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Comments onCoraplaint of Pascagoula National Bank against th e Federal
Reserve Bank o f Atlanta, e t . a l . i n tiie United States District Court
f o r t h e
Northern District
o f
Georgia.
Without-*-attempting to dis cuss pl ai nt i ff ' s preliminary technical alle gatio ns
necessary fo r th e ident i f i ca t ion of part ies , jur isdic t ion, e t c . , t h e following
comments will deal only with certain paragraphs of the allegations having r e f -
i :
erence to the merits of the case.
Paragraph 12 . The statement as tc the checks which Federal Reserve Banks may
receive i s n o t corr ect. Section 13 as originally enacted read
i n part a s follows:
Any Federal Reserve Bank may rec eiv e from any of
i t s member Thanks, and from the United States, d e -
pos i t s of current funds i n lawful money, national-
bank notes, Federal reserve notes, or checks and
drafts upon solvent member banks, payable upon p r e -
sentation; o r , sole ly f o r exchange purposes, may re-
ceive from other Federal reserve banks deposits of
current funds i n lawful money, national-bank notes,
or checks and drafts upon solvent member or other
Federal reserve banks, payable upon presentation.
The Act of September J 1916 amended th e foregoing part of the
Section to read a s follows:
Any Federal Reserve Bank may rec ei ve from any of
i t s member banks, and from th e United States, d e -
pos i t s of current funds i n .lawful money, national
bank notes, Federal reserve notes, or checks and
drafts, payable upon presentation, an d a lso , for
co ll ec ti on , maturing b i l l s : o r , s o l e l y f o r purposes
of exchange or of col lec t ion, may receive from other
Federal reserve banks deposits o f Current funds i n
lawful money, national bank notes, or checks upon
other Federal reserve banks, and checks and draf ts ,
payable upon presentation within i t s d i s t r i c t , and
maturing b i l l s payable with in i t s dis t r ic t -
1 1
On June 21, 1917. this part of the Section was again amended
by insert ing the words notes and» a f t er th e word maturing
i n t h e sixth l ine and in twelfth line a s written above and by
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adding
the
following vhich constitutes
th e
so-called Hardwick
Amendment:
o r ,
so le ly ,
fo r th e
purposes
of
exchange
or of
col lect ion ,
may
receive from
any
non-merrher bank
or
trust company
deposits
of
current fends
i n
lawful money, national-
bank notes, Federal reserve notes, checks
and
drafts
payable upon presentation,
or
maturing notes
and
b i l l s :
Provided, such non-member bank
or
trust company main-
tains with
th e
Federal reserve bank
o f i t s
d i s t r i c t
a
balance sufficient to o f f s e t th e items in transit held
f o r i t s
account
by the
Federal reserve bank; Provided,
further, That nothing
i n
this
or any
other Section
o f
this
Act
shall
b e
construed
as
prohibiting
a
member
or non-member bank from making reasonable charges, to be
determined and regulated by the Federal Reserve Board,
but in no
case
to
exceed
te n
cents
per' $100 or
fraction
thereof, based
on the
total
of
checks
and
drafts pre-*
sented
a t any one
time,
f o r
col lect ion
or
payment
o f
checks and drafts and remission therefor by exchange
or
otherwise;
but no
such charges shall
b e
made against
th e
Federal reserve banks.
The
part
of the
section dealing with checks
has not
been amended
since June
21, 191? and now
reads
a s
indicated above,
. I t
wil l
be
noted that there
is no
limit
so far as
place
of
payment
i s
concerned
as to the
checks
end
drafts which
a
Federal
reserve bank
may
receive from
i t s
member banks
and
th at there
i s
likewise
no
limit
as
regards
th e
place
o f
payment
of
checks
and
drafts which
may be
received from non-member clearing banks.
The
only place where
t h e
vtords within
i t s
dis tri ct occur
i s i n
that part
of the
Section dealing with checks
and
drafts which
may be
rec eived from other Federal rese rv e banks
f o r
purposes
o f
exchange
or of
col lect ion .
The
Section
as i t now
reads confers upon
any
Federal reserve
bank
the
right
to
receipt deposits
of
checks
and
drafts payable
upon presentation
a s
follows:
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1 . From member banks, checks and drafts payable anywhere.
2* From other Federal re serv e banks checks upon other Federal
reserve banks and checks and drafts payable within the
d i s t r i c t of the re ce ivi ng Federal reserve bank when rec eived
f o r purposes of exchange or of col lec t ion.
3 • From any non-member clearing bank or trust company checks
and drafts payable anywhere.
lg « There i s nothing in the Federal Reserve Act to indicate that the
prohibition
of
payment
of
exchange charges
by
Federal reserve
banks was designed solely f o r t h e protect ion of the revenues of
th e Federal re serv e banks. There i s , on th e other hand , ample
indicat ion in the history o f check collection in the United
States both before the Federal Iljserve Act was passed and during
th e operation of the Federal reserve banks prior to th e amendment
o f J-une 21 , 1917> to indicate that Congress intended t o free any
check which could be collected through th e Federal reserve banks
from these so-called exchange charges. The right was conferred
upon Federal reserve banks to receive deposits o f checks from
member banks as well as from non-member banks -under certain
conditions and i t must be supposed that Congress, n o t having
ind icat ed otherw ise , expected that Federal reserve banks would
receive such deposits
in the way
that they
are
generally
r e -
ceived b y banks and that ordinarily, therefore, th e Federal r e -
serve bank mig&t be acting as an agent in the col lec t ion of such
checks. I f this conclusion i s correct, Congress must have intend-
ed member banks which collect checks through th e Federal reserve
banks to get the benef it of exerrption from exchange charges , i r -
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respective of any question o f agency. This view i s supported
by the fact that so fa r a s checks drawn on member banks are
concerned, th e Federal res'erve banks mast, under Section l 6 ,
receive such checks at par and if this requirement is to be
given th e indicated effect th e Federal reserve banks cannot
assess t h e charges on such checks against th e depositing banks.
