Full text of State Banks in Federal Reserve System : Letter from the Governor of the Federal Reserve Board in Response to a Senate Resolution of January 19, 1920, a Communication Submitting a Report as to Alleged Coercive Measures Attempted to Make State Banks Submit to Rules Made By the Federal Reserve Board or any Federal Reserve Bank

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66TIT CONGRESS, |

2d Session.

SENATE.

\

f DOCUMENT
1 No. 184.

STATE BANKS IN FEDERAL RESERVE SYSTEM.

LETTER FROM THE GOVERNOR OF THE FEDERAL RESERVE BOARD
TRANSMITTING, IN RESPONSE TO A SENATE RESOLUTION OF
JANUARY 19, 1920, A COMMUNICATION SUBMITTING A REPORT
AS TO ALLEGED COERCIVE MEASURES ATTEMPTED TO MAKE
STATE BANKS SUBMIT TO RULES MADE BY THE FEDERAL RESERVE BOARD OR ANY FEDERAL RESERVE BANK.

JANUARY 28, 1920.—Referred to the Committee on Banking and Currency and ordered
to be printed.

FEDERAL RESERVE BOARD,

Washington, January 26, 1920.
The PRESIDENT OF THE SENATE,

Washington, D. C.
SIR: I have the honor to acknowledge receipt of a resolution of
the Senate of the United States, dated January 19, 1920—
Requesting the Federal Reserve Board to inform the Senate whether the board
or any Federal reserve bank, under instructions or with the consent or knowledge
of said board, has resorted to any method of coercion to compel State banks to join
the Federal reserve system, or by threats or other coercive means has attempted to
require such State banks to submit to any rules or regulations made by the Federal
Reserve Board or any Federal reserve bank.

Iii order that the Senate may have a full and complete understanding of the position of the board with reference to the matters upon
which it is understood information is requested in its resolution, the
board desires to submit a brief review of the development of the
system of check clearing and collection which is now in force in the
several Federal reserve districts, together with a summary of those
provisions of the law and the amendments thereto under which that
system has been inaugurated and operated.
Section 16 of the Federal reserve act provides, in part, that the
Federal Reserve Board—
May at its discretion exercise the functions of a clearing house for such Federal
reserve banks * * * and may also require each such bank to exercise the functions of a clearing house for its member banks.

In accordance with what is understood to be the purpose of this
provision of the law, the Federal Reserve Board, with the view ultimately of establishing a universal or national system of clearing
intersectional balances as well as bank checks and drafts, has established a gold-settlement fund through which daily clearings between




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STATE BANKS IN FEDERAL RESERVE SYSTEM.

all Federal reserve banks are consummated, and has also required
each Federal reserve bank to exercise the functions of a clearing
house for its member banks. The gold-settlement fund commenced
operations in May, 1915, and has proved a remarkably effective
medium for the expeditious and economical transfer of credits from
one section of the country to another, thereby forming a delicate
balance wheel tending to equalize interest rates in all sections. One
year later in May, 1916, the Federal Reserve Board issued a circular,
entitled "Check Clearing and Collection" (Exhibit A), to all member
banks stating that under authority of section 16 of the Federal
reserve act it would require each Federal reserve bank to " exercise
the functions of a clearing house for its member banks," commencing
June 15, 1916, or as soon thereafter as possible. The system was in
fact inaugurated July 15, 1916. As outlined in that original circular
the check collection facilities of each Federal reserve bank were at
first to be limited primarily to "checks drawn on all member banks,
whether in its own district or other districts," although it was stated
that—
It is proposed to accept at par all checks drawn upon nonmember banks when
such checks can be collected by the Federal reserve banks at par. * * * It is the
purpose of the federal Reserve Board to have the collection system developed so as
to embrace the collection of all checks on nonmember banks and private banks, and
while this can not be done immediately, steps will be taken to afford these facilities
as rapidly as possible.

Immediately upon the inauguration of the system, the Federal
Reserve. Bank of Boston by reason of its having taken over the
Boston Country Clearing House was able to collect checks drawn
upon any bank, member or nonmember, located in New England,
and in other districts many nonmember banks agreed to remit at par
from the outset. (See press statement, July 18, 1916, issued by the
board three days after the check collection system commenced its
operations. Exhibit B.)
At that time—July, 1916—Federal reserve banks were expressly
required by section 16 to "receive on deposit at par from member
banKs or from Federal reserve banks checks and drafts drawn upon
any of its depositors." There was no option vested in the reserve
banks. With reference to checks drawn upon nonmember banks
the board had been advised by its counsel that although there was
no provision of law expressly requiring a Federal reserve bank to
receive for collection checks drawn upon such banks, they might
properly do so, if they desired, in the exercise of their implied powers
conferred by that part of section 4 which authorized them to exercise
"such incidental powers as shall be necessary to carry on the business
of banking within the limitations prescribed by this act." The right
to receive checks for collection-and credit is a right incidental both
to the right to receive deposits and to the right to act as a "clearing
house." In fact, all banking corporations, State and national, have
almost universally exercised the right to collect checks as an incident
to their general banking powers and without any express authority
in the law. All the more justification's'there for a Federal reserve
bank to do so, because of its express power to act as a clearing house.
But even if there were ever any doubt as to that implied power,
Congress on September 7, 1916, within three months after the inauguration of the original check collection system, amended section 13 by
an act which, among other things, expressly permitted (but did not




STATE BANKS IN FEDERAL RESERVE SYSTEM.

3

li

require) Federal reserve banks to receive deposits of all checks and
drafts payable upon presentation." So that there can be no doubt
as to the existing right of a reserve bank in its discretion to accept for
collection checks drawn upon nonmember banks as well as checks
upon member banks.
On June 21, 1917, Congress again amended the terms of section 13
by further defining the collection powers of Federal reserve banks.
The purpose of that amendment was twofold. It was, first, to permit
nonmember banks to become clearing members of the Federal reserve
bank—that is, to permit such institutions to avail themselves of the
privileges of the check collection system upon the maintenance with
the reserve bank of a deposit sufficient to offset items in transit,
without becoming regular members. That amendment was intended
primarily for those nonmember banks which were ineligible for
membership either because of a lack of sufficient capital or otherwise.
It was, second, to permit both member and nonmember banks—
To make reasonable charges to be determined and regulated by the Federal Reserve
Board, but in no case to exceed 10 cents per $100 or fraction thereof, based on the total
of checks and drafts presented at any one time, for collection or payment of checks and
drafts and remission therefor by exchange or otherwise.

But it was expressly provided that—
No such charges shall be made against the Federal reserve banks.

This amendment is commonly referred to as the Hardwick amendment and represents the last change in the law in so far as it relates to
the collection of checks.
Subsequent to its enactment the Federal Reserve Board issued the
existing regulation on " Check clearing and collection (Exhibit C), the
principal changes being those providing for the clearing of checks for
those nonmember banks which desired to become clearing members
under the act of June 21, 1917. Paragraph (1) of this regulation
reads substantially as it did in the original circular:
Each Federal reserve bank will receive at par from its member banks and from nonmember banks in its district which have become clearing members, checks drawn on all
member and clearing member banks and on all other nonmember banks which agree
to remit at par through the Federal reserve bank of their district.

It will be noted that under the terms of this paragraph it is indicated that each Federal reserve bank will receive at par checks drawn
on all member and clearing member banks and checks on all other
nonmember banks which agree to remit at par.
Since that last amendment of Congress and the issue of the present
regulations in accordance therewith the par collection list has grown
gradually until at the present time checks on approximately 26,000
of the 30,000 banks of the country can be collected expeditiously and
economically at par for the banks and through them for the public at
large. In the development of this par list the Federal Reserve Board
has made only such efforts as it deemed consistent with both the purposes of the law and the rights of the banks in general. It has never
resorted to any method of coercion to compel State banks to join the
Federal Reserve System nor has it by threats or other coercive
means attempted to require such State banks to submit to rules or
regulations made by the Federal Reserve Board or any Federal
reserve bank. Furthermore, the board has bever instructed or knowingly consented to any Federal reserve bank's adopting such means




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STATE BANKS IN FEDERAL RESERVE SYSTEM.

in its efforts to extend its par list. Believing, however, that the
purpose of the law itself and the needs and interests of the country
as a whole would be better accommodated by the ability of the
Federal reserve banks to collect for their member and clearing member banks all checks presented to them for that purpose, the board
has consistently approved the efforts of the reserve banks to collect
all checks upon whomsoever drawn, member banks, nonmember
banks, or private banks, whether or not they agree in advance to
remit at par.
But there are only three ways in which the holder of a check,
whether an individual or a corporation, may lawfully and properly
undertake its collections: (1) He may present it in person over the
counter of the drawee bank for payment; (2) he may forward it to an
agent more conveniently located geographically for the purpose of
presentation through that agent to the drawee bank over its counter
for payment; (3) he may forward it direct to the drawee bank for
payment and remission therefor in cash or exchange.
The Federal reserve banks in the operation of their check-collection
systems have followed the third course in the case of checks drawn on
member and nonmember banks which may have agreed to remit at
par either in cash or satisfactory exchange, and whether cash or exchange is remitted the Federal reserve banks have generally provided
postage or necessary costs of transportation covering the shipment to
the reserve bank. Because of the fact, however, that the so-called
Hardwick amendment to section 13 not only prohibits a bank
charging but also prohibits the Federal reserve bank paying a
charge for the "payment or collection of checks and drafts and
remission therefor by exchange or otherwise/' Federal reserve banks
have been impelled to forego the collection of checks in this manner
in any case where the drawee bank does not care to remit at par. (See
Opinions of the Attorney General of the United States, Exhibits D
and E.) The only other available means of making the collection is
to employ some suitable agent for that purpose. Not to adopt that
means would necessitate a flat refusal by the reserve bank to handle
the item for collection in any manner, and the board and the reserve
banks feel that that would now be an evasion of one of the ultimate
purposes for which the law was enacted; that is, the establishment of a
universal country wide par-collection system and the resultant elimination of the burdensome delays and expenses incident to the old
indirect routing system. In this connection the attention of the
Senate is respectfully directed to a copy of a form letter which was
sent by the Federal Reserve Board to nonmember banks and other
parties interested defining the questions of law and policy involved in
the matter of collecting all checks at par (Exhibit F).
When the par-collection system was first put into effect, it was impossible for practical reasons to undertake the collection of all checks
drawn on nonmember banks, but now that there are relatively so few
of those banks not on the par list the reserve banks are able usually
to effect the collection of their checks by means of appropriate
agents. There is no longer any reasonable excuse for refusing to
handle such items for member and clearing-member banks wherever
collection by means of an agent is practicable. This agent may be a
member bank located in the same city as the drawee bank or possibly
a nonmember bank, an express company, or any other suitable person




STATE BANKS IN FEDERAL RESERVE SYSTEM.

5

or corporation able to make the collection over the counter of the
drawee bank.
The reserve banks in extending their collection facilities to include
the checks of those nonmember banks which have declined to remit
at par have generally, by letter or in person, undertaken to explain
that the reserve banks could no longer decline to handle checks drawn
upon those nonmember banks, and that inasmuch as they did not care
to remit at par and inasmuch as the reserve bank could not lawfully pay exchange, it would be necessary to make thoir collections in
the only other way legally possible over the counter either in cash or
suitable exchange. But this explanation by the reserve bank has
always been intended to be an expression of regret, not a threat—as
some few banks have been only too glad to construe it. (Typical
forms of letters used by the Federal reserve banks in this connection
are attached hereto as Exhibit G.)
So far as the Federal Reserve Board is aware, the Federal reserve
banks themselves have never been anything other than both patient
and considerate in explaining the necessity for exercising what is after
all an undisputed legal right to ask for payment over the counter—an
inherent right in the holder of any check or bank draft. If in some
few instances an agent of a reserve bank has, through an excess of zeal,
adopted any other attitude in his efforts to procurre par members or
in explaining the unavoidable alternative that must be adopted by the
reserve bank in the event that the nonmember bank does not want to
remit at par, it has been without the authority or consent of either the
Federal Reserve Board or the Federal reserve banks themselves.
It has been alleged that some of the reserve banks have intentionally held up items drawn on a nonmember bank for the purpose of
presenting them in bulk and demanding payment in cash so as to
embarrass the drawee bank and thus compel it to remit at par. In
order fully to advise the Senate on this particular matter the Board,
upon receipt of the Senate's resolution, telegraphed to each Federal
reserve bank (Exhibit H) specifically requesting to be advised
whether or not such methods had been employed, and if so with
what purpose. The replies of the several reserve banks are attached
hereto (Exhibit I).
In this connection the attention of the Senate is respectfully
directed particularly to the reply of the Federal Reserve Bank of
Kansas City. This telegram, it is believed, indicates the obstacles
which were arbitrarily placed in the way of the Federal reserve bank
in the making of its collections in the more usual manner and explains
to some extent the reason that the Federal reserve bank in that
instance was impelled to send its own agents at stated intervals to
make the necessary collection of items which had been forwarded
to it by its member banks. While that telegram from the Federal
Reserve Bank of Kansas City, as well as the replies from the Federal
reserve banks of Dallas, Minneapolis, and Chicago indicate that in a
few instances they have accumulated checks when collecting through
an agent, it has never been for the purpose of embarrassing the
drawee bank, but has been done solely in pursuance of a practice
generally followed by large commercial banks in various parts of the
country either on account of the physical difficulty of sending a
daily messenger or because of the relatively high overhead charge
in sending a messenger to collect a small check. But even instances




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STATE BANKS IK FEDERAL RESERVE SYSTEM.

of that nature were reported by only 4 of the 12 Federal reserve banks and are not general practices in the case of those 4.
The replies of the banks themselves are explanatory of their purpose.
In conclusion the Federal Reserve Board desires to state that the
development of the Federal reserve par collection system has been
the result of the most conscientious and painstaking thought and
efforts of the board and officers of the several Federal reserve banks
with the sole purpose not of compelling a relatively few unwilling
State banks to become clearing members but of affording to the
great majority of banks in the country the member and clearing
member banks, now over 26,000 out of approximately 30,000, a
complete and effective system of check collection involving a minimum of effort, time, and expense, a system whose facilities are now
offered free of charge to the banks of the country and through them
to the public at large. The burden that some banks have in the
past put upon the commerce of the country through arbitrary and
excessive exchange charges does not need comment.
That a relatively small number of nonmember banks should not
want to become members of the clearing system or should not want
to remit at par is, of course, their own concern and the Federal
Reserve Board and the Federal reserve banks have not and will not
dispute their right to decline to do so. But that those same few
nonmember banks, which through their member bank correspondents
are able to obtain the benefits of the par collection system gratis,
should decline to become clearing members can not and should not
deter the Federal reserve banks in the exercise of their undouted
legal right—the right to collect over the counter in cash or satisfactory exchange, by means of an agent, checks drawn upon a bank
which for one reason or another does not care to remit at par for
checks mailed to it directly.
The Federal Reserve Board submits this report of the steps taken
by it to put into effect these provisions of the Federal reserve
act which they believe will in time prove to Be one of its greatest,
benefits—a universal country-wide system of par check collections
scientifically conceived by Congress and expeditiously and economically operated by the Federal reserve banks in the interest of
the country at large without discrimination in favor of any one class
or classes.
Respectfully submitted.
W. P. G. HARDING, Governor.
EXHIBIT A.
CIRCULAR NO. 1.
SERIES OT 1916
FEDERAL RESERVE BOARD,

Washington, May 1, 1916.
CHECK CLEARING AND COLLECTION.

