The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Ex-Officio W . P. G. HARDING, G O V E R N O R PAU L M. WARBURG, V i c e G o v e r n o r FREDERIC A. DELANO ADOLPH C. M ILLER CHARLES S. HAMLIN members W ILLIAM G. McADOO Secr etar y o f th e T r ea sur y C H A IR M A N JOHN SKELTON W ILLIAM S Co m p tr o ller o f th e C u r r en c y FEDERAL RESERVE BOARD WASHINGTON W ILLIS , S E C R E T A R Y SHERMAN P. ALLE N , A S S T . S E C R E T A R Y a n j* F is c a l A g e n t ADDRESS REPLY TO FE D E R A L RESERVE B O A R D August 11, 1917. Dear Sir:The Board deems..it advisable that there should be a thorough understanding (da the part of the Federal reserve banks and of the member banks of its attitude' in relation to the collection of "maturing notes and bills,11 and wishes to invite your attention to the distinction between the par Clearing and collection of checks and drafts drawn on member banks and the collection of notes and drafts made by or drawn upon individuals, firms, or cor porations other thah banks. Section 13 of the Federal Reserve Act* as amended by the Act approved June Bl, 1917, provides in part that: "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 nocase to exceed 10 cents per $100 or fraction there of, based on the total of checks and drafts pre sented at any one time, for collection or payment of checks and drafts and remission therefor by ex change or otherwiseJ but no such charges shall be tradd against the Federal reserve banks." The question has been raised whether this provision of the law would prohibit a member bank from charging a Federal reserve bank.for collecting and remitting for a note or bill of exchange forwarded to it by a Federal reserve bank for that purpose. In other words, does this provision of the law apply to promissory notes and bills of exchange as well as to checks and drafts on member banks? The Federal Reserve Act in several sections clear ly distinguishes between "checks and drafts" on the one hand and "notes and bills" on the other. For instance, the first paragraph Of Section 13 authorizes Federal reserve banks to receive from mem ber banks deposits of "checks and drafts," without limiting the purpose for which the deposit oust be made. The same paragraph • authorizes a Federal reserve bank to receive "maturing notes and bills," but "for collection" only. So also, Section .16 of the Act requires a Federal reserve bank to receive deposits of "checks and drafts drawn upon any of its depositors," (i. e,, upon member banks and upon banks carrying balances with Federal reserve banks), but nowhere is there any requirement that "maturing notes and bills" X.-3J5. -2- _ must be received, at par, and it is obvious that such items were eliminated for the reason that no bank can properly be fbreed to credit at par an unmatured or uncollected note or bill. Not being in the nature of a cash item, such an instrument is necessarily subject to a discount. In other words, Congress in this section distinguishes between the ordinary check and bank draft, and the note and bill of exchange. With these lights before us, a proper construction of the socalled "Hardwick amendment" to Section 13 which in terms, provides that "nothing in the Act shall be construed as prohibiting a member or nonmember bank from unking charges * * * 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" « must necessarily draw a distinction between checks and drafts Con banks) and promissory notes and bills of exchange. Both the wording of this amendment and the purposes for which it was enacted necessarily lead to the conclusion that it was not intended to pro hibit a member bank from charging a Federal reserve bank for services rendered in collecting bills and notes which the Federal reserve bank sends to it for that purpose. The phrase, "but no such charges shall be made a-gainst the Federal reserve banks" is construed by the Board as being intended solely for the purpose of preserving the check clearing and collection system inaugurated by the various Federal reserve banks; and there was no intention, either express or implied, to prohibit member banks or nonmember banks from making reasonable charges against Federal reserve banks for services render ed in collecting maturing notes and bills. The Board holds therefore, that charges for transactions of this kind may be made now with the same propriety as before the passage of the Act of June 21, 1917. Such charges would seem to be permissible upon the hypothesis that notes and bills thus sent to a member bank by the Federal reserve bank for collection, are not drawn on the member bank, but upon some third p_.rty; and it would be unreasonable and unfair to permit a Federal reserve bank to select any particular member or nonmember bank to c .c t as its interne diary or agent for the purpose of collecting ..nd remitting free of charge all of the notes ..ad bills held by it for collection and payable in any p-.rticular city or Xoc_lity. Such service must be performed by the member or nonmember bank only as a matter of 2-325. —3— contract, and not because of any legal or moral obligation upon such bank to make collections gratis for the Federal reserve bank or for the banks for whom it acts as agent* In the Case of "checks and drafts drawn upon any of its de positors" (i. 04, banks) however, the law provides that no charge for the service of collection, and payment and remission by exchange or otherwise, should be assessed against Federal reserve banks. The Bbard holds that the reason for this is that the Federal reserve banks are affording all member banks certain reciprocal advantages in the collection and clearance ol checks, and because the Feddral reserve banks are obligated to receive cheers at par they may properly expect remission therefor on the same basisi In other words, the prohibition in the Hardwick amendment relating to the Charges on the collection of ehecks and drafts on banks for Federal reserve banks,* is merely an equalizing element in perfecting the check collection system; which must afford reciprocal privileges and advantages with the least possible expense to all concerned. The paragraph of Section 15 which immediately follows the one which requires Federal reserve banks to receive on deposit checks at par, authorizes the Federal Reserve Board at its discretion, to exercise the functions of a clearing house for Federal reserve banks, or to designate a Federal reserve bank to exercise such functions, and to require each Federal reserve bank to exercise the functions of a clearing house for its member banks. In clearing house cities checks on member banks properly go to the clearing house, but promissory notes and drafts or bills of exchange payable by third parties, are not sent to the clearing house but are col lected independently by tlpe holding bank. For these reasons the Federal Reserve Board is of the opinion that not onjy is it clear that the Hardwick amendment does not ap ply to the right of a member bank to charge the Federal reserve bank for the service of collecting notes and bills of exchange, but also that there is no sound reason or policy which would re quire that the Federal reserve banks should be immune from such a charge. While the Board must insist upon a strict compliance by the member banks with the law requiring par collection of checks for Federal reserve banks, it has no desire to deprive any bank of any compensation allowed by the law and to which the bank may be reasonably entitled. Because of competition, banks are perform ing many services free of charge which involve them in expense and -u - for which they are justly entitled to remuneration. In the opinion of the Board, it should he the aim of the Federal reserve hanks in developing plans for the collection of ”maturing notes and hills,” to offer efficient service, hut they should he compensated and protected against any abuse or expense in performing this service, and this principle applies, of course, to member hanks. It seems that some apprehension exists on the part of many member hanks that the clearing of checks at par is hut a prelude to a requirement that they make no charge for checks and drafts re ceived by them for deposit and credit, or for collection and remittance from others than a Federal reserve hank* It appears, however, that the provisions of the so-ceiled Hardwick amendment clearly preserve the right of any member hank to make a reasonable charge against depositors or hanks other than Federal reserve hanks, not to exceed one— tenth of one per centum^ for such services, the amount of such charge to he determined and regulated by the Federal Reserve Board* The Board would request that this letter he brought to the attention of your directors at tie next meeting, and you are at liberty to communicate the views c.f the Board to any of your member hanks which may he' interested. Very truly yours, Governor<
@FedFRASER