The view that th e agency function of the Federal reserve bank
in t h e co l l ec t ion o f checks i s n o t a determining test i n decid-
i n g whether exchange may be charged by the drawee banks i s f u r -
ther supported by the fa ct 'that t h e same A ct (June 21 , 1917)
which inserted prohibition against such charges in Section 1 3
also amended Section
19>
dealing with reserves,
i n
such
a way
as to indicate that th e Federal Reserve bank cannot count as
reserve f o r
9
member checks deposited b y that member bank but
n o t y e t col lected. See opinion of Counsel, Mr. Weed, dated
August 8 , 1923• I n other words, by preventing t h e credit o f
checks to the reserve account before th e proceeds are obtained,
th e amendment of Section 19 if i the Act of June 21, 1917 in
effect practically amaided Section 13 so that checks received
from member banks are received f o r col lec t io n, that i s , Federal
reserve banks a c t a s agents i n obtaining payment of checks.
Paragraph
19 » The
provision
in
Section
16
that every Federal reserve bank
must receive on deposit at par from member banks . . . . checks
and drafts drawn upon any o f i t s depositors i s no t a
requirement that Federal reserve banks mast give immediate
credit in t h e depositing bank
1
s reserve account o t that the
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Federal reserve bank i s under an obligat ion to pay the amount
of the checks deposited or any par t of the deposit as soon as
th e depositing member bank sees f i t to draw a check against i t .
P l a i n t i f f
1
s allegat ion i n this paragraph i s evid entl y based u p-
on an erroneous interpretation of the words deposit or on
deposit a s applied t o ordinary banking practice and as used
in the Federal Reserve Ac t. So fa r as the deposit of money
in an open account i s concerned, i t i s undoubtedly true that
the depositor has a right t o draw a check against th e deposit
at any time he may e lec t , but this may or may not be true of
checks or other negotiable instruments deposited, depending on
th e circumstances* A check may be deposited i n a bank i n such
a way as to constitute a sale of i t or i t may be deposited fo r
col lec t ion. As stated by Tiffany on Banks and Banking , when
a negotiable instrument i s endorsed generally, o r , being payable
t o bearer, i s delivered to and Deposited with a bank, the trans-
action may be a sale of the paper or a deposit fo r col lec t ion,
according to the agreement of the part ies . The agreement of
the part ies may be evidenced by general notices which are printed
on the pass books or deposit slips or otherwise brought home to
th e depositor, or an agreement may be presuired from general u s -
ages obtaining i n a loca l i t y or by statute . I t i s true that
some courts hold that where a different understanding does not
affirmatively appear, Hie t i t l e t o negotiable instruments d e -
posited i n a bank i n th e ordinary course o f business immediately
passes to the bank, which becomes a debtor to the depositor for
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th e amount, but even vdiere there is no affirmative under-
standing as to agency or as to the deposit f o r col lec t ion,
other courts have held that th e practice which i s followed by
some banks o f creditin g deposits of checks a t once to th e d e -
positor's account or by allowing him to draw against such d e -
pos i t s , i s a mere gratuitous privilege, a s stated by Tiffany,
th e privilege being slso extended where th e paper i s endorsed
for collect ion a s well a s where i t i s endorsed without r e -
s t r ic t ion , th e bank being able t o revoke th e priv i lege at any
time and, consequently, unless i t aff ir mat ive ly appears that
th e credit i s irrevocable, t h e beneficiary ownership of the
paper i s n o t transferred and th e transaction constitutes a d e -
pos it f o r col lec t ion.
The words deposit or on deposit a s generally used , th erefore,
*
are capable of a broad interpretation and so far as the Federal
Reserve A c t i s concerned, Congress h as indicated that th e broader
interpretation must apply. For example: Sect ion 13 refers i n
several instances to deposits of checks and drafts fo r purposes
of exchange or of col lec t ion and also indicates that maturing
notes
and
b i l l s
may be
deposits
f o r
co l lec t ion .
A ll of
which
i n -
dicates that the framers of the Federal Reserve Act had in mind
that a deposit may consist of items upon which immediate a vai l -
a b i l i t y i s deferred, and a Federal reserve bank, therefore, has
th e right to defer immediate credit in the reserve account until
th e proceeds a r e obtained. One must go even further than that.
