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FEDERAL RESERVE BOARD
WASHINGTON
X-3466
July
6, 1922.
Dear Sir:
There is enclosed herewith, for your information •
copy of the decision rendered June 26, 1922, by Judge
Wolverton'of the United States District Court for the
District of Oregon, in the case of the Brookings State
Batik (Brookings, Oregon) vs. the Federal Reserve Eank
of San Francisco.
Very truly yours,
Go v e r n o r.
(Enclosure)
GOVERNORS OF ALL F. R. E.ANKS (except San Francisco)
Copies to Agents.
X-3466a
DECISION OF DISTRICT JUDGE WOL~RTON,
UNITED STATES DISTRICT COURT FOR THE DIS1_HICT OF OREGON,
IN THE MATTER OF ~·ROQ!{INGS STATE JL'l1T.K, AN OREGON BANKING CORPORATION 1
VS. FEDERAL P..ESEB.VE B~UiJK 0]' SAN FRt\.NCISCO.
D~C IS I.DN FTnl~1i;]I3ll. JUNE ?~_19:2.2:~
The Brookings State Bank, the plaintiff herein, is an Oregon corporation, with a capital stock of $15,000, and is engaged in the
banki~g
business
a.t 'B~ookings, a. small town in the extreme southwestern part of the state, in
Curry County.
The to·wn is without a:;cpress facili tias.
The bank has
correspondents at San Francisco, California, and Portland, Oregon.
In
making remittances, it has heretofore exacted an exchange charge of onetenth of one per cent.
The defendant, Federal Reserve Bank of San Francisco,
exercising its functions as a collecting and clearing house agency, and desiring to make collGction from the Brookings Bank, requested payment at par,
as it is prohibited by the Federal Reserve Act from paying exchange.
was refused by the Brookings Bank.
This
With the view, therefore, of making
such collGctions without the necessity of paying exchange, the Reserve Bank
maintai~ed
an agent at Brookings for making collection over the counter, of
such paper as might be transmitted to him through cash lettGrs from the
Reserva Bank and its branch bank at Port).and.
The agent was so maintainad
for the space of about a yaar, and he collected over the counter during the
time something above $108,000, at an expense 'to the Reserve Bank of $3,542,
which includes the expense of transmitting the currency to point of destbc·tion.
The method caused the Brookings Bank much annoyance, and required it
to maintain a materially larger raserve than ordinarily would have been
necessary in the usual conduct of its business.
The agent was finally withdrawn, and the Brookings Bank was notified
that thereafter checks
wo~d
be forwarded for collection by mail direct
to~e
~-:'!~
q
'-
><.
- 2 ba:r-2~,
'vith request that they be paid at par and the proceeds terDitt3d. by
e:whange on Portland or San Francisco.
11
Checks were so forwarded, indorsed
Pay to Brookings Stata Bank for collection only and.r·.errd ttance in full without
mant, on the ground that the bank was not called upon to act as agent
the Reserve
Bank to make such collections under the terms imposed.
fo~
The
Reserve Bank, upon the return of the chacks, return,;d them to its correspondents, advising them, in effect, that the Brookings Bank refused to pay
and had not protested the paper 1 and that they must look to tlb.e Brookings
A preliminary injUO;ction issued after hear l:..lg,
'
restraining the R;serva Bank from sending letters to its clients advising
Bank for their protection.
them that they must look to the Brookinss Bank for their protection through
failure to protest such pap0r as demand for payment was made upon it on
condition that it rami t at par.
Wolverton, District Judge:
The Federal Reserve Bank is empo·.vered by the Federal Reserve Act, by
authority of which i t is permitted to incorporate and transact business 1 to
exercise all powers specifically granted by the provisions of the act, and
such
incideatcJ. powers as shdll be necesDc.ry l~::> carry on the business of
banking within the limitations prescribed by th·3 act (Subd. 7, Sec. 4) •
Section
13,
as amended by the act of June 21, 1917,
(40
Stat.
235),
:.w
it is
provided that any Reserve Bank may receive from any of its member baru:s
deposits of current funds in lanful money, or chacks and drafts payable upon
presentation, and also, for collection, maturing notes and bills; or, solely
for the purpose of exchange or of collection, may receive deposits of checks
and drafts, payable upon presentation within its district, and maturing notes
and bills payabl~ tharein; or, solely for the purposes of exchange or of
t
X-3466a
· F1.. -:' ii
"· ·-' ..
- 3 -
·~
collection may receive from any non-member bank or trust company, deposits
of current funds in lawful money, National ba;.1k notes, Federal Reserve notes,
checks, drafts payable upon presentdtion, or maturing notes and bills; prov ided, however, that such non-member bank or ttus t company maintains ·r.ri th
the Federal Reserve Bank of its district a balance-sufficient to offset the
items in transit 4eld for its account by the Federal Reserve Bank; and,
"Provided, further, that nothing in this or any other section oftbis act
shall be construed as prohibiting a member or non-member bank from making
reasonable charges, to be determined and regulated by the Federal Reserve
:Soard, but in no case to exceed 10 cants per $100 or fraction thereof, ·oased
on the total of checks and drafts presented at any one time, for collection
or payment of checks and drafts
a,;ll.l
remission therefor by exchange or other-
wise; but no such charges shall be made against the Federal Reserve Banks."
