the imprinting on it

is an intermediate stage. Yes, we will get rid of this. I do not know’

at w’hat point this will occur, however.

Mr. Dow. I wras just wondering how’ many new instruments you

need in a country with this device of transmitting numbers on a wire.

Would you need one at every counter in Macy’s, for example, or would

you need one at every filling station, or just how extensive w’ould we

have to spread your equipment throughout the country to do this?

Mr. M itchell. I do not think I am particularly wrell qualified to

answer this question. There have been some estimates of the cost of

the hardware to do the whole job, and they are astronomical. I think

that some of the people who have had or are having difficulty with the

systems because they are pioneers blanch a little bit at what they
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 13

think the hardware costs might be. These costs will be substantial,

but I do not think they will be prohibitive to the system.

Mr. Dow. One other thought, Mr. Mitchell. That is, you will

always have optimistic people who try to overdo their bank account

and incur overdrafts. 1 was wondering.-----

Mr. Mitchell. You cannot do it with the system.

Mr. Dow. Why not?

Mr. Mitchell. Because when you advise your bank to pay so and

so, they look at your account before they make the transfer.

Mr. Fascell. It throws the card back at you.

Mr. Dow. There is a little feedback?

Mr. Mitchell. The transaction is not consummated.

Mr. Dow. That is an interesting feature.

Then I did have—I shall not be too long, Mr. Mitchell. I have one

other question, and that is that the word “giro” is an interesting

word. What is the genesis of that word? How does it fit into this

case?

Mr. Mitchell. The giro system is a system that has been used in

Europe to some degree, in which the person who wants to pay a bill

instructs not his bank, but in this case the post office, to pay the bill

for him. That ends the transaction.

Mr. Dow. Does this have something to do with gyroscopes?

Mr. Fascell. It is an Italian expression, Mr. Dow, which means in

a circle. It means a complete circle transaction.

Mr. Dow. Fast spinning.

Well, I am down pretty much to the end.

It says that in such a system, the payor initiates the settlement

process by communicating, not with the payee, but with his own bank, 

notifying it directly whom to pay, how much, and when. That

communication would be through these telephone devices?

Mr. Mitchell. That is one way. He could also write his bank a

letter. Then the bank would have to translate the letter into machine

language. But if he had a telephone, he would put it in machine

language himself.

Mr. Dow. How soon do you think, Mr. Mitchell, this telephone

system will be in fairly extensive play in this country?

Mr. Mitchell. Well, I do not have any feeling, except, you see,

when someone already has one in being-----

Mr. Dow. Then it spreads?

Mr. Mitchell. It spreads very rapidly. So I would think in the

course of, I would say, 4 or 5 years, there will be a lot of installations

of this sort and they will be spreading. It would depend in some

degree on how successful it turned out to be from a cost standpoint.

I do not think—as far as I know, no one has any specific apprehension about costs. They recognize that costs have to be kept down

in order to make the system work. One of the things to be kept in

mind is that nobody knows the cost of the present system. It has

a lot of public costs and has a lot of private costs.

Now, taking care of all this is a very large costly operation. In the

speech I made at New York in January, I gave a figure of $3.3 billion.

This was just a fraction of the total cost.

So one of the problems is to devise a system that will make it

profitable to the banks to run this system instead of what they have

and make it attractive to customers—this is going to have some large

54-50S—66---- 3
14 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

public benefits, too, because it will economize on the use of currency

and coin. It will also benefit all the businesses that will not have to

take all the security measures that go with handling large amounts

of currency.

Mr. Dow. Mr. Mitchell, are you representing what we shall call

the declared official intentions of the Federal Reserve bank when

you look forward to this giro system, or is this thinking that lies within

your experience and on which you are making a personal prediction?

Mr. Mitchell. N o; as you know, the word “I ” appears in here and

this is my statement. However, the Federal Reserve System does

have the two committees I referred to that are officially concerned

with these problems, and while the System does not endorse every

word that is in this statement, still I think it is consistent with the

System’s position.

Mr. Dow. I would like to commend you, Mr. Mitchell, because of

the veterans th a t I know in many lines have a closed mind about

progress in the future, and I think it is very wonderful that you have

an unlimited horizon about this check system, and I think you deserve

a tremendous amount of credit.

Mr. Mitchell. Thank you, sir.

Mr. Dow. Thank you, Mr. Chairman.

Mr. F ascell. Mr. Dow, you said it better than I could say it,

and I am glad you said it.

Mr. Mitchell, I detect in your statement somewhere a slight prediction that we will not need any coin or currency. What is a child

going to do when he wants to buy a 5-cent bar of candy?

Mr. M itchell. I do not think we are going to go that far. However, I think it will decrease our need for coin and currency, as well

as checks. The major example, I believe, is the grocery store, the

supermarket. I think at the supermarket, a card of this kind would

be used instead of cash.

Mr. F ascell. That interests me, because our subcommittee has

been having hearings into eoin shortages over a period of years here,

with the Federal Reserve System and the mint, about the means,

and the need for long-range forecasting and anticipating future coin 

demands. I never really have been satisfied on the availability of

reliable criteria of any kind for that purpose. Yet in all of the discussions we have had nobody up until right now has raised this distinct

possibility which ought to be put into coin production programing

somewhere, and not over the long range, either. It looks like a

short-range need to me.

Here we are planning for producing at the rate of 15 billion coins

a year. We are not only going to be up to our ears in coins, if what

you describe happens in 5 years, and the mint is producing at the

rate of 15 billion coins------

Mr. M itchell. Well, Mr. Chairman, the Federal Reserve has had

a lot of unpleasantness about this coin shortage, as you know full

well. We certainly would like to see the mint provide us with a very

large reserve of coins, so we do not have to go back to rationing, or

anything.

Mr. F ascell. I am for that, too.

Mr. M itchell. I think the worst is over, but looking far ahead, I

believe that if we do actually go into a system where the casli/credit

card is used on a large scale, it is definitely going to affect the cur-
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 15

rency, perhaps more than the coin. The meter device is something 

that is going to require an awful lot of coin, there is no question about

it.

Mr. Fascell. The coin vending machine?

Mr. Mitchell. The coin vending machine. This is going to grow.

I think it will continue to grow as long as wages rise. This is a

laborsaving device. So I would look for the use of coins to perhaps

grow much more.

But I think currency is something else again. Our need for currency with a system of this sort, Tthink, would be less. I think you

still have to have a pocketful of coins, but you might not have to carry 

a big pocketful of bills.

Mr. Fascell. I have a funny kind of feeling, with perhaps no real

basis, that the coin machine may already be obsolete in this computer

era.

Mr. Rothenberg. They have already designed a coin vending

machine which takes a credit card.

Pretty soon, you will not even need any wires. You will have something in your hand that you use to send an impulse to some center.

We are doing that now in some cases, so that what you describe really

should not be too far away.

With all our struggles over the coin problems I have had, anybody, 

Arthur Little, or the mint, or anybody else, discuss this kind of a

future, and I think it is very important to put it into coin programing.

Now, Mr. Mitchell, why do we not just do away with float right

now, by giving everybody immediate credit?

Mr. Mitchell. If I may say so, Mr. Chairman, I think this is

exactly the direction in which we are trending quite rapidly. We are

not in a position to do it until we can-----

Mr. Fascell. Take care of $1.8 billion somewhere in the credit

system?

Mr. Mitchell. No; we can do that any time. We are not in a

position to do it until we can stop the checks when they hit the

Federal Reserve banks, instead of sending the checks on.

Mr. Fascell. You mean control of return items?

Mr. Mitchell. No. When we get a check now, if it is fully

qualified, we put it on tape. Once it is on tape, then all we need is a

wire to transmit it to whatever Reserve bank it goes to, and from there

to charge the account of the drawee bank, and also the drawer’s

account. This can be done instantaneously. But the first thing we

have to do is have the fully qualified item, and then we have to have

the transmission facilities.

You also have to have a system in which we do not have to return

a check. We are trying to get out of the business of moving checks

all over the country. You have to be able to stop the check. This is

one of the things one of these committees is now working on. And

as soon as we can get that problem solved-----

Mr. Fascell. I was not thinking of it from the mechanical point

of view, but from an accounting standpoint. Why not do it? This

has been a fringe benefit, and you have not removed the fringe benefit,

and you have not removed the management problem.

Mr. Farrell. Could I comment on that?

Mr. Fascell. Yes, sir.
16 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

Mr. Farrell. If you gave immediate credit for all items, you would

increase float by about $4 billion, rather than decrease it. The only

way you could give immediate credit for all items is have a system

under which you can make the simultaneous charge for the items.

That would wipe out the float that exists today, as well as the increase

that is now shown in deferred availability.

Now, in order to have an immediate charge system, you have to

have either one of two alternatives. That is, you have to have a

contractual arrangement with the hank that is going to accept the

charge before he gets the check in his hands, or you have to change the

State laws that now require presentment of the check as a basis for the

charge. Now, we think we can do it at least among the larger hanks

by a contractual arrangement to begin with.

Mr. Fascell. What about presentment of the check as a basis for

the charge?

Mr. Mitchell. You have to get rid of that, or else you have to

wait until the check gets there, and that is what takes time. You start

a check at Bangor, Maine, and you head it for La Jolla, Calif. You

have a long plane trip, but you also have a truck trip at both ends.

This takes time. Whereas if you put that on a wire, you can credit

and charge the accounts almost instantaneously, and then no float

exists.

Mr. Dow. Might I inquire?

Mr. Fascell. Certainly.

Mr. Dow. Is there a legal problem, Mr. Farrell, of the same kind

in connection with entering a charge across State lines, we shall say,

on a wire, to an account? Will the State law accept a wire impulse to

charge a man’s account?

Mr. Farrell. The State law, Mr. Dow, that I referred to has to do

with the requirement to present a check for payment in order to

establish the validity of the check. Now, the wire transfer is a separate contractual arrangement which does not require this kind of

presentment.

Mr. Dow. In other words, an impulse on a wire does not come under

the same restraints as a negotiable instrument; is that right?

Mr. Farrell. It is not a negotiable instrument in that case. It

is a contract.

Mr. Dow. Not being a negotiable instrument, can there be a valid

charge made to the account of a payee?

Mr. Farrell. A wire transfer originates by or through a request

by the owner of the funds to reduce his balance, and that becomes the

instrument authorizing the transaction. You go to your bank and 

you tell your bank to transfer a certain amount of your balance to

another bank in another section of the country. Now, the direction

you gave your bank to make that transfer is the authority for the

charge that would be akin to the check if it came in from the other end.

Mr. Dow. I was just wondering whether this has validity within

the law as evidence of the legitimacy of the charge.

Mr. Mitchell. I think the point is that it is your money, and 

if you tell your bank to transfer it, then there is no problem. If you

write a letter and you enclose a check on your bank, then that is the

problem we are confronted with now, because it gets in the hands

of another person.

Mr. Dow. I guess what I am saying is, will the law, State or

otherwise, Federal law, recognize a charge plate, if you want to call
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 17

it that, if some kind of identification which comes over a wire as

an impulse is a valid claim on an account at a distance.

Mr. Mitchell. Well, I do not know. I do know that the Bank

of America—the Bank of America card is the forerunner of this type

of card. There is a Mellon card. I do not know how many cards

there are that operate this way at the present time.

Now, whether they go across State lines, I do not know. The

Mellon card is available to its depositors, who have a list of merchants

and retailers in that area. The same is true of the Bank of America

card, which has been operational for quite some time.

Mr. Dow. I did not want to labor the point. It is no doubt

something that has to be dealt with.

Mr. Mitchell. This is a technical problem with us. As long as

we have a check system, we have to do something with the checks

when they hit the Federal Reserve banks by way of getting them

automated. As soon as we get them automated and we get people

to accept wire transfers in lieu of the check itself, then we can go

ahead with the system. This is the problem that one of these committees is addressing itself to.

Mr. Fascell. By the way, Mr. Mitchell, how long have we been

saying that float is a phenomenon of the past?

Mr. Mitchell. I suppose since 1951, anyway. We had great

faith in the airplane. Now we have transferred the faith from the

airplane to the computer. That is really what it amounts to. There

has been a lot of technological progress, let us face it.

Another factor I think I ought to mention here is that the use of

trucks is doing a great deal to speed up the processing problem here.

We are using contract carriers instead of sending by mail. This has

speeded up the operation considerably.

Mr. Fascell. Overlooking for the moment the presentation of the

check in order to make the charge, why cannot procedures be set up,

strictly accounting procedures, with respect to immediate credit and

immediate charges at every bank and for each bank?

Mr. Mitchell. Well, I think we are not overlooking that; there is

no reason why we cannot do it. In fact, we are still using-----

Mr. Fascell. As a matter of fact, can you not resolve returned

items, those returned for collection, or whatever reason, at some

central account?

Mr. Mitchell. Yes, I think we can. We could say, “If you

want the instrument, we can send it to you. It is going to get there

a little late and cost you 50 cents when it gets there.” I think

actually we can do this.

Mr. Fascell. But there is no compelling reason-----

Mr. Mitchell. No reason that I know of.

Mr. Fascell. Because float is going to be reducing and eventually

be extinct, anyway.

Mr. Mitchell. In any event, this is going to happen. It is going

to happen either as a result of giro, or stopping a check when it hits

the Federal Reserve bank and substituting an electronic impulse for

the check at that point.

Mr. Fascell. With average daily float at $1.8 billion and with the

Board giving it continuous consideration, to use your own words, if

the prognosis that you have made does not come about, then I assume

you are going to be prepared with some other plan. The present plan
18 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

is that, given certain factors, reduction of the float and its elimination

will happen. Now, what if that does not happen. Are you going

to continue to give this continuous serious consideration?

Mr. M itchell. Well, I would say that if we did not have this

prognosis for technological developments to eliminate float, we would

be better off moving to some different deferment schedule. I would

agree with that if I did not think that this is true. I think that would

be the thing to do.

Mr. F ascell. That has been taking some funny bounces, just like

a football. At the time you thought it was going to go down, it

went up, and at the time you thought it was going to go up, it went

down.

Mr. M itchell. I understand that.

Mr. F ascell. It might take another funnj bounce and go up to $3

billion.

Mr. M itchell. I understand.

Mr. F ascell. I thought we ought to make it clear on the record

that we are not just brushing it out the window and saying, “Here it

goes.”

Mr. M itchell. I think your patience exceeds ours.

Mr. F ascell. We have studied the float for several reasons. First

of all, it seemed to present a management difficulty, which obviously

you had to deal with. It also seemed to be some kind of a fringe

benefit.

Mr. Mitchell. Well, I honestly believe------

Mr. F ascell. This is a very competitive business, I might add.

Mr. M itchell. Oh, yes, it is, indeed.

Mr. F ascell. I did not mean to interrupt you.

Mr. M itchell. I just want to say that although I think we have

been much more optimistic in the past than the facts indicate we

should have been, I do think that right now, with the technological

developments that have occurred and are in the process of occurring,

and also with the System devoting its attention right to this specific

point, I think we are going to get results soon.

