by Amy Farber
In 1947, if you didn’t quite understand banking basics, the ten-and-a-half-minute film “Using the Bank” might have served as an introduction.
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From NY Fed’s Liberty Street Economics:
The film follows citizen and prospective entrepreneur Frank Adams as he deposits money in his savings account, requests a business loan from his bank, opens a checking account for his new business, uses a check to pay for business supplies, and gets change for his business. The camera brings every detail to life in glorious black and white.
The film explains some behind-the-scenes activities in a bank: the use of an adding-recording machine, the payment of interest to Mr. Adams’ account, the use of a proving machine (to check deposit slips), the entry through a bank vault whose door takes twenty seconds to open, the negotiation of a business loan to Mr. Adams, the cancelling of a check, and the investment of part of the bank’s proceeds.
On the topic of bank investments, the film’s narrator assures us of conservative bank behavior:
Part of the money that comes into a bank is kept in cash, but the rest of it must be put to work to earn a profit for the bank. And so, the bank invests much of its money. According to law, these investments must be safe investments such as government bonds, municipal bonds and mortgages. The bank also invests its customers’ money in personal and business loans to reliable people.
Seven minutes and forty seconds into the film, after the Miller Supply Company has received a check from Mr. Adams for business supplies, and after an employee has endorsed the check, the film turns to the topic of check clearing, where the Federal Reserve makes an appearance:
But instead of collecting the money direct from the Elmville National Bank, the company does it through its own bank where the check is arriving right now. This bank can collect $150 once it places its own endorsement on the check, as it is doing here. But, instead of collecting the money directly, it uses a more convenient method. Like many other banks, it sends its checks to the Federal Reserve Bank for collection. The Federal Reserve Bank is set up to handle thousands of checks from hundreds of banks in a single day. All these banks save themselves a great deal of trouble by collecting on checks through the reserve bank. The Federal Reserve Bank collects the money direct from the banks on which the checks are drawn and returns the checks to these banks.
While the narrator is describing the role of the Federal Reserve in check clearing, the film depicts checks being sorted by hand into a horizontal wooden structure, check amounts being tabulated with an adding machine,and checks being put into envelopes and sorted again in canvas bins.
There are several online sources describing how the Federal Reserve got involved in check processing. A 1999 paper, “The Fed’s Entry into Check Clearing Reconsidered,” reexamines a standing belief that check clearing was inefficient before the Fed got involved. “Reaching the End of an Era in Check Processing” presents changes regarding the Fed’s role in check processing from the Philadelphia Fed’s point of view. See also the New York Fed’s Check Processing page.
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.
Amy Farber is a research librarian in the New York Fed’s Research and Statistics Group.