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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 Section 13 as originally enacted read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


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


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


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


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


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


. . .

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


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


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


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


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

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