By Section 16, the Federal Reserve Board is empowered at its discretion to exercise the functions of a clearing house for Federal Reserve
Banks, or it
may
designate a Federal Reserve Bank to exercise such functions,
and may also require such bank to exercise the
for its member banks.
fu.~ctions
of a clearing house
By a previous clause of this secUon, it is provided
that 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, and when remitted by a Federal
Reserve Bank, checks and drafts
drawn by any depositor in any other Federal Reserve Bank or member bank upon
funds to the credit of said depositor in ·said Reserve Bank or member bar.U: •
•
The language of the statute is that the R3serve Banks may rec~ive
from non-member banks checks and drafts payable upon presentation, and this·
solely for the purpose of exchange or of collection; but this is on condition
that the non...member bank shall, of its own volition, maintain with the :aeserve
t
'~ ~;
:'l.
: , .~: JL
X-3466a
- 4Bank the appropriate balance as prescribed.
In this way, non-member banks
can avail themselves of the clearing house privileges afforded by the Reserve
:Sank.
Othe~vise,
it would seem that non-member banks are not affected by
the act. (31 Opinions of Attorneys General, 245>"·
But the preceding clause
gives broader scope to the powers of the Reserve Bank.
deposit, for the purpose of exchange or of collection,
payable upon presentation within its district".
It may receive on
11
checks and drafts,
This would seem to comprise
all checks and drafts upon whatsoever bank dra·,.,n, within its district,
without discrimination as to Whether member or non-member.
Th~
use of the
word "may" is indicative of a legislative intendment to concade an optional
function only.
be construed
There .is no particular reason assignable why the word should
StS
"shall 11 or
ma:1da.~Ol'Y
in its.
si~ific"'"tion.
The clause of Section 16, requiring Rese.ve Banks to receive at par
on deposit from member balli{S or from Federal Reserve Banks, checks and drafts
drawn Upon their depOSitOrS 1 Carri:3S With it no SpecifiC power for making
94Change or collections.
Section 13.
The function, so to be exercised, is treated of in
The Reserve :Sank having such paper on deposit, however, may be
treated as the holder or owner of such paper.
The Federal Reserve Boar·d, :1pp.:.rantly recognizing
banks, unless they voluntarily maintained with the
balance, ward not otherwise affected by the
~at,
Resarv~
issued a
th:~.t
nonmember
Bank the
regul~tion
~PPfOpriate
under
title "Check Clearing and Collection", n.s follows:
11 Each l'eder:1l Reserve :B:1:nk 'Nill receiva at pur from its member
banks :md from nonmember banks in its district which h.J.ve becon:e
clearing members, ch3cks dr~wn on all member and clearing member
banks and on all other nonmember bunks Which-agree to remit at
par through the Federal Reserve :S'-lllk of their district. 11
"•
This is in pursuance of a policy inaugurated by the :Soard to induce
X-3466a
(:·
.
~.
n
... ·.··..,_,;
- 5nonmember banks, which are without the pale of the act, to remit at par, and
thus to unify bank clearances and collections throughoat the country.
The questions presented here are: First, Whether the Reserve Bank
has the authority to make collections from nonmember banks; and, Second,
wha ther it
coerce such bDnks to a e:ree to remit at par.
c~m
As to the fir3t, it is already apparent that the
at its option, receive
power, it
may
pape~
Reserve Ba~ may,
against such bapJrs for collection.
Having that
collect it, if it can find a way of doing so without the pay-
ment of exchange which it is prohibited from paying by the act.
It is a banking custom, as •vell as a legal right which· a holder of
a check has at all times, to present paper at the counter of the payee bam[
and demand payment, and, if denied, the paper is subject to dishonor. Paper
so presented and paid over the counter is not subject to exchange.
It is
also a custom among banks, in making collections from other banks where there
is not more than one bank in a place, to send checks to the drawee bank with
request for remittance, and the request is honored unless there is some
special reason why the bank should not pay.
These bcmking rules and regulations
are conceded.
As to the second question, the nonmember banks, being ·Nithout the
pale of the Fed-3ral R'::serve
l~ct,
h::.ve the right, if they sse fit, to· charge
reasonable e.;;:change on remitt~'"lces.
This
is.
a right 'the bank may relinquish
at its option, but it ought not to be coerced into doing so, or agreeing to
do so, and any strategy which has for its purpose the coercion of suCh nonmember bank to yield its legal right in this raspect is unlawful, and will
not be approved by the courts.
The Supreme Court, speakin:::; through Mr.
