Full text of Mimeograph Letters and Statements of the Board : Letter From Secretary Eddy re Topic for Governors' Conference, Number X-4976, Volume 27, Page 230

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FEDERAL RESERVE BOARD
WASHINGTON

X-H97S

ADDRESS OFFICIAL CORRESPONDENCE T O
T H E FEDERAL RESERVE BOARD

Oc tube.: 13. 192J.

SUBJECT:

Topic f o r Governors' Conference,

Dear S i r :
The r i g h t of a F e d e r a l r e s e r v e bank to charge to
t h e r e s e r v e account of an i n s o l v e n t member bank checks r e c e i v e d by t h e F e d e r a l r e s e r v e bank f o r c o l l e c t i o n and t r a n s m i t t e d to t h e member bank f o r payment p r i o r to i n s o l v e n c y ,
has been q u e s t i o n e d by t h e r e c e i v e r of an i n s o l v e n t n a t i o n a l
bank as t h e r e s u l t of such a charge made by t h e F e d e r a l Res e r v e Bank of Richmond. The m a t t e r has been t h e s u b j e c t of
correspondence between t h e F e d e r a l Reserve Bank of Richmond
and Counsel f o r t h e F e d e r a l Reserve Board, who has a l s o t ak en
i t ut> w i t h Honorable Newton D. Baker.
The Board has voted to r e f e r t h e s u b j e c t to t h e
forthcoming Conference of Governors and a c c o r d i n g l y t h e r e i s
enclosed h e r e w i t h copy of a memorandum r e l a t i v e t h e r e t o , add r e s s e d to t h e Board by i t s General Counsel, t o g e t h e r w i t h
c o p i e s of v a r i o u s communications on t h e s u b j e c t .
By d i r e c t i o n of the F e d e r a l Reserve Board.

Walter L, Eddy,
Secretary.

TO GOVERNORS OF ALL F. R. BANKS




COPY
X-42 7 6 - a
Date - O c t o b e r 8, 1937.
To - The F e d e r a l Reserve Board
From - k r . vi/yatt - General Counsel

S u b j e c t : E i g h t of F e d e r a l Heserve
Lank t o charge t o t h e a c c o u n t of an
i n s o l v e n t member bank checks r e c e i v ed by t h e F e d e r a l R e s e r v e Bank f o r
c o l l e c t i o n and t r a n s m i t t e d t o such
member bank f o r -payment p r i o r t o i n solvency.