To MEMBER BANKS: The Federal Reserve Board is empowered, under section 16
of the Federal reserve act, to require each Federal reserve bank to—
"Exercise the function of a clearing house for its member banks."
After very thorough investigation and many conferences with the governors of
Federal reserve banks on this subject, the Federal Reserve Board has determined
to exercise its authority and to offer to the member banks, and through them to the
public, the machinery of the Federal reserve banks for the operation of a check collection and clearing system which it is believed, with the cooperation of member




STATE BANKS IN FEDERAL RESERVE SYSTEM.

7

banks, will afford a direct, expeditious, and economical system of check collecting
and settlement of balances.
The date for the inauguration of this system is expected to be June 15, 1916, or as
soon thereafter as the Federal reserve banks can complete preparations for undertaking this work.
Member banks in each district will in due course receive from their Federal reserve
bank full information as to the terms and all necessary details of the arrangements
but for the information of all concerned the general terms may be stated to be as
iollows:
(1) In order that no inconvenience may be experienced the plan will follow as
closely as practicable the practice which long experience has developed between
country banks and their reserve city correspondents.
Each Federal reserve bank will receive at par from its member banks checks drawn
on all member banks, whether in his own district or other districts. It is also proposed to accept at par all checks drawn upon nonmember banks when such checks
can be collected by the Federal reserve banks at par.
Each Federal reserve bank will receive at par from other Federal reserve banks
checks drawn upon all member banks of its district and upon all nonmember banks
whose checks can be collected at par by the Federal reserve bank.
It is the purpose of the Federal Reserve Board to have the collection system developed so as to embrace the collection of all checks on nonmember banks and private
banks, and while this can not be done immediately, steps will be taken to afford
these facilities as rapidly as possible. The Federal reserve banks will prepare a
par list of all nonmember banks, to be revised from time to time, which will be furnished to member banks.
Immediate credit entry upon receipt subject to final payment will be made for
all such items upon the books of the Federal reserve bank at full face value, but
the proceeds will not be counted as reserve nor become available to meet checks
drawn until actually collected, in accordance with the best practice now prevailing.
(2) Checks received by a Federal reserve bank on its member banks will be forwarded direct to such member banks and will not be charged to their accounts until
advice of payment has been received or until sufficient time has elapsed within
which to receive advice of payment.
(3) In the selection of collecting agents for handling checks on nonmember banks
member banks will be given the preference.
(4) Under this plan Federal reserve banks will receive at par from their member
banks checks on all member banks, and on nonmember banks whose checks can be
collected at par by any Federal reserve bank. Member banks will be required by
the Federal Reserve Board to provide funds to cover at par all checks received from,
or for the account of, their Federal reserve banks: Provided, however, That a member
bank may ship lawful money or Federal reserve notes from its own vaults at the expense of its Federal reserve bank to cover any deficiency which may arise because
of and only in the case of inability to provide items to offset checks received from or
for the account of its Federal reserve bank.
(5)
Section 19 of the Federal reserve act provides that—
k
'The reserve carried by a member bank with a Federal reserve bank may, under
the regulations, and subject to such penalties as may be prescribed by the Federal
Reserve Board, be checked against and withdrawn by such member bank for the
purpose of meeting existing liabilities: Provided, houever, That no bank shall at any
time make new loans or shall pay any dividends unless and until the total reserve
required by law is fully restored."
It is manifest that items in process of collection can not lawfully be counted as
reserve either by a member bank or by a Federal reserve bank. Therefore, should a
member bank draw against such items the draft would be charged against its reserve
if such reserve were sufficient in amount to pay it; but any resulting impairment of
reserves would be subject to all the penalties provided by the act.
Inasmuch as it is essential that the law in respect to the maintenance of required
reserves by member banks shall be strictly complied with, the Federal Reserve
Board will fix a penalty to be imposed upon member banks for encroaching upon
their reserves.
Member banks can at all times arrange to keep their reserves intact by rediscounting
with their Federal reserve bank.
(6) Each Federal reserve bank will determine by analysis the amounts of uncollected funds appearing on its books to th e credit of each member bank. Such analysis
will show the true status of the reserve held by the Federal reserve bank for each
member bank and will enable it to apply the penalty for impairment of reserve.
A schedule of the time required within which to collect checks will be furnished
to each member bank to enable it to determine the time at which any item sent to
-C

11




8

STATE BANKS IN FEDERAL RESERVE SYSTEM.

its Federal reserve bank will be counted as reserve and become available to meet
any checks drawn.
(7) In handling items for member banks, a Federal reserve bank will act as agent
only. It will require that each member bank authorize it to send checks for collection to banks on which checks are drawn, and, except for negligence, will assume no
liability. Any further requirements that the bo,ard may deem necessary will be set
forth by the Federal reserve banks in their letters of instruction to their member
banks.
(8) The cost of collecting and clearing checks must necessarily be borne by the
banks receiving the benefit and in proportion to the service rendered. An accurate
account will be kept by each reserve bank of the cost of performing this service and
the Federal Reserve Board will, by rule, fix the charge, at so much per item, which
may be imposed for the service of clearing or collection rendered by the reserve banks,
as provided in section 16 of the Federal reserve act.
CHARLES S. HAMLIN,
Governor.
SHERMAN ALLEN,
A •' i-«fant Secretary.
EXHIBIT B.
PRESS STATEMENT.
JULY 18, 1916.

The Federal Reserve Board gave out the following statement to-day:
"The new country-wide clearing system was inaugurated on July 15 in all the
Federal reserve banks. Reports as of the close of business on July 17 show that the
operations started out in a very satisfactory manner, and it is especially gratifying to
the board to record the cordial cooperation of banks and bankers. The public doubtless understands that through this method all national banks and all State banks
which are members of the Federal Reserve System have the privilege of using the
Federal reserve banks as clearing houses for the clearing and collection of checks.
Not only may checks drawn against other member banks be collected at par, but
checks drawn against most nonmember banks can also be so collected at a minimum
of expense to the depositing bank.
"The Boston district, by reason of having taken over the Boston Country Clearing
House, was able to make the most nattering exhibit, so that in New England checks
drawn against a bank, whether member or nonmember, are collected at par without
exception. . In the other districts there is no difficulty in collecting checks at par,
even when drawn against nonmember State banks, provided thesre are national banks
in the same city or town. There is more difficulty where these State banks are located
in towns where there are no national or other member banks, but even in these cases,
the reports in the hands of the board show that a very large percentage of nonmember
State banks have agreed to remit at full face value through the Federal reserve banks.
"Some time must necessarily elapse before the new collection system will be used
to its capacity, but the Federal Reserve Board believes confidently that the country
has now witnessed the inauguration of the most effective check collection system that
has ever been devised, and that each passing week will add to the use and appreciation of the system by the banking and business communities of the country."
EXHIBIT C.

[Federal Reserve Board. Regulations Series of 1917. June, 1917.]
FEDERAL RESERVE BOARD,
Washington, June 22, 1917.

The Federal Reserve Board transmits herewith a new issue of sill of its regulations of
1916 applicable to member banks. This revision was necessitated by the enactment
of the recent amendments to the Federal reserve act.
Regulations C, H, and J have been materially altered because of those amendments.
Regulation D has been amended so as to include postal savings deposits in the definition of a "time deposit" as required by the recent amendment to section 19. Regulation G has been amended by adding a paragraph relating to the renewal of loans upon
the security of real estate. Regulations A, B, E, F, and I are identically the same
as last year.
Instructions which concern only Federal reserve agents or Federal reserve banks
will be covered in separate letters or regulations, as in the past.




W. P. G. HARDING, Governor.
H. PARKER WILLIS, Secretary.

STATE BANKS IN FEDERAL RESERVE SYSTEM.
REGULATION A.
SERIES OF 1917.

(Superseding Regulation A of 1916.>
REDISCOUNTS UNDER SECTION 13.

A.
NOTES, DRAFTS, AND BILLS OP EXCHANGE.

I. General statutory provisions.
Any Federal Reserve Bank may discount for any of its member banks any note,
draft, or bill of exchange provided—
(a) It has a maturity at the time of discount of not more than 90 days, exclusive of
days of grace; but if drawn or issued for agricultural purposes or based on live stock,
it may have a maturity at the time of discount of not more than six months, exclusive
of days of grace.
(6) It arose out of actual commercial transactions; that is, it must be a note, draft,
or bill of exchange which has been issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used or are to be used for such,
purposes.
(c) It was not issued for carrying or trading in stocks, bonds, or other investment
securities, except bonds and notes of the Government of the United States.
(d) The aggregate of notes, drafts, and bills bearing the signature or indorsement of
any one borrower, whether a person, company, firm, or corporation rediscounted for
any one member bank shall at no time exceed 10 per cent of the unimpaired capital
and surplus of such bank; but this restriction shall not apply to the discount of bills
of exchange drawn in good faith against actually existing values.
(e) It is indorsed by a member bank.
(/) It conforms to all applicable provisions of this regulation.
II. General character of notes, drafts, and bills of exchange eligible.
The Federal Reserve Board, exercising its statutory right to define the character
of a note, draft, or bill of exchange eligible for rediscount at a Federal reserve bank,
has determined that—
(a) It must be a note, draft, or bill of exchange the proceeds of which have been
used or are to be used in producing, purchasing, carrying, or marketing goods l in
one or more of the steps of the process of production, manufacture, or distribution.
(6) It must not be a note, draft, or bill of exchange the proceeds of which have been
used or are to be used for permanent or fixed investments of any kind, such as land,
buildings, or machinery.
(c) It must not be a note, draft, or bill of exchange the proceeds of which have been
used or are to be used for investments of a purely speculative character.
(d) It may be secured by the pledge of goods or collateral, provided it is otherwise
eligible.
III. Applications for rediscount.
All applications for the rediscount of notes, drafts, or bills of exchange must contain
a certificate of the member bank, in form to be prescribed by the Federal reserve bank,
that, to the best of its knowledge and belief, such notes, drafts, or bills of exchange
have been issued for one or more of the purposes mentioned in II (a).
IV. Promissory notes.
(a) Definition.—A promissory note, within the meaning of this regulation, is defined
as an unconditional promise, in writing, signed by the maker, to pay, in the United
States, at a fixed or determinable future time, a sum certain in dollars to order or to
bearer.
(b) Evidence of eligibility and requirement of statements.—A Federal reserve bank
must be satisfied by reference to the note or otherwise that it is eligible for rediscount.
Compliance of a note with II (6) may be evidenced by a statement of the borrower
1
When used in this regulation the word "goods" shall be construed to include goods, wares, merchandise'
or agricult ural products, including live stock.




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STATE BANKS IN FEDERAL RESERVE SYSTEM.

showing a reasonable excess of quick assets over current liabilities. The member
bank shall certify in its application whether the note offered for rediscount has been
discounted for a depositor or another member bank or whether it has been purchased
from a nondepositor. It must also certify whether a financial statement of the borrower is on file.
Such financial statements must be on file with respect to all notes offered for rediscount which have been purchased from sources other than a depositor or a member
bank. With respect to any other note offered for rediscount, if no statement is on
file, a Federal reserve bank shall use its discretion in taking the steps necessary to
satisfy itself as to eligibility. It is authorized to waive the requirement of a statement
with respect to any note discounted by a member bank for a depositor or another
member bank—
(1) If it is secured by a warehouse, terminal, or other similar receipt covering goods
in storage;
(2) If the aggregate of obligations of the borrower rediscounted and offered for
rediscount at the Federal reserve bank is less than a sum equal to 10 per cent of the
paid-in capital of the member bank and does not exceed $5,000.
V. Drafts, bills of exchange, and trade acceptances.
(a) Definition.—A draft or bill of exchange, within the meaning of this regulation
is defined as an unconditional order in writing, addressed by one person to another,
other than a banker as defined under B (b), signed by the person giving it, requiring
the person to whom it is addressed, to pay, in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person; and a
trade acceptance is defined as a draft or bill of exchange drawn by the seller on the
purchaser of goods sold and accepted by such purchaser.
(b) Evidence of eligibility.—A Federal reserve bank shall take such steps as it deems
necessary to satisfy itself as to the eligibility of the draft or bill offered for rediscount,
unless it presents prima facie evidence thereof or bears a stamp or certificate affixed
by the acceptor or drawer showing that it is a trade acceptance.
VI. Six months' agricultural paper.
(a) Definition.—'Six months' agricultural paper, within the meaning of this regulation, is defined as a note, draft, bill of exchange, or trade acceptance drawn or issued
for agricultural purposes, or based on live stock; that is, a note, draft, bill of exchange,
or trade acceptance the proceeds of which have been used, or are to be used, for agricultural purposes, including the breeding, raising, fattening, or marketing of live
stock, and which has a maturity at the time of discount of not more than six months,
exclusive of days of grace.
(6) Eligibility.—To be eligible for rediscount six months' agricultural paper, whether
a note, draft, bill of exchange, or trade acceptance, must comply with the respective
sections of this regulation which would apply to it if its maturity were 90 days or less
VII. Commodity paper.
(a) Definition.—Commodity paper within the meaning of this regulation is defined
as a note, draft, bill of exchange, or trade acceptance accompanied and secured by
shipping documents or by a warehouse, terminal, or other similar receipt covering
approved and readily marketable, nonperishable staples properly insured.
(b) Eligibility.—To be eligible for rediscount at the special rates, authorized to
be established for commodity paper, such a note, draft, bill of exchange, or trade
acceptance must also comply with the respective sections of this regulation applicable
to it, must conform to the requirements of the Federal reserve bank relating to shipping documents, receipts, insurance, etc., and must be a note, draft, bill of exchange,
or trade acceptance on which the rate of interest or discount, including commission,
charged the maker does not exceed 6 per cent per annum.
(c) Suspension of commodity rate.—As the special rate on commodity paper is intended to assist actual producers during crop-moving periods and is not designed to
benefit speculators, the board reserves the right to suspend the special rates herein
provided whenever it is apparent that the movement of crops, which this rate is
intended to facilitate, has been practically completed.




STATE BANKS IK FEDERAL RESERVE SYSTEM.

11

B.
BANKERS'

ACCEPTANCES.