Justice Holmes, has putthe stamp of its disapproval upon the act of a party
X-3466a
- 6massing a number of checks again$t a bank and presenting them in bulk at
the counter for payment, although the l1older of paper has the legal right
to demand payment, on the ground that it evidences an ulterior purpose
of compelling the bank to yield against its will to a
par.
demar~
for,payment at
(.American .Bank and Trust Company, et al, vs. Fede.ral Reserve Bank,
41 Sup. Ct. Rep. 399).
I;.
the opinion, the distinguished jurist has
this to say:.:.
"If this were a C3.se of CC'rr.pet:5. tio-..1 in private business, it
would be hard to admit the justification of self-interest .considering the naN current opinion as to public policy expressed
in statutes and decisionsi but this is not a private busir'ss.
The policy of the Federal Reserve Banks is governed by the policy
of the United States with regard to them and to these relatively
feeble competitors. Wd do not need aid from the debates upon
the statute under which the Reserve Bunks exist to asffiXme that
the United States did not intend by that statute to sanction
this sort of warfare upon legitimata creations of the states. 11
The testimony here impels me to the conclusion that the Federal
Reserve :Bank has gone to the len<i;th of endeavoring to coerce the Brookin:;s
:;;,3.nk to acced.a to its derra11d that the lc.tt:;r bank agree to r3mit at par.
Its purpose is obvious, from the fact th&t it maintained an agent at
Brookings for practically a year, at an expense to it of $3,542, for collecting over the counter checks and drafts dravvn upon the Brookings Bank, knowing at the time that the procedure _was embarras.sing to the bank, and required it to maintain a much larger reserve in its coffers to take care of
its current
earnings.
busines~,
thus depriving the -bank of·
a:
portion of its or9-inary
Such a purpose is furth~r manifest from correspondence found in
the record.
One letter to which I refer is defendant's exhibit "q", from
the manager of the Portland Branch to an officer of the Reserve Bank at
San Francisco.
It relates to an incident of the acceptance by the agent
at Brookings of the bank's draft at par in payment of checks presented
X-3466a
- 7 -
are, of course, extracting th_j sting from our direct collections."
Another
is plaintiff's exhibit 20, a letter from the mana&Sr at Portland to the
Scio State Bank, advising that "Shortly, after all the banks in the country
have had time to consider becoming par volur.tarily, it will be necessary
to use more forcible methods with the f.aw ba:n.k:s that refuse to pay their
checks at par."
Corroboration is found in other correspondence and. evi-
dence adduced at the trial, but the record is too voluminous to attempt
to particularize.
But with all this, it appears that the Brookings State Bank
·,vas advised by letter of September 20, 1921, that the agent at Brookings
would be 'Nithdrawn on September 30, and the agent was so withdrawn, and
has not since been maintained there, and as this suit was instituted on
September 29, 1921, t}1ere would seem to be no necessity for enjoining the
defendant from maintaining an agent at Brookings for r.-.aking collections over
the counter of the bank, whether absolutdy or in modified te:rms; nor ,,vould
it have been necessary to go into these matters to the extent we have, but
for the earnest insistence that it was the defendant 1 s absolute duty, imposed upon i t by the act, and as to which it had no volition, to make such
collections.
The Federal Reserv3 Bank, however, has recognized the optional
character of its function in this regard by notifying its correspondents that
it will accept no more paper on the Brookings State Bank for collection.
As it relates to the method adopted by the defendant for making
collections, through the mail by sending checks and drafts drawn upon the
Brookings Bank direct to the bank, indorsed "Pay to Brookings State Bank,
for collection only and remittance in full without deduction for exchange
or collection chargas, 11 it is plain tha.t the b.1nk was not called upon so to
X-3466a
- 8 remit, and its return of the checks without payment as aemanded 1vas not
tantamount to dishonor.
I repeat 'Vhat was s:.:.dd in decidint, the matter
at the preliminary hearing:
"While, under the prevlilil ing cu.stom, the defendant ban?.: could rightfully remit its checks 8Ild drafts dra1m .:::.gainst the plaintiff b::.nk direct to the l::1tter for collection and could th2raby exc1ct p~yment of
them, it could not impose conditions upon which such payment should be
made; much less could it m~~e the plaintiff b~ru: its agent for causing
protast to be made for non-paym~nt. The idea of requiring that a mlker
or drawee shall h:1ve protested his own paper is so inconsistent with the
functions of an ugent that it cc.n harc.ly recaive the s-,netion of law.
No man can have two ma.sters, especL:..lly ::imself and another. 11
The defendant ·.vas, therefore, not .:tuthorized to ndvise its clients
that they must look to the plaintiff
b~·.n~::
fo1· protect ion through failure to
protest.
The preliminary injunction heretofore decreed will be made perrrument,
but no injunction will issue respecting title maintenance of
-~gent
at Brookings,
as such agent h,.J,d been wi thdr;;,wn pmcticully at the time of the :institution
of the suit, n.nd there
to replace him.
~ppears
to be no intention upon the part of defendant
@FedFRASER