I r e s p e c t f u l l y submit h e r e w i t h f o r the B o a r d ' s i n f o r m a t i o n
a copy of c e r t a i n c o r r e s p o n d e n c e between t h i s o f f i c e and Mr. M.S.
W a l l a c e , Counsel t o the F e d e r a l Reserve Bank of Richmond, on t h e above
s u b j e c t . I am c a l l i n g t h i s t o t h e B o a r d ' s a t t e n t i o n b e c a u s e of t h e
f a c t t h a t i t i n v o l v e s , a c o n t r o v e r s y which i s about to he made t h e b a s i s
of a t e s t s u i t i n v o l v i n g l e g a l q u e s t i o n s of i n t e r e s t t o . t h e e n t i r e
F e d e r a l R e s e r v e System, and i t h a s o c c u r r e d to me t h a t i t mcy be a d v i s a b l e to make t h i s a t o p i c f o r d i s c u s s i o n a t t h e G o v e r n o r s ' C o n f e r e n c e .
The f a c t s may be summarized b r i e f l y , a s f o l l o w s : The Fede r a l R e s e r v e Bank of Richmond r e c e i v e d c e r t a i n checks f o r c o l l e c t i o n
p u r s u a n t to t h e terms of R e g u l a t i o n J and f o r w a r d e d them t o t h e drawee
bank f o r payment. A f t e r such checks had been r e c e i v e d by t h e drawee
bank and c h a r g e d t o t h e drawers 1 a c c o u n t s , b u t b e f o r e t h e time f o r p a y ment s t i p u l a t e d i n t h e time s c h e d u l e h a d e l a p s e d , t h e drawee bank f a i l e d
and a r e c e i v e r was a p p o i n t e d . Subsequent to t h e i n s o l v e n c y of t h e drawee
bank t h e F e d e r a l R e s e r v e Bank of Richmond c h a r g e d t h e auouiit of such
checks t o t h e r e s e r v e a c c o u n t of t h e drawee bank and c r e d i t e d same t o
t h e banks from which t h e y h a d been r e c e i v e d . S u b s e q u e n t l y , t h e r e c e i v e r q u e s t i o n e d t h e r i g h t of t h a F e d e r a l Reserve Bank to c h a r g e such
checks to t h e i n s o l v e n t h a n k ' s r e s e r v e a c c o u n t and demanded t h a t t h e
F e d e r a l R e s e r v e Bank a c c o u n t t o Jhim f o r t h e r e s e r v e b a l a n c e of t h e i n s o l v e n t bank w i t h o u t d e d u c t i n g t h e amount of such c h e c k s . The F e d e r a l
Reserve Bank t h e r e u p o n n o t i f i e d t h e banks f r o m which t h e checks were
r e c e i v e d of t h e p o s i t i o n t a k e n "by t h e r e c e i v e r and a d v i s e d such br.nks
t h a t i f t h e F e d e r a l R e s e r v e Bank was r e q u i r e d to r e f u n d t h e amount of
such checks to t h e r e c e i v e r , i t would c h a r g e same to t h e a c c o u n t of
t h e banks from which t h e checks h a d been r e c e i v e d . Some of t h e banks
from which t h e s e checks h a d been r e c e i v e d t h e n n o t i f i e d t h e F e d e r a l
Reserve Bank t h a t t h e y would n o t p e r m i t the F e d e r a l R e s e r v e Bank t o
charge such checks "back t c t h e i r a c c o u n t s , b u t would h o l d t h e F e d e r a l
R e s e r v e Bank r e s p o n s i b l e f o r the amounts t h e r e o f on t h e ground t h s t
t h e c h e c k s h a d been c o l l e c t e d .
The r e c e i v e r t o k o s t h e p o s i t i o n t h a t , inasmuch as t h e Fede r a l R e s e r v e Bank was a c t i n g m e r e l y a s a g e n t i n c o l l e c t i n g such c h e c k s ,
i t had no r i g h t to o f f s e t t h e amount t h e r e o f a g a i n s t t h e r e s e r v e
a c c o u n t of the drawee bank. P u r e l y a s a q u e s t i o n of o f f s e t , t h i s p o s i t i o n i s sound, b e c a u s e t h e a c c o u n t s wore n o t mutual and no o f f s e t i s
t o m i s s i b l e u n d e r such c i r c u m s t a n c e s .