Mr. F ascell. You mentioned the establishment of computer

centers—and that you thought that from a geographical standpoint,

about 250 of them will do the job, and that some have already been

established. How many are in existence?

Mr. Mitchell. Well, I suppose there have been probably more

than this established, or maybe as many as this established. Most of

the large banks, the hundred largest banks, have their own computers

right now, I am sure. In Wisconsin, for example—I just happen to

have heard something about the situation there—one bank has enough

facilities to handle all the checks in that State in its computer center,

the First Wisconsin National Bank. At least they advertised this, and

I think they can do it. They have established centers at three different locations in the State. At least two competitors are doing the

same thing.

So, in a State like Wisconsin, we might have five centers that will

handle a State. We do not know—with 13,000 banks—how many

cooperative centers and how many service centers there are going to be. 

But the cooperative centers are springing up all over the State, and

there are some service bureaus that are doing deposit accounting for

banks, along with all kinds of things.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 19

Mr. Fascell. I gathered from this discussion that as far as the

Federal Reserve Board is concerned, it is leaving all of this to the

natural flow of events?

Mr. Mitchell. We are urging them to move as rapidly as they

possibly can to encode checks for machine processing. That is, the

drawee bank is imprinting its checks with routing symbols, and the

bank that cashes the check is imprinting the amount of the check, so

that when the check comes to a Reserve bank it can be processed by

high-speed electronic equipment. We are also encouraging banks to

establish or use computer centers, because this reduces the processing

that must be done at the Reserve banks. The checks do not come to

us. They go to the computer center. That means that checks come

to us only from banks in more remote areas not serviced by computer

centers.

Mr. Fascell. How about the regulatory agency in this case? Are

there any reasons for any rules or regulations or guidelines? Perhaps

1 am maybe a little bit anticipatory, but from past experience between

these two bodies-----

Mr. Mitchell. Well, I do not know of anything. The only issue

that has come up on this was when the law authorized the creation of

computer centers, did it not, the cooperative centers? Who could

process the checks?

Mr. Farrell. Who could own them, and the law was changed to

permit banks to own them cooperatively.

Mr. Mitchell. And that has already been done. That was done,

I think, 3 years ago. And 1 do not think of any other reason to

expect-----

Mr. Fascell. In other words, the legal base has been established,

and there does not seem to be any reason for any regulation of any

kind at this point?

Mr. Mitchell. I do not think so. The only problem here is going

to be this business of stopping the check, and this is something that

our people are working on.

Mr. Fascell. We, as a subcommittee, will be interested as your

own committees get into this problem, as you peer into the future, 

and experience it and its growth, of being kept advised of any identifiable problem areas.

Mr. Mitchell. I think it would be wonderful if we could come to

you when we get some concrete-----

Mr. Fascell. We not only want to provide a proper forum, but

we want to try to do some long-range planning on our own here and 

see if we cannot stop operating on a crash basis. It would be extremely helpful for us to continue to be somewhat abreast of the

whole situation.

Mr. Mitchell. I am sure we would be very happy to keep you

abreast of what is going on.

Mr. Fascell. We would certainly appreciate it.

Mr. Matan, do you have some questions?

Mr. Matan. Yes, sir.

First, Mr. Chairman, may I submit for the record the correspondence which passed between this subcommittee and its predecessor

subcommittee and the Federal Reserve Board concerning the float,

over the years between 1960 and 1965? Also a copy of a letter from

the Executive Committee of the Conference of Governors of the
20 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Federal Reserve Board to the Board, dated December 14, 1915, and

two pages of illustrative examples of float, which were supplied to

us in the course of this study.

Mr. F ascell. Without objection, they will be included in the

record.

(The documents referred to appear in the appendixes, pp. 37-64.)

Mr. M atan. Mr. Mitchell, in your statement, you several times

speak of the float problem. I wonder if you would say what you

consider to be the problem of float?

Mr. M itchell. Well, the operating problem, from the standpoint

of the system, is the fluctuation of float, because there are several

things that affect the availability of reserves to the banking system.

Among them, one of the least predictable, is float. If these fluctuations are not offset by the actions of the manager of the open market

account, they cause knots in the money market or they cause excessive ease in the money market.

Now, to the degree that we can predict these or can feel them as

we are going along on a day-to-day basis, we try to offset them. But

they are disruptive of the smooth operation of the money market.

The system’s problem is to eliminate this type of disturbance in the

money market. That is the problem.

Mr. M atan. Have you any figures on the extent of open market

operations that are required, say, in a year, as a result of the fluctuations?

Mr. M itchell. Let me say that, on any given day, there are several factors affecting the reserve position of the banking system.

Float may be extremely important on some days but not very important on others. But there will be other factors on every day. It

is the combination of all these factors plus the drift of policy that

determines what this does.

Mr. Matan. We have been interested, as a subcommittee charged

with efficiency and economy of governmental operations, to find out

about how much it costs the Fed to undertake open market operations which perhaps could be obviated fully by doing away with the

float, or minimized by changing the deferment date.

Mr. Mitchell. Well, I do not think that the cost here is a significant item. It is just sweat, that is the only item that is involved.

The manager has to work harder and the committee has to wonder

more. I do not think there is a cost. There is not that kind of a

price tag on it. It is a price tag of doing a better or a poorer job.

Sometimes, you see, float is supplying reserves and we do have more

reserves than we want and we have to sop some of this up. Sometimes when the reverse process is taking place, we have to provide

reserves.

Mr. Matan. Are there no expenses to such operations?

Mr. Mitchell. Well, virtually none. You have an operation that

is going on anyway. This is one of a half dozen different factors.

It means that you are doing the job better or poorer.

Mr. F arrell. There are some benefits, too, if I could mention them,

that at a time when more reserves are needed and float is going up,

it means we do not have to take the kind of market actions that we

would if it were not for float, because then it is being taken care of

automatically by the increase in float. So it is not all on the outgoing

side is what Governor Mitchell, I think, is saying.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 21

Mr. Mitchell. It goes both ways, that is right.

The thing that is irritating about float as far as open market operations are concerned is its unpredictability. When you have a snowstorm, you do not know what it is going to do to you. There are

certain elements of float that have seasonal characteristics. It has a

monthly characteristic, a weekly characteristic. It has longer range

characteristics. But, and these are studied very carefully, and 

we do have people whose duties include projecting float, so maybe

there is some cost involved. But I am confident that this cost would

not exceed $5,000 a year.

Mr. Fascell. It requires many decisions to be made.

Mr. Mitchell. We could do a better job if we did not have float.

Mr. Matan. Can you fairly well predict time schedule float?

Mr. Mitchell. We do very well on that.

Mr. Matan. What indicia do you use?

Mr. Mitchell. Past experience.

Mr. Farrell. That is almost entirely geared to the dollar amount

of the checks that will be processed at any given time. Looking

back, you can predict the dollar amount of checks during a certain

time of the year and the time schedule float is almost entirely controlled by the dollar amount of checks.

Mr. Matan. Does the amount of checks returned for insufficient

funds, or some other such reason, affect float?

Mr. Mitchell. I do not think so, but I do not know. It is not

that big.

Mr. Matan. How about check kites?

Mr. Mitchell. It is not that big.

Mr. Fascell. Does float affect one bank more than another or one

bank less than another because of the number of items or distance

or size, or for any other reason?

Mr. Mitchell. I do not think, Mr. Chairman—let me put it

this way. I have not seen evidence which shows one bank has more

float or more of a benefit or loss from float than another bank, though

this statement is often made. Generally, I would think most banks

that are in a balanced position get as much—taking the year as a

whole—get as much benefit or as much loss from float as any other

bank. This may not be the case. I have not seen any evidence

which shows that a bank or a class of bank-----

Mr. Fascell. What happens to be the current thinking with

respect to that in the profession? Do the people in the business really

think they get a benefit out of this?

Mr. Mitchell. As a class, they do; yes. They argue that if they

lose the benefit of float, then they ought to have a compensating

advantage—yes; that is right. But I think then they are speaking

about the banking industry as a whole rather than about their

particular bank.

Mr. Fascell. But the Board’s professional judgment is that on

the overall, one is not really helped any more than the other?

Mr. Mitchell. That would be my judgment, sir.

John, do you have anything to add?

Mr. Farrell. You can argue both sides of the question, Mr. 

Chairman. There are many people who think that float benefits

primarily the depositing bank; that is, the bank that deposits the

54-508—'6i 4
22 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

checks because that bank gets credit for those checks quicker because of the float than they would if there were no float.

In other words, it gets credit for the checks in a maximum of 2

days now, whereas if we changed the time schedule, in some instances

it would have to wait 3 days.

But on the other hand, the drawee bank, because we are not working

on an actual collected funds basis, does not have to pay for the checks

as quickly as it would under this system that Governor Mitchell has

been describing. So you can argue both sides of the fence.

Mr. F ascell. So both banks benefit. In other words, the quicker

they can get credit, it seems to me, the more benefit there would be to

them. If it took 5 days to actually collect a check, and if I were in

the banking business and could get credit for the check in 2 days, I

would think I had been helped tremendously because I got the use

of money for 3 days for nothing.

Mr. F arrell. You would have. But if we went to an immediate

charging system, if you were the big bank, you would have to pay

that check immediately when the check hit the Federal Reserve

Bank and you would lose your money------

Mr. F ascell. The way to find out if anybody thinks there is

any benefit to it would be to change the time schedule to 4 days.

I think there would be some injured protests here and there.

Is there any legitimacy to the thought that you have $1.8 billion

of money which the banks use and get the benefit of? At the current

rates of interest, on a daily basis, that mounts up to a lot of money.

Mr. Mitchell. I think this has to be regarded as meeting part of

their reserve requirement.

Mr. F ascell. Maybe so, but the point I am getting at is, there is

no law on this, and nobody has authorized the banks to have the use

of this money for that period of time, except by your regulation. Do

you have any authority to do that?

Mr. M itchell. I am sure we must have authority. All these

years we would have been operating illegally, otherwise. Our

General Counsel would never let us do that.

Mr. F ascell. I am sure that the responsibility will come back,

right into the laps of the Congress, because we gave you your authority.

How can you have a counterbalancing effect on float through reserve

requirements?

In other words, where you are applying even factors against uneven

or variable factors, I do not see how you can counterbalance anything.

Mr. Mitchell. All I am saying is that the present sources of Federal Reserve Bank credit are purchases of Government securities by

the Reserve banks and borrowings from the Reserve banks by member banks.

Mr. Fascell. These are uniform, aren’t they, applied all over, to

all banks?

Mr. Mitchell. N o, some banks borrow, some banks do not. If

they want to borrow, they are the ones that get the credit. Credit

is, of course, mainly supplied by purchases of Government securities.

Mr. F ascell. But the reserve requirement is a management tool,

when applied, on a uniform basis, isn’t it?

Mr. M itchell. Yes.

Mr. F ascell. How does that counterbalance the fluctuations in

float?
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 23

Mr. Mitchell. I did not mean to say it counterbalanced the

fluctuations in float. What T meant to say was that the aggregate

level of float, since it has to do with the banking system’s own reserves,

could be regarded as an adjunct to the reserve requirements. In

other words, as I mentioned in my statement, the present level of

float means that the Federal Reserve is extending credit to member

banks that is equivalent to about 1% percentage points in meeting

their reserve requirements on demand deposits. These requirements

are 16/2 percent for Reserve city banks and 12 percent for country 

banks.

Mr. Fascell. Could it be that because of that, as a practical

operational matter in the eyes of the manager or whoever it is that

buys, float really isjust another sort of variable, and the whole problem

is just one more variable.

Mr. Mitchell. I think it is. It is just one more variable. All

member banks are depositing in their Federal Reserve banks, so I

think they are all treated pretty much alike on the question of float.

In this sense, I think it is uniform.

Mr. Fascell. Well, as far as the time schedule, and the holdover,

they are uniform asto each bank. But does not a bank doing a hundred

million dollars a day in checks as against some bank down the street

that is doing $5 million, have a tremendous advantage over that bank 

competitively?

Mr. Farrell. Mr. Chairman, that is one of the things that has

bothered us over the years, particularly since your committee started

writing to us about when we were going to do something about this.

It is true that there is a group of banks that benefit from float. But

there is not any assurance that if we took that float away from those

banks and did something to restore the total level of reserves, the

restoration process would benefit the banks that lost the float.

Mr. Fascell. I agree with you. The fact of the matter is, I do

not think that whether you benefit the other banks or not has anything to do with the problem.

Mr. Farrell. Well, you would disturb the competitive position of

the alinement of banks.

Mr. Fascell. Well, it would appear to me that what you would do

is eliminate one competitive factor which redounds automatically to

the banks which do the greatest amount of business. I think I could

draw a float chart in the banking business on any given day—take

the top 100 banks, and there would be 70 percent of the float.

Mr. Farrell. As Governor Mitchell pointed out in his statement,

the total factors reflecting reserve credit at the present time run somewhere around $43 billion, of which over $40 billion are Government

securities and about $2 billion, roughly, are float.

Now. if you take the float away, you are going to have to put the

total level back to $43 billion.

Mr. Fascell. Well, the member banks would come up with that.

Mr. Farrell. We would have to give it to them. They would not

come up with it automatically.

Mr. Fascell. Well, they borrow it.

Mr. Farrell. All right.

Mr. Fascell. The point is that when float is considered as part of

your reserve requirements for your banks and when 70 percent of the

float is in the top 100 banks, it means those banks are going to have to
24 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

increase the reserves when you do away with the float. That is the

reason it has not been done away with. What we are saying is, it is

going to have to die a natural death. Obviously, the other banks

which make up the other 30 percent of the float are at a tremendous

disadvantage and have been for all the years we have been doing this.

Mr. Rothenberg?

Mr. Rothenberg. I would like to ask a question right on this point. 

Recently, the Federal Reserve Board raised the discount rate, the

purpose of which, as I understand it, was to stem inflation. The

question 1 am trying to put now is had the float been reduced, and

according to your statement, Governor Mitchell, this would have

reduced the reserves by one and a half percent. The question is did

the Board, in considering a means to stem inflation, consider the

reduction of the float?

Mr. Mitchell. Whenever a change in monetary policy is made,

all of the factors affecting the status of reserves at that time are

automatically considered. And if the decline that did occur in float

had not occurred there would have been a slight difference in the

situation at the time the action was taken. If the float declined

precipitately, you would have a great tightening effect in proportion 

to that much of a decline in reserves. If the float expanded, we would

have a reverse situation.

What we try to do is simply to offset the fluctuation in float. That

is all that is done at the present time with float.

Mr. Rothenberg. I understand you have more flexibility the way

you are operating now?

Mr. Mitchell. This is the kind of flexibility we would rather not

have to exercise.

Mr. Rothenberg. But since this is a means of reducing money

in circulation-----

Mr. Mitchell. Yes, reducing bank credit; that is right.

Mr. Rothenberg. My question was whether it had been considered.

Following the lines of the chairman’s discussion as to what is

happening with the float, since this seems to be an opportunity which

you could have used to do away with some of the float-----

Mr. Mitchell. We could have also raised reserve requirements

and had the same effect. Or reduced the portfolio and had the same

effect.