(a) General statutory provisions.—Any Federal reserve bank may discount for any
of its member banks bankers' acceptances which have a maturity at the time of discount of not more than three months' sight, exclusive of days of grace, which are
indorsed by at least one member bank, and which grow out of transactions involving
the importation or exportation of goods, or which grow out of transactions involving
the domestic shipment of goods, provided shipping documents are attached at the
time of acceptance, or which are secured at the time of acceptance by a warehouse
receipt or other such document conveying or securing title covering readily marketable staples. Any Federal reserve bank may also acquire drafts or bills of exchange
drawn on member banks by banks or bankers in foreign countries or dependencies or
insular possessions of the United States for the purpose of furnishing dollar exchange.
(6) Definition.—A banker's acceptance within the meaning of this regulation is
defined as a draft or bill of exchange of which the acceptor is a bank or trust company,
or a firm, person, company, or corporation engaged in the business of granting bankers'
acceptance credits.
(c) Eligibility.—To be eligible for rediscount the bill must have been drawn under
a credit opened for the purpose of conducting or settling accounts resulting from a
transaction or transactions involving (1) the shipment of goods between the United
States and any foreign country, or between the United States and any of its dependencies or insular possessions, or between foreign countries, or (2) the domestic shipment
of goods, provided shipping documents are attached at the time of acceptance; or it
must be a bill which is secured at the time of acceptance by a warehouse receipt or
other such document conveying or securing title covering readily marketable staples.
Any Federal reserve bank may also acquire drafts or bills drawn by a bank or banker in a
foreign country or dependency or insular possession of the United States for the purpose of furnishing dollar exchange and accepted by a member bank in accordance
with the provisions of Regulation G, following. Such drafts or bills may be acquired
prior to acceptance, provided they have the indorsement of a member bank.
(d) Evidence of eligibility.—A Federal reserve bank must be satisfied, either by
reference to the acceptance itself or otherwise, that it is eligible for rediscount. Satisfactory evidence of eligibility may consist of a stamp or certificate affixed by the
acceptor in form satisfactory to the Federal reserve bank.
REGULATION B.
SERIES OF 1917.

(Superseding Regulation B of 1916.)
OPEN-MARKET

PURCHASES OF BTLLS OF EXCHANGE, T R A D E ACCEPTANCES, AND
B A N K E R S ' ACCEPTANCES UNDER SECTION 14.

I. General statutory provisions.
Section 14 of the Federal reserve act permits Federal reserve banks, under rules
and regulations to be prescribed by the Federal Reserve Board, to purchase and sell
in the open market from banks, firms, corporations, or individuals bankers' acceptances and bills of exchange of the kinds and maturities made eligible by the act for
rediscount, with or without the indorsement of a member bank.
I I . General character of bills and acceptances eligible.
The Federal Reserve Board, exercising its statutory right to regulate the purchase
of bills of exchange and acceptances, has determined that a bill of exchange or acceptance, to be eligible for purchase by Federal reserve banks under section 14—
(a) Must not have been issued for carrying or trading in stocks, bonds, or other
investment securities, except bonds and notes of the Government of the United States.
(b) Must not be a bill the proceeds of which have been used or are to be used for
permanent or fixed investments of any kind, such as land, buildings, or machinery,
or for investments of a merely speculative character.
(c) Must have been accepted by the drawee prior to purchase by a Federal reserve
bank unless it is accompanied and secured by shipping documents or by a warehouse,
terminal, or other similar receipt conveying security title.
(d) May be secured by the pledge of goods l or collateral, provided it is otherwise
eligible.
i When used in this regulation the word "goods" shall be construed to include goods, wares, merchandise, or agricultural products, including live stock.




12

STATE BANKS IN FEDERAL RESERVE SYSTEM.

In addition to the aboA'e general requirements, each bill of exchange and trade*
acceptance purchased under the terms of this regulation must also conform to the morespecific requirements set forth under III, and each banker's acceptance must also
conform to the more specific requirements set forth under IV.
I I I . Bills of exchange and trade acceptances.
(a) Definition.—A bill of exchange, within the meaning of this regulation, is defined
as an unconditional order in writing, addressed by one person to another, other than
a banker as denned under IV (a), signed by the person giving it, requiring the person
to whom it is addressed to pay, in the United States, at a fixed or determinable future
time, a sum certain in dollars to the order of a specified person; and trade acceptance is
defined as a bill of exchange drawn by the seller on the purchaser of goods sold, and
accepted by such purchaser.
(b) Eligibility.—To be eligible for purchase the bill must have arisen out of an actual
commercial transaction, domestic or foreign; that is, it must be a bill which has been
issued or drawn for agricultural, industrial, or commercial purposes or the proceeds of
w^hich have been used or are to be used for the purpose of producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production, manufacture, or distribution. It must have a maturity at time of purchase of not more
than 90 days, exclusive of days of grace.
(c) Evidence of eligibility.—A Federal reserve bank shall take such steps as it deems
necessary to satisfy itself as to the eligibility of the bill offered for purchase, unless it
presents prima facie evidence thereof or bears a stamp or certificate affixed by trieacceptor or drawer showing that it is a trade acceptance.
(d) Statements.—Unless indorsed by a member bank, a bill is not eligible for purchase until a satisfactory statement has been furnished of the financial condition of oneor more of the parties thereto.
IV, Bankers' acceptances.
(a) Definition.—A banker's acceptance, within the meaning of this regulation, is a.
bill of exchange of which the acceptor is a bank or trust company, or a firm, person,
company, or corporation engaged in the business of granting bankers' acceptancecredits.
(b) Eligibility.—To be eligible for purchase, the bill which must have a maturity
at time of purchase of not more than three months, exclusive of days of grace, must
have been drawn under a credit opened for the purpose of conducting, or settling
accounts resulting from, a transaction or transactions involving—
(1) The shipment of goods between the United States and any foreign country,
or between the United States and any of its dependencies or insular possessions, between foreign countries, or
(2) The shipment of goods within the United States, provided the bill at the
time of its acceptance is accompanied by shipping documents, or
(3) The storage within the United States of readily marketable goods, provided
the acceptor of the bill is secured by warehouse, terminal, or othersimilar receipt, or
(4) The storage within the United States of goods which have been actually sold,
provided the acceptor of the bill is secured by the pledge of such goods;
or it must be a bill drawn by a bank or banker in a foreign country or dependency or
insular possession of the United States for the purpose of furnishing dollar exchange.
In this latter case the bank or banker drawing the bill must be in a country, dependency, or possession whose usages of trade have been determined by the Federal
Reserve Board to require the drawing of bills of this character.
(c) Evidence of eligibility.—A Federal reserve bank must be satisfied either by reference to the acceptance itself, or otherwise, that it is eligible for purchase. Satisfactory evidence of eligibility may consist of a stamp or certificate affixed by the
acceptor, in form satisfactory to the Federal reserve bank. No evidence of eligibility
is required with respect to a bill accepted by a national bank.
(d) Statements.—Bankers' acceptances, other than those accepted or indorsed by
member banks, shall be eligible for purchase only after the acceptor has furnished a,
satisfactory statement of financial condition in form to be approved by the Federal
Reserve Board and has agreed in writing with a Federal reserve bank to inform it
upon request concerning the transactions underlying such acceptances.




STATE BANKS IN FEDERAL RESERVE SYSTEM.

13

REGULATION C.
SERIES OF 1917.

(Superseding Regulation C of 1916.)
ACCEPTANCE BY MEMBER BANKS OF DRAFTS AND BILLS OF EXCHANGE.

A.
ACCEPTANCE OF DRAFTS OR BILLS OF EXCHANGE DRAWN AGAINST DOMESTIC OR FOREIGN SHIPMENTS OF GOODS OR SECURED BY WAREHOUSE RECEIPTS COVERING
READILY MARKETABLE STAPLES.

I. Statutory provisions.
Under the provisions of the fifth paragraph of section 13 of the Federal reserve act,
as amended by the acts of September 7, 1910, and June 21, 1917, any member bank
may accept drafts or bills of exchange drawn upon it, having not more than six months'
sight to rim, exclusive of days of grace, which grow out of transactions involving the
importation or exportation of goods; or which grow out of transactions involving the
domestic shipment of goods, provided shipping documents conveying or securing title
are attached at the time of acceptance: or which are secured at the time of acceptance
by a warehouse receipt or other such document convening or securing title covering
readily marketable staples. This paragraph limits the amount which any bank shall
accept for any one person, company, firm, or corporation, whether in a foreign or
domestic transaction, to an amount not exceeding at any time, in the aggregate, more
than 10 per cent of its piid-up and unimpaired capital stock and surplus. This
limit, however, does not apply in any case where the accepting bank is secured either
by attached documents or by some other actual security growing out of the same
transaction as the acceptance. The law also provides that any bank may accept such
bills up to an amount not exceeding at any time, in the aggregate, more than one-half
of its paid-up and unimpaired capital stock and surplus; or, with the approval of the
Federal Reserve Board, up to an amount not exceeding at any time, in the aggregate,
more than 100 per cent of its paid-up and unimpaired capital stock and surplus.
In no event, however, shall the aggregate amount of acceptances growing out of domestic
transactions exceed 50 per cent of such capital stock and surplus.
II. Regulations.
1. Under the provisions of the law referred to above the Federal Reserve Board has
determined that any member bank, having an unimpaired surplus equal to at least 20
per cent of its paid-up capital, which desires to accept drafts or bills of exchange
drawn for the purposes described above, up to an amount not exceeding at any time,
in the aggregate, 100 per cent of its paid-up and unimpaired capital stock and
surplus, may file an application for that purpose with the Federal Reserve Board.
Such application must be forwarded through the Federal reserve bank of the district
in which the applying bank is located.
2. The Federal reserve bank shall report to the Federal Reserve Board upon the
standing of the applying bank, stating whether the business and banking conditions
prevailing in its district warrant the granting of such applications.
3. The approval of any such application may be rescinded upon 90 days' notice to
the bank affected.
B.
ACCEPTANCE OF DRAFTS OR BILLS OF EXCHANGE DRAWN FOR THE PURPOSE OF CREATING
DOLLAR EXCHANGE.

I. Statutory provisions.
Section 13 of the Federal reserve act also provides that any member bank may
accept drafts or bills of exchange drawn upon it having not more than three months'
sight to run, exclusive of days of grace, drawn, under regulations to be prescribed by
the Federal Reserve Board, by banks or bankers in foreign countries or dependencies
or insular possessions of the United States for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries, dependencies, or
insular possessions.
No member bank shall accept such drafts or bills of exchange for any one bank to an
amount exceeding in the aggregate 10 per cent of the paid-up and unimpaired cap-




14

STATE BANKS IN FEDERAL RESERVE SYSTEM.

ital and surplus of the accepting bank unless the draft or bill of exchange is accompanied by documents conveying or securing title or by some other adequate security.
No member bank shall accept such drafts or bills in an amount exceeding at any time
in the aggregate one-half of its paid-up and unimpaired capital and surplus. This 50
per cent limit is separate and distinct from and not included in the limits placed upon
the acceptance of drafts and bills of exchange as described under section A of this
regulation.
II. Regulations.
Any member bank desiring to accept drafts drawn by banks or bankers in foreign
countries or dependencies or insular possessions of the United States for the purpose
of furnishing dollar exchange shall first make an application to the Federal Reserve
Board setting forth the usages of trade in the respective countries, dependencies, or
insular possessions in which such banks or bankers are located.
If the Federal Reserve Board should determine that the usages of trade in such
countries, dependencies, or possessions require the granting of the acceptance facilities
applied for, it will notify the applying bank of its approval and will also publish in the
Federal Reserve Bulletin the name or names of those countries, dependencies, or
possessions in which banks or bankers are authorized to draw on member banks whose
applications have been approved for the purpose of furnishing dollar exchange.
The Federal Reserve Board reserves the right to modify, or, on 90 days' notice to
revoke, its approval either as to any particular member bank or as to any foreign country or dependency or insular possession of the United States in which it has authorized
banks or bankers to draw on member banks for the purpose of furnishing dollar exchange.
REGULATION D.
SERIES OF 1917.

(Superseding Regulation D of 1916.>
TIME DEPOSITS AND SAVINGS ACCOUNTS.

Section 19 of the federal reserve act provides, in part, as follows:
Demand deposits, within the meaning of this act, shall compiise all deposits payable within 30 days, and time dey)osits shall comprise all deposits payable after 30'
days, and all savings accounts and certificates of deposit which are subject to not less
than 30 days' notice before payment, and all postal-savings deposits.
TIME DEPOSITS, OPEN ACCOUNTS.

The term "time deposits, open accounts" shall be held to include all accounts, not
evidenced by certificates of deposit or savings pass books, in respect to which a written
contract is entered into with the depositor at the time the deposit is made that neither
the whole nor any part of such deposit may be withdrawn by check or otherwise,
except on a given date or on written notice given by the depositor a certain specified
number of days in advance, in no case less than 30 days.
SAVINGS ACCOUNTS.

The term "sayings accounts" shall be held to include those accounts of the bank
in respect to which, by its printed regulations, accepted by the depositor at the time
the account is opened—
(a) The pass book, certificate, or other similar form of receipt must be presented
to the bank whenever a deposit or withdrawal is made, and
(6) The depositor may at any time be required by the bank to give notice of
an intended withdrawal not less than 30 days before a withdrawal is made.
TIME CERTIFICATES OP DEPOSIT.

A "time certificate of deposit"- is denned as an instrument evidencing the deposit
with a bank, either with or without interest, of a certain sum specified on the face of
the certificate payable in whole or in part to the depositor or on his order—
(a) On a certain date, specified on the certificate, not less than 30 days after the
date of the deposit, or
(b) After the lapse of a certain specified time subsequent to the date of the
certificate, in no case less than 30 days, or
(c) Upon written notice given a certain specified number of days, not less than
30 days before the date of repayment, and
(d) In all cases only upon presentation of the certificate at each withdrawal for
proper indorsement or surrender.




STATE BANKS IN FEDERAL RESERVE SYSTEM.

15

REGULATION E.
SERIES OF 1917.

(Superseding Regulation E of 1916.)
P U R C H A S E OF WARRANTS,
STATUTORY REQUIREMENTS.

Section 14 of the Federal reserve act reads in part as follows:
Every Federal reserve bank shall have power—
(b) To buy and sell, at home or abroad, bonds and notes of the United States, and
bills, notes, revenue bonds, and warrants with a maturity from date of purchase
of not exceeding six months, issued in anticipation of the collection of taxes or in
anticipation of the receipt of assured revenues by any State, county, district, political
subdivision, or municipality in the continental United States, including irrigation,
drainage, and reclamation districts, such purchases to be made in accordance with
rules and regulations prescribed by the Federal Reserve Board.
For brevity's sake, the term "warrant" when used in this regulation shall be
construed to mean "bills, notes, revenue bonds, and warrants with a maturity from
date of purchase of not exceeding six months,'' and the term "municipality" shall
be construed to mean "State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage, and reclamation districts."
REGULATION.

I. Any Federal reserve bank may purchase warrants issued by a municipality
in anticipation of the collection of taxes or in anticipation of the receipt of assured
revenues, provided—•
(a) They are the general obligations of the entire municipality; it being
intended to exclude as ineligible for purchase all such obligations as
are payable from "local benefit" and "special assessment" taxes when
the municipality at large is not directly or ultimately liable;
(b) They are issued in anticipation of taxes or revenues which are due and
payable on or before the date of maturity of such warrants; but the
Federal Reserve Board may waive this condition in specific cases. For
the purposes of this regulation, taxes shall be considered as due and
payable on the last day on which they may be paid without penalty;
(c) They are issued by a municipality—
(1) Which has been in existence for a period of 10 years;
(2) Which for a period of 10 years previous to the purchase has not
defaulted for longer than 15 days in the payment of any part
of either principal or interest of any funded debt authorized to
be contracted by it;
(3) Whose net funded indebtedness does not exceed 10 per cent of
the valuation of its taxable property, to be ascertained by the
last preceding valuation of property for the assessment of taxes.
II. Except with the approval of the Federal Reserve Board, no Federal reserve
bank shall purchase and hold an amount in excess of 25 per cent of the total
amount of warrants outstanding at any time and issued in conformity with provisions
of section 14 (b) above quoted, and actually sold by a municipality.
III. Except with the approval of the Federal Reserve Board, the aggregate amount
invested by any Federal reserve bank in warrants of all kinds shall not exceed at
the time of purchase a sum equal to 10 per cent of the deposits kept by its member banks with such Federal reserve bank.
IV. Except with the approval of the Federal Reserve Board, the maximum amount
which may be invested at the time of purchase by any Federal reserve bank in
warrants of any single municipality shall be limited to the following percentages of
the deposits kept in such Federal reserve bank by its member banks:
Five per cent of such deposits in warrants of a municipality of 50,000
population or over;
Three per cent of such deposits in warrants of a municipality of over 30,000
population but less than 50.000;
One per cent of such deposits in warrants of a municipality of over 10,000
population but less than 30,000.
V. Warrants of a municipality of 10,000 population or less shall be purchased only
•with the special approval of the board.
The population of a municipality shall be determined by the last Federal or State
census. Where it can not be exactly determined, the board will make special rulings.




