frsbog_mim_v21_0648.pdf

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7/17/2019 frsbog_mim_v21_0648.pdf http://slidepdf.com/reader/full/frsbogmimv210648pdf 1/22 I (  COPY  )  X-4I49 Comments onCoraplaint  of  Pascagoula National Bank against  the  Federal Reserve Bank  of  Atlanta,  et. al. in  tiie United States District Court for the  Northern District  of  Georgia. Without-*-attempting  to  discuss plaintiff's preliminary technical allegations necessary for the  identification  of  parties, jurisdiction,  etc., the  following comments will deal only with certain paragraphs  of the  allegations having  ref- i : erence to the  merits  of the  case. Paragraph  12. The  statement  as tc the  checks which Federal Reserve Banks  may receive is not  correct. Section  13 as  originally enacted read in  part  as  follows: Any  Federal Reserve Bank  may  receive from  any of its  member Thanks,  and  from  the  United States,  de- posits  of  current funds  in  lawful money, national- bank notes, Federal reserve notes,  or  checks  and drafts upon solvent member banks, payable upon pre- sentation;  or,  solely  for  exchange purposes,  may re- ceive from other Federal reserve banks deposits  of current funds  in  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  the  foregoing part  of the Section  to  read  as  follows: Any  Federal Reserve Bank  may  receive from  any of its  member ba nk s,  and  from  the  United States,  de- posits  of  current funds  in  .lawful money, national bank notes, Federal reserve notes,  or  checks  and drafts, payable upon presentation,  and  also,  for collection, maturing bills:  or,  solely  for  purposes of  exchange  or of  collection,  may  receive from other Federal reserve banks deposits  of  Current funds  in lawful money, national bank notes,  or  checks upon other Federal reserve banks,  and  checks  and  drafts, payable upon presentation within  its  district,  and maturing bills payable within  its  district- 11 On  June  21, 1917.  this part  of the  Section  was  again amended by  inserting  the  words notes and» after  the  word  maturing in the  sixth line  and in  twelfth line  as  written above  and by

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I

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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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V.

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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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  x-UiUg

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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L r" - o

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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- 1 2 -  x-UiUg

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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- 1 3 - X-UI49

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