Mr. Rothenberg. May I ask another question along this line?

Mr. Mitchell. Yes.

Mr. Rothenberg. I think you said before there was no question 

about your right to have this float. In your statement, you said,

and we have had correspondence from the Board, that the amount

of the float is unrealistic to the extent that it takes 3 days to collect

checks, whereas they give credit for two. Does your authority extend

to having an unrealistic float?

Mr. Mitchell. Well, I think that in this particular instance, we

have to consider what might be the consequences to commercial

banks of making a change of this character. It introduces an additional source of work, introduces more costs, both for us and for them, 

of another type. And I think we might make a judgment that in

view of the additional complication, tlie slowing down of processing

and the expense introduced, it is not worth it to move back to a
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 25

3-day system, when in fact, we think we are on the way to-----

Mr. Rothenberg. Well, it is inconvenient, but my question is

directed to legality.

Mr. Mitchell. I think it is more than inconvenient. This would

be a judgment, in my opinion, as to which was the best way to do it. 

I would think we would have a little latitude for our judgment.

Certainly we are closer to it right now, Mr. Rothenberg, than we have

ever been.

Mr. Rothenberg. This has always raised a question. I do not

think there is any question that you have a right to have float.

Mr. Mitchell. Whether or not we are abusing this, I guess, is

the question you are asking.

Mr. Rothenberg. Whether or not, yes, the authority extends to

the extra day.

Mr. Fascell. Mr. Matan?

Mr. Matan. In answer to one of Mr. Dow’s questions, when you

said the expectation of float declining in the next 2 years, would that

be limited to holdover float?

Mr. Mitchell. I think it is going to have some effect on other

kinds of float, too, including time schedule float. I was trying to

give him a conservative answer. It seems to me that it is easier to

reduce holdover float.

Mr. Fascell. In other words, we ought to have about a $500

million reduction in about 2 years?

Mr. Mitchell. I would say so and I would expect this to be on

the conservative side.

Do you want me to make this prediction, John, or no?

Mr. Farrell. I could not make a better one.

Mr. Fascell. Mr. Mitchell, we shall not hold you to it.

Mr. Matan. Now, a depositor who presents a check to a local bank, 

the check being drawn, say, on a California bank, is not generally

permitted to draw on that check immediately when it is deposited?

Mr. Mitchell. It depends on the size of the check. If it is a $15,

$20, or $50 check, I think you could draw on it immediately. If it

is $1,000, absolutely not.

Mr. Matan. Suppose it exceeds the amount of his deposit?

Mr. Mitchell. There he would have to wait.

Mr. Matan. He would have to wait until the check cleared, went

clear to California and back?

Mr. Mitchell. No, they have a kind of rule of thumb, I think. I do not know what it is.

Mr. Farrell. It is roughly twice the transportation time plus a

couple of days, if it is a large amount. In order to allow the check

to go to California and come back, if it is going to come back.

Mr. Matan. Say it were put in here in Washington, what would

be the time on it?

Mr. Farrell. Ten days would not be unreasonable. In fact, I got

a call just the other day from a widow whose lawyer was settling her

estate and was holding her up on that very kind of a thing. She

wanted to know if 10 days were an appropriate delay for him to

impose upon her before he would make available funds out of the

estate. Ttold her it was. I also told her that it could be avoided by

having the lawyer, when he deposited the check here, request that

the fate of the check, as they call it, be telegraphed back here.
26 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

In other words, when the check gets to California, you put an

instruction on it to wire payment or nonpayment. That cuts it down.

That is generally done where large amounts are involved. In fact,

large amounts, very large amounts, are more generally handled by

these transfers of funds that Governor Mitchell spoke of in his

statement rather than check for that reason.

Mr. Matan. But if it is just an ordinary check transaction clearing

out to California, the bank in which the deposit is made could have

credit against its required reserves after 2 days?

Mr. Farrell. That is right.

Mr. Matan. Then suppose a strike or a heavy storm like we have

just had, intervened, the bank could add an additional several days,

perhaps, because of the holdover. The bank there is earning money

on the basis of the check that was deposited, is it not?

Mr. Farrell. Yes.

Mr. Matan. But the depositor is not given any payment, or any 

part of such earnings, is he?

Mr. Farrell. Well, that is harder to answer categorically. The depositor ordinarily is required to keep a minimum balance in the

bank. So actually, he is permitted to draw against that balance on

a first in-first out basis.

In other words, if he has $1,000 in the bank and puts another

thousand dollars in, he can pull down his first thousand without

waiting for the second thousand to be cleared and still have his

minimum balance of $1,000 and not drawn against—not have it drawn

against an uncollected item. That is the way it actually works.

Now, we understand, and of course, we are not in this business

directly, but we have heard that corporate treasurers where big

accounts are involved do press banks to get the same kind of availability from the commercial bank that the commercial bank is getting from the Reserve bank. So I cannot answer your question yes

or no, Mr. Matan.

Mr. Fascell. Of course, a banker could say to a customer in the

hypothetical case Mr. Matan has just described, if you want our

service, that is the price you are going to pay.

As a matter of fact, that is the price he is now paying and has been

paying. Whether it is right or not is something else again. But

is that not a matter for the regulatory agency, rather than a function

of the Board’s policy?

Mr. Farrell. I do not know even whether that would come under

regulatory agency.

Mr. Fascell. I think so. I think they can proscribe or delimit

the amount of money a bank could make on credits. I do not think

there is any question about it. They could just tell them you cannot

do it, period.

Mr. Mitchell. I do not think they have done it.

Mr. Fascell. I understand that.

Mr. Mitchell. There are a lot of services provided.

Mr. Fascell. This is a question of service, I understand.

Mr. Mitchell. There is a prohibition on payment of interest on

demand deposits, but there are a lot of services provided that are in

effect a payment.

Mr. Fascell. In the hypothetical case, I would think this would

be a problem if the total amount of money involved in this kind of
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 27

transaction could be identified. It might be a question to raise with

respect to regulation. If there is any way to identify the extent of

that, I would like to know about it.

In other words, if on a daily basis we are talking of several billion

dollars of transactions of that kind, where a bank gets the use of

money for a period that seems inordinate, over 4 or 5 days, and it is

the kind of thing that ought to be examined, well, then, let’s examine

it.

Mr. Matan. Sir, the bank which gets the reserve credit is earning

money on the basis of an operation in the Federal Reserve clearance

system. That clearance system is provided by the System. Why

should not the bank pay a reasonable value for that service?

Mr. Mitchell. Well, I think the thing that we run into, just from

a perfectly practical operating standpoint, is membership in the

Federal Reserve System. Membership is not mandatory for State

banks, of which there are about 9,000. We have been losing a lot

of member banks in the last 2 or 3 years, for us—we think it is a lot of

banks. I think last year we lost something like 30. We expect to

lose some banks, particularly among smaller banks. But we lost a

couple of banks of over a hundred million dollars in deposits.

Now, this is not good for the Federal Reserve System, and I do

not think it is good for the banking system. Nonetheless, these banks

feel that the reserve requirements that are imposed by the Federal

Reserve are too large a price to pay for the services provided by the

Federal Reserve. The reserve requirements of nonmembers are very,

very much less. In some cases they are nonexistent, virtually, and

in other cases the reserves can be kept in Government securities or

some other asset that earns a return, whereas the reserves that are

required by the Federal Reserve System have to be in balances kept

in the Reserve banks, on which there is no return paid. But they

must maintain them at exactly that level for the given reserve period.

Now, this is quite a serious competitive disadvantage for banks

that are competing with nonmembers. And I think this comes back,

Mr. Chairman, to some of the questions you were raising about these

privileges that the Federal Reserve confers. We are not as a System as competitive with the nonmember banks as wre would like to

be. We would like to have more people in our System. We think

the Federal Reserve System provides better supervision, provides better banks, and also provides banks that offer better services than

nonmembers do. Therefore, we do not like to see banks leave the

Federal Reserve System.

But this is the main reason they leave. It is the reserve requirement imposed by the Federal Reserve compared to the reserve requirement they have to meet outside the System. It is not only the

main reason, it is almost the only reason they leave.

Mr. Matan. Sir, in the correspondence with the subcommittee, 

the Board has expressed the desire to get to a realistic deferment

schedule and, also, an intention to continue to watch the float from

time to time. In view of the approach being made toward the “cashless society,” can the Board now feel that it need not concern itself

any longer with the float?

Mr. Mitchell. Oh, not at all. I mention these tw*o committees

just to point out that we are not only interested in this thing, but we

are actively working to deal with the problems involved in a better
28 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

settlement system than we have now. I think as a result of the work

of these two committees, we are going to deal with the problem of

float, along with a lot of other things. Float is not the primary objective here, but it is an incidental aspect.

Mr. Matan. Have you taken any steps to determine at what point

you will take action to change the deferred schedule to 3 days?

Mr. Mitchell. Well, the last time the 3-day deferment schedule

was considered was 4 or 5 years ago—when I say considered, I mean

debated back and forth—-was several years ago, about 4 or 5 years ago.

But the problem of accelerating the processing of the settlement,

using checks, is a matter of constant concern to us and this is the

reason we got banks to imprint with magnetic ink on their checks and

pushed them as hard as we could. We put into each of our banks and

most of our branches electronic equipment. It was all with a view to

accelerating, speeding up this whole settlement process.

Now, as I was saying in my statement, I think we are just about at

the point of fruition here.

Mr. F ascell. We certainly hope so.

Mr. M itchell. Maybe if I should be back here in a couple of years,

I would have to eat every word I said. But I do not think so.

Mr. F ascell. We certainly hope not.

Mr. M atan. Have you determined at what point float as required

reserves might become too high from a liquidity standpoint?

Mr. M itchell. Well, I do not think we tend to look at it that way.

In fixing the posture of monetary policy, you first try to determine

what it is you think the banking system ought to have in the way of

reserves. Then, having determined that, you decide where the reserves are coming from. Float is one of several factors that affects

the level of reserves in the banking system. As float moves up and

down, it adds to or subtracts from reserves, just as gold outflows

reduce reserves and gold inflows add to them. We watch float and

try to predict the turns it will take, so that we may vary our actions

accordingly. At times float moves in the direction that we believe

reserves should move, so that it then reduces the need for other action

by the Federal Reserve. At other times it moves in the opposite

direction, so that we must offset the trend in float. When float goes

up, we can absorb the resulting addition to reserves by selling off some

of the Government securities in the System’s open market account.

When float goes down, we can supply more reserves by buying Government securities. Member banks may wish to borrow from their

Reserve banks to offset losses of reserves, and the System can affect

the volume of this borrowing by changing the interest rate it charges

or by changing the terms and conditions under which it will permit

borrowing. Of course, another alternative is to change the level of

reserve requirements. Thus, if float were eliminated entirely, the

Federal Reserve might decide to offset the impact on the banking

system by lowering reserve requirements, rather than by supplying

more reserves through purchases of Government securities.

The level of float is implicitly considered always. The fluctuations

in float are part of our day-to-day operating problem.

Mr. M atan. But the daily average level of float has been roughly 10

percent of required reserves at times, I believe.

Mr. M itchell. Well, it is $1.8 billion. The perspective I was

trying to put it in was in Federal Reserve credit, and as I was saying in
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 29

my statement, total Reserve credit is $43 billion, as I recall, of which

the portfolio was $40.7 billion, float was $1.8 billion, borrowing was

$400 million. Then I tried to cast the amount of float in terms of

reserve requirements. This is the way I tend to look at it.

Mr. M atan. Sir, the Board’s operations permit float at times to

constitute 10 percent of the required reserves. How much more

would still be a safe percentage?

Mr. M itchell. Well, I would say we could have a considerably

larger amount of float if there was some reason for it. I do not think

it would be desirable to have a substantially larger amount of float.

I think it is desirable to have less float. In fact, I would like to see

float out of the System, because I think there are a great many

advantages in having an immediate charge and credit system all

around. The closer you get to such a system, I think the better

you are.

I think your committee’s efforts to get us to cut down on float are

entirely proper and I am sorry that we have not been able to do it

more rapidly. I think we have just not accurately appraised the

technological changes as they came along.

Mr. F ascell. Well, you have a competitive problem, too, and I

would not want to superimpose my judgment on your judgment in

dealing with the competitive aspects of your business.

Mr. M itchell. It is a very real problem.

Mr. M atan. Does the fact that many correspondent banks offer

immediate credit on checks and offer clearing services pretty much

as the Federal Reserve banks offer, as well as other services, in any

way impair the operations of the Federal Reserve System?

Mr. M itchell. Well, I do not believe it impairs our operations

but I would rather Mr. Farrell would comment on that, because I

think he knows the mechanics better than I do in this respect.

Mr. F arrell. Well, it reduces the inducement to become a member

or stay a member. When you talk to a bank about membership,

they ask you, why should 1 be a member of the Federal Reserve

System and have to go to this, even as we have today, sorting checks

between immediate, 1- and 2-day deferment, when I can bundle those

same checks up in one bundle with no sorts, deposit them in a correspondent bank and get immediate credit for them? Why should I

be a member of the Federal Reserve System? From that standpoint,

it does hurt us.

Mr. M itchell. If items were fully qualified when they came to

us, we could sort them.

Mr. F ascell. That gets back to one of the questions I asked

originally, which is why not go on and be competitive right now by

giving them credit immediately?

Mr. F arrell. We could not give them credit immediately unless

we had the arrangement or the contract for immediate charge. What

Governor Mitchell is saying is that we could accept them without

the sorts and have the machine decide whether to give them immediate,

1- or 2-day deferment.

Mr. Mitchell. Immediate credit with no sort would increase the

reserves by $4 billion. That is one reason we do not want to do this.

Mr. R othenberg. Following up on the question of whether or not

larger banks might not be getting more benefit out of float than

smaller banks, and tying that into your response with reference to

54-508—^16------5
30 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

the fact that correspondent banks offer services which are competitive with yours, I think the statistic is that only 43 percent of the member banks use the check clearing system The others use correspondent banks and use your service to compete against you. This,

therefore, raises the question as to whether or not you could not devise

a system to charge banks on the basis of the extent to which they use

the services in order to beat down your own competition?

Mr. Farrell. Mr. Rothenberg, as you recall, you had that question in one of your previous letters and we did give it considerable

thought. Our best judgment at the time was that the bookkeeping

involved in such a procedure would be almost fantastic, certainly very

costly. For example, a bank deposits a check, and take Mr. Matan’s

example, and on its way to California, the plane runs into a snowstorm and we have some holdover. When the check gets to California

eventually, it is 2 days’ business instead of 1 day’s business and the

bank can’t process it out there on time. Now, the depositing bank

knew nothing about this snowstorm when it deposited the check;

neither did we. How would we appraise the value or the cost or the

benefit of the float? What kind of records would be needed to keep

up with that?

Mr. Rothenberg. That is a good question, but it seems to me that

there might be an answer to it in the sense that particularly large

banks on a daily basis calculate their reserves. Not only do they

calculate their reserves, but they use any excess reserve to sell Federal

funds. I think we have raised questions in the past as to how do you

exercise supervision over the Federal funds transactions, how do you

compute deficiencies, et cetera?