The
Federal Reserve
A c t ,
prior
to the
amendment-of June
21, 1917,
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recognized s right t o defer c red i t b u t since t h e amendment of
June 2 1 , 1 9 1 7 , i t
imposes
a
pos it i ve duty
upon Fsderal reserve
banks
to
defer credit . for
checks
deposited until
t h e
proceeds
are
obtained, because th e only balance of a member bank i n a Federal
reserve bank which can b e checked against is the required balance
carried
as a
reserve,
and
that balance, under Section
19 as
amended June 21 , 1917 , must be an actual n e t balance . An actual
n e t balance means a col lec ted balance and not a balance created
by giving immediate credit f o r checks n o t y e t collected* See
opinion o f Counsel, Mr. Weed, dated August 8, 1923 » The Act o f
June 2 1 , 1 9 1 7 , constitutes, therefore, i n e f f e c t a n amendment of
that part of Section 13 dealing with t h e deposit of checks, a s a l -
ready stated , and also that part of Section l 6 dealing with the
same subject.
Paragraph 2 1 . Pla int if f *s allegat io n that s ince the Federal reserve bank defers
credit the drawee banks a re entit led to charge exchange, i s
evidently based upon the t es t of agency which pl ai n ti ff seeks to
establish, because th e further allegation i s made that if im-
mediate credit i s gi ven, t i t l e being thereby vested i n t h e Federal
reserve bank receiving
t h e
deposit ,
th e
right
t o
charge exchange
against th e Federal reserve bank would be destroyed by th e pro-
hib i t ion i n Section 13, As pointed o u t e l s evil ere , th e mere d i f -
ference between principal and agency does n o t af f ec t th e matter.
Section
13
makes
a
positive declaration that
no
such charges
shall b e made against the Federal reserve banks , and there is no
qua l i f i ca t ion to that prohibition expressed or implied anywhere
i n th e Ac t .
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As already related , Congress evidently intended that an y bank
which clears checks through the Federal reserve bank should get
th e benef i t o f th is exemption from exchange charges- I n fact
i t i s this reciprocal be ne fi t i n clearance that is one of the
considerations i n requiring member banks, at any rate> to pay
at par for checks drawn upon themselves. This cons iderat ion of
th e mutual benefit of par clearance was evidently i n t h e mind
of the Supreme Court i n i t s decision i n th e Farmers and Merchants
National Bank of Monroe, North Carolina against the Federal S e -
serve Bank' of Richmond, because the Court i n speaking of the
amendment o f September, 1916 and of the provisions of the later
amendment (June 21, 1917) by which non-member barks were given
th e right to clear through Federal reserve banks, uses t h e f o l -
lowing language:
" I t w a s
recognized t ha t non-members were l e f t f r ee
t o
refuse assent
t o pa r
clearance
. . .
Rese rve banks could
n o t under t h e then l a w , make collections f o r n o n -
members, I t was believed th at i f Congress would gran t
Federal reserve banks permission
t o
make collection
also
f o r
non-members,
t h e
Board could offer
t o a l l
banks
inducements adequate
to
secure their consent
to pa r
clearance,
A
fu r t he r amendment
t o
Section
13 was
the re -
upon secured by th e Act of June 21, 1917 ••• »
( th e Supreme Court thereupon quoting that part of Section 13
which
permits th e col lec t ion of checks f o r non-member banks). Un-
doubtedly, t h e inducement which th e Supreme Court had in mind
was the right t o have checks which banks might de po si t, co ll ec ted
without payment
of
exchange
•
I t should
b e
added that
Section l 6
compels the reception of certain checks at par from member banks.
I t should also be added that neither Section 13 nor Section l 6
either expressly or impliedly
imposes
an y duty upon Federal reserve
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banks to a c t a s th e agent of a drawee bank, from which i t has
received payment
fo r
checks,
i n
collecting from
th e
banks
d e -
positing those checks, th e drawee barik*s charges f o r remission
of the
proceeds.
Paragraph 22 I t seems highly improbable that a member bank could success-
fully attack th e const i tut ional i ty of the prohibition o f Section
13 against th e payment of exchange charges by Federal reserve
banks. With re spec t to national banks i t may be said that as
long as such a bank continues to operate under a national
charter i t must accept an y reasonable regulations imposed by
act o f Congress. I t h a s , however, a n alternative; i t m ay r e -
l inquish i t s charter and operate under such state charter a s
i t may
obtain.
A
st at e bank like wi se
has an
alternative;
i t
may abstain from or withdraw from membership i n t h e Federal R e-
serve System. This pro hi bi ti on i s a condition o f membership
imposed upon a l l member. banks, national banks havi rg had a
ce rt ai n per iod. wi thin vthich t o choose whether they should b e -
come members, and if membership i s retained or accepted, i t
would seem to be binding and the conditions having been assumed
or accepted voluntarily by member banks, i t i s d i f f i c u l t to see
that th e prohibit ion i s open t o attack o n th e ground of con-
s t i t u t i o n a l i t y .
Paragraph 2%. The Supreme Court decisions quoted dealt with t h e matter o f ex -
change charges by non-member banks and one of them had r e f -
erence to exchange charges by a non-member bank i n a state which
by stat ute sp eci fi ca ll y permitted a drawee bank to pay fey draft
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f o r
checks presented through
a
Federal reserve bank.
The
question
of the
right
of a
Federal reserve bank
t o
defer credit
on
checks rec ei ve d from member banks,
w a s ,
therefore,
n o t
raised.