16

STATE BANKS IN FEDERAL RESERVE SYSTEM.

VI. Opinion of recognized counsel on municipal issues or of the regularly appointed counsel of the municipality as to the legality of the issue shall be secured
&nd approved in each case by counsel for the Federal reserve bank.
VII. Any Federal reserve bank may purchase from any of its member banks
warrants of any municipality, indorsed by such member bank, with waiver of demand,
notice, and protest, up to an amount not to exceed 10 per cent of the aggregate
capital and surplus of such member bank: Provided, however, That such warrants
comply with provisions I and III of these regulations, except that where a period
of 10 years is mentioned in I (c) hereof a period of 5 years shall be substituted for
the purposes of this clause.
REGULATION F.
SERIES OF 1917.

(Superseding Regulation F of 1916.)
TRUST POWERS OP NATIONAL BANKS.

I. Statutory provisions.
The Federal reserve act provides:
SEC. 11. The Federal Reserve Board shall be authorized and empowered:
(k) To grant by special permit to national banks applying therefor, when not in
contravention of State or local law, the right to act as trustee, executor, administrator,
or registrar of stocks and bonds, under such rules and regulations as the said board may
prescribe.
II. Applications.
A national bank desiring to exercise any or all of the privileges authorized by section 11, subsection (k), of the Federal reserve act shall make application to the Federal Reserve Board on a form approved by said board (Form No. 61). Such application shall be forwarded by the applying bank to the chairman of the board of directors
of the Federal reserve bank of its district, and shall thereupon be transmitted to the
Federal Reserve Board with his recommendations.
III. Separate departments.
Every national bank permitted to act under this section shall establish a separate
trust department, and shall place such department, under the management of an
officer or officers, whose duties shall be prescribed by the board of directors of the bank.
IV. Provision for keeping trust funds.
The funds, securities, and investments held in each trust shall be held separate and
•distinct from the general funds and securities of the bank, and separate and distinct
one from another. The ledgers and other books kept for the trust department shall
be entirely separate and apart from the other books and records of the bank.
V. Examinations.
Examiners appointed by the Comptroller of the Currency or designated by the
Federal Reserve Board will hereafter be instructed to make thorough and complete
audits of the cash, securities, accounts, and investments of the trust department of
•every bank at the same time that examination is made of the banking department.
VI. Conformity with State laws.
Nothing in these regulations shall be construed to give to a national bank doing
business as trustee, executor, administrator, or registrar of stocks and bonds under
section 11 (k) of the Federal reserve act any rights or privileges in contravention of
the laws of the State in which the bank is located.
VII. Revocation of permits.
The Federal Reserve Board reserves the right to revoke permits granted under these
regulations in any case where in tke opinion of the board a bank has willfully violated
the provisions of these regulations or the laws of any State relating to the operations
of such bank when acting as trustee, executor, administrator, or registrar of stocks
and bonds.
VIII. Changes in rules.
These regulations are subject to change by the Federal Reserve Board: Provided,
however, That no such change shall prejudice obligations undertaken in good faith
under regulations in effect at the time the obligation was assumed.




STATE BANKS IN" FEDERAL RESERVE SYSTEM.

17

REGULATION G.
SERIES OF 1917.

(Superseding Regulation G of 1916.)

LOANS ON FARM LAND AND OTHER REAL ESTATE.
Section 24 of the Federal reserve act provides in part that—
''Any national banking association not situated in a central reserve city may make
loans secured by improved and unencumbered farm land situated within its Federal
reserve district or within a radius of 100 miles of the place in which such bank is located,
irrespective of district lines, and may also make loans secured by improved and
unencumbered real estate located within 100 miles of the place in which such bank
is located, irrespective of district lines; but no loan made upon the security of such
farm land shall be made for a longer time than five years, and no loan made upon the
security of such real estate as distinguished from farm land shall be made for a longer
time than one year nor shall the amount of any such loan, whether upon such farm
land or upon such real estate, exceed 50 per cent of the actual value of the propertyoffered as security. Any such bank may make such loans, whether secured by sucn
farm land or such real estate, in an aggregate sum equal to 25 per cent of its capital
and surplus or to one-third of its time deposits, and such banks may continue hereafter
as heretofore to receive time deposits and to pay interest on the same."
National banks not located in central reserve cities may, therefore, legally make
loans secured by improved and unencumbered farm land or other real estate as provided by this section.
Certain conditions and restrictions must, however, be observed—
(a) There must be no prior lien on the land; that is, the lending bank must hold
an absolute first mortgage or deed of trust.
(6) The amount of the loan must not exceed 50 per cent of the actual value of the
land by which it is secured.
(c) The maximum amount of loans which a national bank may make on real estate,
whether on farm land or on other real estate as distinguished from farm land, is limited
under the terms of the act to an amount not in excess of one-third of its time deposits
at the time of the making of the loan, and not in excess of one-third of its average time
deposits during the preceding calendar year: Provided, however, That if one-third of
sucJ^L time deposits as of the date of making the loan or one-third of the average time
deposits for the preceding calendar year, is less than one-fourth of the capital and
surplus of the bank as of the date of making the loan, the bank in such event shall
have authority to make loans upon real estate under the terms of the act to the extent
of one-fourth of the bank's capital and surplus as of that date.
(d) Farm land to be eligible as security for a loan by a national bank must be situated
within the Federal reserve district in which such bank is located or within a radius
of 100 miles of such bank, irrespective of district lines.
(e) Real estate as distinguished from farm land to be eligible as security for a loan
by a national bank must be located within a radius of 100 miles of such bank, irrespective of district lines.
(/) The right of a national bank to "make loans" under section 24 includes the right
to purchase or discount loans already made as well as the right to make such loans
in the first instance: Provided, however, That no loan secured by farm land shall have
a maturity of more than five years from the date on which it was purchased or made
by the national bank and that no loan secured by other real estate shall have a maturity
of more than one year from such date.
(g) Though no national bank is authorized under the provisions of section 24 to
make a loan on the security of real estate, other than farm land, for a period exceeding
one year, nevertheless, at the end of the year, it may properly make a new loan upon
the same security for a period not exceeding one year. The maturing note must be
canceled and a new note taken in its place, but in order to obviate the necessity of
making a new mortgage or deed of trust for each renewal the original mortgage or
deed of trust may be so drawn in the first instance as to cover possible future renewals
of the original note. Under no circumstances, however, must the bank obligate
itself in advance to make such a renewal. It must, in all cases, preserve the right
to require payment at the end of the year and to foreclose the mortgage should that
action become necessary. The same principles apply to loans of longer maturities
secured by farm lands.
(h) In order that real estate loans held by a bank may be readily classified, a statement signed by the officers making a loan and having knowledge of the facts upon
which it is based must be attached to each note secured by a first mortgage on the land
by which the loan is secured, certifying in detail as of the date of the loan that all of
the requirements of law have been duly observed.
S. Doc. 184, 66-2




2

18

STATE BANKS IN FEDERAL RESERVE SYSTEM.
REGULATION H.
SERIES OF 1917.

(Superseding Regulation H of 1916.)
MEMBERSHIP OP STATE BANKS AND TRUST COMPANIES.

I. Statutory requirements.
Section 9 of the Federal reserve act, as amended by the act approved June 21,1917,
which authorizes State banks and trust companies to become members of the Federal
reserve system, is quoted in the appendix to this regulation on page 24.
II. Banks eligible for membership.
A State bank or a trust company to be eligible for membership in a Federal reserve
bank must comply with the following conditions:
1. It must have been incorporated under a special or general law of the State or
district in which it is located.
2. It must have a minimum paid-up unimpaired capital stock as follows:
In cities or towns not exceeding 3,000 inhabitants, $25,000.
In cities or towns exceeding 3,000 but not exceeding 6,000 inhabitants, $50,000.
In cities or towns exceeding 6,000 but not exceeding 50,000 inhabitants, $100,000.
In cities exceeding 50,000 inhabitants, $200,000.
III. Application for membership.
Any eligible State bank or trust company may make application on F. R. B. Form
83a, made a part of this regulation, to the Federal Reserve Board for an amount of
capital stock in the Federal reserve bank of its district equal to 6 per cent of the paidup capital stock and surplus of such State bank or trust company. This application
must be forwarded direct to the Federal reserve agent of the district in which the
applying bank or trust company is located and must be accompanied by Exhibits I,
II, and III, referred to on page 1 of the application blank.
IV. Approval of application.
In passing upon an application the Federal Reserve Board will, consider especially—
1. The financial condition of the applying bank or trust company and the general
character of its management.
2. Whether the corporate powers exercised by the applying bank or trust company
are consistent with the purposes of the Federal reserve act.
3. Whether the laws of the State or district in which the applying bank or trust
company is located contain provisions likely to prevent proper compliance with the
provisions of the Federal reserve act and the regulations of the Federal Reserve
Board made in conformity therewith.
If, in the judgment of the Federal Reserve Board, an applying bank or trust company conforms to all the requirements of the Federal reserve act and these regulations,
and is otherwise qualified for membership, the board will issue-a certificate of approval
subject to such conditions as it may deem necessary to insure compliance with the
act and these regulations. When the conditions imposed by the board have been
accepted by the applying bank or trust company the board will issue a certificate of
approval, whereupon the applying bank or trust company shall make a payment to
the Federal reserve bank of its district of one-half of the amount of its subscription,
i. e., 3 per cent of the amount of its paid-up capital and surplus, and upon receipt of
this payment the appropriate certificate of stock will be issued by the Federal reserve
bank. The remaining half of the subscription of the applying bank or trust company
shall be subject to call when deemed necessary by the Federal Reserve Board.
V. Powers and restrictions.
Every State bank or trust company while a member of the Federal reserve system—
1. Shall retain its full charter and statutory rights as a State bank or trust company,
subject to the provisions of the Federal reserve act and to the regulations of the Federal Reserve Board, including any conditions embodied in the certificate of approval.
2. Shall maintain such improvements and changes in its banking practice as may
have been specifically required of it by the Federal Reserve B oard as a condition of
its admission and shall not lower the standard of banking then required of it; and
3. Shall enjoy all the privileges and observe all those requirements of the Federal
reserve act and of the regulations of the Federal Reserve Board made in conformity
therewith which are applicable to State banks and trust companies which have become
member banks.




STATE BANKS IIST FEDERAL RESERVE SYSTEM.

19

VI. Examinations and reports.
Every State bank or trust company, while a member of the Federal reserve system,
shall be subject to examinations made by direction of the Federal Reserve Board or
of the Federal reserve bank by examiners selected or approved by the Federal Reserve
Board.
In order to avoid duplication, examinations of State banks and trust companies
made by State authorities will be accepted in lieu of examinations by examiners selected or approved by the board wherever these are satisfactory to the directors of the
Federal reserve bank and where, in addition, satisfactory arrangements for cooperation in the matter of examination between the designated examiners of the board and
those of the States already exist or can be effected with State authorities. Examiners
from the staff of the board or of the Federal reserve banks will, whenever desirable, be
designated by the board to act with the examination staff of the State in order that
uniformity in the standard of examination may be assured.
Every State bank or trust company, while a member of the Federal reserve system,
shall be required to make in each year not less than three reports of condition and of
the payment of dividends. Such reports shall be made to the Federal reserve bank
of its district on call of such bank on dates to be fixed by the Federal Reserve Board.
REGULATION 1.
SERIES OF 1917.

(Superseding Regulation I of 1916 .
INCREASE OR DECREASE OF CAPITAL STOCK OF FEDERAL RESERVE BANKS,
INCREASE OF CAPITAL STOCK.

Whenever the capital stock of any Federal reserve bank shall be increased by new
banks becoming members, or by the increase of capital or surplus of any membei
bank and the allotment of additional capital stock to such bank, the board of directors
of such Federal reserve bank shall certify such increase to the Comptroller of the
Currency on Form 58, which is made a part of this regulation.
DECREASE OF CAPITAL STOCK.

I. Whenever a member bank reduces its capital stock or surplus, and, in the case
of reduction of its capital, such reduction has been approved by the Comptroller of
the Currency and by the Federal Reserve Board in accordance with the provisions of
section 28 of the Federal reserve act, it shall file with the Federal reserve bank of
which it is a member an application on Form 60, which is made a part of this regulation. When this application has been approved, the Federal reserve bank shall take
up and cancel the receipt issued to such bank for cash payments made on its subscription and shall issue in lieu thereof a new receipt after refunding to the member bank
the proportionate amount due such bank on account of the subscription canceled.
The receipt so issued shall show the date of original issue, so that dividends may be
calculated thereon.
II. Whenever a member bank shall be declared insolvent and a receiver appointed
by the proper authorities, Such receiver shall file with the Federal reserve bank of
which the insolvent bank is a member an application on Form 87, which is made a
part of this regulation, for the surrender and cancellation of the stock held by, and
for the refund of all balances due to such insolvent member bank. Upon approval
of this application by the Federal reserve agent the Federal reserve bank shall accept
and cancel the stock surrendered, and shall adjust accounts between the member
bank and the Federal reserve bank by applying to the indebtedness of the insolvent
member bank to such Federal reserve bank all cash-paid subscriptions made by it
on the stock canceled with one-half of 1 per cent per month from the period of
last dividend, if earned, not to exceed the book value thereof, and the balance, if
any, shall be paid to the duly authorized receiver of such insolvent member bank.
III. Whenever a member bank goes into voluntary liquidation and a liquidating
agent is appointed, such agent shall file with the Federal reserve bank of which it
is a member an application on Form 86, which is made a part of this regulation, for
the surrender and cancellation of the stock held by and for the refund of all balances
due to such liquidating member bank. Upon approval of this application by the
Federal reserve agent the Federal reserve bank shall accept and cancel the stccs
surrendered, and shall adjust accounts between the liquidating member bank and the




20

STATE BANKS IN FEDERAL RESERVE SYSTEM.

Federal reserve bank by applying to the indebtedness of the liquidating member
bank to finch Federal reserve bank all cash-paid subscriptions made by it on the
stock canceled with one-half of 1 per cent per month from the period of last dividend, if earned, not to exceed the book value thereof, and the balance, if any, shall
be piid ho the duly authorized liquidating agent of such liquidating member bank.
IV. Whenever the stock of a Federal reserve bank shall be reduced in the manner
provider! in Paragraphs I, II, or III of this regulation the board of directors of such
Federal reserve bank shall, in accordance with the provisions of section 6, file with
the Comptroller of the Currency a certificate of such reduction on Form 59, which is
made » part of this regulation.
REGULATION J.
SERIES OF 1917.
(Superseding Regulation J of 1916.)
CHECK CLEARING AND COLLECTION.