Now, it seems to me you have to do this. You have to look at the

Federal funds transactions of the banks.

Mr. Mitchell. We do, but they have to meet their reserve requirements every week or every 2 weeks. And this on an average daily

basis. If they want to sell a lot of Federal funds at the beginning of

the week, they are going to have to buy some at the end of the week

or else get an inflow.

Mr. Rothenberg. Can you relate the Federal funds transactions

to the float, to a particular bank on-----

Mr. Mitchell. To that bank’s float?

Mr. Rothenberg. Yes; in totals—I am sure they have totals.

Mr. Mitchell. Well, I do not know the answer to your question

exactly, but what every bank must do now is meet its reserve requirements not on a given day, but on the average for a week—that is a

large bank, a Reserve city bank—or on the average for 2 weeks, for

other member banks. Now, they may be low on some days. They

are not allowed to run deficits.

Mr. Rothenberg. Your examiners get into this area, do they?

Mr. Mitchell. Examiners examine this, yes, but this record is

kept on a daily basis at every Federal Reserve bank for every member

bank. In fact, many banks watch it not on a daily basis but an

hourly basis if their balance is getting low.

Mr. Rothenberg. This is the point, then, you do have some basis

for making a quick calculation as to Federal funds transactions?

Mr. Mitchell. We have a basis for making a calculation as to

what their balance is with us.

Mr. Rothenberg. And their float, too?
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 31

Mr. Mitchell. I don’t think so.

Mr. Farrell. And T might say that I think you would defeat

your own end, because what you would do would be to reduce that

43 percent of the banks that are now using our services to 23 percent.

Mr. Rothenberg. I don’t want to do that. 1 am just asking

questions.

Mr. Farrell. Let me cite an example. In the New York blackout, 

there was a lot of float generated. That in turn generated excess

reserves which the banks could not use. Now, in order to remove

the ill effects of the blackout, the Board permitted in this one case the

banks to carry over those excess reserves to the next week. If it had 

not permitted that carryover and if we were operating under your

system, these excess reserves that the banks got would have cost

them because they were float reserves, but they were not any good

to them. If we charged for them, we certainly would not have won

any friends for the System by charging them for something they did

not want and had no control over getting.

Mr. Fascell. In that case, you certainly would not have charged

them.

Mr. Mitchell. One sign of the extent to which banks found themselves with excess, unwanted reserves on their hands at that time is

that some banks were selling these reserves at a quarter of 1 percent

in the Federal funds market, where the going rate had been something

over 4 percent.

Mr. Fascell. I want to clarify a point that has been raised in my

own mind now. Is float or is not float considered part of the reserve

requirement?

Mr. Farrell. Tf you would change the last word, Mr. Chairman,

it is considered part of the reserves.

Mr. Fascell. Well, if I am required to keep $100 million in reserve,

is the float in my bank part of that?

Mr. Farrell. Yes, sir.

Mr. Mitchell. If, under the deferment schedule, you are entitled

to it, yes.

Mr. Fascell. So in order for me to determine whether or not I have

met my reserve requirement for fulfilling my reserves, I have to

know what my float is, do I not?

Mr. Farrell. That is right.

Mr. Fascell. And I have to know it every day and I have to know

it every hour in some cases?

Mr. Mitchell. No one knows when the collection took place.

You have the credit.

Mr. Fascell. You have to decide whether I have met my requirements?

Mr. Mitchell. That is right. The check has been credited to

your account, but you do not know whether we have collected it. 

That is the point. It is the other end of the transaction you do not

know the answer to.

Mr. Farrell. The reason 1 objected to the word “requirement,”

the point is that the reserve requirements and reserves are never

actually the same. On a day-to-day basis, there are excess reserves

which may be pared down today below even required reserves, but

over the weekly average, the requirement has to be met, the reserve

balance has to be at least equal to the requirement.
32 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Mr. Fascell. I follow that. But in order for me to maintain my

reserves, I have to know what my float is. In order for you, that is,

the Board, to know whether or not I have met my requirement, you 

are going to have to determine whether or not 1 have estimated or

accounted for my float to determine whether or not the reserves have

been met.

Mr. Farrell. It does not follow, sir.

Mr. Fascell. That is the reason I asked the question.

Mr. Farrell. Our only question is what is your balance in our

bank. We do not analyze that balance to see how much of it was

float, how much of it was purchased Federal funds or borrowings or

anything else. We know the borrowings from a separate record. 

But we are only interested in the total balance.

Mr. Mitchell. That you got under the rules. And we might have

actually got collections. We do not know.

Mr. Fascell. That explains it.

Mr. Rothenberg. What is to prevent a bank from putting in a

wrong balance?

Mr. Fascell. Jail.

Mr. Copenhaver?

Mr. Copenhaver. I have two short questions.

Mr. Mitchell, as I understand it, you have a short-term and a

long-term program. The long term is the giro and the short term

is your wide-band-transmission operation?

Mr. Mitchell. And doing something about the check, yes.

Mr. Copenhaver. Do you have any opinion as to when you will

be going over to your wide-band-transmission operations?

Mr. Mitchell. Well, we are kind of bureaucratic, too, you know.

But we do know that the switching center at Richmond is obsolete.

We also know that the equipment that enables us to transmit any

number of messages that we could conceivably generate is available.

And I do not honestly know, sir, whether we have actually had 

transmissions using this equipment to date or not. But I dare say

that we will have them within the next month if we do not have

them right now. We will have experimented with it. We are right

at that point.

Mr. Copenhaver. Now, with the institution of the wide-band

transmission, you will, of course, eliminate, you hope within 2 years,

anyway, your holdover float probably. This was in answer to Mr.

Dow’s question.

Mr. Mitchell. That is right, but this involves our being able to

stop checks when they come to the Reserve bank. This is not a

problem that we have solved up to this point, but it is a problem that

1 am confident we can solve.

Mr. Copenhaver. This is why I asked you if you had some estimates about when, within say, a 2-year period, this might be solved.

Mr. Mitchell. Well, the transmission channels are available and

the equipment is available. Now, it is just a case of being able to get

the banking community to accept the transmission of funds in this

fashion rather than having to get the check and present the check to

the customer. As far as we know, some customers like to get their

checks back, but there are some banks that are not returning checks

to customers. It is not done in Britain, for example. You do not

really have to send that check back, although the practice is so engrained here, maybe there will be a lot of resistance to eliminating it.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 33

Mr. Copenhaver. With the wide-band transmission, you will also

reduce or greatly reduce your time flow. So if you can conceivably

gain acceptance to this operation, not only will you eliminate your

holdover float, but all float. And conceivably within a period of a

couple of years, if you can sell acceptance of it, it will be eliminated.

Mr. Mitchell. 1 was trying to be conservative, as conservative as

I knew how in replying to his question. Even if we must continue

to forward checks to the drawee banks for payment, we still can

eliminate the holdover float. I am convinced, however, that we are

going to make progress in this other direction.

There is another possibility which I did not mention in my statement. This is that we could sort checks by size and we could always

forward the large checks for collection, using facsimile transmission of

the check. This is another possibility. This is needlessly expensive,

but it would be better than some other systems. You might find

that you give check facsimile transmission for large checks over

$500 or $1,000 or some limit of this sort, and this would take care of

the float problem.

Mr. Copenhaver. My other question, Governor Mitchell, is that

as you and Mr. Farrell testified, float is built into reserve?

Mr. Mitchell. Yes.

Mr. Copenhaver. Since you determine the reserve requirements,

the problem that exists today is the holdover float tends to disrupt

a fine guidance, you might say, or control over reserves. If you eliminate the holdover, you are with the time schedule, and you can get

a pretty good control over that.

Mr. Mitchell. That is right.

Mr. Copenhaver. Since this is built into reserves, the question I

ask is, Is there really any benefit that the banks receive from float?

Mr. Mitchell. Well, the benefit the banks get from float is that

if there were no float, they would not have the reserves they presently

have, and they might want their reserve requirements reduced to

provide an equivalent amount of reserves.

Mr. Copenhaver. I am taking an arbitary figure excess of your

reserve requirement.

Mr. Mitchell. That is why, if you will recall, I mentioned that

reserve requirements were 12 and 16.5 percent on demand deposits

and a 1^-percent reduction across the board on demand deposits of

both country and city banks would be equivalent to the present

level of float.

Mr. Copenhaver. In your statement, you indicate that float could

be offset by open market operation.

Mr. Mitchell. That is right, you could also offset it that way.

Mr. Copenhaver. So having established this figure, you are now

building float into that. If you eliminate float, you can adjust it by 

other means and come back to the same point you began with.

Mr. Mitchell. If that is the direction of policy, yes.

Mr. Copenhaver. I am not differing with what the chairman

said, because his point was very well taken, concerning the possibility 

of 100 or so large banks perhaps receiving a short-term benefit from

the use of float. But even with the existence of float, if a certain

number of banks did not receive the advantages of float, you would

have to give them the offsetting adjustment, would you not, through

other means?
34 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Mr. Mitchell. Well, Mr. Copenhaver, I stated when this matter

came up before that while float provides in the aggregate $1.8 billion

of reserves, I have yet to see evidence which shows that this is unequally distributed among members of the Federal Reserve System.

Mr. Copenhaver. But even if it were unevenly distributed?

Mr. Mitchell. Yes, even if it were, so- - ■

Mr. Copenhaver. Then if you eliminated it, you would have to

inject an additional offsetting requirement, would you not?

Mr. Mitchell. Well, yes. As I say, there are many ways of doing

this. If you did it by changing reserve requirements, or by purchases

of Government securities, you would have presumably some kind of a

differential effect on the banks concerned. And I do not know

precisely what the effect is, because when we inject reserves in the

market, we do not know where the impact may come. The funds

presumably go to places where they are wanted the most, where

people are willing to pay the most for them. The theory is when you

inject funds in the New York money market, they feed out to the

hanks where reserves are most needed.

Mr. Dow. May I ask a question? I shall not be long.

Mr. Fascell. Mr. Dow.

Mr. Dow. Just to make dead sure about the elimination of float

within 2 years, you were pretty confident that the holdover float

could be eliminated in that time?

Mr. Mitchell. Yes.

Mr. Dow. I am a little uncertain whether this would be true in

your mind of the time schedule float. Do you think this would

take longer?

Mr. Mitchell. I think that depends on the extent to which one

of these committees succeeds in stopping the check when it hits the

Federal Reserve bank. If they can succeed in making that stick,

then the time schedule float will go, too. Whatever happens, it

will be a gradual process.

Now, if they cannot do this but they can succeed by using facsimile

transmission of the check itself, or by using wire transfer for larger

amounts, these techniques will reduce time schedule float. Then to

the degree to which giro operations do come into being for many 

types of transactions, this will also reduce float, even before it is

eliminated completely. So I think I have these things going for me

on schedule float.

But in giving you this other estimate, I was simply trying to say

that I think this is about as conservative as I can be.

Mr. Dow. Yes. Just one other question, then I will be done.

Referring to this $1.8 billion of average daily float which is a kind

of bonanza for the banking community, has there been anywhere

along the line any effort to deter the Federal Reserve Board from

eliminating float or from going to any of these advanced techniques

that you mentioned? Has either the Board of Governors or one of

the member banks or anywhere, have you found any stickiness

about this?

Mr. Mitchell. Well, let me say this, that I think that the System’s

effort to speed up the collection process has not been inhibited by

anyone. There is a certain amount of inertia. The commercial

banking system is not noted for its eagerness in venturing into the

unknown.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 35

Mr. Fascell. We think we understand.

Mr. Mitchell. They do not move, you know, with great celerity.

But the System worked very, very hard to persuade them to put on

the checks the magnetic symbols so the checks could be processed.

It worked very, very hard to get the drawee bank to imprint its

checks with routing symbols, and to get the bank that cashes the

check to imprint the amount of the check before forwarding it for

collection. These are the things on which the foundation rests. 

Without this, you cannot do anything. I do not think anyone has

been dragging his feet or lobbying against this movement.*” I think

this is basically the whole problem.

Mr. Dow. Thank you, Mr. Mitchell.

Mr. Fascell. Mr. Mitchell, Mr. Farrell, I want to thank you

very much for being with us today and cooperating with us in this

study. You have been most helpful and informative. We appreciate

it. We shall continue to follow this matter with great interest, and

we certainly wish you every success in what you have predicted here.

1 believe we understand the limits within which you make those

predictions.

Mr. Mitchell. It was a pleasure being here, sir.

Mr. Fascell. The subcommittee is adjourned.

(Whereupon, at 12:15 p.m., the subcommittee adjourned.)

A P P E N D I X E S

APPENDIX A—CORRESPONDENCE BETWEEN LEGAL AND

MONETARY AFFAIRS SUBCOMMITTEE AND THE FEDERAL RESERVE BOARD 1

E xcerpt of Letter From Hon. P orter Hardy, Jr., Chairman,

Foreign Operations and Monetary Affairs Subcommittee, to

Federal Reserve Board, J une 10, 1960

J une 10, 1960.

Hon. William McC. Martin, Jr.,

Chairman, Board of Governors,

Federal Reserve System, Washington, D.C.

Dear Mr. Chairman:

* * * * * * *

The questions upon which I invite your comments follow. It

would be most helpful if, in commenting, you sought to explore all

relevant facets of each question—even facets not implicit in the question, but considered by you to be germane.

1. Whether it would not be of economic advantage to the Treasury,

without substantial detriment to the banking community, to reduce

the “float” by raising the maximum deferment time for check credits

so that it more nearly coincides with the time required to complete

the mechanical steps involved.

* * * * * * *

Sincerely yours,

Porter Hardy, Jr.,

Chairman, Foreign Operations and

Monetary Affairs Subcommittee.

Letter From William McC. Martin, J r., Chairman, Federal

Reserve Board, to Hon. Porter Hardy, J r., April 14, 1961,

With Attachment

Board of Governors of the

Federal Reserve System,

Office of the Chairman,

Washington, April 14, 1961.

Hon. P orter Hardy, Jr.,

Chairman, Foreign Operations and Monetary Affairs Subcommittee of the

Committee on Government Operations, House of Representatives,

Washington, D.C.

Dear Mr. Chairman: The Board’s responses to all but two of the

questions presented in your letter of June 10, 1960, were transmitted

i In the 88th Congress the monetary affairs functions of the Foreign Operations and Monetary Affairs

Subcommittee ofthe House Committee on Government Operations was assigned to the Legal and Monetary

Affairs Subcommittee.

37
38 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

on June 29 and a response on one of the other questions was sent to

you on December 22, 1960.

There is now enclosed a reply to the remaining question that your

committee presented relating to the matter of “float” that arise

under the procedures followed in the collection of checks by the Federal Reserve System.

Sincerely yours,

William McC. Martin, Jr.