X-4976-a

The F e d e r a l Eeserve Ban?:, however, r e l i e s upon the p r o v i s i o n s
of i t s check c o l l e c t i o n c i r c u l a r wherein i t r e s e r v e s the r i g h t " t o
charge a cash l e t t e r to t h e r e s e r v e account of the member benk a t any
time when i n any p a r t i c u l a r c a s e i t deems i t n e c e s s a r y to do s c . "
This p r o v i s i o n v<as i n s e r t e d i n the check c o l l e c t i o n c i r c u l a r of t h e
F e d e r a l Reserve Bank of Richmond p u r s u a n t to t h e a u t h o r i t y c o n t a i n e d
i n S e c t i o n V(4) of R e g u l a t i o n J , which p r o v i d e s t h a t :
"Any F e d e r a l r e s e r v e "bank may r e s e r v e t h e r i g h t
i n i t s check c o l l e c t i o n c i r c u l a r to charge such items
t o t h e r e s e r v e account or c l e a r i n g account of any such
bank a t any time when i n any p a r t i c u l a r c a s e the Fede r a l r e s e r v e bank deems i t n e c e s s a r y to do s o . "
The l e g a l i t y of the above quoted p r o v i s i o n of t h e B o a r d ' s
r e g u l a t i o n s and of t h e F e d e r a l Reserve Bank's check c o l l e c t i o n c i r c u l a r h a s n e v e r been t e s t e d i n t h e c o u r t s and i s somewhat d o u b t f u l .
I s e r i o u s l y doubt t h a t t h e F e d e r a l Reserve Board o r t h e F e d e r a l Reserve
Tank has t h e r i g h t to compel a member bank to pay a chock which t h e
F e d e r a l Reserve Bank does not own but is h a n d l i n g merely a s a g e n t by
p e r m i t t i n g sam3 t o be charged to t h e drav/ee b a n k ' s a c c o u n t , u n l e s s the
drawee bank c o n s e n t s to such c h a r g e . This p r o v i s i o n was i n s e r t e d i n
R e g u l a t i o n J on tho t h e o r y t h a t , by f o r w a r d i n g checks to F e d e r a l Reserve
Banks f o r col]pc£3,£n undor t h e terms of R e g u l a t i o n J , and oy r e m i t t i n g
to t h e Federal/ iBan&s'for chocks under the terms of R e g u l a t i o n J , the
member banks would be h e l d to have a c q u i e s c e d i n t h e terms cf t h a t
r e g u l a t i o n and to have a u t h o r i z e d t h e F e d e r a l Reserve Banks to charge
such checks to t h e i r r e s e r v e a c c o u n t s . Such a u t h o r i z a t i o n s would be
c o n t i n u o u s ; but i t ma" be argued w i t h much f o r c o t h a t t n e a,utiior_ty
t h u s given would bo revoked a u t o m a t i c a l l y upon t h e i n s o l v e n c y of t h e
drawee bank and t h a t , t h e r e f o r e , the F e d e r a l Reserve Bank h a s no right,
to charge checks t o the dra.wee b a n k ' s account a f t e r t h e drawee oank
becomes i n s o l v e n t .
I f t h e c o u r t should merely r u l e t h a t the F e d e r a l Reserve
Bank h a s no r i g h t to charge a check to the r e s e r v e account of an
i n s o l v e n t member bank, I do n o t believe- t h e d e c i s i o n would do much
harm; but t h e r e i s a danger t h a t t h e court might go much f u r t h e r by
way of dictum and say t h a t the F e d e r a l Reserve Bank h a s no r i g h t
under any c i r c u m s t a n c e s to cherge a check to the r e s e r v e ac coUj.it of
tho drawee bank u n l e s s t h e drawee bank a u t h o r i z e s the c h a r g e . <»hile
such a dictum would not be a b s o l u t e l y b i n d i n g upon the F e d e r a l ^ R e s e r v e
Bank, i t would r a i s e such s e r i o u s doubts a s to the l e g a l i t y of the
above quoted p r o v i s i o n of t h e B o a r d ' s R e g u l a t i o n s and of tne check
c o l l e c t i o n c i r c u l a r s a s to g r e a t l y i m p a i r , i f not u t t e r l y d e s t r o y ,
t h e i r u s e f u l n e s s , and I t h i n k t h i s would be q u i t e u n f o r t u n a t e .




-3X-4976-a

I n view cf a l l those c i r c m s t a r c ^ s , I "believe i fc
T<ould "be a d v i s a b l e to p l a c e t h i s s u b j e c t on t h e urogram f o r
d i s c u s s i o n a t t h e next Governors' Conference, i n o r d e r t h a t
t h e Governors might d i s c u s s v/ith Kr. Seay t h e a d v i s a b i l i t y
of making a t e s t s u i t on t h i s rruestion and might a l s o d i s cuss the p r a c t i c a l problems involved i n connection r-ith
t h e c h a r g i n g of checks to the accounts of drawee "banks.
He s-pect f u l l y ,

Vinlter ?,'yatt
Genero.l Counsel,
P aper s a t t a c h e d
TO OMC




^ , •* r j

C c t o b j r 18, 1537.