Neither
of the
Supreme Court decisions questions
t h e
r i ght
of
a
Federal reserve bank
t o
co l l ec t checks from member banks with-
out the payment of exchange charges. I n American Bank & Trust
Company against
th e
Federal Reserve Bank
o f
Atlanta which de al t
only with
t h e
question
o f t h e
right
of a
Federal reserve bank
t o collect checks payable in i t s own d i s t r i c t by presenting
checks over
th e
counter
of the
drawee bank,
t h e
Supreme Court
of
th e
United St at es ruled
a s
fol lows:
Federal reserve banks a r e , thus, authorized by
Congress
t o
c o l l e c t
f o r
other reserve barks,
f o r
members,
and for
affiliated non-memters checks
on
any
bank within th eir res pective di s tr ic t s ,
i f
t h e
check
i s
payable
on
presentation
and can in
fac t
b e
colle cted cons iste ntly With
the
legal
r i ght s
of the
drawee without paying
an
exchange
charge. Within th es e li mi t s Federal re se rv e banks
have ordinarily
t h e
same right
t o
present
a
check
t o t h e
drawee bank
f o r
payment over
t h e
counter
as any
other bark, state
or
national, would have .
Part
o f
p l a i n t i f f
*«'
complaint
i n
this allegation appears
to be
that
the par
l i s t
i s
st i l l c i rculated
a id
sti l l drawing
to the
Federal reserve banks
f o r
co l l ec t i on
a
large volume
o f
checks
that could otherwise
b e
presented
i n
other ways,
but the
Supreme
Court i n t h e same de ci si on ju st mentioned, i ndi cat es th at t h | s
i s n o t a
proper cause
o f
complaint against Federal reserve banks,
t h e
Court having taken cognizance
of the
fact that largely
b e -
cause
o f t h e
superior fac i l i t i es
of the
Federal reserve banks,
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most checks
on
country banks
a r e now
route d through
t h e
reserve banks
and the
Court having stated that
11
Country banks
a r e n o t
en t i t l ed
t o
prot ect i on against leg i t i mat e compet i t ion.
Their loss here shown
i s o f th e
kind
t o
vdiich business
c o n -
cerns
a r e
commonly subj ecte d when improved f a c i l i t i e s
a r e i n -
troduced
by
o thers
o r , a
more efficient competitor enters
the
f ie ld
1 1
•
Even
i n t h e
case
o f a
North Carolina bank where
t h e
s ta te s ta tute permits
t h e
drawee,bank
to
remit
b y
d r a f t
on a
correspondent,
t h e
Supreme Court, while denying
t h e
obl igat ion
of the
Federal reserve bank
t o
c ol lec t checks from non-member
banks, admits that they may do so* The Court used t he f o l -
lowing 'language
:
"But
neither Section
1) nor any
other provision
of the Federal Reserve Act imposes upon reserve
banks
any
obl igat ion
t o
receive checks
f o r c o l -
l e c t i o n .
The Act
merely confers authority
t o
d o s o " .
Paragraph
25* The
al le ga ti on tha t Federal res erv e banks
a r e n o t
authorized
t o
receive
f o r
co l l ec t i on
any
check
o r
dr af t except from th ei r
respective^/nembers
or
depositing non-members
and no
check
o r
draf t tha t
i s n o t
payable
on
presentat ion within
t h e
d i s t r i c t
of the
Federal reserve bank receiving
i t " , i s n o t
supported
by
t h e
provis ions
of
Section
13 *
Those pro vis ion s
a r e
quoted
i n
t h e
foregoing comments upon paragraph
12 of the
a l l ega t ions .
The
three groups
of
checks which Federal reserve banks
may r e -
ceive
a r e
summarized
i n t h e
comments
on
t h at parag raph- With
regard
t o
checks from member banks
and
non-member clearing banks,
there i s no d i s t i n c t i o n a s t o t h e place where a check o r draf t
may be
payable* Moreover, Sec tio n
13
does
n o t
i t s e l f r e s t r i c t
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th e
purposes
f o r
which de po si ts
o f
checks
may be
made
by
member banks, although, a s stated elsewhere, th e amendment
o f June 21, 1917 to Section 1 9 does i n ef fec t const i tute a
restriction that such checks
a r e
received
f o r
c o l l e c t i o n .
Though i t i s n o t s o e x p l i c i t l y s t a t e d , t h e bas i s o f p l a i n t i f f ' s
contention that i t i s ent i t l ed t o charge exchange against the
Federal reserve bank, appears
to
cons i s t
of the
argumaat that
there i s a conflict between t h e right of drawee banks to collect
exchange recognized by the Federal Reserve A ct , and the pro -
hibi t ion aga ins t th e payment of such charges by the Federal
reserve banks, which can be reconciled only i n t h e w a y e v i -
dently advanced by p l a i n t i f f , th e determining principle o b -
viously being whether th e Federal reserve bank acts as an agent
in t h e c o l l e c t i o n of checks deposited with i t . The quest ion of
agency h a s been disc usse d elsewh ere i n these comments* As a
matter o f fact, there is no conflict between th e various p r o -
v i s io n s
of the
Federal Reserve
Act
dealing with exchange
charges. Section 13 specifies that member and non-member banks
are no t p roh ibi ted from making reasonable changes wi th in
certain maximum limits, f o r t h e c o l l e c t i o n or payment o f checks
and d r a f t s and the remission therefor. At the same time that
this r ight i s recognized, th e expl ic i t d irec t ion i s made that
no charges shall b e made against t h e Federal reserve banks*
The Supreme Court o f t h e United States i n Farmers' & Merchants
Bank o f Monroe, N . C . , v s . Federal Reserve Bank of Richmond,
recognizes th e difference between a charge f o r c o l l e c t i o n and
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par
clearance
i n t h e
following language:
Par
clearance does
n o t
mean that
the
payee
of a
check
who
deposits
i t
with
h i s
Dank
f o r
collection rail
be
credited i n h i s eccoxint with th e face of the check i f
i t i s
collected.
