Amazing articles on just about every subject...


How The Federal Reserve Banks Assist The Treasury

( Originally Published Early 1900's )



THE establishment of the Federal reserve banks made the subtreasuries no longer necessary. They were therefore abolished, and much of the Government business that they had been performing was taken over by the twelve Federal reserve banks that were organized pursuant to the Federal Reserve Act.

There are now twenty-five branches of the twelve parent banks. The Government carries deposits in the twelve parent banks in order to facilitate the dispatch of the Federal financial operations. The banks per-form valuable services for the Government and for the public.

THEY HANDLE GOVERNMENT DEPOSITS

The Government's balance is built up in those banks by their being authorized to receive the deposit of Federal funds. Internal-revenue collectors, customs col-lectors, and other Government officials who receive Federal revenue are required by the Treasury to de-posit such receipts to the credit of the Treasurer forth with upon acquiring them, and are privileged to do so at the Treasury or in a Federal reserve bank, which-ever is more convenient. It serves the Government quite as well whichever the depositor may choose, for it goes to the credit of the Treasurer's general account in either case.

As the Government has balances in each of the twelve banks as well as in the Treasury, commercial banks that have cashed checks for holders may procure payment either at the Treasury or at any Federal re-serve bank. It is clearly a convenience both to depositors and to those who wish to cash checks to be able to settle such matters at near-by establishments rather than to deal only with the Treasury itself, with the ensuing delay due to distance.

The Government's working balance is made up by calculating the total available for expenditures at the Treasury plus all other funds wherever they may be deposited to the credit of the Treasurer. It is absolutely imperative that the aggregate available balance be known currently, for it is essential that the Government have no greater volume of idle money than good administration requires.

It is perfectly obvious that the maintenance of a sufficient but not excessive balance is an object constantly to be sought. The fact is that the most careful attention is given that matter daily in order that the Government's funds may be provided and utilized to the best possible advantage.

The fact that the Government has obligations outstanding that bear interest is never out of the minds of those who guide the Treasury finances. The forecast of what will have to be paid out, when it will be paid, and what revenue will be on hand to meet the payments is all-important to the Treasury. It is most carefully calculated by those who serve immediately under and who are in daily contact with the head of the department.

DAILY BANK BALANCES ARE REQUIRED

It is manifest that the Treasury must know daily not only the amount of the Treasurer's balance in each depositary bank, but that it also must have notice of each particular deposit and payment in order to demonstrate the accuracy of the bank's account with the Government. The regulations of the department provide for that information being supplied by the banks daily. It is procured and utilized in the following manner:

At the close of each business day every bank that carries a Government balance is required to state its account with the Government and transmit it to the United States Treasurer. The bank must send with the account a carbon copy of each deposit receipt it has issued that day and also send with it each Federal check it has cashed and claims credit for. Thus on arrival at the Treasury the deposit receipts and the checks demonstrate the accuracy of the bank's statement, and the bank's account with the Government is charged or credited accordingly on the books of the Treasurer. The Treasurer's record thus discloses the Treasurer's balance in the bank concerned as it stands each day.

THEY HELP WHEN UNCLE SAM BORROWS MONEY

The Federal reserve banks are a great convenience to the Government, for they perform many services that otherwise would have, almost wholly, to be attended to in detail in Washington. The twelve Federal reserve banks are the principal mediums through which the Government is able to borrow money from the public. They assist greatly in handling our borrowings economically and expeditiously.

When the Government announces its purpose to float a loan, it is the practice for the Federal reserve banks to accept subscriptions from those within their respective districts who wish to invest. The banks assist in acquainting the public and the member banks with the terms of the proposed loan and with the fact that subscribers may procure the bonds by applying through the Federal reserve banks. Those banks thus receive the subscriptions and attend to details that otherwise would have to be attended to in Washington. Congestion and delay at the Treasury are thus avoided.

THEY FACILITATE CLEARANCE OF LARGE ITEMS

With the establishment of the Federal reserve system, facilities were made available to the Government whereby a transaction such as the $20,000,000 payment to Spain in 1899 may be wholly cleared on the same day as a single transaction. At the time that amount was paid it was necessary to accomplish payment by issuing four warrants for $5,000,000 each in order to spread payment over several days. They were paid successively from May 5 to May 16, instead of paying them all in one day. A transaction of that character, although involving an amount ten times as large as that paid to Spain, may now be conducted without difficulty in one day by utilizing the facilities that the Federal reserve system affords. That system has supplied the means whereby a piecemeal payment practice is no longer necessary. The first payment made under the act of April 24, 1917, which occurred shortly after the United States entered the World War, is an illustration.