S*3' ' ton 16 of the Federal reserve act authorizes the Federal Reserve Board to require
eacl> Federal reserve bank to exercise the function of a clearing house for its member
baPLv/4, and section 13 of the Federal reserve act, as amended by the act approved
June 21, 1917, authorizes each Federal reserve bank to receive from any nonmember
bank or trust company, solely for the purposes of exchange or of collection, deposits
of current funds in lawful money, national-bank notes, 1 ederal reserve notes, checks,
and drafts payable upon presentation, or maturing notes and bills, provided such
nonmember bank or trust company maintains with its Federal reserve bank a balance
sufficient to offeet the items in transit held for its account by the Federal reserve bank.
In pursuance of the authority vested in it under these provisions of law. the Federal
Reserve BouTd, desiring to afford both to the public and to the various banks or the
country a direct, expeditious, and economical system of check collection and settlement of balances, has arranged to have each Federal reserve bank exercise the functions of a clearing house for such of its member banks as desire to avail themselves of
its privileges and for such State banks and trust companies as may maintain with the
Federal reserve bank a balance sufficient to qualify it as a clearing member under
the provisions of section 13.
Each Federal reserve bank shall exercise the functions of a clearing house under
the following general terms and conditions:
(1) E&ch Federal reserve bank will receive at par from its'member banks and from
nonmember banks in its district which have become clearing members, checks *
drawn on all member and clearing member banks and on all other nonmember banks
which agree to remit at par through the Federal reserve bank of their district.
(2) Each Federal reserve bank will receive at par from other Federal reserve banks
and will receive at par from all member and clearing member banks, regardless of
their location, for the credit of their accounts with their respective Federal reserve
banks, checks drawn upon all member and clearing member banks of its district and
upon all other nonmember banks of its district whose checks can be collected at par
by the Federal reserve bank. The Federal reserve banks will prepare a par list of
all nonmember banks, to be revised from time to time, which will be furnished to
member and clearing member banks.
(3) Immediate credit entry upon receipt subject to final payment will be made
for all such items upon the books of the Federal reserve bank at full face value, but
the proceeds will not be counted as part of the minimum reserve nor become available to meet checks drawn until actually collected, in accordance with the best
practice now prevailing.
(4) Checks received by a Federal reserve bank on its member or clearing member
banks will be forwarded direct to such banks and will not be charged to their accounts
until sufficient time has elapsed within which to receive advice of payment.
fM In the selection of collecting agents for handling checks on nonmember banks,
which have not become clearing members, member banks will be given the preference.
(6) Under this plan each Federal reserve bank will receive at par from its member
and clearing member banks checks on all member and clearing member banks and
on all other nonmember banks whose checks can be collected at par by any Federal
reserve bank. Member and clearing member banks will be required by the Federal
i A check is generally denned as a draft or order upon a bank or order upcn a bank or banking house
purporting to be drawn upon a deposit of funds, for the payment at all events of a certain sum of money
to a certain person therein named, or to him or his order, or to bearer, and payable instantly on demand.




STATE BANKS IN FEDERAL RESERVE SYSTEM.

21

Reserve Board to provide funds to cover at par all checks received from or for the account of V- ^r Federal reserve banks: Provided, hoicerer, That a member or clearing
member bank may ship currency or specie from its own vaults at the expense of its
Federal reserve bank to cover any deficiency which may arise because of and only
in the case of inability to provide1 items to offset checks received from or for the account of its Federal reserve bank.
(7) Section 19 of the Federal reserve act provides that—
"The required balance carried by a member bank with a Federal reserve bank may,
under the regulations and sub:ect to such penalties as may be prescribed by the
Federal Reserve B mrd, be checked against and withdrawn by s^ch member bank for
the purpose of meeting existing liabilities: Provided, however, That no bank shall at
any time make new loans or shall pay any dividends unless and until the total balance
required by law is fully restored."
It is manifest that items in process of collection can not lawfully be counted as
part of the minimum reserve balance to be carried by a member bank with its Federal
reserve bank. Therefore, should a member bank draw against such items the draft
would be charged against its reserve balance if such balance were sufficient in amount
to pay it; but any resulting impairment of reserve balances would be subject to all
the penalties provided by the act.
Inasmuch as it is essential that the law in respect to the maintenance by member
banks of the required minimum reserve balance shall be strictly complied with, the
Federal Reserve Board, under authority vested in it by section 19 of the act, hereby
prescribes as the penalty for any deficiency in reserves a sum equivalent to an interest
charge on the amount of the deficiency of 2 per cent per annum above the 90 day discount rate of the Federal reserve bank of the district in which the member bank is
located. The board reserves the right to increase this penalty whenever conditions
require it.
For the purpose of keeping their reserve balances intact member banks may at all
times have recourse to the rediscount facilities offered by their respective Federal
reserve banks.
(8) Each Federal reserve bank will determine by analysis the amounts of uncoL
lected funds appearing on its books to the credit of each member bank. Such analysis
will show the true status of the reserve held by the Federal reserve bank for each
member bank and will enable it to apply the penalty for impairment of reserve.
A schedule of the time required within which to collect checks will be furnished
to each bank to enable it to determine the time at which any item sent to its Federal
reserve bank will be counted as reserve and become available to meet any checks
drawn.
(9) In handling items for member and clearing member banks, a Federal reserve
bank will act as agent only. The board will require that each member and clearing
member bank authorize its Federal reserve bank to send checks for collection to banktw
on which checks are drawn, and, except for negligence, such Federal reserve bank will
assume no liability. Any further requirements that the board may deem necessary
will be set forth by the Federal reserve banks in their letters of instruction to theii
member and clearing member banks. Each Federal reserve bank will also promulgate rules and regulations governing the details of its operations as a clearing house,,
such rules and regulations to be binding upon all member and nonmember banks*
which are clearing through the Federal reserve bank.
(10) The cost of collecting and clearing checks must necessarily be borne by the
banks receiving the benefit and in proportion to the service rendered. An accurate
account will be kept by each reserve bank of the cost of performing this service and
the Federal Reserve Board will, by rule, fix the charge, at so much per item, which
may be imposed for the service of clearing or collection rendered by the reserve banks,
as provided in section 16 of the Federal reserve act.
1
In accordance with instructions issued by the Federal Reserve Board on Apr. 24, 1917, the varioui
Federal reserve banks have issued circulars setting forth the conditions under which their respective member banks may draw drafts on their reserve bank accounts payable with or through any other Federal
reserve bank.




STATE BANKS IN FEDERAL RESERVE SYSTEM.
APPENDICES.
APPENDIX TO REGULATION E (P.

11).

"NET FUNDED INDEBTEDNESS."

The term "net funded indebtedness" is hereby defined to mean the legal gross
indebtedness of the municipality (including the amount of any school district or other
*>onds which depend for their redemption upon taxes levied upon property within the
municipality) less the aggregate of the following items:
(1) The amount of outstanding bonds or other debt obligations made payable
from current revenues;
(2) The amount of outstanding bonds issued for the purpose of providing the inhabitants of a municipality with public utilities, such as waterworks,
docks, electric plants, transportation facilities, etc.: Provided, That evidence is submitted showing that the income from such utilities is sufficient
for maintenance, for payment of interest on such bonds, and for the
accumulation of a sinking fund for their redemption;
(3) The amount of outstanding improvement bonds, issued under laws which
provide for the levying of special assessments against abutting property
in amounts sufficient to insure the payment of interest on the bonds and
the redemption thereof: Provided, That such bonds are direct obligations
of the municipality and included in the gross indebtedness of the municipality;
(4) The total of all sinking funds accumulated for the redemption of the gross
indebtedness of the municipality, except sinking funds applicable to
bonds just described in (1), (2), and (3) above.
"EXISTENCE" AND "NONDEFAULT."

Warrants will be construed to comply with that part of I (c) of Regulation E relative
to terms of existence and nondefault, under the following conditions:
(1) Warrants issued by or in behalf of any municipalitv which was, subsequent
to the issuance of such warrants, consolidated with or merged into an existing political
division which meets the requirements of these regulations, will be deemed to be the
warrants of such political division: Provided, That such warrants were assumed by
such political division under statutes and appropriate proceedings the effect of which
is to make such warrants general obligations of such assuming political division and
payable, either directly or ultimately, without limitation to a special fund from the
proceeds of taxes levied upon all the taxable real and personal property within its
territorial limits.
(2) Warrants issued by or in behalf of any municipality which was, subsequent to
the issuance of such warrants, wholly succeeded by a newly organized political division whose term of existence, added to that of such original political division or of any
other political division so succeeded, is equal to a period of 10 years will be deemed
to be warrants of such succeeding political division: Provided, That during such
period none of such political divisions shall have defaulted for a period exceeding
15 days in the payment of any part of either principal or interest of any funded debt
authorized to be contracted by it: And provided further, That such warrants were
assumed by such new political division under statutes and appropriate proceedings
the effect of which is to make such warrants general obligations of such assuming
political division and payable, either directly or ultimately, 'without limitation to
a special fund from the proceeds of taxes levied upon all the taxable real and personal
property within its territorial limits.
(3) Warrants issued by or in behalf of any municipality which, prior to such issuance,
became the successor of one or more, or was formed by the consolidation or merger of
two or more, preexisting political divisions, the term of existence of one or more of
which, added to that of such succeeding or consolidated political division, is equal
to a period of 10 years, will be deemed to be warrants of a political division which has
been in existence for a period of 10 years: Provided, That during such period none of
euch original, succeeding, or consolidated political divisions shall have defaulted for
a period exceeding 15 days in the payment of any part of either principal or interest
of any funded debt authorized to be contracted by it.




STATE BANKS IN FEDERAL RESERVE SYSTEM.
APPENDIX TO REGULATION H (P.

23

17).

Section 9 of the Federal reserve act as amended by the act approved June 21, 1917,
provides that:
Any bank incorporated by special law of any State, or organized under the general
laws of any State, or of the United States, desiring to become a member of the Federal
reserve system, may make application to the Federal Reserve Board, under such rules
and regulations as it may prescribe, for the right to subscribe to the stock of the Federal
reserve bank organized within the district in which the applying bank is located.
Such application shall be for the same amount of stock that the applying bank would
be required to subscribe to as a national bank. The Federal Reserve Board, subject
to such conditions as it may prescribe, may permit the applying bank to become a
stockholder of such Federal reserve bank.
In acting upon such applications the Federal Reserve Board shall consider the
financial condition of the applying bank, the general character of its management,
and whether or not the corporate powers exercised are consistent with the purposes
of this act.
Whenever the Federal Reserve Board shall permit the applying bank to become a
stockholder in the Federal reserve bank of the district, its stock subscription shall be
payable on call of the Federal Reserve Board, and stock issued to it shall be held
subject to the provisions of this act.
All banks admitted to membership under authority of this section shall be required
to comply with the reserve and capital requirements of this act and to conform to
those provisions of law imposed on national banks which prohibit such banks from
lending on or purchasing their own stock, which relate to the withdrawal or impairment of their capital stock, and which relate to the payment of unearned dividends.
Such banks and the officers, agents, and employees thereof shall also be subject to
the provisions of and to the penalties prescribed by section 5209 of the Revised
Statutes, and shall be required to make reports of condition and of the payment of
dividends to the Federal reserve bank of which they become a member. Not less
than three of such reports shall be made annually on call of the Federal reserve bank
on dates to be fixed by the Federal Reserve Board. Failure to make such reports
within 10 days after the date they are called for shall subject the offending bank to
a penalty of $100 a day for each day that it fails to transmit such report; such penalty
to be collected by the Federal reserve bank by suit or otherwise.
As a condition of membership such banks shall likewise be subject to examinations
made by direction of the Federal Reserve Board or of the Federal reserve bank by
examiners selected or approved by the Federal Reserve Board.
Whenever the directors of the Federal reserve bank shall approve the examinations
made by the State authorities, such examinations and the reports thereof may be
accepted in lieu of examinations made by examiners selected or approved by the
Federal Reserve Board: Provided, however, That when it deems it necessary the board
may order special examinations by examiners of its own selection and shall in all
cases approve the form of report. The expenses of all examinations, other than those
made by State authorities, shall be assessed against and paid by the banks examined.
If at any time it shall appear to the Federal Reserve Board that a member bank
has failed to comply with the provisions of this section or the regulations of the Federal
Reserve Board made pursuant thereto, it shall be within the power of the board after
hearing to require such bank to surrender its stock in the Federal reserve bank and
to forfeit all rights and privileges of membership. The Federal Reserve Board may
restore membership upon due proof of compliance with the conditions imposed by
this section.
Any State bank or trust company desiring to withdraw from membership in a
Federal reserve bank may do so, after six months' written notice shall have been
filed with the Federal Reserve Board, upon the surrender and cancellation of all of
its holdings of capital stock in the Federal reserve bank: Provided, however, That no
Federal reserve bank shall, except under express authority of the Federal Reserve
Board, cancel within the same calendar year more than 25 per cent of its capital
stock for the purpose of effecting voluntary withdrawals during that year. All such
applications shall be dealt with in the order in which they are filed with the board.
Whenever a member bank shall surrender its stock holdings in a Federal reserve
bank, or shall be ordered to do so by the Federal Reserve Board, under authority
of law, all of its rights and privileges as a member bank shall thereupon cease and
determine, and after due provision has been made for any indebtedness due or to
become due to the Federal reserve bank it shall be entitled to a refund of its cash
paid subscription with interest at the rate of one-half of 1 per cent per month from
date of last dividend, if earned, the amount refunded in no event to exceed the




24

STATE BANKS IN FEDERAL RESERVE SYSTEM.

book value of the stock at that time, and shall likewise be entitled to repayment
of deposits and of any other balance due from the Federal reserve bank.
No applying bank shall be admitted to membership in a Federal reserve bank unless
it possesses a paid-up unimpaired capital sufficient to entitle it to become a national
banking association in the place where it is situated under the provisions of the
national bank act.
Banks becoming members of the Federal reserve system under authority of this
section shall be subject to the provisions of this section and to those of this act which
relate specifically to member banks, but shall not be subject to examination under
the provisions of the first two paragraphs of section 5240 of the Revised Statutes as
amended by section 21 of this act. Subject to the provisions of this act and to the
regulations of the board made pursuant thereto, any bank becoming a member of the
Federal reserve system shall retain its full charter and statutory rights as a State
bank or trust company, and may continue to exercise all corporate powers granted
it by the State in which it was created, and shall be entitled to all privileges of member
banks: Provided, however. That no Federal reserve bank shall be permitted to discount for any State bank or trust company notes, drafts, or bills of exchange of any
one borrower who is liable for borrowed money to such State bank or trust company in an amount greater than 10 per cent of the capita and surplus of such State
bank or trust company, but the discount of bills of exchange drawn against actually
existing value and the discount of commercial or business paper actually owned
by the person negotiating the same shall not be considered as borrowed money within
the meaning of this section. The Federal reserve bank, as a condition of the discount of notes, drafts, and bills of exchange for such State bank or trust company,
shall require a certificate or guaranty to the effect that the borrower is not liable
to such bank in excess of the amount provided by this section, and will not be permitted to become liable in excess of this amount while such notes, drafts, or bills
of exchange are under discount with the Federal reserve bank.
It shall be unlawful for any officer, clerk, or agent of any bank admitted to membership under authority of this section to certify any check drawn upon such bank
unless the person or company drawing the check has on deposit therewith at the time
such check is certified an amount of money equal to the amount specified in such
check. Any check so certified by duly authorized officers shall be a good and valid
obligation against such bank, but the act of any such officer, clerk, or agent in violation of this section may subject such bank to a forfeiture of its membership in the
Federal Reserve System upon hearing by the Federal Reserve Board.
EXHIBIT D.
MARCH 21,

1918.

