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E X - O F F i C I O MEMBERS W . P . G . H A R D I N G . GOVERNOR A L B E R T S T R A U S S , VICE GOVERNOR ADOLPH C. MILLER CHARLES S. HAMLIN CARTER GLASS SECRETARY OF THE TREASURY CHAIRMAN J O H N SKELTON WILLIAMS COMPTROLLER o r THE CURRENCY FEDERAL RESERVE BOARD WASHINGTON J . A . B R O D E R 1 C K . SECRETARY L . C . A D E L S O N , ASSISTANT SECRETARY W . T . C H A P M A N . ASSISTANT SECRETARY W . M. IMLAY, FISCAL ASENT ADDRESS REPLY TO F E D E R A L R E S E R V E BOARD January 2, 1918. CONFIDENTIAL X-1341 SUBJECT: DRAFTS MADE PAYABLE, OR PAYABLE IF DESIRED, AT A DESIGNATED BANK. Dear S i r : I i n c l b s e f o r your c o n f i d e n t i a l information copy of a l e t t e r from t h e Board's General Counsel which r e l a t e s t o d r a f t s drawn by f i r m s or c o r p o r a t i o n s upon themselves and trade payable, or payable if d e s i r e d , a t a designated bank. The Board i s i n c l i n e d t o agree with t h e view taken by i t s General Counsel, but before formally adopting t h e opinion would be glad t o have an expression of t h e views of your bank on the s u b j e c t t o g e t h e r with a statement a s t o what i t s p r a c t i c e i s regarding such items. In t h i s connection I d e s i r e t o c a l l a t t e n t i o n t o an opinion rendered by the Attorney General of t h e United S t a t e s s e v e r a l months ago, which takes the p o s i t i o n t h a t the Federal Reserve Banks a r e not a u t h o r i z e d t o receive items which involve the payment of exchange charges. Very t r u l y yours, Governor. X-I341a FEDERAL COPY. RESERVE WASHINGTON BOARD Decerr.ber 31, 1918. Ebar Governor: Under Section 13 of the Federal Reserve Act, Federal Reserve Banks a r e authorized to receive froir. other Federal Reserve &nks, s o l e l y f o r the purposes of exchange or c o l l e c t i o n , checks drawn upon other Federal Reserve Banks, and checks and d r a f t s payable upon p r e s e n t a t i o n . I t appears from the correspondence submitted t h a t i t i s customary f o r some of the l a r g e r f i r e s or corporations t o issue d r a f t s drawn upon themselves payable a t a designated bank. One of the Federal Reserve Banks has objected t o receiving these itetr.s f o r c o l l e c t i o n on the ground t h a t they are not checks and because t h i s f o n t of instrument i s used by the drawer t o enable hirr. to issue these d r a f t s without f i r s t depositing the money with the bank a t which i t i s payable, t o p r o t e c t there. From a l e g a l standpoint, if the instruments in question a r e in n e g o t i a b l e form, t h a t i s t o say, if they contain an unconditional order on the drawee t o pay a f i x e d sun t o a designated person, t h e r e i s no o b j e c t i o n t o a Federal Reserve Bank receiving them f o r c o l l e c t i o n . Under Section 87 of the Negotiable Instruments Law "Where the instrument is trade payable a t a bank i t i s equivalent t o an order t o the bank t o pay the sane f o r the account of the p r i n c i p a l debtor thereon." 3his Section i s omitted in I l l i n o i s , Nebraska and South Dakota. In Minnesota, the word "not" i s i n t e r p o l a t e d so t h a t in t h a t State a d r a f t would not be equivalent t o an order on a bank t o pay the same. In the other S t a t e s which have adopted t h e Negotiable Instruments Law such a d r a f t could be t r e a t e d to a l l i n t e n t s and purposes as a d r a f t on the bank a t which i t i s payable. The Negotiable Instruments Law has now been adopted by a l l of the S t a t e s except Georgia and Texas. In some instances which have been brought t o the a t t e n t i o n of t h i s O f f i c e , t h e instrument presented does not contain an unconditional order t o pay a f i x e d sum and i s t h e r e f o r e t e c h n i c a l l y n o n - n e g o t i a b l e . In such cases a Federal Reserve Bank i s e n t i r e l y j u s t i f i e d in d e c l i n i n g t o receive such items f o r c o l l e c t i o n . X-1341a — 2 — The Board*s a t t e n t i o n has "been c a l l e d t o the f a c t t h a t some question has been r a i s e d as t o the r e c e i p t on d e p o s i t of checks or d r a f t s drawn by Federal Treasurers of the Railroad Administration a g a i n s t various r a i l r o a d companies. While the forms used oy the Railroad Administration a r e not e n t i r e l y uniform,an examination of p r a c t i c a l l y a l l of these forms furnished t h i s O f f i c e by the Director of Finance and Purchases of the United S t a t e s Railroad Administration, i n d i c a t e s t h a t t hese d r a f t s a r e in n e g o t i a b l e form and t h e r e would seem to be no reason why they should r o t be handled as any other bank checks* The f a c t t h a t in some instances t h e check or d r a f t i s accompanied Ly an explanatory voucher showing the d e t a i l s to enable the a u d i t o r to make proper d i s t r i b u t i o n , should not a f f e c t the n e g o t i a b i l i t y of the instrument. Respectfully., (Signed) M. C. ELLIOTT. General Counsel. For Governor Harding*
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