1. Whether it would not be of economic advantage to the Treasury, without

substantial detriment to the banking community, to reduce the

“float” by raising the maximum dejerment time for check credits

so that it more nearly coincides with the time required to complete

the mechanical steps involved

Estimates indicate that an increase in the maximum deferment

time for check credits from 2 days to 3 days would reduce float by

around $500 million. Whether such a withdrawal of reserves from the

banking system would result in an economic advantage to the Treasury

and could be accomplished without substantial detriment to the

banking community would depend largely upon economic conditions

prevailing at the time the change was made and upon any related

actions taken at the same time.

If it were concluded that the resulting shrinkage in reserves might

cause banks generally to be more restrictive in extending credit—at

a time when such a policy would be injurious to economic activity and 

public confidence—the monetary and credit needs of the country

would require restoration in some fashion of the reserves withdrawn

from the banking system. Whatever action the Federal Reserve

System took to this end would, of course, be for the purpose of implementing monetary and credit policy rather than increasing Treasury

revenue. If the reserves were restored by way of reductions in reserve

requirements, there would be no increase in Treasury revenue. On the

other hand, if the reserves were restored by Federal Reserve purchases

of securities in the open market or loans to member banks, earnings of

the Reserve banks would be increased by the amount of the yield on

such securities or loans—like any other monetary action which increases Federal Reserve loans and investments. This, in turn, would

increase Treasury revenue, since all Federal Reserve earnings over

and above expenses, dividends, and adjustments in surplus are paid to

the Treasury. The gain in revenue would be offset in part, however,

by a decrease in income-tax payments by banks and investors, and to

some extent by the fact that the Treasury, like the member banks,

now benefits from the crediting of checks in accordance with the

existing deferment schedule—principally at the time of quarterly

tax payments.

Federal Reserve “float” may be said to be a result of the streamlined check collection procedures developed in this country, where

90 percent of payments are made by check. Under these procedures

checks deposited with the Reserve banks are credited to member

banks’ reserve accounts (as well as to Government and other deposit

accounts kept at Federal Reserve banks) in accordance with a deferred

availability time schedule which does not always, or exactly, coincide

with the actual time required for the Reserve banks to collect the

checks. Time schedules are used rather than precise collection time
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 39

because bulk handling and accounting greatly reduces the cost and

speeds up the process of check clearing and collection. The cost of

an alternative that would result in the complete elimination of float

as a matter of principle—that is, the crediting of the proceeds of each

check individually as it is collected—would be prohibitive to Reserve

banks, member banks, and the general public. About 4 billion checks

were processed by the Reserve banks in 1960. Personnel, space, and

equipment requirements for individual handling of this volume of

checks would be stupendous. Such a check collection procedure

(were it feasible) would be completely out of harmony with the System’s concern for over 40 years in affording maximum benefits to the

public of an efficient check collection system, which is expressed in

regulation J of the Board of Governors in the following way:

In pursuance of the authority vested in it under these provisions of law, the Board of Governors of the Federal Reserve

System, desiring to afford both to the public and to the various banks of the country a direct, expeditious, and economical

system of check collection and settlement of balances, has

arranged to have each Federal Reserve bank exercise the

functions of a clearinghouse and collect checks * * *

The availability period (in Federal Reserve check collection time

schedules) begins on the day checks are received at the collecting

Federal Reserve bank, or on the day of dispatch of checks by member

banks in one district direct to Reserve banks in other districts. The

periods consist essentially of immediate credit for so-called “city items,”

1-day deferred credit for certain other items (principally those drawn

on banks located in “other” Federal Reserve cities), and deferred

credit for a maximum of 2 days for all other items. The time

schedules for the first two groups of items coincide in large measure

with actual collection time, but many of the third group of items

cannot be collected in less than 3 days. The measure of float is the

dollar amount of those checks which the Federal Reserve banks have

credited to the reserve accounts of member banks and other deposit

accounts, but which have not yet been collected—i.e., items for which

payment in immediately available funds has not been received by the

date such credits become available for reserve purposes. Federal

Reserve float thus supplies reserves to the banking system without

cost to member banks.

In recent years the volume of Federal Reserve float has averaged

around $1 billion, with considerable fluctuations daily, weekly,

monthly, and seasonally. A substantial portion of the total arises

from the fact that it takes an average of 3 days to collect most interFederal Reserve district “country” checks whereas, as above stated,

the deferred availability schedule is set at a maximum of 2 days.

The remaining portion of float arises from a variety of circumstances;

a principal factor is the need from time to time for holding over checks

for processing on the next business day. These holdovers come about

when substantial delays occur in presentation of checks (due, for

example, to irregularities in air transportation caused by bad

weather), or when the volume of checks received on a given day—-

which fluctuates quite widely—is beyond the capacity of available

personnel, space, and equipment.
40 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

During the first 25 years of Federal Reserve operations the deferred availability time schedules ran up to a maximum of 8 days, and

member banks were required to sort their checks according to the

days of availability given in these schedules. In September 1939 the

maximum deferred availability period was reduced to 3 days, thereby

giving much earlier credit, consistent with improved collection experience, for some of the increasing volume of checks deposited for

collection. The processing and collecting of checks was greatly

simplified, and operating costs were reduced for the Reserve banks,

member banks, and large depositors that receive numerous checks

in payment of obligations due them. It was anticipated also that

the simplified procedures would encourage accessions of banks to

Federal Reserve membership, as well as use of the System’s check

collection facilities by member banks that had been reluctant to make

the previously required detailed sorting of checks. The simplified

schedules were adopted in the spirit of the Board’s regulation J and

were regarded widely as of immediate and potential benefit.

In 1940, the first year after the maximum 3-day deferment schedule

had been adopted, Federal Reserve float amounted to about $57

million. During the war years float increased to an average of $468

million in 1945 as a result of a number of factors, principally a tremendous increase in the volume of checks deposited for collection,

shortage of qualified personnel and equipment, and irregularities in

transportation. In the postwar years float declined substantially;

in 1949 the daily average was $369 million, a reduction of 21 percent

from 1945. This decrease in float, despite an ever-increasing inflow

of checks, was made possible by speedier collections which in turn

reflected greater use of air transportation, an improved personnel

situation, and increased availability of needed equipment.

Because of such improved collection experience Federal Reserve

System officials in 1949 began a new study of the deferment schedule.

The principal step contemplated was a reduction in the schedule to

a maximum of 2 days. It was estimated that if this were done Federal

Reserve float would increase by $180 million. After extensive consideration by the Federal Reserve banks and Board of Governors it

was decided to put the 2-day maximum into effect in January 1951.

One consideration favoring such action was the faster and simpler

check collection practices that had been developed over the years.

Another objective was the elimination of inequities as between member

banks in different sections of the country, which had resulted from an

extension by individual Reserve banks of a previously limited practice

of giving 2-day deferred credit (to conform to certain long-established

check collection customs) even though collection generally required

3 days.

Expectations that float would not greatly increase following adoption of the 2-day maximum deferment were not borne out; in fact,

daily average float in 1951 of $1 billion was about twice that of 1950.

Moreover, neither the 2-day maximum established in 1951 nor the

3-day maximum adopted in 1939 appears to have encouraged increased used of Federal Reserve collection facilities by the smaller

member banks. In addition, wide fluctuations in the volume of

float at times presented operating problems to the Federal Open

Market Committee in its endeavor to maintain member bank reserve

positions at the currently agreed level.
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 41

For these reasons a special System committee was established late

in 1956 to study all aspects of the float problem and to suggest

remedial actions. The general program suggested by this committee

included certain recommendations aimed at reducing the level of

and fluctuations in float. Various steps have been taken to reduce

Federal Reserve float pursuant thereto (apart from the time-schedule

float resulting from the 2-day maximum deferment), and the staffs

of the Federal Reserve banks are continuing their efforts to improve

check collection procedures and thereby to reduce float further.

Inspection of the statistics over the past 12 months indicates that the

average level of float is slightly higher than when the study was

begun, owing mainly to a further increase in the volume of checks

presented to the Federal Reserve banks for collection.

Besides the question of possible economic advantage to the Treasury, the subcommittee of the Government Operations Committee

asks whether the reduction in float could be effected “without substantial detriment to the banking community.”

Some of the considerations regarding a possible change in the

deferment schedule from the presei

one means of reducing the volume

lowing:

PROS

1. Would result in closer adherence to the principle that

bank reserves should be represented by collected funds.

2. Would tend to reduce fluctuations in float that create

difficulties in making projections for the guidance of

those implementing directives of the Open Market

Committee.

3. Would reduce by perhaps $500

million the amount of “ free

credit” toward meeting reserve requirements.

4. Would offset tendency for volume of float to increase with

growing volume of checks.

it 2-day basis to a 3-day basis as

of float are indicated by the folCONS

1. Would change a practice in

effect for over 10 years with

possible disturbances to existing competitive pattern.

2. Would be construed by some

members of banking community and public as a

backward step from a decision taken 10 years ago—

one that would be untimely

in view of current and prospective technological advances in check processing.

3. Would require an additional

sort of checks with some

additions to operating costs.

4. Would fail to eliminate whatever objection in principle

there may be to permitting

a portion of reserve requirements to be met by credits

against uncollected funds.

5. Might induce more indirect

routing of checks and consequent delays in collection

of cash items.

6. Might result in higher service

charges against deposit accounts where such charges

are related to balances based

on available funds.
42 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Proponents of a change in the maximum deferment schedule from

2 to 3 days advance the view that such an increase would not directly

affect the majority of member banks since most such banks use the

check collection services of correspondent banks, rather than those

of the Reserve banks. They also suggest that such action would not

be opposed by the general public since few depositors are aware of or

take any special account of Federal Reserve time schedules.

Those who feel that the objections to restoring the former 3-day

maximum deferment schedule outweigh possible advantages point out

that over the past decade the present schedule has become an established element of commercial practice for banks that use the Federal

Reserve check collection system and for those bank customers that

have occasion, in the handling and investment of their funds, to take

close account of Federal Reserve availability schedules. Consequently, even though there was a good deal of bank opposition in

1950 to adoption of the 2-day maximum deferment, there is a feeling

that restoration of the former 3-day maximum would be regarded as

an unnecessary disturbance to a smoothly working operation, not to

be undertaken unless the resultant benefits to the general public were

commensurate with the risks involved in a change.

conclusion

A weighing of the facts and arguments relating to float has caused

the Board to conclude, at least for the present, that the objections to

the present 2-day maximum deferment schedule are not sufficient to

warrant the amount of disturbance that probably would be caused in

banking procedures by increasing the maximum to 3 days. In concluding that an extension of the deferment schedule would not be

wise at this time, the Board is influenced partly by the belief that

some further progress will be made during the next several years in

reducing the number and total dollar value of items requiring more

than 2 days for collection. It also is impressed by the fact that the

existing 2-day maximum time schedule has been in operation for

over 10 years, and a move at this time to return to a longer time schedule would be construed by parts of the banking and business community as a backward step—particularly in view of the intensive

work now being done by the commercial banking system and by the

Federal Reserve to improve methods cf collecting checks in shorter

time through use of electronic and other devices.

Notwithstanding its conclusion that the present is not an appropriate time for a change in the maximum deferment schedule, the

Board will continue to follow this whole question closely, and periodically it will reconsider whether a change in Federal Reserve time

schedules should be made.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 43

Letter From Hon. Dante B. Fascell, Chairman, Legal and

Monetary Affairs Subcommittee, to Federal Reserve

Board, March 5, 1963

March 5, 1963.

Mr. William McC. Martin, Ji\,

Chairman, Board of Governors of the Federal Reserve System,

II ashington, D.C.

Dear Mr. Chairman: Please refer to the exchange of correspondence you had with Hon. Porter Hardy, Jr., then chairman of the

Foreign Operations and Monetary Affairs Subcommittee, concerning

certain operations of the Board of Governors of the Federal Reserve

System, commencing with his letter of June 10, 1960.

Through subcommittee reorganization, jurisdiction of the inquiry

to which that correspondence pertained is now lodged with my 

subcommittee. At this time the subcommittee is interested in the

subjects to which the first three numbered questions in Chairman

Hardy’s letter of June 10, 1960, referred, namely, the problems of

“float,” one central issue of Federal Reserve notes, and local destruction of Federal Reserve notes. Your responses to the questions

were made on April 14, 1961, December 22, 1960, and August 10,

1960, respectively.

In view of the time lapse since your responses and the possibility

that current data or circumstances may alter the Board’s earlier expressed views on the subjects, or on aspects of them, we would appreciate receiving, as soon as possible, your present comments on the

three subjects under inquiry.

Sincerely yours,

Dante B. Fascell, Chairman.

Excerpt of Letter From C. Canby Balderston, Vice Chairman,

Federal Reserve Board, to Hon. Dante B. Fascell, August

15, 1963, With Attachment

Board of Governors of the

Federal Reserve System,

Washington, D.C., August 15, 1963.

Hon. Dante B. Fascell,

Chairman, Legal and Monetary Affairs Subcommittee of the Committee

on Government Operations, House of Representatives, Washington,

D.C.

Dear Mr. Chairman: This refers to your letter of March 5, 1963,

asking for our present thinking with regard to questions that had been

discussed 2 or 3 years ago concerning float, one central issue of Federal

Reserve notes, and local destruction of Federal Reserve notes.

In the light of the studies mentioned in our letter of March 19, 1963,

the Board believes that—

(1) It would not be appropriate at this time to reduce float by raising the maximum deferment time for check credits from 2 to 3 days.

* * * * * * *
44 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Enclosed are * * * statements discussing more fully the Board’s

views with regard to these matters.

Sincerely yours,

C. C anby B alderston,

Vice Chairman.

Enclosures.

1. Whether it would not be oj economic advantage to the Treasury,

without substantial detriment to the banking community, to reduce

the “float” by raising the maximum deferment time for check credits

so that it more nearly coincides with the time required to complete

the mechanical steps involved

A recent survey of check float indicated that, on a daily average

basis:

(1) Time schedule float on interdistrict country items amounted

to about $742 million during the last quarter of 1962 as compared

with $624 million during the last quarter of 1959, an increase of $118 

million or approximately 19 percent. Previous studies indicated that

1 day of time schedule float is assumed for substantially all country

items forwarded to other Federal Reserve offices because of inability

to collect such items in accordance with the present availability

schedules.

(2) Holdover float amounted to $488 million during April 1963 as

compared with $93 million during April 1958, an increase of $395

million or approximately 420 percent. Holdover float arises whenever

a Federal Reserve office passes credit for checks received prior to its

closing hour in accordance with its time schedule, but does not clear

or dispatch such checks on the day of receipt.

The percentage increase in the time schedule float corresponds

closely with the percentage increase in the volume of country checks

handled by the Federal Reserve banks during the same period of time.

Unless a change is made to increase the maximum deferment schedules

of the Federal Reserve banks from 2 to 3 days, it appears highly

likely th at time schedule float will continue to rise because (a) the

float arising from interdistrict country items is closely related to the

volume and average value of such items which continue to rise year

after year, and (6) there is no reason to expect that in the foreseeable

future interdistrict country items can be collected in less than 3 days.

In the light of present circumstances the Board is of the opinion

that the present 2-day deferment for interdistrict country items is not

realistic. The Board feels, however, that the timing of a change is

of paramount importance and that, for reasons subsequently discussed,

the change should not be made at this time.