H is
bank
may,
despite
par
clearance,
make
a
charge
t o M m f o r i t s
service
i n
collect ing
th e
check from
t h e
drawee bank.
I t may
make such
a
charge although both
it and the
drawee bank
a r e
members
of the
Federal Reserve System;
and
some third bank
which aids
i n t h e
process
o f
col lec t ion
may
likewise
make
a
charge
f o r t h e
service
i t
renders. Such
a
collection charge
may be
made
n o t
only
to
member banks
by
member banks, national
o t
state ,
bu t i t may be
made
t o
member banks also
by the
Federal reserve banks
for
the
services whicia
t h e
latter render.
The
collect ion
charge
i s
expressly provided
f o r i n
Section
l6 o f the
Federal Reserve
Act
which declares that
' t h e
Federal
Reserve Board shall by rule f i x t h e charges t o b e c o l -
lected
by the
member banks from
i t s
patrons whose checks
are
cleared through
t h e
Federal reserve bank
and the
charge which
may be
imposed
f o r t h e
service
of
clearing
or collection rendered by the Federal Reserve Bank
1
.
Par
clearance refers
t o a
wholly different matter.
I t
deals
n o t
with charges
fo r
col lec t ion
b u t
with charges
incident
to
paying.
I t
deals with exchange .
Any
member
W hk
dealing with other member banks
or
with
n o n -
member banks
may
make charges
f o r
col lec t ion
or
payment
of
checks
and the
remission therefor.
I t
simply cannot make such
charges against
th e
Federal reserve bank.
I t
should
b e
further
noted that Section
l 6
provides that
th e
charges
to be
collected
by member banks when checks a r e cleared through the Federal r e -
serve bank,
are to be
collected from
th e
patrons
of the
member
banks, t h e language used being a s follows:
The
Federal Reserve Board shall,
by
rule ,
f i x t h e
charges
to be
collected
by the
member bank(s) from
i t s patrons whose checks are cleared through the
Federal reserve bank
. . .
There
i s ,
therefore,
no
c o n f l i c t
i n t h e
provisions
of the
Federal
Reserve
Ac t . I f the
drawee bank deals direct with other banks
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i
» l 4 - X-U.1U9
i t may c o l l e c t exchange; i f i t deals direct with t h e Federal
reserve bank, i t may no t collect exchange, b u t i n that case
i t profits from th e right to clear checks itself through the
Federal reserve bank and also i s permitted by the Federal R e-
serve Act to collect from i t s patrons such diarges f o r their
checks which a r e cleared through t h e Federal reserve bank, as
th e Federal Reserve Board may sanction.
\
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v...- ...
C. O P T v v, •• ..
x-Umg
(a)
HERRICK, SMITH, DONALD & FARLEY
BOSTON
August
8 ,
1021+.
Honorable W. P. G. Harding,
Federal Reserve Bank,
Boston, Mass,
llbj dear Governor Harding:
You have asked my opinion a s t o whether a s a mat ter of law a Federal Reserve
Bank has any au t hor i t y t o give immediate credit on checks deposited with i t f o r
col l ec t ion .
So f a r a s
member oanks
a r e
concerned, thi s question ne ces sar i ly involves
the
question of reserve requirements under Section 19 of the Federal Reserve Act•
In Ejt opinion a reserve balance requir ed by Sect ion 19 and which i s defined
a s a n Actual n e t balance can not'- include unc olle cte d checks, and hence a Fed -
eral Reserve Bank has no author i ty t o grant immediate credit on checks deposited
with
i t and
ther eby g ive member banks
t h e
benef i t
of
uncollected i tems
i n
t r ans i t
i n computing reserve balances. •
My reasons a r e a s fol lows: Pr ior t o t h e adoption o f the amendment of
June 21, 19171 Sect ion 19 provided in sub stance a s follows:
n**********]£very subscribing member bank shall establish
and maintain reserves a s fol lows:
( a ) A
bank
no t in a
reserve
o r
central reserve ci ty
************
s ^ a l 1
hold
and
maintain reserves
equal t o twelverper centum of th e aggregate
amount o f i t s demand deposits , and f i v e p e r
centum o f i t s time deposits a s fol lows:
I n i t s vaul t s f o r a period of t h i r t y - s i x
months after said date
$ / l 2
thoreof
a nd p e r -
manent ly thereaf ter 4
/ 1 2
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x-UiUgU) ^
- 2 - -
In t he Federal reserve bank o f i t s d i s t r i c t ,
f o r a
per iod
of
twelve months after said date,
2 / l 2 , a nd f o r
each succeeding
s i x
months
a n
add i t i ona l
l / l 2 ,
u n t i l
5 / 1 2
have been
so
deposited,
which shall be t he amount permanently required .
I t i s
unnecessary
f o r t h e
purposes
of
this opinion
t o
quote
i n
t h e i r
e n -
t i r e t y t h e somewhat elaborate provisions of Section 19 a s originally drawn.