Ivir. C-eorga J . Secy, Governor,
F e d e r a l Reserve Bank,
Richmond, V i r g i n i a .
Dear Governor Seay:
I have r e c e i v e d your l e t t e r of October 14th v i t h r e f e r e n c e
to the c o n t r o v e r s y "between t h e F e d e r a l Reserve Bank of Richmond and
t h e Receiver of t h e Farmers & Merchants Bank of Lake C i t y and have
a l r e a d y s u b m i t t e d your l e t t e r to t h e F e d e r a l Reserve Board and
c a l l e d i t p e r s o n a l l y to the a t t e n t i o n of Governor Young.
You s t a t e t h a t you u n d e r s t a n d my viev; to "be t h a t the q u e s t i o n
i n v o l v e d i n t h i s c a s e ' . . i l l only become a System m a t t e r i n c a s e the
Judge should i n t r o d u c e some dictum not n e c e s s a r y to a d e c i s i o n . That
i s not e x a c t l y my v i e v . Inasmuch a s the p o i n t of la",, which w i l l
a c t u a l l y "be decided i n t h i s case w i l l n e c e s s a r i l y a f f e c t a l l the
F e d e r a l r e s e r v e "banks, I t h i n k t h e c a s e i s i n h e r e n t l y one of such a
n a t u r e t h a t i t should he c a l l e d to t h e a t t e n t i o n of a l l F e d e r a l
r e s e r v e "banks, and t h a t t h e Governors' Conference s h o u l d have an opp o r t u n i t y to d e c i d e whether or not i t d e s i r e s to have the case cade
a System c a s e . I f e e l , however, t h a t the r i g h t to charge checks to
the drawee "bank's account subsequent to i n s o l v e n c y i s r e l a t i v e l y unimportant and t h a t i t vould not do much harm i f t h a t q u e s t i o n i s dec i d e d a d v e r s e l y to t h e F e d e r a l r e s e r v e benks. On the o t h e r hand, I
f e e l t h a t the q u e s t i o n of the r i g h t to charge checks to t h e drawee
b a n k ' s account p r i o r to i n s o l v e n c y , which might be a f f e c t e d by a
dictum i n t h i s c a s e , i s of much more importance and t h a t i t would be
u n f o r t u n a t e i f i n d e c i d i n g t h i s c a s e t h e Court should i n d u l g e i n a
dictum which would r a i s e doubts a s to the r i g h t of a Federal r e s e r v e
bank to charge checks to the account of the drawee bank p r i o r to i n solvency.
I am not i n c l i n e d t o recommend t h r t t U t s cose be s e t t l e d
out of c o u r t or t h a t the F e d e r a l Reserve Bank of Richmond s u r r e n d e r
i t s r i g h t s i n t h e p r e m i s e s . The O f f i c e of tb® Comptroller of the Currency a p p a r e n t l y i s determined to have t h i s q u e s t i o n s e t t l e d by a
t e s t s u i t ; and, so f a r a s I have been a b l e to a s c e r t a i n , the c a s e
which you have pending i s f r e e of any c o m p l i c a t i o n s and should make
a good t e s t c a s e . The only p o s s i b l e advantage to be d e r i v e d from the
s e t t l e m e n t of t h i s c a s e out of c o u r t and the consequent s u r r e n d e r by
the F e d e r a l r e s e r v e banks of t h e i r r i g h t to charge checks to t h e