One of the factors counseling delay in changing the time schedules

of the Reserve banks is the sharp increase in and present magnitude

of holdover float. Studies show’ that this type of float is significantly

influenced by problems incident to the transition to high-speed electronic procedures for handling checks. There are strong indications,

however, that this type of float can be and w’ill be reduced as more

and more commercial banks put themselves in a position to deposit

with the Reserve banks checks that are fully coded for high-speed

handling. The Federal Reserve banks are now directing their efforts

to accomplish this objective and progress is being made despite the

fact that the program may result initially in additional costs to at

least some commercial banks.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 45

Under present circumstances, a change in the time schedules of the

Federal Reserve banks (from a maximum of 2 days to a maximum of

3 days) would require an additional sort and additional expense on

the part of many member hanks. After the Federal Reserve banks

achieve substantial conversion to high-speed procedures, however, it

should be possible to avoid requiring such an additional sort and perhaps even to reduce the number of sorts that member banks are now

called upon to make. In summary, it appears on the one hand that

a change now in the time schedules of the Federal Reserve banks

would impede the progress that is being made in conversion to highspeed handling of checks and would also hinder the prospects of reducing holdover float, while on the other hand such a change could

possibly be made in the future without these attendant ill effects.

The other major factor underlying the Board’s belief that a change

in the time schedules would not be appropriate at this time is the effect

that such a change might have on credit and money market conditions. 

In the Board’s opinion it would be unwise now to risk disturbing the

availability of reserves and credit to the extent that would be involved 

by the elimination of time schedule float.

Letter From H on. Dante B. Fascell, to Federal Reserve

Board, February 20, 1964

February 20, 1964.

Mr. C. Canby Balderston,

Vice Chairman, Board of Governors of the Federal Reserve System,

Federal Reserve Building, Washington, D.C.

Dear Mr. Balderston: Please refer to your letter of August 15,

1963, and previous correspondence with this subcommittee and its

predecessor on the question of whether it would not be of economic

advantage to the Treasury, without substantial detriment to the

banking community, to reduce the “float” by raising the maximum

deferment time for check credits so that it more nearly coincides with

the time required to complete the mechanical steps involved.

In that correspondence the Board has indicated that the present

2-day deferment for interdistrict county items is unrealistic, but that

the time was inappropriate for reducing the “float” by raising the

maximum deferment time for check credits from 2 to 3 days.

In aid of the subcommittee’s further inquiry into the matter, I

would appreciate your advising on the following matters:

1. To what extent would the “float” be reduced by changing the

deferment schedule from 2 to 3 days?

2. What circumstances make it inappropriate to now change the

deferment schedule from 2 to 3 days?

3. Under what circumstances would it be appropriate to make the

change, and when could such circumstances be expected to come into

being?

4. What would be the estimated effect of such change on fluctuations of reserves, and on the money supply; and could such effects be

offset by agency action?

5. What other means does the Federal Reserve Board have at its

disposal to offset a change in reserves caused by change in deferment

schedule?
46 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Any additional information which would be helpful in the consideration of the subject of the float in the light of deferment schedules would

be appreciated.

Sincerely yours,

D ante B. F ascell, Chairman.

L etter F rom Wm. M cC. Martin, J r., Chairman, F ederal R eserve

Board, to H on. D ante B. F ascell, M arch 13, 1964

Board of Governors of the

F ederal R eserve System,

Washington, March 13, 1964-

Hon. Dante B. F ascell,

Legal and Monetary Affairs Subcommittee oj the Committee on Government Operations, House oj Representatives, Washington, D.C.

D ear M r. Chairman: In your letter of February 20, 1964, you

refer to previous correspondence about the possibility of reducing

float in the Federal Reserve System by raising the maximum deferment time for check credits, and you ask five specific questions about

this matter. You also ask for any additional information that might

be helpful in considering the subject of float in the light of deferment

schedules.

Generally speaking, there have been no new developments that

would add much to the information previously furnished to your

subcommittee with the Board’s letter of August 15, 1963, and to

its predecessor with our letter of April 14, 1961. However, reshaping

this information in reply to the questions in your recent letter may be

helpful.

1. To what extent would the float be reduced by changing the

deferment schedule from 2 to 3 days?

It is estimated that a change in the maximum deferment of credit

for interdistrict country items from 2 to 3 days would result in a

daily average reduction of something between $700 and $800 million

in time-schedule float.

2. What circumstances make it inappropriate to now change the

deferment schedule from 2 to 3 days?

There are three factors that impel the Board to a belief that such

a change should not be made at this time; namely (1) the requirement

of additional sorting work by member banks, (2) the effect on holdover float, and (3) the possible effect on credit and money market

conditions.

Under present circumstances, a change in the maximum deferment

for check credits from 2 to 3 days would require an additional sort

and added expense on the part of many member banks. At such

time, however, as the Federal Reserve banks are able to process

most of their check volume on high-speed equipment, it should be

possible to change the deferment schedule without requiring member

banks to make an additional sort, and perhaps to reduce the number

of sorts the member banks would have to make even though the

deferment schedule were changed. This is because the high-speed

equipment has the capability of making the deferment schedule sorts

on the basis of the magnetic ink characters on the checks, rather than

on the basis of a physical separation of the checks.
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 47

A study last year indicated that daily average holdover float was

in the neighborhood of $500 million, and was rising much more

rapidly than time-schedule float. The study also showed that holdover float is significantly influenced by problems incident to the

transition to high-speed electronic procedures for handling checks, and

that this type of float can be and will be reduced as more and more

commercial banks are able to deposit with the Reserve banks checks

that are fully coded for high-speed handling. In other words, the

hope of reducing holdover float depends in large measure on the

continued cooperation of commercial banks. This cooperation 

might not be so readily forthcoming if member banks were now

burdened with the requirement of an additional sort of checks they

presented for payment through the Federal Reserve banks.

Credit and money market conditions are now geared in part to

time-schedule float. While the elimination of this source of reserves

could be offset in total member bank reserves, the net effect of the

reduction and the counteraction would undoubtedly be far from

equal among individual banks. A change from 2 to 3 days in the

maximum deferment for check credits would affect the reserve accounts

of only those banks that clear through the Federal Reserve banks. 

The most severe effect would be on the banks, generally located in

the larger cities, that act as collection agents for correspondent

country banks. It would be difficult to use open-market operations

or a change in reserve requirements to channel appropriate amounts

of reserves to those banks that would suffer from the deferment

schedule change, and only to those banks. The effect that such

resulting disequilibrium might have on credit and money market

conditions is difficult to predict.

3. Under what circumstances would it be appropriate to make

the change, and when could such circumstances be expected to come

into being?

During the year 1962, Federal Reserve banks and branches handled

a total of about 3 billion country checks, of which 272 million were

processed on high-speed equipment. In 1963 the total volume of

country checks was 3.2 billion, of which 872 million were handled on

high-speed equipment. The use of high-speed equipment is expected

to increase even more rapidly this year. If these expectations materialize, there is hope that both holdover float and sorting required of

member banks can be substantially reduced in another year or so.

This prospect, however, should not be taken as an implication that

the Board w’ould favor changing maximum check credit deferment

from 2 to 3 days in a year or two. This decision would still be heavily

influenced by the possible effect of such a change on credit and money

market conditions at that time.

4. What would be the estimated effect of such change on fluctuations

of reserves, and on the money supply; and could such effects be offset

by agency action?

5. What other means does the Federal Reserve Board have at its

disposal to offset a change in reserves caused by change in deferment

schedule?

As previously indicated, it is estimated that changing the maximum

deferment of credit for interdistrict country items would reduce reserves by $700 or $800 million. The resulting reduction in the money

supply would be at least that much, and probably several times more.
48 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

If time-schedule float on interdistrict country items were removed

from float-based reserves, fluctuations in such reserves would be

reduced in terms of dollar amounts; however, fluctuations on a percentage basis would be sharper and perhaps more troublesome.

While a reduction in reserves resulting from the elimination of timeschedule float on interdistrict country items could be offset in total

either by a reduction in reserve requirements or by open-market purchases of Government securities, neither of these two alternatives

would be completely satisfactory since they would have to be based

on countrywide averages. A reduction in reserve requirements would

benefit some banks that would not have suffered from the reduction in

float-based reserves, and it might fall short of the objective in the

case of banks that would have suffered. Open-market purchases

might come closer to restoring equilibrium, but they would have the

effect of requiring banks to give up earning assets to offset the loss of

reserves accruing from float.

In summary, an extension of the deferment schedule for the purpose

of reducing time-schedule float and the compensating action that

would have to be taken would undoubtedly disturb money market

conditions, and would also disturb, perhaps to a significant extent in

some cases, the competitive position that now exists among member

banks.

Sincerely yours,

Wm. M cC. M artin, Jr.

Letter from H on. Dante B. F ascell, to F ederal R eserve

B oard, April 6, 1964

April 6, 1964.

Mr. Wm. M cC. M artin, Jr.

Chairman, Board oj Governors oj the Federal Reserve System, Federal

Reserve Building, Washington, D.C.

D ear M r. Chairman: Please refer to your letter of March 13, 1964,

responding to further questions on the subject of float which were

contained in my letter of February 20, 1964. We would appreciate

your consideration of the following:

Recent statistics reporting the float show that on occasions it has

approximated 10 percent of the estimated required reserves for all

member banks. Since the float keeps increasing in the overall, the

question arises as to whether there is any defined point at which the

amount of float in such reserves is to be considered as too high.

The float constitutes cost-free reserves to member banks. Has

any consideration been given to the question of whether banks utilizing

float as reserves should pay a reasonable charge therefor?

Copies of any studies or determinations on these matters would be

appreciated, together with any comments.

Sincerely yours,

Dante B. F ascell, Chairman.
FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT 49

Letter From Wm. McC. Martin,J r., Chairman, F ederal Reserve

Board, to Hon. Dante B. Fascell, J une 12, 1964

Board of Governors of the

Federal Reserve System,

Washington, Jane 12, 196J.

Hon. Dante B. Fascell,

Chairman, Legal and Monetary Affairs Subcommittee, Committee on

Government Operations, House of Representatives, Washington, D.C.

Dear Mr.Chairman: By letter of April 6, 1964, you have requested

certain information regarding “float” in check clearings to supplement the Board’s response of March 13 to a previous inquiry from you

on this same subject. In your most recent letter, you observe that

the level of total float keeps rising, that float on occasions has approximated 10 percent of the estimated required reserves for all member

banks, and that float constitutes cost-free reserves to member banks;

and you ask whether (1) there is any defined point at which the

amount of float in such reserves is to be considered too high, and (2)

if any consideration has been given to the question whether banks

utilizing float as reserves should pay a reasonable charge therefor.

TH E SIG N IFIC A N CE OF FLOAT

In the absence of countervailing action, each time float rises or falls

there would be a corresponding increase or decrease in total reserves

of member banks. However, such movements in float, as well as a

variety of other technical factors affecting the volume of reserves, are

carefully offset by Federal Reserve actions consistent with current

policy to keep the banking system as a whole from experiencing any

excessive addition to or contraction of total reserves. As an illustration, member bank float increased $542 million between April 1

and April 15, 1964, to a level of $1,729 million, but the System offset

this rise in float (and also the net of other market factors) by reducing 

its holdings of Government securities by $557 million.

So long as float does not grow so large that necessary offsettingsales would absorb the bulk of Federal Reserve holdings of Government securities (and there is no expectation of any rise in float even

remotely approaching this dimension), its sheer size is not a matter

of particular importance.

Nor do we believe that there is any ground for concern in the fact

that float at times has reached 10 percent of required reserves, even

though on its face this might seem to raise questions about liquidity

within the banking system. In practice, the relative amount of

checks that are returned by drawee banks is very small, and the presenting bank almost always has assets at the Federal Reserve bank

that total many times the amount of any returned checks that would

be charged back against the previously given credit. Typically, 

these assets consist not only of the bank’s reserve account, but also

of a continual stream of cash items being presented for collection on

its behalf. Also, as an ultimate recourse, a member bank is able to

borrow from its Reserve bank in times of need. Consequently, the

provisional crediting to reserve accounts of checks presented for

collection is not believed to pose any practical liquidity risk either

to member banks or to the Federal Reserve banks.
50 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

FLOAT CHARGE

To levy a charge for float-based reserves would be prohibitively

expensive if based on the actual payment experience of each check

presented to the Federal Reserve for collection. There is no way to

tell, at the time of a deposit of checks for collection, how much float

may ultimately be involved in the credit given for the deposit. It

would therefore be necessary to keep records showing the payment

experience of the thousands of cash letters sent out every day by the

Federal Reserve banks and branches, which receive for collection

checks drawn on the 12,000-odd commercial banks—member and

nonmember alike—that remit at par. Last year, over 3 billion

country checks were handled. There would also be questions as to

which bank should in fairness be charged; for example, it would be

hard to justify charging the depositing bank for float arising from

delay in processing by a Reserve bank or in payment by the drawee

bank.

In theory, it might seem possible to base charges on general rules

derived from average experience in check collection rather than the

actual experience of each check. But it seems likely that to the

extent this reduced administrative costs, it would become increasingly

inequitable.

Speaking more broadly, check collection is only one of a number of

services that member banks are provided by the Federal Reserve

banks so that they, in turn, may provide good banking service to the

public. Thus, the value of those services does not accrue solely or

even primarily to the member banks, but extends to the bank customers in each community served. This service to the public through

the member banks is a basic objective of Federal Reserve operations.

Offsetting the benefits directly or incidentally received from

membership in the Federal Reserve System are various costs incurred

by member banks as a consequence of belonging to the System,

such as the maintenance of a required minimum of non-interestbearing reserve deposits at the Reserve bank and a variety of required

operations, specified limitations on loans and investments, and the

obligation to maintain a prudent cushion of capital. These requirements are intended, of course, to benefit the public by assuring sound

banking conditions. However, taken together with the Federal

Reserve monetary and service operations mentioned above, these

supervisory requirements have given rise to a complex skein of banking

costs and benefits, affecting both member banks and the customers.

It has been the view of the Board that an attempt more or less to

balance the sum total of the burdens and benefits of Federal Reserve

membership is not only desirable but necessary in the interest of

equity. Until recently, it is believed that a satisfactory accommodation in this respect has been approached. However, in the last

year or so an increasing number of member banks have been voluntarily -withdrawing from the System, mainly because of an earnings

pinch. A charge for float-based reserves undoubtedly would further

disturb many smaller banks that are now pondering the desirability

of retaining their membership in the Federal Reserve System, both

because float cannot be controlled by the depositing bank and because

such banks, as a group, customarily maintain excess reserves. To

charge these banks for something they cannot control and, for the
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 51

most part, do not need or want, might well precipitate an accelerated

rate of withdrawals from membership in the System.

In sum, therefore, the float component of member bank reserves

would be a matter for concern only if offsetting transactions in the

System open market account were to require liquidation of the bulk

of Federal Reserve holdings of Government securities, an eventuality

that is not perceived to be even a remote possibility, and it is believed

that the inequity of levying a charge on member banks for float-based

reserves would far outweigh any possible virtue that such a practice

might have.