I t i s
s u f f i c i e n t
t o
note that
a
member bank
was
required
t o
hold
and
maintain
cer tain reserves
an d
tha t
a
por t ion
of
those reserves might
b e " i n t h e
Federal
Reserve Bank , t h e por t ions i n t h e Federal Reserve Banks t o increase un t i l t he
f i n a l amounts have been
so
de po si te d . Thus amounts de po sit ed
i n t h e
Reserve
Banks counted
a s
r e se rves .
I t i s t o be
noted that there
was
nothing specific
a s t o
whether these reserve deposits might
o r
might
not
include checks which
had
been deposited b u t which had not been collected.
Af ter
t h e
amendment adopted
on
June
21 , 191? .
Section
19
provided
i n s ub -
stance
a s
follows:
Every bank, banking association,
o r
trust.company
which
i s o r
which .becomes
a
member
of any
Federal
Reserve Bank shall establish
and
maintain reserve'
balances with
i t s
Federal Reserve Bank
a s
follows:
(a ) I f no t in a
reserve
o r
central reserve city
******** 1% shal l hold and maintain with t he
Federal Reserve Bank
of i t s
d i s t r i c t
a n
ac tua l
n e t
balance equal
t o n o t
less than
seven
p e r
centum •********<'.
I t i s
unnecessary
f o r t h e
purposes
of
t h i s opinion
t o
quote
t h e
other
p r o -
vis ions of Section 19 r e l a t i n g t o reserves . The words ac tu al n e t balance
appear
i n t h e
amendment
o f
June
21 , 1917 fo r t he
f i r s t t ime
a n d
should
b e
care-
f u l l y note d. What do th es e words mean? Clea rl y to my mind t h e words Actual
a n d " n e t "
qua l i fy
a n d
l imi t
t h e
word bal anc e
, and
quite apart from
any
l ight
which
may be
thrown
on
the i r i n t e rp re t a t i o n
by
reference
t o
congressional debat
o r
banking usage
I
should construe these words
t o
exclude checks
i n t h e
process
of
co ll ec ti o n. .However,
I
be l ieve
t h e
h i s to ry
o f t he
Legis la t ion
a n d
banking
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-3 -
X-4l49(a)
usage assist material ly i n th e i r in t e rp re ta t i o n .
The proposal t o amend t h e reserve requirements of Section 19 emanated from
t h e
Federal Reserve Board
and in
p a r t i c u l a r
t h e
words ac tu al
n e t
bal anc e seem
t o have orig ina te d with t h e Board. The statement which t h e Board made to the Com-
mittees of Congress i n proposing t h e amendment i n quest ion i s t h e r ef o r e p e r t i -
ne nt . This statement appears i n t h e February Bulletin of 1917 and reads i n part
a s follows:
"A minimum amount of currency that t h e member banks should
be
required
t o
keep
i n
thei r vau l ts
i s ,
th e re fo re , p resc r ib ed .
The
amount suggested
i s 5 p e r
cent
of the
demand deposits,
so
tha t t h e total requirements - cash and reserve - will remain
pr a c t i c a l l y unchanged. While
t h e
e f f e c t
o f
some
o f t h e p r o -
posed changes will be to reduce somewhat th e reeerve requ i re-
men t s , t h e reserves wi l l b e increased by t he abrogation of t he
pract ice hi therto observed of counting items i n t r a n s i t o r
f l o a t a s reserve*. The permission given member banks t o
u s e t h e i r own d i sc re t io n a s t o t he character of currency i n
th ei r va ul ts , wil l enable them
t o
r e l e a s e
t h e
gold they
now
hold, with t h e important result that th e s u b s t i t u t i o n of
Federal Reserve notes f o r gold and g o ld ce r t i f i ca tes w i l l b e
f a c i l i t a t e d by this change i n t he l a w . Without some such
change member banks will continue
t o a s k f o r
g o ld ce r t i f i ca tes
i n small denominations, because a s long a s they must have
gold,
o r
lawful money
t o
count
a s
reserve
i t
would
b e
impossible
f o r t h e
batiks
t o
exchange them
f o r
Federal Reserve notes .
The
above statement
i s i n no (way)
ambiguous
and i t i s
per fe ct l y c lear tha t
i n
proposing
t h e
amendment
t o
Section
19 the
Federal Reserve Board intended
t o
el im-
inate items i n t r a n s i t o r f l o a t , or in other words, t h e Federal Reserve Board
intended to preclude t h e p o s s i b i l i t y of giving immediate credit on deposited
checks i n computing re se rv e bala nces .
The debates i n Congress when t h e amendment to Section 9 was before t h e House
of
Representat ives
f o r
considera t ion
as H. R .
3675
a r e
enlig hteni ng. Repre-
sentative McFadden offered a n amendment reducing the 7f° rese rv e a s contained
in H. R. 3673 to 5^0. Re pr esen ta ti ve McFadden made t h e following comments, i n -
dicat ing that
th e
proposed
l a w , i f
enacted, would eliminate from
t he
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' ' 5
- 4 - x-UiUg(a)
reserve required t o be maintained t h e f l o a t o r uncollected i tems:
"Mr. McFadden, M r. Chairman, this amendment proposes t o
reduce
t h e
legal requirements
o f t he
reserves
of
country banks
from 7 t o 5 p e r cent , a s proposed i n this Federal Reserve Amend-
ment, b u t i t i s a well-known fact that while under t he o ld l aw
t h e legal reserve of 12 p er cent applied t o cou ntry bank s, tho se
banks, notwithstanding this fact , a r e keeping an average reserve
of
about
27 p e r
cent .