x-,,s76-b

3 3 5

drawee ba,rk subsequent t o i n s o l v e n c y would, be to a v o i d the p o s s i b i l i t y
of a dictum c a s t i n g a doubt upon t h e i r r i g h t to charge checks to t h e
drafcoe b o n k ' s account n r i c r t c i n s o l v e n c y ; and I doubt t h a t t h i s a d vantage i s s u f f i c i e n t to j u s t i f y a l l t h e F e d e r a l r e s e r v e banks i n s u r r e n d e r i n g v.hat m. ay of them c o n s i d e r an i m p o r t a n t l e g a l r i g h t and i n
asking the F e d e r a l Reserve Bank of Richmond to s u f f e r a s e r i o u s f i n a n c i a l
l o s s . I f e e l , t h e r e f o r e , t h a t i t i s j u s t as 'well to t r y the case you
have pending; but I c o n s i d e r i t my duty t o c a l l i t to the a t t e n t i o n of
the F e d e r a l Reserve Borrd and the o t h e r F e d e r a l r e s e r v e banks, because i t
i s i n the n a t u r e of a t e s t case on a c u e s t i o n of law which v i l l a f f e c t
a l l of the F e d e r a l r e s e r v e banks.
I s i n c e r e l y t r u s t t h a t t h i s l e t t e r w i l l s e r v e to irake my
p o s i t i o n e n t i r e l y c l e a r and t h a t you and Ivir. 7* a l l ace w i l l a g r e e t h a t
I have done t h e r i g h t t h i n g i n recommending to the Board t h a t t h i s
case be o u t on the program f o r d i s c u s r i o n a t the Governors' Conference.
I a g r e e w i t h you t h a t the q u e s t i o n s of law could be d i s c u s s e d more app r o p r i a t e l y by the Counsel of t h e v a r i o u s F e d e r a l r e s e r v e banks than
by the Governors; but t h e r e a r e c e r t a i n p r a c t i c a l q u e s t i o n s which I
t h i n k should be c o n s i d e r e d by the Governors. I b e l i e v e t h a t p l a c i n g .
t h e s u b j e c t on t h e program f o r d i s c u s s i o n a t the Governors' Conference
w i l l serve a double p u r p o s e , s i n c e the Governors can d i s c u s s t h e p r a c t i c a l
q u e s t i o n s involved and undoubtedly each Governor w i l l ask h i s own Counsel
f o r an o p i n i o n on the q u e s t i o n of law.
If the Governors decide to have t h i s q u e s t i o n c o n s i d e r e d i n
more d e t a i l by the Counsel to the F e d e r a l r e s e r v e banks I s h a l l be very
g l a d , w i t h t h e approval of the F e d e r a l Reserve Board, to a r r a n g e f o r a
j o i n t c o n f e r e n c e of Counsel of a l l t h e F e d e r a l r e s e r v e banks t o d i s c u s s
t h i s and o t h e r l e g a l m a t t e r s of System i n t e r e s t . %e have h e l d two such
c o n f e r e n c e s h e r e t o f o r e and i t seems to be t h e unanimous o p i n i o n of Couns e l t h a t they have been very h e l p f u l .
u i t h k i n d e s t p e r s o n a l r e g a r d s , I an:
Sincerely yours,

'v

v-alter Wyatt,
General Counsel.

WW sad




COPY

x -4 9 7 6 -c
FEISLrUL kLS_EiV... B.-JiK OF itICHkCIiD.
October 14, 1S-27.

"'to. Walter "iyatt, General Counsel,
F e d e r a l Reserve Board,
Washington, D. C.
Dear Mr. Wyatt:
Mr. Wallace h a s shov.n itie your l e t t e r to him of
October 8 r e l a t i n g to a c o n t r o v e r s y "betweeii t h i s hank and
t h e r e c e i v e r of the Farmers
Merchants 6ank of Lake C i t y ,
accompanied hy a copy of your l e t t e r to the F e d e r a l Reserve
Board, i n which you recommend t h a t the m a t t e r he p l a c e d on
the urogram f o r d i s c u s s i o n a t the next Governors 1 Conference.
I have reviewed the c a s e and a l l of the c o r r e s p o n d ence which h a s massed between you and our Counsel, Mr. Wallace,
and i t seems to me t h a t the s u b j e c t i s e n t i t l e d to much more
c o n s i d e r a t i o n , i n d e t a i l , than i t i s u s u a l l y p r a c t i c a b l e to
give a t t h e s e c o n f e r e n c e s of g o v e r n o r s . As a r u l e , a m a t t e r
of t h i s k i n d would, I t h i n k , be r e f e r r e d by each governor to
the counsel of h i s bank f o r study and o p i n i o n . In o r d e r to get
the m e r i t s of the case f u l l y b e f o r e t h e c o n f e r e n c e , a s t a t e m e n t
of a l l the f a c t s should be p r e s e n t e d , and I t h i n k i t would be
d e s i r a b l e , i f not n e c e s s a r y , to r e a d
. a t l e n g t h from the c o r respondence which h a s p a s s e d between you and our Counsel, i n o r der to develop t h e n i c e t i e s of the c a s e .
There seems to be, i n some measure, d i f f e r e n c e s of
o p i n i o n between y o u r s e l f and Mr. Newton D. Baker a s to whether
t h i s c a s e i s l i k e l y to become a System m a t t e r . As I u n d e r s t a n d
your p o i n t of view, i t w i l l only become a System m a t t e r i n case
the Judge should i n t r o d u c e some d i c t u m / n e c e s s a r y to a d e c i s i o n i n
the c a s e , and w h i l e no one can say how g r e a t t h a t danger may be,
you have f e a r of i t and i t must be r e g a r d e d a s a p o s s i b i l i t y .
I t h a r d l y seems to me t h a t the danger of t h a t p o s s i b i l i t y would
j u s t i f y t h i s bank i n withdrawing from t h e case and assuming the
l o s s which would e n s u e . The amount involved i n t h e c a s e of t h e
Lake C i t y bank i s covered by two r e m i t t a n c e # , a g g r e g a t i n g about
$34,000; the amount i n v o l v e d i n a s i m i l a r ca§e w i t h r e s p e c t to
the F a y e t t e v i l l e bank i s , I b e l i e v e , i n the neighborhood of
$20,000, making t h e t o t a l sum involved approximately $54,000.
As an o f f s e t , we would r e c e i v e t h e d i v i d e n d s pfiid by the
r e c e i v e r s of the r e s p e c t i v e banks, which i n t h e case of the
Lake C i t y bank we a r e l e d to b e l i e v e w i l l be very s u b s t a n t i a l ,
but which i n t h e c a s e of the F a y e t t e v i l l e bank cannot even be
a-roroximated a t the p r e s e n t t i m e ,