Sincerely yours,

Wm. McC. Martin, Jr.

Excerpt of Letter F rom Hon. Dante B. Fascell, to the F ederal

Reserve Board, April 1, 1965

April 1, 1965.

The Chairman,

Federal Reserve Board,

Federal Reserve Building, Washington, D.C.

Dear Mr. Chairman: Please refer to the earlier correspondence

betweeu the Board and the subcommittee concerning “float” in check

clearings, particularly your letters of March 13 and June 12, 1964.

In view of the increased uses of automatic data processing in check

clearings, and the passage of time since those letters, I would appreciate

your bringing up to date your responses to the questions contained in

my letters of February 20 and April 6, 1964.

Also please advise whether in arriving at the Board’s contemplated

changes in reserve requirements on demand deposits, the possibility of

having the “float” reflect a more accurate reserve position, either by

change in the deferment schedule or by allowing immediate reserve

credit, has been considered.

It would also be helpful to have a detailed explanation of the relationship between the “float,” required reserves and the Federal funds

market. Because “float” accounts for between 7 and 10 percent of

required reserves, and excess reserves generally total less than one-half

of the amount of “float,” please also advise how the Federal Reserve

System assures that member banks do not sell Federal funds beyond

their excess reserves, or buy beyond appropriate volumes.

* * * * * * *

Any information pertaining to “float” which you may care to add 

would be appreciated.

Sincerely yours,

Dante B. Fascell, Chairman.
52 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

Letter From Wm. McC. Martin, Jr., Chairman, Federal

Reserve Board, to Hon. Dante B. Fascell, May 20, 1965

Board of Governors of the

Federal Reserve System,

Washington, May 20, 1965.

Hon. Dante B. Fascell,

Chairman, Legal and Monetary Affairs Subcommittee oj the Committee

on Government Operations, House oj Representatives, Washington,

Dear Mr. Chairman: This is in response to your letter of April 1,

1965, asking for an updating of our previous comments with regard

to float, particularly in the light of increased uses of automatic data

processing equipment in check clearings. You also asked for information with respect to (a) the relationship between float and possible

changes in reserve requirements of member banks, (6) the relationship 

between float and the Federal funds market, and (c) possible benefits to

be derived if reserve computation periods were put on a monthly

basis.

Developments during the past year include the following:

(1) The total number of checks handled by the Reserve banks in

1964 was about 6 percent higher than in 1963.

(2) Checks handled on automatic equipment increased from about

23 percent of the total in 1963 to 53 percent of the total in 1964.

(3) The daily average amount of total float during 1964 was about

8 percent higher than in 1963, due mainly to the increase in the volume

of checks handled.

(4) A special study showed that the amount of daily average float

due to holdover in April 1965 was $227 million as compared with the

$488 million disclosed by a similar study for April 1963. This reduction is largely the result of the increased use of automatic equipment.

1963 1964

Percent

increase

in 1964

Checks handled by Reserve banks:

Total number (in millions)____ ___ .. _____

Percent handled on automatic equipment... ______

Daily average float (in millions):

Total during year___ _

4,069

22.8

$1,744

$488

4,319

53.0

$1,885

i $227

6.1

132.5

8.1

—53.5 Amount due to “holdovers” during month of A p ril___

i This figure is for April 1965. A special survey was made for that month comparable to one made for

April 1963. No such survey was made in 1964.

In our letter of March 13, 1964, we indicated that a change in the

deferment schedule—i.e., an increase, say, to 3 days—would reduce

the volume of float. In the same letter the belief was expressed that,

when the Reserve banks are able to process most of their checks on

high-speed equipment, it should be possible to change the deferment

schedule without requiring member banks to make an additional sort. 

We also indicated in that letter that holdover float will be reduced as

more and more commercial banks are able to deposit with the Reserve

banks checks that are fully coded for high-speed handling.

As indicated by the above table and summary comments, a substantial reduction has been made in holdover float. The Reserve
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 53

banks are still in a transition period with respect to the use of highspeed check-handling equipment, however, and last year they processed only a little more than half of their checks in this manner. Not

enough progress has yet been made in this undertaking to permit

addressing the possibilities of the high-speed equipment toward

changes in the deferment schedule or other means of reducing total

float.

You also ask about the relationship between float and changes in

reserve requirements of member banks. Whenever the Board considers an action to change reserve requirements, it necessarily takes

into account the amount of reserves actually held by member banks,

including the amount provided by float. The relationship between

the total of required reserves of member banks and the reserves they

actually hold is, of course, of special significance. If the average level

of float were reduced substantially with a consequent substantial reduction in the level of actual reserves, and if no changes in monetary

policy were desired, reserve requirements could be lowered correspondingly.

While the relationship between float and the Federal funds market

is somewhat indirect, there has been a tendency for both the amount

of float and the volume of Federal funds transactions to increase

during the middle part of each calendar month. As a reason for this,

it may be noted that when there is a rise in float and hence an increase

in bank reserves, that increase tends to lead to offsetting open market

sales of securities by the Federal Reserve System. To a large extent

the payments for these securities are debited to the reserve balances

of money market banks, in New York City and other principal centers.

These transactions may lead, in turn, to purchases of Federal funds

by these banks from other banks whose reserve balances are temporarily higher than they would have been if there had been no increase

in float.

If a bank were to sell Federal funds beyond its excess reserves, it

would then have a deficiency in its reserve account. If the deficiency

persisted through the bank’s reserve period, the bank would either

nave to borrow from its Reserve bank, with its attendant disciplines,

or it would be liable to penalites. The threat of such disciplines and

penalties serves as an automatic governor, we believe, against excessive

sales in the Federal funds market.

The question of the appropriate settlement period for Federal

Reserve member banks is currently under active study by a Federal

Reserve System committee. The proposal mentioned in your letter,

to lengthen the settlement period to a month, is but one of several

that have been advanced recently with the idea of improving the

functioning of the reserve mechanism. Other proposals include

equalizing the length of the settlement period for Reserve city and

country members at either 1 or 2 weeks, using the previous period’s

deposits instead of the current period’s deposits as the basis for

calculating reserve requirements, and staggering the settlement dates

for groups of banks to avoid the wide swings in money market pressures

sometimes occasioned by a common settlement date for all member

banks.

With respect to the particular proposal that was mentioned in

your letter, various of the factors both for and against it are set forth

in a series of four articles that were published in the Journal of Finance
54 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

for March and September 1964, authored by a leading banker, a staff

member of the American Bankers Association, and an official of the

Federal Reserve Bank of New York. If you wish, we would be glad

to provide your staff with copies of these materials. Our own research

work on these proposals has not, however, proceeded far enough for

the Board to take a definite position on the advisability of changing

the existing structure of member bank settlement periods at this time.

Sincerely yours,

Wm. McC. Martin, Jr.
1

APPENDIX B—DOCUMENTS REFERRED TO IN THE

HEARING

L etter F rom th e E x ecutive C ommittee of the C o n feren ce of

G overnors of the F ederal R eserve B oard, to the F ederal

R eserve B oard, D ecem ber 14,1915.

W ashington, D.C., December 1^, 1915.

To the F ederal R eserve B oard,

Washington, D.C.

G en tlem en : We have the honor to submit hereunder in more

extended form than in the report prepared in Washington, answers of

the Executive Committee of the Conference of Governors to the five

questions submitted by the Federal Reserve Board, together with

exhibits A and B hereto attached containing statistics covering the

operation of the intradistrict collection system now in effect in the

Federal Reserve banks. The questions and answers are given

seriatim in the order propounded by the Board, and are as follows:

Question No. 1. The evils incident to a system of interdistrict

clearing based on immediate credit and debit?

Answer 1: (a) Under a general plan of interdistrict clearing or

collection involving immediate credit and debit, the Federal Reserve

banks would be required to give credit to member banks’ accounts

on the day of receipt all checks drawn on all member banks located in

all 12 Federal Reserve districts. Inasmuch as member banks may

withdraw at once any excess thus created in their reserve accounts,

the Federal Reserve banks would be in the position of being obliged

immediately to pay cash or other funds demanded, notwithstanding

the fact that it takes from 2 to 10 days to receive returns for the

items for which immediate credit has been given.

Such practice involves the advancing of cash by the Federal Reserve

banks against uncollected items and is called in banking parlance

“carrying the float,” the “float” being checks in process of collection

for which remittances in payment have not been received from the

banks upon which they are drawn.

If the Federal Reserve banks undertake to give immediate credit at

par for all checks on member banks throughout the United States, it is

fair to assume that the great bulk of such checks payable outside of the

city or town of the bank which first receives them on deposit, will be

collected through the Federal Reserve banks. To justify this assumption, we need only mention that when the rules of the Clearing House

Association in one of the Federal Reserve cities regulating collection

charges were so amended that checks collectible at par through the

Federal Reserve bank of that city for immediate credit were placed

on the “discretionary list” (which means that a charge of exchange

by a member bank against a depositor is discretionary with such bank 

but in practice it means the receipt of all items on such fist at par)

many of the State banks and trust companies promptly made arrange55
56 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

merits to deposit in member banks all out-of-town checks that could be

collected through the Federal Reserve bank. These arrangements

were effected for the purpose of receiving immediate credit for checks

on less than 100 banks, a majority of which were accustomed to remit

without charge for such checks. The principal object to be attained,

therefore, was to have some one else carry the float.

The volume of float for the whole country is so large that the

resources of the Federal Reserve banks are insufficient to carry it. 

In certain of the large commercial banks the transit account (representing float or items in process of collection) averages in individual

cases from $5 million to $15 million, and these figures do not include

checks charged on the day of transmittal to banks with which balances

are maintained.

The total float for the United States has been estimated at from

$300 million to $500 million.

As the total resources of the Federal Reserve banks are about $450

million the investment of their funds in such a volume of items in

process of collection would nullify the fundamental purposes for

which these banks were founded, as their means of extending credit

to member banks would be entirely consumed in paying for uncollected checks, and the system would break down upon the first

general demand of member banks for the rediscounting privilege.

Even if the bulk of the out-of-town checks should not be deposited

in the Federal Reserve banks in normal times, it is practically certain

that under a system of immediate credit the member banks would,

when interest rates were high and in times of financial stress (such as

were experienced in 1893, 1907 and 1914) quickly take advantage of

the opportunity to turn uncollected items into cash or reserve money

by depositing with the Federal Reserve banks all their checks drawn

on member banks, and withdrawing currency against the balances

so created.

(6) We have shown the futility of attempting to require the Federal

Reserve banks to carry the float. Now consider the problem on the

assumption that the member banks will carry the float under a

system of immediate credit and immediate debit.

A certain part of the float could not in any event (under the immediate credit and debit plan) be carried by the member banks, viz:

the amount in transit between Federal Reserve banks. While it

is not possible to estimate what this will amount to when the Federal

Reserve banks are the great collecting agencies of the country, it

may be interesting to note that even their extremely limited activities

in the field of check collecting to date have frequently resulted in

float or an amount in transit between Federal Reserve banks of from

$10 million to $15 million being shown in the consolidated weekly

statement.

But, under the plan of immediate debit the member banks would

carry the float with respect to checks on themselves from the time

of the receipt of such checks by the Federal Reserve bank of their

district. This means that banks within 1 day’s mail time of the

Federal Reserve city would be obliged to maintain with the Federal

Reserve bank excess reserves equaling the amount of checks on themselves received by the Federal Reserve bank during 2 days’ business,

owing to the fact that 2 days’ items are continuously in process of

collection.
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 57

In the larger Federal Reserve districts many member banks are

located from 2 to 3 days distant from the Federal Reserve bank. 

Mail from some of the member banks in the San Francisco district

takes 4 or 5 days to reach the Federal Reserve bank, which would

require them to maintain excess reserves equaling the amount of

checks on them received by the Federal Reserve bank during 8 or

10 days. In other words, member banks would have to provide in

advance for such checks drawn upon them as might be deposited with

the Federal Reserve banks during from 2 to 10 days, depending upon 

their distance from the Federal Reserve city.

The comments immediately preceding are not applicable to banks

located in the Federal Reserve cities. These banks will receive

checks drawn upon them on the day that they are received by the

Federal Reserve bank and charged against their balances, and they

can on the same day make deposits to cover, which will immediately

count as legal reserve.

Therefore, under a plan of immediate credit and debit the country

banks will not only be obliged to provide funds in advance, in the

Federal Reserve bank, in excess of their legal reserve requirements,

to meet an unknown volume of checks, and to carry their own float,

but will also be forced to carry that part of the float which the large

collecting banks in the Federal Reserve cities have heretofore borne.

Furthermore, country banks would have no possible means of

estimating the amount of checks deposited in the Federal Reserve

banks the payment of which they would have to anticipate. The

provision of funds to meet checks drawn on them would so increase

the actual cash reserve balances that such banks would be obliged to

maintain, in order to have the full legal reserve required in the Federal

Reserve banks, that their loanable funds would be reduced to a point

that would seriously impair their earning capacity. Even with a

sincere attempt on the part of country banks to cover checks drawn

against them, the accounts of many banks would frequently be overdrawn and each Federal Reserve bank would be confronted with the

question as to whether it should honor or dishonor the draft of a

member bank under such circumstances.

Would the Federal Reserve bank be required to make such advance

and grant such credit as would be involved in paying the draft of the

member bank? Or, if it dishonored such a draft, what would be its

legal liability in the matter? Might not the member bank have just

cause for complaint and dissatisfaction if its checks were dishonored

because balances had been depleted or exhausted without its knowledge, assent or without opportunity to restore?

(c) There appears to be unanimity of opinion among the counsel

who have been consulted in this matter to the effect that the Federal

Reserve banks are not authorized by law to charge checks drawn on

a member bank against such bank’s reserve account, without permission having been obtained from the member bank. We understand

that this opinion is based not upon any provision of the Federal

Reserve Act or of the National Bank Act, but upon general principles

of law. We do not understand that this opinion necessarily excludes

the view that the Federal Reserve banks might charge such checks to

the account of a member bank after such member bank had had an

opportunity of seeing the checks charged and rejecting those which

for any reason were not good; nor does it necessarily exclude the view
58 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

that the Reserve banks could require a member bank to remit funds

to cover such checks at the Reserve bank without cost to the Reserve

bank.

(d) In the opinion of this committee, member banks would withdraw

in large numbers from the system as the result of the introduction of

any mandatory plan of immediate credit and debit.

(e) Actual experience with the present intradistrict collection

system has already demonstrated that any plan of immediate credit

and debit operates largely in the interests of the banks in close proximity to Federal Reserve cities and against the more remote banks.