The
country banks have never confined
themselves
t o t h e
le ga l requi rement s. Under the se Fede ral
reserve amendments as now proposed they wi ll b e compelled n o t only
t o keep a l l t h e reserves they now keep i n t h e Federal Reserve
Banks,
b u t t o
increase them
2 p e r
cent ,
o r
from
5 p e r
cent
t o
7 p e r cent - and this mist be a ne t balance o f 7 p e r cent -
whereas present requirements a r e a gross requi remen t. That i s t o
s a y , t h e banks mast carry t h e float amounting on the average t o
l ^ p e r cent, being t h e checks i n process o f co l l ec t i on - s o , the re -
f o r e , t h e banks must car ry in st ea d o f 7 pe r cent.
"Mr. Cannon. Will t h e gentleman yield f o r a question?
"Mr. McFadden. Yes, I wi l l .
"Mr, Cannon. Does t h e gentleman, s ay tha t t h e country banks
voluntar i ly keep 57 pe r cent reserve with t h e regional banks
under t h e Federal Reserve Act?
"Mr.
McFadden.
O h, n o t a t a l l .
"Mr, Cannon. With t h e i r corre sponde nts?
"Mr. McFadden. With t h e city correspondents o f t h e bank and
t h e regional banks combined.
"Mr, Cannon. Upon which th ey ge t 2 pe r cent interest?
"Mr. McFadden. That is one point I was coming t o . T he ci ty
correspondent banks
pay
them interest usually
a t t h e
r a t e
of
2 p e r
cent ,
b u t t h e
regional banks
pay no
i n t e r e s t .
•
That
is one
of t he reasons for my amendment reduc ing t h i s requ irement t o 5 pe r
cen t . -
"Mr. Cannon. And they ge t no interest f rom t h e Federal Reserve Banks?
"Mr. McFadden. No; a s a matter of fa c t , t he ir combined re se rv es
today a r e about 27 p e r ce nt . They a r e permitted under t h e present
l aw to
keep
a
small portion
of
that with other banks
i n
reserve
c i t i e s , an d under this l aw, i f adopted, there wil l be a complete
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- 5 -
X-4l49(a)
mobilization o f a l l reserves into the 12 regional reserve banks
inmeditately. Now, th e purpose of t h i s amendment i s t o permit
these country banks
t o
keep
a
portion
of
their reserves with other
than Federal reserve banks an d thus receive more compensation in
the way of interest and other emoluments, such a s services which
a re known only to the country banks. These c i ty banks perform
many forms of services f o r t h e country banks and are repaid by
a compensating balance from th e country banks. I might ad d here
that i n th e Senate a b i l l h a s been reported from th e Senate
Banking an d Currency Committee i n which they have provided that
th e reserves of the country b e f ixed at 6 per cent.
So that this amendment of mine would be 1 per cent lower than
th e Senate amendment. When you consider that this i s a n e t r e -
serve, an d that th e banks must carry th e f l o a t or the checks i n
trans it , and that amounts to on the average 1-f per cent the
country over, i f y o u f i x th e required reserve at 7 per cent i t
means th e banks must carry actually 84 per cent reserve t o meet
th e legal requirements; whereas if you make th e legal require-
ments 5 per cent an d then add the f loa t or checks i n process of
collection, amounting
to i f- per
cent,
you
then have
th e
correct
statement of what will then be required of the country banks -
namely, 64 per cent under my amendment or 8f per cent under the
proposed amendment of the Federal Reserve Board.
I t seems to me from th e above that i t may be stated without fear of con-
tradiction that Congress adopted th e amendment of June 21, 1917 with full and
complete understanding that th e words actual n et balance eliminated unco l-
lected checks*
I have made inquiry of the of f icer s of two of the largest banks i n Boston
a s to
whether
i n
banking circles there
is any
common usage
of
terms
so as to
indicate what a net Balance or an actual n et balance might mean a s d i s -
tinguished from a balance . I am informed that i t i s customary among banks,
i n computing th e balances of their depositors, t o make a very marked distinction
between ledger balances and net or collected balances. I find that fo r th e
purpose of computing interest and for other purposes, i t i s common pract ise
among bankers to refer t o balances and net balances, meaning by net balances
th e balances of thei r depositors af te r eliminating uncol lect ed items. I was
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I -
v...- ... i
- 6 - X-Ul49(a)
informed by one banker that " n e t balanc e might i n some cases b e used by a
commercial bank t o mean t h e balance estab l ished a f t e r giving ef fe ct t o
amounts
due to and
from other banks. Never thele ss
he
f e l t t ha t
t h e
term
" n e t "
o r actual n e t " balance a s commonly used i n banking circles would be inter*
pre ted t o eliminate uncollected i tems o r f lo a t .
Thus,
i n
addi t ion
t o t h e
light which
i s
obtained from
t h e
debates
i n
Congress,
I
think
we may
f a i r l y
say
t h a t
t h e
term
" n e t
balance
o r
actual
balance a s coimonly used i n banking circles would b e construed t o eliminate
t h e
f lo a t .
As above stated, s o f a r a s member banks a r e concerned, t h e question of
immediate credit necessarily involves t h e question of reserve requirements.