SIR: YOU have requested my opinion as to whether the limitations contained in
section 13 of the Federal reserve act relating to charges for the collection and payment of checks can be held to apply to State banks which are neither members of the
Federal Reserve System nor depositors in Federal reserve banks.
As originally enacted, the first paragraph of section 13 reads as follows:
"Any Federal reserve bank may receive from any of its member banks, and from
the United States, deposits of current funds in lawful money, national-bank notes,
Federal reserve notes, or checks and drafts upon solvent member banks, payable upon
presentation, or, solely for exchange purposes, may receive from ether 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."
In section 16, apparently as the basis of a system of check clearing or collection, it
is provided that Federal reserve banks shall receive on deposit at par checks and drafts
on member and other Federal reserve banks; and the Federal Reserve Board is authorized to fix b y rule t h e charges to be collected by member banks from patrons whose checks
are cleared through the Federal reserve bank a n y charge for t h e service of clearing or
collection rendered by the Federal reserve bank.
It will be noted that under the first paragraph of section 13 in its original form the
only classes of banks which might be depositors in and thus clear through a Federal
reserve bank were its member banks and other Federal reserve banks, and the only
checks and drafts specified as receivable on deposit were checks and drafts drawn
upon member banks or upon other Federal reserve banks.
The acts of September 7, 1916, and June 21, 1917, so amended the first paragraph
of section 13 as to extend the clearing and collection facilities of the Federal Reserve
System to include checks and drafts generally, to make these facilities directly available to nonmember banks, and to establish the limitations as to charges referred to in
the question submitted. The paragraph as so amended reads as follows:




STATE BANKS IN FEDEKAL KESERVE SYSTEM.

25

^ Federal reserve bank may receive from any of its member banks, and from
the United States, deposits of current funds in lawful money, national-bank notes,
Federal reserve notes, or checks and drafts, payable upon presentation, and also, for
collection, maturing notes and 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 notes
and bills payable within its district; or, solely for the purposes of exchange or of collection, may receive from any nonmember bank or trust company deposits of current
funds in lawful money, national-bank notes, Federal reserve notes, checks, and drafts
payable upon presentation, or maturing notes and bills: Provided, Such nonmember
bmk or trust company maintains with the Federal reserve bank of its district a balan e sufficient to offset the items in transit held for its account by the Federal reserve
bank: Provided further, That nothing in this or any other section of this act shall be
construed as prohibiting a member or nonmember bank from making reasonable charges,
to be determined and regulated by the Federal Reserve Board, but in no case to exceed 10

cents per $100 or fraction thereof, based on the total of checks and drafts presented at
any one time, for collection or payment of checks and drafts and remission therefor b y
exchange or otherwise; but no such charges shall be made against the Federal reserve

banks." [Italics mine.]
The limitations as to charges referred to in the question submitted are contained
in the second proviso quoted above. This proviso, apparently recognizing an existing right of member and nonmember banks to make reasonable charges for the collection or payment of checks and drafts and remission therefor by exchange or otherwise
provides (1) that these charges are "to be determined and regulated by the Federal
Reserve Board, but in no case to exceed 10 cents per $100/' but (2) that "no such
charges shall be made against the Federal reserve banks/'
Clearly these limitations apply to national banks, which are compelled to be
member banks, to such State banks as become member banks by voluntarily accepting the terms and provisions of the Federal reserve act, and to such other State banks
as do not become member banks but by becoming depositors in Federal reserve
banks upon the conditions specified avail themselves directly of the facilities of the
Federal reserve clearing system.
The specific question to be determined is whether these limitations apply to nonmember State banks which do not become depositors but checks upon which may
pass through Federal reserve banks in process of clearing or collection.
The theory and scheme of the Federal reserve legislation seems inconsistent with
the purpose on the part of Congress to subject State banks against their will to Federal
control or regulation. State banks are not compelled to become members of the
Federal reserve system or depositors therein. Those possessing the necessary qualifications are, however, invited to become members. They are not only free to accept
or decline, but if they accept remain at liberty to withdraw from the system. (Sec. 9.)
By section 13 as amended, State banks not desiring to become members or too small
to be eligible for membership are likewise invited to share in the clearing and collection facilities of the system by becoming depositors in Federal reserve banks. But
they may accept or reject the invitation, and if they become depositors may close
their accounts at their pleasure.
It would accordingly seem that the limitations referred to ought not to be regarded
as intended to be imposed upon State banks not connected with the Federal reserve
system as members or depositors, against the will of such banks, unless that intention
clearly appears.
The term "nonmember bank" as used in the proviso may reasonably be construed as referring to a nonmember bank that has become a depositor as authorized
in the preceding provisions of the paragraph. If this term is so construed, obviously
the provision requiring charges "to be determined and regulated by the Federal
Reserve Board, but in no case to exceed 10 cents per $100," will have no application
to nonmember State banks which are not depositors in a Federal reserve bank. The
broad language of the concluding clause, "no such charges shall be made against
the Federal reserve banks," may be construed not as directed against State banks
which are not depositors, but merely as specifying a condition upon which checks
may clear through the Federal reserve banks—in effect a prohibition against the
payment of such charges by the Federal reserve banks.
Under this construction, member banks and nonmember banks which are depositors in the Federal reserve banks will be subject to the limitations in the proviso,
but nonmember banks which are not depositors will not be subject to the limitations.
All, however, will have to adjust their charges among themselves and with their
own depositors, the Federal reserve banks being prohibited from paying such charges..




26

STATE BANKS IN FEDERAL RESERVE SYSTEM.

This construction seems to be in harmony with the intention of the framers of the
amendment to section 13 embodying the above-mentioned proviso.
The act of June 21, 1917, amending section 13 and other sections of the Federal
reserve act, as originally introduced in both the House and Senate contained no part
of the (second) proviso, the section in the proposed amended form ending with the
preceding proviso. The Senate, adopting an amendment offered by Senator Hardwick, added the second proviso in the following form:
"Provided further, That nothing in this or any other section of this act shall be construed as prohibiting a member or nonmember bank from making reasonable charges,
but in no case to exceed 10 cents per $100 or fraction thereof, based on the total of checks
and drafts presented at any one time, for collection or payment of checks and drafts and
remission therefor by exchange or otherwise." (55 Cong. Rec, 2065.)
It was thought the effect of the Hardwick amendment would be to recognize the
right of any bank upon which checks are drawn to make charges against the Federal
reserve bank through which such checks might be cleared or collected. The Hardwick amendment was opposed by the Federal Reserve Board, as appears from letters
from its governor to Senator Owen and Congressman Glass,, chairmen of the respective
Committees on Banking and Currency of the Senate and House (pp. 2071, 3795).
The President also called attention to the seeming effect of the amendment in a letter
to Senator Owen, reading as follows:
" I have been a good deal disturbed to learn of the proposed amendment to the
Federal reserve act which seems to contemplate charging the Federal reserve banks for
payment of checks cleared by them, or charging the payee of such checks passing through
the reserve banks with a commission. I should regard such a provision as most unfortunate and as almost destructive of the function of the Federal reserve banks as a
clearing house for member banks, a function which they have performed with so much
benefit to the business of the country.
" I hope most sincerely that this matter may be adjusted without interfering with
this indispensable clearing function of the banks" (p. 4083).
In conference, apparently as the result of the letters of the governor of the Federal
Reserve Board and the President, the proviso took its present form, two changes being
made by the conferees: First, the charges which member or nonmember banks may
make were made subject "to be determined and regulated by the Federal Reserve
Board"; and, second, the final clause was added,"but no such charges shall be made
against the Federal reserve banks."
In presenting the conference report to the Senate, Senator Owen emphasized the
importance of not interfering with the clearing functions of the Federal reserve banks,
explained that under the proviso as amended "the banks can charge each other for
making these accommodations if they like, and they can adjust that to their own satisfaction with one another without troubling the reserve banks," and apparently conceded that State banks not connected as members or depositors with the Federal
Reserve System could not be subjected to Federal legislation (p. 4083).
Mr. Glass in presenting the report to the House, said:
"The Congress has no control whatsoever over nonmember banks. It can not regulate their charges and will not regulate them if this Hardwick amendment should prevail. * * * This House has no control over the nonmember bank in this matter.
Even the Federal Reserve Board has no control over their operations unless they voluntarily join the voluntary collection system established by the Federal Reserve Board"
(p. 3794).
And further, "no nonmember bank that does not voluntarily join the collection system established by the Federal Reserve Board will be specifically affected. No law that
we pass here can directly affect them. The only way they can be affected is incidental" (p. 3795).
It thus seems clear that the proviso was understood by Congress as designed to
protect the clearing functions of the Federal reserve banks and not directed at State
banks which have no connection as members or depositors with the Federal Reserve
System and upon which it was considered the effect of the proviso could be only
incidental.
It may be argued, and is probably true, that the proviso will necessarily affect the
practice of State banks, though not members or depositors, as to making charges for
the payment of checks drawn upon them. With the concentration of reserve balances
in Federal reserve banks as required by the Federal reserve act, the Federal reserve
clearing system may offer the only adequate and convenient facilities for clearing or
collecting checks drawn upon banks at a distance, and depositors may find it inadvisable to maintain accounts with banks upon which checks can not be cleared or
collected by the use of these facilities.




STATE BANKS IN FEDERAL RESERVE SYSTEM.

27

The Federal reserve act, however, does not command or compel these State banks
to forego any right they may have under the State laws to make charges in connection
with the payment of checks drawn upon them. The act merely offers the clearing
and collection facilities of the Federal reserve banks upon specified conditions. If
the State banks refuse to comply with the conditions by insisting upon making
charges against the Federal reserve banks, the result will simply be, so far as the
Federal reserve act is concerned, that since the Federal reserve banks can not pay
these charges they can not clear or collect checks on banks demanding such payment
from them.
From what has been said it follows that in my opinion the limitations contained in
section 13 relating to charges for the collection and payment of checks do not apply
to State banks not connected with the Federal Reserve System as members or depositors.
Checks on banks making such charges can not, however, be cleared or collected
through Federal reserve banks.
Respectfully,
(Signed)
T. W. GREGORY, Attorney General.
The

PRESIDENT,

The While House.
EXHIBIT E.
APRIL 30,

1918.

MY DEAR GOVERNOR: I acknowledge receipt of your letter of the 19th instant with
reference to my opinion of March 21, 1918, holding that Federal reserve banks.are
prohibited from paying the charges for collection and payment of checks and drafts
mentioned in the first paragraph of section 13 of the Federal reserve act.
In a memorandum by the general counsel of the American Bankers Association,
which you inclose, the point is raised that the prohibition against the charges referred
to must be confined to checks owned by the Federal reserve bank as distinguished from
checks deposited to be cleared or collected for the account of a member or depositor.
You ask to be advised whether the board correctly interprets my opinion as implying
that no such distinction can be recognized and that no member bank can under any
circumstances make any charge against its Federal reserve bank in connection with
the collection or payment of checks deposited with the Federal reserve bank as provided in the paragraph mentioned.
The reason for the suggested distinction is not apparent. I do not understand why
checks deposited with a Federal reserve bank to be cleared or collected can not be
considered as owned by the bank.
As the basis of the check-clearing system contemplated by the Federal reserve act,
the Federal reserve banks are required by section 16 to "receive on deposit at par,"
unconditionally, the checks therein specified drawn on Federal reserve and member
banks. If the phrase " receive on deposit" is given its ordinary signification, it seems
clear that the Federal reserve bank becomes the owner of the checks so deposited, title
to the checks passing to that bank and the depositors receiving immediate credit
therefor. (Burton v. United States, 196 U. S., 283; Security National Bank v. Old
National Bank, 241 Fed., 1, and cases therein cited at pages io to 12.)
The first paragraph of section 13, as amended to extend the clearing facilities of the
Federal reserve banks to nonmember banks and to include checks generally, requires
each nonmember bank availing itself of these facilities to maintain with the "Federal
reserve bank of its district a balance sufficient to offset the items in transit held by the
Federal reserve bank." As so amended, the paragraph may be regarded as at least
authorizing the Federal reserve abnk to receive on deposit from nonmember depositors
as well as from member banks all classes of checks to be cleared or collected, taking the
title thereto and giving credit therefor to the depositing banks.
As a Federal reserve bank may thus become the owner of all the checks cleared or
collected through it, there appears to be no basis in the act for drawing a distinction
between checks owned by the Federal reserve bank and checks deposited with it to
be cleared or collected.
But even if the checks received could be classified on the basis suggested, the
language of the paragraph seems to preclude the idea of excluding checks deposited
to be cleared or collected from the checks as to which charges are prohibited.
The charges which the Federal reserve banks are prohibited from paying by the
final clause, "no such charges shall be made against the Federal reserve banks," obviously include the "charges * * *• for collection or payment of checks and drafts
and remission therefor by exchange or otherwise " mentioned in the preceding clause.
The checks authorized by the paragraph to be deposited with the Federal reserve
bank, upon being received by that bank, are to be collected from and paid by the
banks upon which they are drawn. To say that charges in connection with the pay-




28

STATE BANKS 1ST FEDERAL RESERVE SYSTEM.

merit of these checks ma^e by the banks drawn upon and collected from the Federal'
reserve bank are not made against that bank seems to do violence to the ordinary
meaning of the words usad, regardless of whether the charges are ultimately borne
by it or subsequently transferred to the banks by which the checks were deposited.
Moreover, the legislative history of the amendment as referred to in the opinion
shows clearly that the prohibition was directed primarily against the making of charges
in connection with the clearing of checks. It was a propose^ amendment to the Federal reserve act, which apparently contemplated "charging the Federal reserve banks
for payment of checks cleared by them" that the President opposed in his letter to
Senator Owen. And it was to prevent the possibility of such charges being made
that the final clause was added, which, as explained by Senator Owen, prevented
"troubling the reserve banks" or "interfering with the clearing of checks at par by
the reserve banks." (55 Cong. Rec, p. 3761.)
I construe the first paragraph of section 13 as prohibiting member banks under any
circumstances from making the charges therein referred to against Federal reserve
banks.
You are accordingly advised that the interpretation placed by the board upon my
opinion of March 21 is correct.
Respectfully,
(Signed)

T. W. GREGORY,

Attorney
Hon.

General.

W. P. G. HARDING,

Governor Federal Reserve Board, Washington, D. C.