(/) On account of the frequency and large volume of overdrafts

which would occur as above described, it is apparent that the Federal

Reserve banks would assume serious risks in the event of the suspension of member banks whose accounts were overdrawn. In the

limited operation of the intradistrict collection system now in force

in the Federal Reserve banks overdrafts are of daily occurrence in

practically all banks which are operating on an immediate credit and debit basis. As an illustraticn, one of the banks reported daily 

overdrafts averaging 100 in number and over $800,000 in amount. This average comprises the overdrafts only. To ascertain the

deficiency in the reserves of the member banks in question there

must be added to the amount of such overdrafts the entire legal reserve

which should be held in the Federal Reserve bank. When it is considered that the overdrafts in the case mentioned was caused by the

deposit of checks by member banks within the district averaging only

$1,500,000 daily, and excluded all checks which had come from

without the district, it is plain that the dangers of deficient reserves

and overdrafts would be greatly increased by the extension of a

system of immediate credit and debit to interdistrict collections by

adding the volume of checks that would be received from the other 11

Federal Reserve banks.

See exhibits A and B hereto attached showing overdrafts and

deficiencies in reserve caused by the operation of the collection

system now in effect in the Federal Reserve banks.

Our experience convinces us that the operation of an interdistrict

plan involving immediate credit and debit of items over a territory

as large as that of the United States, in which are many member banks

of small responsibility, would present so many possibilities of danger

as to be wholly impracticable.

For the reasons above stated this committee is unwilling to entertain

a proposal to adopt a general plan involving immediate credit and debit.

Question 2. What remedies can you suggest short of a tax on

deficient reserves?

Answer 2. After mature deliberation of this question, we are

constrained to reply that we cannot suggest any remedy for the

defects and dangers of a plan of immediate credit and debit, nor do

we believe that the proposed remedy of a tax on deficient reserves

would be efficacious in reaching the desired result, for the reasons

set forth in our reply to the next question.

Question 3. What are the objections to this proposed plan? Answer 3. We understand this question to refer to the proposed

plan of imposing a tax on deficient reserves.

We quote from section 19 of the Federal Reserve Act in part as

follows: “Every subscribing member bank shall establish and main-
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 59

tain reserves as follows.” This section further provides that a certain

percentage of the member bank reserves are to be held “ in its vaults,”

or “ in the Federal Reserve bank, or (at present) in national banks in

reserve or central reserve cities as now defined by law.”

This language clearly indicates that the amount of reserve required

to be kept with the Federal Reserve bank by a member bank must

at all times be, and remain, intact in the hands of the Federal Reserve

bank and cannot include items in transit from the member bank to

the Federal Reserve bank. It is, therefore, apparent that the present practice of counting uncollected checks as reserve is not

contemplated or authorized under the Federal Reserve Act.

We do not believe that a tax on deficient reserves, however severe,

would accomplish the purpose of maintaining the reserves of member

banks unimpaired in the hands of the Federal Reserve banks for the

following reasons, which are founded upon experience:

1. The volume of checks drawn by customers of any bank in 1

day is very large in proportion to the percentage of the reserve required to be kept in the Federal Reserve bank. In the case cf a

small country bank, as much as 90 percent in amount of the checks

drawn upon it are frequently received through the mail. The result

of the proposed plan, necessarily involving the receipt of such checks

by the Federal Reserve bank and their being charged against the

reserve held by it, would be at present to require this large percentage

of checks (the amount of which could not be anticipated) being

charged against only three-twelfths of the country bank’s reserve.

Even if the member banks kept all of their reserve with the Federal

Reserve banks excepting the amount required to be kept in the member

banks’ vaults, deficiencies in reserves and overdrafts would not be

prevented, inasmuch as the proportion of checks drawn on member

banks and deposited in the Federal Reserve banks would be large in

comparison to the total legal reserve of the member banks.

2. Actual operation has already shown that member banks distant

only 1 day from their Federal Reserve bank have found it necessary,

in order to maintain their reserves intact to keep an average amount

over and above their required reserves equal to the amount of 2 days’

debits on the books of its Federal Reserve bank.

In spite of earnest effort on the part of the member banks to maintain the proper reserves, there would be frequent occasions when it

would, nevertheless, be impossible to estimate the amount necessary

to be furnished and their reserves as shown by the books of the Federal

Reserve banks would be exhausted as heretofore described, and overdrafts created. There would thus arise so many cases in which it

would be wholly inequitable to impose a tax upon deficient reserves

that the rule would have to be frequently suspended and its effectiveness thus practically destroyed.

3. Member banks would not submit to a tax imposed as a penalty

for the violation of a rule, when such violation had been caused by

conditions entirely beyond their control.

Question 4. What effect, if any, has the voluntary clearing plan

had upon the abolition of collection charges?

Answer 4. It has resulted in the reduction of collection charges in

several ways:

First. By inducing many banks which formerly charged exchange

to receive and cover at par the checks drawn on them received from

the Federal Reserve banks.
60 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

Second. By causing many banks which formerly charged exchange

to remit at par to correspondent banks.

Third. By bringing about the establishment by several clearinghouses of departments for collecting country checks with the prospect

of the establishment of others, the effect of which will be further

materially to reduce collection and exchange charges.

Fourth. By influencing clearinghouses to modify or abolish rules

which require their members to impose charges upon their customers

for collecting country checks. In some cases, these modifications

have even effected charges upon checks not now being handled by 

Federal Reserve banks.

For instance, the Boston Clearing House Association in a circular

dated November 16, 1915, added to its list of points outside of New

England upon which the charge is discretionary all items on the cities

of Chicago, St. Louis, Brooklyn, Richmond, checks on all Federal

Reserve banks, on 2 banks in Delaware, 137 banks in New Jersey, 

153 banks in New York State, and 70 banks in Pennsylvania.

It will be noted that, while very few of the additions cover items

that can be collected through the Federal Reserve Bank of Boston,

depositors in the Boston clearinghouse banks are given the benefit

of the facilities available to said banks by depositing items with 

correspondents in New York City, which correspondents can in turn

deposit such items with the Federal Reserve Bank of New York.

Depositors in the Boston Federal Reserve Bank are thus already receiving the benefits of collection facilities offered by the Federal

Reserve Bank of New York to its own member banks, although the

Federal Reserve Bank of New York does not as yet receive such

items directly from the Federal Reserve Bank of Boston.

The following amendment to the rules and regulations of the

New York Clearing House were adopted, after the inauguration of the

Federal Reserve System:

And, for all items (whether such items are collected

through the Federal Reserve bank in New York, or otherwise,) which the Federal Reserve bank in New York shall

have notified the manager of the New York Clearing House

Association it will receive from its members for immediate

credit at par, shall in all cases be discretionary with the

collecting bank and the same shall not be governed by the

provisions of these rules and regulations.

The Chicago Clearing House Association adopted at a meeting

on June 8, 1915, the following amendment:

Resolved, That the schedule of exchange rates now in

effect under the rules of this association regulating collection

charges be and is hereby amended so that checks collectible

at par through the Federal Reserve Bank of Chicago for immediate credit shall be placed on the discretionary list

when the collection plan of that bank is by it declared to be

in operation.

The St. Louis Clearing House Association on November 16, 1915,

adopted an amendment to its rules relating to collection charges, by

the terms of which the members and associate members of the St.

Louis Clearing House Association are relieved of their former obliga-
FEDERAL RESERVE SYSTEM--- CHECK CLEARANCE FLOAT 61

tion to make a charge on checks and drafts drawn upon banks outside of St. Louis, which are members of the clearing system of the

Federal Reserve Bank of St. Louis. This amendment has just gone

into effect December 1, 1915, and will result in relieving depositors

in the St. Louis banks of exchange charges formerly paid on checks

on between 300 and 400 banks that are members of the clearing system

of St. Louis Federal Reserve Bank.

These examples of the modifications in the clearinghouse regulations

governing exchange charges indicate clearly that individuals, firms

and corporations, making up the business public, are already receiving

the benefit of the above mentioned developments.

Question 5. Can we not devise or invent some sort of seal, or die,

or effigy to be authorized to be embossed or placed on checks emitted

by a bank which authorizes immediate charge of checks drawn

against it?

Answer 5. In answering this question it is assumed that it refers

not only to checks emitted by a bank, which would mean checks drawn

by that bank upon other banks, but also to checks drawn by the

customers of a bank.

In the opinion of the committee it is desirable to have checks

indicate in some way that they may be collected through a Federal

Reserve bank.

Many devices might be utilized for that purpose.

It is believed, however, that this is fully covered by the practice

recommended by all the Reserve banks in the operation of their

voluntary intradistrict collection systems, that is, by having printed

on the face of checks the following:

Collectible at par through the Federal Reserve Bank

o f _______________________________________________

This is believed to be the most practical and most easily understood

plan of indicating that a check may be collected through a Federal

Reserve bank without deduction for exchange.

J. B. McDougal, Chairman.

Benj. Strong, Jr.,

Alfred L. Aiken,

George J. Seay,

Charles J. Rhoads,

E. R. Fancher,

Executive Committee.

a memorandum setting forth the understanding of the committee of PARAGRAPH 13, SECTION 16, OF T H E ACT RELA TIN G TO

COLLECTION AND CLEA RING

As an appendix to the foregoing report, this committee submits the

following general statement on the subject of collecting checks and the

provisions of the Federal Reserve Act in regard thereto.

1. Every Federal Reserve bank is required to receive on deposit

from member banks of its own district, checks drawn on other member

banks of the district without making deduction for collection or exchange charge, but may make a charge for service as provided by the

act.
62 FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT

2. Every Federal Reserve bank may receive on deposit from member

banks of its district checks drawn on member banks of other districts,

without making deduction for collection or exchange charge, but likewise may impose a service charge. Such checks must be sent to the

other Federal Reserve banks for collection.

3. Every Federal Reserve bank is required to receive on deposit

from other Federal Reserve banks checks drawn on the member banks

of its own district without deduction for collection or exchange charge,

but may impose a service charge as provided by the statute.

4. The collection of checks as described in paragraph 1 has been

attempted upon an immediate debit and credit basis at par without any

such deductions and has proved to be ineffective, partly because the

Reserve banks are without power to make the plan mandatory. This

committee is of the opinion, however, that even a mandatory immediate debit and credit collecting plan, although confined to intradistrict collections, is unsound and dangerous and will not operate in

harmony with such interdistrict plan as may be adopted.

5. Checks deposited by one Federal Reserve bank with other

Federal Reserve banks as in paragraphs 2 and 3, in other words,

interdistrict collections, cannot safely be handled for immediate debit

and credit as indicated in the foregoing memorandum and, consequently, the plan for handling interdistrict collections must be a plan

for deferred debit and credit of items, such as is recommended by the

transit managers’ conference and by this Committee.

6. Upon the adoption of an interdistrict plan of this character, it

will probably be found impracticable to continue the plan for immediate debit and credit now in operation in all the districts except

San Francisco.

7. Whenever a complete collection plan is adopted which will

eliminate collection or exchange deductions, the Federal Reserve

Board should fix the charges to be imposed upon member banks for the

services performed by the Federal Reserve banks in collecting checks,

which would include as a part of such cost the amount which a member

bank is permitted to charge for collecting and remitting funds. This

would enable the Federal Reserve banks to collect from depositing

banks an amount sufficient to pay what is allowed to collecting banks

and to defray other expenses incurred.

8. Such a plan, however, cannot be put into effect unless checks

deposited with the Federal Reserve banks can be collected without

being subject to a deduction for charges other than that provided in

paragraph 7, by the banks upon which the checks are drawn. This

Committee, therefore, believes that the objects sought to be accomplished by the Federal Reserve Act can be best promoted and are

dependent upon:

(а) The adoption of a plan of deferred debit and credit, and

(б) Ability on the part of Reserve banks to enforce the collection

of checks drawn on member banks, free of exchange deductions.

The Committee is also of the opinion that if the deferred debit and

credit plan is adopted the amount of service charge to be fixed should

be assessed against the depositing bank; and that the maximum

charge which the Board authorizes a member bank to impose upon

its patrons should be permissive and not mandatory, as in many cases

such a charge might not be imposed, although authorized.
FEDERAL RESERVE SYSTEM— CHECK CLEARANCE FLOAT 63

The Committee draws attention to the fact that the charges authorized by the statute, if generally imposed, would subject most

country checks to exchange charges, including many drawn on

country banks which now make no deduction for exchange, and

might result in collection charges becoming universal. This Committee is further of the opinion that country banks which now object

to the loss of exchange will resist, and possibly defeat, the complete

introduction of a mandatory plan, unless it can be shown that the

Federal Reserve banks have ample legal powers to enforce it.

J. B. McDougal, Chairman.

Benj. Strong, Jr.,

Alfred L. Aiken,

George J. Seay,

Charles J. Rhoads,

E. R. Fancher,

Executive Committee.

Illustration of Time-Schedule Float

Friday, March 27

Check for $100 drawn on Albany, N.Y., deposited in Norfolk, Va.,

and sent by Norfolk to Richmond Federal Reserve Bank.

Monday, March 30

Check received by Richmond Federal Reserve Bank, $100 credit

to Norfolk deferred 2 days, and check sent to New York Federal

Reserve Bank.

Tuesday, March 31

Check received by New York Federal Reserve Bank, $100 credit

to Richmond Federal Reserve Bank deferred 2 days, and check sent

to Albany.

Wednesday, April 1

Norfolk credited $100 by Richmond Federal Reserve Bank.

1

Check received by Albany, charged to customer’s account, and 

remittance draft drawn on Albany reserve account with New York 

Federal Reserve Bank forwarded to New York Federal Reserve Bank. 

Thursday, April 2

Richmond Federal Reserve Bank credited $100 by New York

Federal Reserve Bank.

1

Albany draft received by New York Federal Reserve Bank and

charged to Albany account in New York Federal Reserve Bank.

Illustration of Various Kinds of Float

Monday, March 30

Check for $100 drawn on Romney, W. Va., deposited in Albany,

N.Y., and sent by Albany to New York Federal Reserve Bank.

i One-day lag between credit to Norfolk and charge to New York results in time-schedule float.
64 FEDERAL RESERVE SYSTEM----CHECK CLEARANCE FLOAT

Tuesday, March 31

Check received by New York Federal, $100 credit to Albany

deferred 2 days, and check sent to Richmond Federal Reserve Bank. 

Wednesday, April 1

Receipt of check by Richmond Federal Reserve Bank delayed 1

day by fog-bound airport.

Thursday, April 2

Albany credited $100 by New York Federal Reserve Bank. Holdover float.

Check received by Richmond Federal Reserve Bank too late for

processing, $100 credit to New York Federal Reserve Bank deferred

2 days. Holdover float.

Friday, April 3

Check sent to Romney. Transit-delay float (see April 1).

Saturday, April 4

May or may not be counted for deferment purposes; not counted

in this example. Weekend float.

Sunday, April 5

Never counted for deferment purposes. Weekend float.

Monday, April 6

New York Federal Reserve Bank credited $100 by Richmond Federal Reserve Bank. Time-schedule float.

Check received by Romney, charged to customer’s account, and 

remittance draft drawn on Richmond correspondent forwarded to

Richmond Federal Reserve Bank. Time-schedule float.

Tuesday, April 7

Romney draft en route to Richmond. Remittance-delay float.

Wednesday, April 8

Romney draft received by Richmond Federal Reserve Bank, 

presented through clearinghouse, and charged to reserve account of

Richmond correspondent of Romney.

o