X-4976-c
Mr. Walter Wyatt, General Counsel, Pg. 2 .

October 14, 1927.

The Conference of Governors, i t seems to me, would
be l i k e l y to take one of only two c o u r s e s : e i t h e r recommend t h a t
the Federal Reserve Bank: of Richmond withdraw from i t s p o s i t i o n and
assume the l o s s ; or recommend t h a t the matter be r e f e r r e d to the
counsel of the s e v e r a l banks f o r an opinion as to whether the
p o s s i b l e danger to the System vrcmld seem to make i t a d v i s a b l e
f o r the Richmond bank to withdraw. We should hardly be w i l l i n g
to take the f i r s t course upon the s u g g e s t i o n of the Conference
because, i n the nature of the c a s e , we b e l i e v e i t c o u l d only be
s u p e r f i c i a l l y c o n s i d e r e d i n a general d i s c u s s i o n w i t h i n the time
a v a i l a b l e ; but we might be w i l l i n g to f o l l o w the recommendation
of t h e counsel of the s e v e r a l banks should there be any uniform
concurronce of o p i n i o n among them, and i f the other banks adopted
the o p i n i o n of c o u n s e l .
In one of Mr. W a l l a c e ' s l e t t e r s to you, he sugg e s t e d t h a t a statement o f the f a c t s be submitted to the counsel
of the s e v e r a l banks f o r c o n s i d e r a t i o n and e x p r e s s i o n of o p i n i o n .
This course, i n my judgment, would be p r e f e r a b l e t o d i s c u s s i o n
a t the Conference. Whether Mr. Baker had reviewed the e n t i r e case
when he wrote the l e t t e r to you on June 18, I do not know, bu.t i f
not t h e same matter
submitted to the counsel of the banks might,
a l s o , be submitted to Mr. Baker, should the Board think i t a d v i s a b l e .
In c o n s i d e r i n g the e f f e c t of an embarrassing court d e c i s i o n upon
the System, i t i s w e l l to bear i n mind that only two of the Fede r a l Reserve Banks, P h i l a d e l p h i a and Richmond, pursue the d e f e r r e d
charge p r a c t i c e ; the r e s t have the remittance p l a n .
I am w r i t i n g t h i s l e t t e r d i r e c t l y to you r a t h e r
than to the Board because t h i s course seems t o me to o f f e r t h e most
convenient manner of p l a c i n g the matter b e f o r e the Board, and I sugg e s t that you b r i n g the l e t t e r to the a t t e n t i o n of the Board a l o n g
w i t h your communication to the Board of October 8 .
Very t r u l y y o u r s ,
(Sgd.)

GJS

CCP




Geo. J . Eeay,
Governor.

X-4S76-a

October 8, 1527.