When the United States joined the Allies in the World War, the credit of a number of our allied nations required immediate assistance. A number of them owed large sums to the American millers, meat packers, steel manufacturers, etc., and payment had become a very urgent necessity to the debtor. The act of April 24, 1917, above mentioned, authorized the Treasury to make loans of Federal funds to the Allies, and on the day following the passage of that act arrangements were made to advance $200,000,000 to one of them that had applied for a loan and whose needs were particularly urgent.

The obligation of the nation concerned was presented to the Secretary of the Treasury on the morning of April 25. A payment warrant was executed and delivered to the accredited official who represented the borrowing nation. That official immediately indorsed the warrant to one of the large New York banking houses. That house was the financial agent of the nation concerned and simultaneously issued cashier's checks in number and amount sufficient to cover deposits that it desired to be placed in various Federal reserve banks. The depositing bank instructed each of those Federal reserve banks as to the disposition of the funds by designating the amount to be credited to particular member banks. The member banks selected were those on which the New York bank desired to draw checks in payment of the borrowing Ally's outstanding debts. The entire transaction was completed within one day. An all-important feature to the transaction took place on that same day, viz., the Government had to procure the necessary funds in order to be in a position to make the loan to the Ally. It had done so by borrowing the money from the Federal reserve banks. As a matter of fact, the Government borrowed the money from the Federal reserve banks on the morning of April 25. The loan was represented by delivering United States interest-bearing certificates to the lending banks and the lent funds were represented by book credits set up in the lending banks in favor of the Government. The warrant payment offset the credits and thus the two transactions washed.

The credits the New York bank procured by the deposit of the cashier's checks were offset by charge to them simultaneously with the credit in favor of the member banks. The expenditure of the funds to discharge the borrowing nation's debts to the packers, millers, steel manufacturers, and other creditors was a subsequent result and a more gradual payment process such as commercial banking facilities customarily digest in ordinary course.

But so far as the Government was concerned, the borrowing and the paying processes were accomplished simultaneously by bookkeeping entries. Although the transaction represented the borrowing and lending of that huge amount, it was not necessary for any cash to pass from lender to borrower nor from the latter to the Federal reserve banks concerned. Although the loan, in actual coin, called for the payment of some 3 1/2 tons of gold, not a single bag of gold was actually disturbed.

The foregoing illustrates the efficiency of the Federal reserve system and of the commercial banking system of the United States, and discloses the convenience those systems have been to the Government in conducting the great financial transactions that modern conditions necessitate.

THEY RECEIVE BOND SUBSCRIPTIONS AND DELIVER BONDS TO SUBSCRIBERS

The Federal reserve banks subscribe for loans and accept subscriptions from other subscribers.

The proceeds of a bond-subscription payment are credited to the Government in the account of each subscribing Federal reserve bank on the day designated for the interest to commence to run on the subscribed bonds, and they are delivered to the subscriber by the banks acting for the Government.

Obviously, the banks thus perform very prompt and valuable assistance to the Treasury.

The Federal reserve banks act as fiscal agents of the Government and also perform a very great service in the matter of assisting the Government not only in the distribution of subscribed bonds but also in honoring the bonds when they fall due; they also honor the Government's interest coupons and the Government's checks.

The honoring of checks by the Federal reserve banks enables the Federal disbursing officers, such as army and navy paymasters, postmasters, and disbursing officers attached to the various Government establishments throughout the country, to procure the cash to meet their pay rolls.

THEY REDEEM SOILED AND DAMAGED CURRENCY

The Federal reserve banks render the Government another valuable service that is a convenience and a benefit to all the banks in the country and to every citizen, viz., they redeem the paper currency that is unfit for further circulation and supply the new currency that the Government provides. The Federal reserve banks send worn-out notes daily to the Treasury and receive credit therefor just as they do for the Goverment's checks they send in.

The process by which our paper currency is issued, redeemed, and reissued is an interesting procedure and will be described later.

THEY EXCHANGE BONDS AND CASH THE COUPONS FOR HOLDERS

There is still another very great service that the Federal reserve banks render the Government and the public—they. attend to the exchange of one denomination of Federal coupon bonds for any other denomination of the same loan and aggregate value that the holder may request. In order that the banks may be able to perform that service, the Government provides each of the twelve Federal reserve banks with a supply of each class and denomination of the Federal bonds. For example, the holder of a $1,000 Fourth Liberty Loan coupon bond may present it at a Federal reserve bank and procure therefor two $500 bonds of the same loan. If any coupons have been detached, the corresponding coupons will be detached from the two $500 bonds and the bondholder's wishes are met without any expense to him. It is not the practice of the Government to cause the bonds thus exchanged to enter into the Treasury's cash transactions.