I bel ieve this requires no argument. As bear ing on t h i s poi nt , however, t h e
following provision contained i n Section 19 i s in t e r e s t i ng ;
"The required balance carried by a member bank with
a
Federal Reserve Bank
may,
under regulations
and
subject
t o
such penal t ies
a s may be
prescr ibed
by
t h e Federal Reserve Board, be checked against and
withdrawn by such member bank f o r t h e purpose of
meeting exi s t i ng l i a b i l i t i e s ; provided, however, e t c " .
The words required balance cl ear ly re fe r t o reserve balances a n d r e -
serve balances clearly refer t o an actual n e t balance . I n other words, a
member bank may draw checks against i t s ac tua l n e t balance by v i r t u e o f t he
above provision, and by implicat ion no other balance which i s no t an actual
n e t balance i s ava i lab le t o be checked against. I t i s i n t e r e s t i n g t o compare
t h e provision quoted above with t h e provision contained i n Section 19 of the
Federal Reserve A ct p r io r t o t h e amendment of June 21, 1917• Pr io r t o t he
'•.amendment, Section
19
contained
a
similar provis ion,
b u t i t w a s
provided;
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- 7
- X-UlUg(a)
"The reserve carr ied by a member bank with a Federal
Reserve Bank nay ******** be checked against **********
I n other words, i t would seem that i n adopting t h e amendment o f June 21,
1 9 1 7 . i t w as t h e in t en t i on of Congress n o t only t o el iminate t h e f l o a t a s
/counting i n confut ing a reserve balance, b u t a l so t o e l imina te t h e power of
a
member bank
t o
check against
any
balance which included
t h e
f l o a t .
In
other words, t h e amendment of June 21, 1917» seems t o b e consistent throughout.
Sect ion
13 o f the
Federal Reserve
A ct
provides that
a
Federal Reserve
Bank may receive from i t s member banks and from t h e United States deposits of
checks and draf ts payable on presenta t ion , o r sole ly f o r purposes o f exchange
o r co l l ec t i on m y re ce iv e from oth er Fede ral Reserve Banks de po si ts of checks
upon other Federal Reserve Banks and checks and draf t s payable on presenta t ion
within i t s d i s t r i c t , o r solely f o r purposes of exchange and co ll ec ti on ffi^y
v
receive from
any
non-member bank
o r
t r u s t company de po si ts
of
checks
and
d r a f t s payable upon pr es en ta ti on , provid ed such non-member bank
o r
t rus t
company maintains with t h e Federal Reserve Bank o f i t s d i s t r i c t a balance
s u f f i c i e n t
t o
o f f s e t
t h e
items
i n
t rans i t he ld
f o r i t s
account
b$r the Fed-
eral Reserve Bank.
I n reading Section 1 3 , i t should be noted that a non-member bank i s r e -
quired t o maintain a ba lance suf f ic ient t o offset i tems i n t r a n s i t . The
words used
a r e n o t " n e t
balance
o r
actual
n e t
balance ,
b u t
r a the r . a
balance suff icient
t o
offset i tems
i n
t r a n s i t .
I t
seems
to me
that th is
provision regarding non-member banks h a s nothing to do with t h e present
discussio'n. A non-member bank i s n o t required t o carry reserves i n t h e Fed -
eral Reserve Bank. A non-member bank i s nnly required t o carry a balance
which (presumably i n t h e d i sc r e t i on of the Reserve Bank) must b e s u f f i c i e n t
t o offset i tems i n tr a n s i t . Apart from t h i s pr ov isi on reg ard ing non-member
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~ g - UlU9(a)
banks, I find nothing i n Section 13 which could b e construed t o requi re o r
authorize a Federal Reserve Bank t o give immediate credit on account of
checks deposited#
Section
lG
pro vid es th at every Fede ral Reserve Bank sh al l r ec ei ve
on
deposit
a t p a r
from member banks
o r
from Fed era l Reserve Banks checks
o r
drafts drawn upon
any of i t s
deposi tors ,
a n d ,
when remitted
by a
Federal
Re
serve Bank, checks
and
drafts drawn
by any
deposi tor
in any
other Federal
Reserve Bank
o r
member bank upon funds
t o t h e
cred i t
o f
said deposi tor
i n
said Reserve Bank or member bank. Although t h i s pr ov is ion of Sect ion l 6
would seem t o requi re a Federal Reserve Bank t o rece ive on deposit under
certain circumstances checks
and
draf ts* nevertheless
I see
nothing
i n
th i s
Section which would require
o r
author ize
a
Federal Reserve Bank
t o
give
immediate credit
on
uncollected checks»
The
e f f e c t
of
giving immediate credit
on an
uncollected check mast
necessar i ly be in t he nature of making an advance t o t h e depositing bank
pr io r
t o t h e
co l l ec t i on
of the
item.
I t
seems
to me
tha t
t h e
elaborate
provisions contained
i n t h e
Federal Reserve
A ct
regarding
t h e
discount
of
paper a n d t h e loaning t o member banks on col la teral notes preclude t h e idea
of a Reserve Bank being authorized t o make advances on uncol lec ted i tems*
Thus, on the whole, a s previously s ta ted, i t seems to me t h a t t h e ques
t i on of giving immediate credit necessarily involves t h e quest ion o f r e -
serve requirements, and on th e question of reserve requirements I think
c lear ly tha t , a s a matter of law, ac tua l n e t b alanc es mean bala nces a f t e r
e l imina t ing t h e f l o a t o r uncollected i tems.
Very truly yours,
(Signed) A. H. WEED