EXHIBIT F.
FEDERAL RESERVE BOARD,

Washington, December 11, 1919.
Subject: Questions of law and policy involved in matter of collecting all checks at
par.
DEAR SIR: In view of complaints which are being made from time to time concerning the policy of Federal reserve banks in collecting checks or all points in their
respective districts at par, there is inclosed for your information a copy of a letter
which was sent to a protesting nonmember bank in one of the districts, which defines
the questions of law and policy involved.
Very truly, yours,
GOVERNOR.
To CHAIRMEN AND GOVERNORS OP ALL FEDERAL RESERVE BANKS.
DEAR SIR: Receipt is acknowledged of your letter of the
in which you protest against the policy which has been adopted by the Federal reserve banks with
the approval of the Federal Reserve Board in the matter of the collection of checks
which are received by Federal reserve banks from their member banks or form nonmember banks which maintain clearing or collection accounts with them.
The board's action is based upon its conception of the very evident purposes of the
Federal reserve act. Section 13 of the act begins as follows: "Any Federal reserve
bank may receive from any of its member banks, and from the United States, deposits
of current funds in lawful money, national bank notes, Federal reserve notes, or checks,
and drafts, payable upon presentation, and also, for collection, maturing notes and
bills." Even though the Federal Reserve Board has heretofore ruled that the permissive "may," as used in the foregoing paragraph, should not be construed to mean
the mandatory "shall," nevertheless it is clear that a Federal reserve bank in order
to do any business whatever must exercise some of the permissive powers authorized
by law. It would be impossible otherwise for a Federal reserve bank to afford to its
member banks many of the privileges which the law clearly contemplates and to
which the member banks are clearly entitled. But, independently of a discussion
of this phase of the situation, it seems to the board that doubts upon this question
are resolved upon a consideration of the provisions of section l(i. "Every Federal
reserve bank shall receive on deposit at par from member banks or from Federal
reserve banks checks and drafts drawn upon any of its depositors." In this case, the
obligatory "shall" is used so that there is no option in the Federal reserve bank sofar as checks and drafts upon its depositors are concerned. From this it may be
argued that as the depositors of a Federal reserve bank are member banks there is
no call obligation upon the Federal reserve bank to receive on deposit at par checks
on nonmember banks, but even if the language of section IS be construed as per-




STATE BANKS IK" FEDERAL RESERVE SYSTEM.

29

missive there seems to be no question that the Federal reserve bank has the right to
receive on deposit from any of its member banks any checks or drafts upon whomsoever drawn, provided they are payable upon presentation. The whole purpose of
the act demands that in justice to member banks, they should exercise that right.
Section 16 further provides that the Federal Reserve Board "may, at its discretion,
exercise the functions of a clearing house for such Federal reserve banks * * * and
may also require each such bank to exercise the functions of a clearing house for its
member banks." In accordance with the purpose of this paragraph, the Federal
Reserve Board, with the view ultimately of establishing a universal or national system of clearing intersectional balances as well as bank checks and drafts, has established a gold settlement fund through which daily clearings between all Federal
reserve banks are consumated and has also required each Federal reserve bank to
exercise the functions of a clearing house for its member banks. In order, however,
to make fully effective its facilities as a clearing house in accordance with the terms
of this section, there does not seem to be any doubt that the Federal reserve bank
should not only exercise its obligatory power to receive from member banks checks
and drafts drawn upon other member banks, but that it should also exercise its permissive power to receive from member banks any other checks and drafts upon whomsoever drawn, provided that they are payable upon presentation.
There are no doubt many nonmember banks without sufficient capitalization to
make them eligible for membership in the Federal reserve system, but provision is
made for such banks in section 13 by authorizating the Federal reserve banks, for
purposes of exchange or of collection, to receive deposits from any nonm ember bank
or trust company. But for the fact that the small country banks are able to have
their out-of-town items credited at par by some city correspondent, there is no doubt
that many more of them would avail themselves of the nonmember collection privilege
than have done so.
There is a proviso in section 13 which allows member and nonmember banks to
make reasonable charges "to be determined and regulated by the Federal Reserve
Board, but in no case to exceed 10 cents per $100 or fraction thereof, based on the
total of checks and drafts presented at any one time, for collection or payment of
checks and drafts, and remission therefor by exchange or otherwise; but no such charges
shall be made against the Federal reserve banks." This has been construed by the
Attorney General of the United States as meaning that a Federal reserve bank can
not legally pay any fee to a member or nonmember bank for the collection and
remittance of a check. It follows, therefore, that if the Federal reserve banks are
to give the service required of them under the provisions of section 13 they must,
in cases where banks refuse to remit for their checks at par, use some other means of
collection no matter how expensive.
The action of the various Federal reserve banks in extending their par lists has
met with the cordial approval of the Federal Reserve Board, which holds the view
that under the terms of existing law, the Federal reserve banks must use every effort
to collect all bank checks received from member banks at par. Several of the Federal
reserve banks are now able to collect on all points in their respective districts at par,
and new additions to the other par lists are being made every day. The board sees
no objection to one bank charging another bank or a firm or individual the full amount
provided in section 13 of the Federal reserve act (10 cents per $100), and has not
undertaken to modify these charges, but the act expressly provides that no such
charge shall be made against the Federal reserve banks.
It is the board's duty to see that the law is administered fairly and without discrimination, and that it applies to all banks alike, and it is making an earnest endeavor
to carry out the laws as construed by the highest legal authority of the administrative
branch of the Government.
EXHIBIT G.
FIRST LETTER TO THE NONMEMBER BANK.

GENTLEMEN: YOU are doubtless aware of the fact that we have in the past been
obliged to refuse to handle checks on your bank for the reason that we have not had a
par arrangement with you.
Federal reserve banks can not handle checks on banks under any arrangements
which would cantemplate the paying of exchange because, under the Attorney
General's interpretation of the law, they are not, under any circumstances, permitted
to pay exchange.
Our declining to handle checks drawn by your depositors has not in any case been
intended as a reflection on your bank and we believe that you have not so considered it.




30

STATE BANKS 1ST FEDERAL RESERVE SYSTEM.

The campaign conducted by the Federal reserve banks for the addition of new par
points has reached such a stage that we do not feel justified in any longer refusing to
handle checks on banks located in what we must consider as being par territory.
We would advise, therefore, that on and after November 15, we will discontinue
refusing to handle checks on you, but will receive at par such checks as are offered
to us and will forward them to you in our regular cash letters, accompanied by stamped,
addressed envelopes for such convenience in making returns. Remittance should,
in all cases, be made in
exchange or its equivalent at par.
We trust that this will meet with your approval and that we may receive your early
advke to the effect that we may expect your cooperation in this important movement.
SECOND LETTER TO THE NONMEMBER BANK.

GENTLEMEN: Referring to our letter of November 28, we would say that we are
to-day in receipt of checks on you which we have received at par in accordance with
the Federal reserve act.
These checks are being forwarded to you to-day in one of our regular cash letters
accompanied by stamped, addressed envelope for your convenience in making returns.
We anticipate par remittance in
exchange or its equivalent and hope that
we may receive your assurance that you will continue to remit at par for all checks
drawn by your depositors which we may receive and forward to you in the usual course
of business.
THIRD LETTER TO NONMEMBER BANK.

GENTLEMEN: We are in receipt of your remittance covering our cash letter of January 14, total $1,549.22 and note your deduction of $2.32 exchange.
Practically all of the banks in
have already agreed to remit to us at par for
checks drawn by their depositors, received by us and forwarded in the usual course
of business and we were hoping that the bank of
, would also agree to cooperate
with us in this important movement.
We can not in justice to the great number of par banks in your vicinity decline to
handle checks drawn on you, and since we are not permitted to pay exchange it
necessarily follows that we must arrange to collect them at par.
If we can not obtain a direct connection with your good bank, we will be obliged to
make collection through other channels.
We request therefore that hereafter if you can not remit at par, you be good
enough to certify and return to us such checks as are forwarded to you in our
cash letters. >
[Telegram.]
FEDERAL RESERVE BOARD,

Washington, January 20, 1920.
GOVERNOR OF ALL FEDERAL RESERVE BANKS:

Under a resolution adopted by the Senate yesterday Board is required to inform
the Senate whether Federal Reserve Board or any Federal reserve bank under instructions or with consent of knowledge of board has resorted to any method of coercion ta
compel State banks to join Federal reserve system, or by threats or other coercive
means has attempted to require such State banks to submit to any rules or regulations
made by Federal Reserve Board or any Federal reserve bank. This is result of complaints made to Senators by State banks of efforts of Federal reserve banks to collect
checks at par. Specific charge is made that Federal reserve banks hold back checks
on small banks until they amount to considerable sums, then send messenger to make
personal demand for payment in currency in order to embarrass payee bank and
compel it to submit. Has such action been taken by your bank and if so, was it
done with object of embarrassing payee bank or merely to reduce percentage cost of
collection? Is it not the usual practice of larger banks in your district when they
collect on nonmember banks by sending items direct to avail themselves of lower
charges by holding back small items until they have round amounts of $100 or more,
thus avoiding payment minimum charge of 10 or 15 cents on a $5 item? State primary
purpose of the use of express companies or private agencies and give outline of any
threats, oral or written, which may have been made by your employees or agents.
Please wire answer.




HARDING.

STATE BANKS IN FEDERAL RESERVE SYSTEM.

31

EXHIBIT I.
.TELEGRAMS FROM THE 12 FEDERAL RESERVE BANKS REPLYING TO THE TELEGRAM OP
THE FEDERAL RESERVE BOARD, DATED JANUARY 21, AND MARKED EXHIBIT H.
BOSTON, MASS., January 21, 1920.

Replying telegram 20th: This district has been all par practically since its inauguration of check-collection system. No collection by messenger or demands for payment in currency have been made by us except for a few days in one or two instances
where nonmember banks failed to keep their promises to remit promptly. These
cas,£s were dealt with by forwarding checks for collection through express companies
solely for the purpose of protecting Federal reserve bank against Joss and ordinary
methods of sending direct for remittances were readopted on receipt of satisfactory
assurances that future remittances would be made promptly. It has never been
practice of this bank nor, to my knowledge, practice of larger banks in this district
to accumulate checks more than a day before forwarding for collection.
MORSS,
Governor Federal Reserve Bank of Boston.
N E W YORK, January 22, 1920.

Replying your telegram of 20th: First, this bank has never resorted to any method
of coercion to compel State banks to join the Federal reserve system. Second, this
bank has never attempted by threat or any coercive measure to require State banks
to submit to any rule or regulation made by the Federal Reserve Board or any Federal
reserve bank. Third, it has never been the policy of this bank to hold back any
checks on any banks in the district for any purpose whatsoever. The only occasions—••
perhaps not more than three or four—where this has been done were due to our inability to secure the presentation of the items by agents or express company, as, for,
example, during the strike of express company employees about one year ago. Fourth,
it has been the practice of collecting banks in this district when they collect on nonmember banks by sending items direct to hold back small items until they secure
round amounts and thus avoid paying the maximum charge, but, as above stated,
such practice has never been adopted or used by this bank. Fifth, the primary
purpose of our use of express companies and private agents was, and is, to furnish a
complete par-check collection system in this district for the use of our member banks,
other Federal reserve banks, and through them for their member banks. This was
the only method open to us to collect the checks drawn upon certain State banks and
private bankers who had declined to remit at par for checks drawn upon them after
the matter had been unsuccessfully taken up with these banks by letter, by personal
visits, and by invitations to visit our bank. The appointment by us of agents for thecollection of checks upon nonremitting State institutions was caused by their stamping
their checks, ''Not collectible through an express company," so that we had no other
method of handling their checks. So far as we know and certainly not with our
authority, have any threats, oral or written, been made by our agents. The total
number of banks and bankers in this district upon which we are collecting checks is
1,702, of which but 4 State banks and 2 private bankers are being collected by express
companies or agents.
CASE,
Federal Reserve Bank of New York,
PHILADELPHIA, PA., January 21, 1920.

Answering you telegram of yesterday, this bank has not used coercive methods and
has deliberately refrained from any action savoring of a threat of any description either
in securing membership in the Federal reserve system or in securing par collections
throughout our district. Neither we, nor the larger banks in this district, have any
occasion to hold back small items until they accumulate to some round amount.
For a very brief period, not exceeding two weeks at most, we did use express companies, but we do not now use them nor any private agency in our collection service.
Our policy has always been to invite application for membership from State institutions through excellence of our service and obvious advantages they may derive from
such membership.




PASSMORE,
Governor Federal Reserve Bank of Philadelphia.

32

STATE BANKS IN FEDERAL, RESERVE SYSTEM.
CLEVELAND, OHIO, January 21, 1920.

Answering your wire this bank has not used coercive methods to compel State banks
to join Federal reserve system. All State banks on par list have been obtained by
persuasive methods. No threats other than statement by our representative that we
were obliged to collect their checks in justice to State banks which have voluntarily
agreed to remit at par and that if they will not agree to do so we will collect through
the express company or private agent. Checks on only two banks, both located in
Kentucky, now being collected through express company, none through agents.
Before par list was completed in this district a number of large collecting banks made
a practice of holding small items until total amount was sufficient to avoid minimum
charge and to save postage no longer necessary to hold items for that reason.
FANCHER.

RICHMOND, January 21, 1920.
Answering wire January 20: The Federal reserve bank of Richmond has never taken
any step to coerce or compel a State bank to join the system or to require such bank
to submit to rules or regulations made by Federal Reserve Board or this bank. Referring to matter of par collection of checks drawn on nonmember banks following methods have been followed in Maryland and to some extent in West Virginia. As the
board knows, out of 29,586 banks in the United States, checks on all except 4,000 are
collectible at par. The collection facilities of the Federal reserve system are open to
all banks, whether members or nonmembers; to the member banks directly, to the
nonmember banks through their member correspondents, and such facilities are
being used to an ever increasing extent. In justice, therefore, to the 25,500 and odd
member and nonmember banks whose names are on the par list we feel that it is our
duty to attempt by all fjir and reasonable methods to collect for them the checks on
the remaining 4,000 banks, many, if not all of whom, are collecting on par points
through members of the system. As the law does not allow us to pay the exchange
upon the collection of checks it is incumbent upon us to devise some means of collecting without the payment of exchange to the bank on which the checks are drawn.
Our procedure has been and is now to correspond with the nonpar nonmember banks
explaining the situation. Failing to obtain results special representatives are sent to
present the facts and argue to the justice of our endeavor with the officers of the banks.
In the comparatively few cases in which neither of these methods was successful we
arranged to present checks daily through a local agent selected by us; none, however,
are acting at present. While it is in many places the custom of commercial banks to
accumulate small items to avoid minimum exchange charges we have in no case accumulated items either for that purpose or for the purpose of embarrassing the bank by
the presentation of checks amounting to an unusual sum at one time. On the contrary we have done everything in our power to avoid embarrassing situations and
in the very few cases in which we have appointed agents we have instructed them to
consult the convenience of the bank so far as it is practicable to do so, and under no
circumstances to present checks in such a manner as to give rise in the community
to any apprehension as to the standing of the bank or its ability to meet proper demands
upon it in money.
SEAY.