The exchanged bonds that are accepted from the holder are not remitted to the Treasurer. They are accounted for with just as much care, but it is the practice to remit them to the Register of the Treasury, where they are fully audited and the bond records are noted so as to disclose the fact that the bonds have been returned.

The number of bonds that have been exchanged for other bonds is astonishingly great, and their aggregate face value is a vast sum. For example, during 1930, 500,000 exchanged bonds were thus sent in and their aggregate face value was $780,000,000. The year be-fore, 1,600,000 bonds, with a total face value of $1,-200,000,000, were exchanged. As almost all the exchanges take place through the Federal reserve banks' accepting the old and issuing the new bonds, the service is not only a great convenience, but it saves the Treasury much clerical expense that would be a heavy burden.

The banks are required by Treasury regulations to sort all the bonds they take up and list each according to the various loans and amounts; also to list each bond by number and in regular progressive serial number order. Each denomination list is required to be totaled to disclose the aggregate value. As each bond number has many digits, it is no small clerical task to list them. The lists must be strictly accurate. The Register's bond clerks will detect any variations between the lists and the instruments.

Especial care in the Register's audit is imperative, because the bond book records are posted from the lists after the bonds are audited. It is from those book records that a particular bond may be located when an inquiry regarding it is made.

The same method is employed as to listing, auditing, and recording the bonds that are honored by Treasury payment, except that the Treasurer receives and verifies them with the bank invoices. The Register audits and keeps the records of those bonds just as he does the exchanged bonds.

From the above description it will be apparent that a holder of a bond should take pains to keep a record of it that discloses the loan to which the bond relates, its number, its series, the date it falls due, and the face value of the bond. Every owner should do that as a matter of precaution, lest the bond be stolen, lost, or destroyed.

The Government cannot undertake to require a bond that is payable to bearer to be shown to be the property of the person who presents it for honor; but if it be stolen and thereafter be honored by the Treasurer, the Government will inform the true owner how the bond came to the Treasury—what bank sent it in.

Of course, the owner must know how to describe the stolen bond accurately. The benefit to the rightful owner would be that he might be able to discover who the wrongdoer was and recover from that individual. There have been many instances in which bondholders have been assisted in this way and a number of wrong-doers have cause to remember that it is' dangerous to defy Uncle Sam's strong arm.

In case a bond has been lost in a fire or otherwise destroyed, the Government will provide the owner with another bond upon his furnishing a protecting surety bond and satisfactory proof of destruction. But an accurate description of the destroyed bond is an absolutely essential requirement.

How BONDS ARE CANCELED

It is often asked how the Treasury is able to keep an accurate check on all the bonds it redeems and how losses through theft are prevented when the bonds are en route to the Treasury and while they are undergoing audit. It is explained that the Treasury causes the remitting banks to cancel each bond and each attached coupon; also each interest coupon that the banks honor and transmit to the Treasury. The cancellation is a machine-punched hole that is of a distinct design for each particular bank. From the appearance of that perforation the particular Federal reserve bank that sent the bond or coupon in is disclosed. The bond is also perforated by a punch design that spells "void." By the invoice accurately describing each bond and by each bond being thus canceled, the Government is so well protected that insurance is not considered necessary. Insurance premiums on so vast a sum as the face value of bonds remitted during a year would be a large expense. Obviously, the cancellation plan helps reduce administrative cost.

The honoring of the interest coupons as the semi-annual due dates occur also places a heavy task on the Federal reserve banks. The coupons are paid by them, assorted, invoiced, and canceled in a manner similar to the bond procedure described above. The banks must observe that each coupon is a genuine instrument, that it is a matured coupon, and that it is not a coupon that has been cut from a bond that was called before maturity.

In case a bond or an interest coupon is remitted to the Treasury and for any reason is not a valid or a matured instrument, such fact must be discovered by the Treasurer. In such a case the Treasurer, upon detection of the defect, returns the faulty document to the bank from which it came and reduces the remitting bank's credit accordingly. If the Treasurer's employees should fail to detect the fault, the Register when auditing the Treasurer's monthly submissions would deny credit and the Treasurer would have to make good the shortage.



Home | More Articles | Email: info@oldandsold.com