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A visible hand: the Fed's involvement in the check payments system

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  • James N. Duprey
  • Clarence W. Nelson

Abstract

It is common knowledge that the Federal Reserve System was originally set up to provide the nation with a stable currency and a sound banking system. Less well known, however, is why the Fed was given an operating role in the nation's payments system. In this article, James N. Duprey and Clarence W. Nelson describe the problems of the check payments system before the Fed was created, suggest reasons why the private sector was unable to resolve them, and indicate how the framers of the Federal Reserve Act intended to have the Fed resolve them. Duprey and Nelson argue that while a unified national check-clearing system clearly would have been more efficient than the fragmented system that then existed, both private and Fed initiatives to reform the payments system met strong resistance from the banking community -- especially smaller nonpar banks. These banks were reluctant to give up their profitable practice of nonpar payment (paying less than the written amount of checks drawn on their accounts). Duprey and Nelson conclude that, despite the banking community's resistance, the Fed did improve the efficiency of the check payments system.

Suggested Citation

  • James N. Duprey & Clarence W. Nelson, 1986. "A visible hand: the Fed's involvement in the check payments system," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 18-29.
  • Handle: RePEc:fip:fedmqr:y:1986:i:spr:p:18-29:n:v.10no.2
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    References listed on IDEAS

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    1. O. M. W. Sprague, 1911. "The Reserve Association and the Improvement of Methods of Making Payments Between the Banks," Journal of Political Economy, University of Chicago Press, vol. 19, pages 831-831.
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    Cited by:

    1. McAndrews, James & Roberds, William, 1999. "A General Equilibrium Analysis of Check Float," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 353-377, October.
    2. William Roberds, 1997. "What's really new about the new forms of retail payment?," Economic Review, Federal Reserve Bank of Atlanta, pages 32-45.
    3. Jeffrey M. Lacker & Jeffrey D. Walker & John A. Weinberg, 1999. "The Fed's entry into check clearing reconsidered," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-32.
    4. Stephen F. Quinn & William Roberds, 2008. "The evolution of the check as a means of payment: a historical survey," Economic Review, Federal Reserve Bank of Atlanta.

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