ATLANTA, GA., January 20, 1920.
The Federal Reserve Bank of Atlanta has never received any instructions from the
Federal Reserve Board nor has it with the consent or knowledge of the Federal Reserve
Board resorted to any method of coercion to compel State banks to join the Federal
reserve system, nor has the Federal Reserve Bank of Atlanta by threat or other coercive means attempted to require such State banks to submit to any rule or regulations made by the Federal Reserve Board or this bank. This bank has never held
back checks on small banks until they amounted to considerable sums, and then sent
messengers to make personal demand for payment in currency. This bank has not
so far collected through duly appointed employees, and only in few instances has it
collected through express companies. In the latter case there were no accumulations
only those checks received in current day's work being sent forward to place of payment. It is the usual practice of large banks clearing out of town checks by sending
direct to hold over for a day or so spall checks until the aggregate reaches 100 or more,
thus avoiding the payment of minimum charge of 10 or 15 cents which would be
incurred onan item of small amount. The primary purpose of using express companies or paid employees to collect checks and drafts payable upon presentation drawn
on banks that do not remit at par is to enable the Federal reserve banks to carry out




STATE BANKS IN FEDERAL, RESERVE SYSTEM.

33

the provisions and intent of the Federal reserve act in so far as they relate to collection
of checks and drafts payable upon presentation that are received on deposit from the
sources named in the act. The act does not limit the checks that may be received on
deposit to those drawn on member banks, and as it is clearly intended that we shall
receive all checks and drafts payable upon presentation, and as section 13 interpreted
by the Attorney General provides that no charges for remission shall be made against
Federal reserve banks it of course follows that unless arrangements can be made with
nonpar remitting banks to remit at par we must find a way of making collection that
will not involve exchange charges. This bank has endeavored in every possible way
to encourage nonmember banks to remit at par, and thus obviate the necessity of our
arr&nging to present items for payment in cash and has from time to time offered to
such nonmember banks the privilege of opening a clearing account for the purpose of
collecting checks drawn on banks named in our par list, the balances so created to be
used in remitting for items sent them by us, and any excess over the balance required
against our average daily sendings to be subject to their order, we to inclose stamped
envelope with each cash letter, and they to have the privilege of sending us in payment currency at our expense when more convenient. The privilege of opening a
nonmember clearing account was offered so as to give them the benefit of our collection
facilities if they desired to avail of them and not with the view of coercing them to
become members of the Federal reserve system, for as a matter of fact many nonmember banks are not eligible from a standpoint of capital and requirement. There
have been no threats, oral or written, by any one connected with this bank. We have
stated to nonmember banks that while the Federal reserve act does not permit us to
pay exchange for the remittance of bank checks and drafts payable upon presentation,
we can incur any cost that is necessary in order to carry out the purposes of the act,
and that we would very much regret to be forced to adopt other methods of collection
that would prove embarrassing, annoying, and expensive.
ADELSON.

CHICAGO, January 21, 1920.

Replying to your wire, our policy in soliciting State bank membership is to point
out its advantages and show where a State bank can be benefited by becoming a
member. We certainly would not want any State bank to join the system unwillingly, or if it was not an advantage to it to do so. The same consideration is shown
prospective State bank members as would be accorded them by a commercial bank
soliciting their business. With regard to the collection at par of checks on nonmember
banks, all such banks which were not on our par list January 1, 1919, have been
visited by our representatives, who fully explained the advantages of the collection
system, with a view to obtaining their friendly cooperation. When all banks in the
States of Illinois, Indiana, and Iowa were placed on our par list there were a few
which did not agree to remit for checks on them at par. Checks on these banks were
forwarded through the express companies for collection, a practice which is legitimate and which has been used in commercial banks for many years. In a few cases,
where we were unable to obtain satisfactory service from the local express acent, and
also at points where there was no express office, we held the checks a few days, and
presented them by our messenger at the bank's counters for payment rather than
have our messenger make daily trips. We are at present collecting through the
express company checks on only one bank in Illinois, eight banks in Indiana^ seven
banks in Iowa, which have not agreed to par their checks, and are collecting checks
on one town in Indiana and two towns in Iowa through agents which we have appointed. Our solicitors in obtaining par points have been instructed at all times to
endeavor to obtain the good will and cooperation of the nonmember banks, and that
coercive measures must not be used. We know of no case3 where our agents or employees used any threats, oral or written.
MCKAY.

ST. LOUIS, January 22, 1920.

Replying to your telegram to-day. This bank has never at any time coerced State
banks into making application to join the system. On the contrary, we have made
every effort to explain to banks making application both the advantages and disadvantages of membership. We have not wished to have any bank a member that did
not thoroughly understand the workings of the system and appreciate the advantages.
In collecting at par checks on nonmember banks there are only a few instances where
we have found it necessary to make such collections by express or agent. The following excerpt from a letter addressed to the secretary of the Illinois Bankers' AssoS. Doc. 184, 66-2
3




34

STATE BANKS IN FEDERAL RESERVE SYSTEM.

ciation, under date of November 20, 1919, is indicative of our views and the policy
pursued by us when it has been necessary to collect by express or agent: "One of
our directors, Mr. Sam A. Ziegler, of Albion, 111., mentioned to me yesterday a conversation he has had with you, from which he understood that it wTas your impression
that it was the policy of this bank to hold up checks for several days, presenting same
at one time, and demanding cash in all cases where it has been necessary for us to use
other than the mails as a means of collecting checks. We are glad of this opportunity
to advise you that such is not the case. We invariably see thai: the checks that we
may through necessity have to present at the counter of a bank for payment in cash
be presented promptly, the same as if they were transmitted through the mails.
There have been some few instances where the action of the bank in returning items
to us has resulted in more than one day's items reaching them at one time. This,
however, has been unavoidable, and due entirely to the action of the bank on which
the items are drawn, and not us." Several of the larger commercial banks in this
district make it a habit to accumulate checks in order to avoid payment of minimum
charges on small amounts. Purpose of collecting by express or agent is to avoid
payment of exchange, and to obtain actual payment at par without assuming liability
which would result if we were to authorize our agent or the express company to accept
draft in lieu of currency. There has never been any occasion for our making any
threats either oral or written in connection with our services in collecting at par checks
on nonrnember banks.
ATTEBERY, Deputy Governor.
MINNEAPOLIS, MINN., January 21, 1920.

Officers and employees of this bank have been cautioned repeatedly not to use any
methods of coercion to compel State banks to join the Federal Reserve System. I
have never heard this complaint from any State bank in this district, with the exception of one I called upon last summer that complained that they had been classed
as unpatriotic because they had not joined the Federal Reserve System. I assured
him that no such expression ever emanated from this bank, and upon further inquiry
he intimated that the remark came from sources other than the Federal reserve bank
or Federal Reserve System. As you know, we have conducted an active campaign
for several years at a meeting to get State banks to remit at par with anything but
satisfactory results. Early in December we wrote all nonpar banks in the States of
Montana, North Dakota, and Michigan and told them we planned putting all banks
in those States on our par list January 1, 1920, and it was optional with them whether
we presented the checks at their counter for payment in cash or whether they preferred to remit without deductions for collection charges or exchange in funds immediately available. Some of the banks elected to remit, others told us we could
present checks at their counter, and others refused to reply to our letter of inquiry,
with the result that we made arrangements with the express companies and a few
postmasters to collect checks for us on approximately 60 banks. This number has
since been reduced to 43. We are now advising nonpar banks in South Dakota in
the same manner, that all banks in that State will be placed on our par list February 1.
As soon as facilities in our own bank warrant all banks in Minnesota and Wisconsin
will be placed on a par basis. The officers and employees in charge of this campaign
have been cautioned not to use any threats, but simply announce what we are going
to do. I have just had them in my office, and they assure me no threats have been
made by them. We have never held up a large amount of checks on any one particular bank, so that they would be embarrassed when cash was demanded. However, it has been our policy not to send one small check for collection on a nonremitting bank because of the expense, but we have waited until we accumulated at least
$100 in such checks. It has never been our intention to hold sufficient checks to be
presented at one time so that the bank could not make payment in cash. Upon
inquiry of the larger banks in Minneapolis I find that in the past they pursued a
similar policy, but are not doing so at present. Our instructions to collecting express
companies or private agencies are to present the checks and demand payment in
cash, and if payment is not made, wire us immediately on items over $500 regarding
the items unpaid. Our par point campaign has been conducted almost entirely by
correspondence. We have never employed any representative to solicit nonpar
banks in this district. Glad to furnish copies of our circular letters and telegrams,
if you feel they are necessary.




YOUNG.

STATE BANKS IN FEDEKAL RESERVE SYSTEM*

35

KANSAS CITY, January 21, 1920.

Replying your telegram 20th: You are advised that—in so far as the Federal Reserve
Bank of Kansas City! including its branches, is concerned—no method of coercion has
been employed to "compel State banks to join the Federal reserve system and no
threats or other coercive means have been used or practiced to require such State
banks to submit to rules or regulations made by the Federal Reserve Board or this
bank. Under section 13, which prohibits Federal reserve banks from legally paying
any fee to a member bank or nonmember bank for the collection and remittance of a
check sent for collection, it has been necessary in certain cases to collect checks by
such means as are available. In some cases there are no express companies and others
where the express agents refuse for business reasons to handle collections. When such
contingency arises and where we can not obtain a satisfactory local agent, it is necessary to send a messenger to present the checks at the counter of the payee. In cases
where the payee bank is located in a distant town, for economic reasons we can not
send messenger daily. About the only county in the tenth district where the banks
have stubbornly resisted and treated with contempt our efforts to carry out the provisions of section 13 of the Federal reserve act as relate to collection of items at
par is Pierce County, Nebr., all of the banks in which county are dominated to a
greater or less degree by one Woods Cones, who has the moral support of C. A. McCloud,
president of the First National Bank of York, Nebr., who is interested in several State
banks also. The First National Bank of York for three years insisted upon charging
this bank exchange on items sent to it and only desisted when advised by the comptroller that the publication of its statement snowing as an asset action against the
Federal reserve bank for exchange charges would be regarded as a misrepresentation
of its condition. Until the development of the Federal reserve collection system it
has been the practice of the city banks to hold small items against payee banks which
charged exchange until such items amounted to at least $100, in order to avoid prohibitory charges on small items of $5 and $10. It is not our practice to accumulate
any specific amount or to hold checks over even for one day when sending them out
for collection by mail or express; but where it is necessary to send a messenger—as in
the case of Pierce, Nebr., 118 miles from our branch at Omaha—the cost of such visits
warrants us in accumulating several days' checks for collection at once, assuming, of
course, that any payee bank that preferred to pay checks on it over the counter in cash
rather than to remit exchange at par for same woul d be always prepared to liquidate such
demands in that way. Feeling sure that the complaints referred to in your telegram
originated from Pierce, Nebr., we feel justified in going into some details regarding
the collections of items of that town. The bankers of Pierce, by intimidation or otherwise, have prevented use of the facilities common to the public; as, for instance, the
express agent not only refused to handle our collections but refused to accept a shipment of currency tendered to him by our messenger. This necessitates a visit to
Pierce by automobile in order to carry to the next town funds that are paid. The
notaries of Pierce were intimidated or influenced to the point where they were not
available to our messenger when asked to protest items payment on which was refused.
This required our messenger to take with him a notary from another town to legally
present and protest items when refused for any reason. About a week ago Cones,
McCloud, and. others called a meeting of the State bankers at Omaha to discuss the
Pierce campaign of the Federal reserve bank. At this meeting Cones, the principal
speaker at the meeting, is reported to have made certain false and misleading statements.
MILLER.

DALLAS, January 21, 1920.

Answering your telegram date. The Federal Reserve Bank of Dallas has never
through any of its officers or by any implied or direct sanction of the Federal Reserve
Board, or its own board of directors, taken any steps toward or adopted any method
of coercion to compel State banks to go into the system or has it by any threats implied
or otherwise attempted to require nonmember State banks to submit to any rules or
regulations made by the Federal Reserve Board or itself. The Federal Reserve Bank
of Dallas in collecting checks on nonmember banks has never done otherwise than to
recognize its right under the Federal reserve act and the regulations of the Federal
Reserve Board to receive from its member banks, other Federal reserve banks and the
Treasurer of the United States, negotiable checks and drafts drawn on any solvent
bank, banker or trust company in its district, and to present and collect the face value
of such checks through the most readily available channel. It has endeavored to
avoid presenting checks either through express companies or its bonded agents for
payment at face value in cash without first giving drawee banks the opportunity and




36

STATE BA^KS IK" FEDERAL RESERVE SYSTEM.

privilege of receiving checks on them by mail directly from the Federal reserve bank
and remitting all face value on receipt for those checks good on their books in convenient exchange or currency or coin at expense of Federal reserve bank. Being
fully cognizant of the fact that as shown by statistics, full 95 per cent of commercial
transactions are settled by the medium of checks and drafts and considering at all
times the business and financial interests of the entire eleventh Federal reserve district
as reflected in the activities of both member and nonmember banks, it does not desire
to withdraw cash from small localities in payment of checks except where necessary
to collect fully face value of solvent checks which it receives. Its management fully
realizes that such method of collection is wholly unnecessary unless made incumbent
upon the Federal reserve bank by the refusal of drawee banks to pay without deduction
checks drawn on them by their depositors when presented through other channels
than at their counter. They also fully realize and appreciate that drawee banks can
pay checks of their depositors presented them by making mail remittances drawn
against the proceeds of checks which they have received on deposit themselve-3. The
necessity for shipping currency to distant centers to pay such checks is minimized
by reason of commercial settlements being made by the remittance of checks, and any
expense of transportation of such small amounts of currency as may be necessary to
cover the difference is absorbed by the Federal reserve bank. The Federal Reserve
Bank of Dallas has never with any intent to embarrass a drawee bank permitted checks
to accumulate in its possession from day to day, but has to some extent followed the
established practice of commercial banks which handle collections in Imlk to allow
small checks to accumulate until they amount to as much as $1,000 in order to reduce
the percentage of cost of collection and handling to permit drawee banks to pay a
number of small checks in one transaction. It may be well to inform you that in
some instances, due to the refusal of drawee banks to pay the full face value of checks
of their depositors to express agents or bonded agents when such checks were presented at the counters of the drawee banks and payment demanded and by reason
of the express agents not following instructions and uniform rules established by the
companies which they represent, occasionally a volume of checks has been thrown
back on our hands which added to those in transit and those received by us on the
date of receipt of such returned checks were subsequently presented by an agent of
this bank as the holder of such checks and payment demanded and received. However, even in such few cases of this description where embarassment to the bank was
apparent our agent voluntarily accepted the bank's exchange in payment.
VAN ZANDT, Governor.
SAN FRANCISCO, January 21, 1920.

Federal Reserve Bank of San Francisco has not resorted to any method of coercion
to compel State banks to join the Federal reserve system nor by any threats or other
coercive means has the Federal Reserve Bank of San Francisco attempted to require
State banks to submit to any rules or regulations made by the Federal Reserve Board.
This bank does not hold back checks on small banks or any banks until they amount
to a considerable sum then send them by any means to make demand for payment in
currency to embarrass or coerce banks. Such action has not been taken by this
bank. It is not the practice of large banks in this district when collecting on nonmember nonpar banks to hold back small items until in round amounts they amount
to $100, except our Portland branch reports some banks in Portland hold items for no
longer than two days. The only instance of what might be construed as coercive or
threatening statements have been statements oral or written made by officers of this
bank from time to time the types of which were that "the Federal reserve banks are
by law not permitted to pay exchange and that if an exchange charge is made it will
necessitate our collecting checks by whatever other means are available to.insure
their payment at par.




DAY.

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