Jir. l«i. G. Wallace, Counsel,
F e d e r a l Reserve Bank of Richmond,
Eichnond, V i r g i n i a .
Dear Mr. Wallace:
I have r e c e i v e d your l e t t e r of August
20th w i t h f u r t h e r r e f e r e n c e to the c o n t r o v e r s y "between
your t a n k and the r e c e i v e r of the Farmers & Merchants
N a t i o n a l Bank of Lake C i t y , but have not r e p l i e d more
promptly "because I have "been a b s e n t from t h e o f f i c e
much of the time and have "been e x c e e d i n g l y "busy d u r i n g
t h e time I have "been i n the o f f i c e .
A f t e r r e a d i n g your l e t t e r I can r e a l i z e
t h a t you f i n d y o u r s e l f ""between t h e d e v i l and t h e deep
b l u e sea" and t h a t you a r e p r a c t i c a l l y f o r c e d to t r y a
law s u i t on t h i s q u e s t i o n e i t h e r w i t h the r e c e i v e r or
w i t h t h e member banks from which you r e c e i v e d the checks
i n q u e s t i o n , u n l e s s the F e d e r a l Reserve Bank of Richmond
wishes to s e t t l e t h e case and a b s o r b t h e n e c e s s a r y f i n a n c i a l l o s s which I judge the bank i s u n w i l l i n g to do.
In view of the f a c t t h a t the l e g a l quest i o n i n v o l v e d i n t h i s c a s e w i l l a f f e c t a l l of t h e F e d e r a l
r e s e r v e banks, I an c a l l i n g t h i s m a t t e r t o t h e a t t e n t i o n
of t h e F e d e r a l Reserve Board w i t h t h e s u g g e s t i o n t h a t i t
p u t t h e s u b j e c t on t h e program f o r d i s c u s s i o n a t t h e
f o r t h c o m i n g Governors' Conference. If t h e Board a d o p t s
t h i s s u g g e s t i o n , i t w i l l g i v e t h e Governors sua o p p o r t u n i t y
to d i s c u s s the m a t t e r from a System s t a n d p o i n t ai|& to cons i d e r t h e p r a c t i c a l a s r a i l a s the l e g a l questioqis i n v o l v e d .
With a l l b e s t wishes, I am,
Cordially yours,

P.S.




Walter # y a t t ,
General Counsel.
For your i n f o r m a t i o n I e n c l o s e a copy of t h e memorandum
which I am s u b m i t t i n g t o tho Board.

COPY

r*0
.£>0
X-4276-e
F3IE2AL RESERVE 3 * H CI
RICHUOKQ
August 20, 1S27.

F e d e r a l Reserve Board,
Washington, D. C.
ATT22TTI0H OF fcR. WADT3W V.YATT General Counsel.

My dear Mr. Wyatt:
I have your l e t t e r of August 17th w i t h r e f e r e n c e •
to t h e c o n t r o v e r s y "between t h i s bank and the Receiver of the
Farmers & Merchants H a t i o n a l Bank of Lake C i t y .
I have, of c o u r s e , c o n s i d e r e d your l e t t e r c a r e f u l l y ,
and have d i s c u s s e d i t w i t h t h e o f f i c e r s of t h i s bank. I am
r a t h e r i n c l i n e d tti Agree w i t h k r , Baker i n t h i n k i n g t h a t the
q u e s t i o n i n v o l v e d i n t h i s c o n t r o v e r s y i s so remote from t h e
q u e s t i o n i n v o l v e d i n the A t l a n t a d i s t r i c t t h a t t h e r e i s l i t t l e
chance t h a t a d e c i s i o n i n one case w i l l have any b e a r i n g upon
t h e o t h e r , b u t , of c o u r s e , none o f u s can f o r e s e e what some Judge
may u n d e r t a k e to say by way of o b i t e r d i c t a .
In my case t h e r e c o u l d be no doubt of our r i g h t to
charge t h e r e s e r v e account of t h e member bank i f i t remained
s o l v e n t . The s o l e q u e s t i o n i n v o l v e d would bo whether or n o t t h e
i n s o l v e n c y of t h e member bank revokes t h e a u t h o r i t y which i t has
g i v e n to u s to charge i t s account, and, i f so, whether or not the
r e v o c a t i o n o p e r a t e s w i t h r e s p e c t to charge which c o u l d have boon
made b e f o r e the c l o s i n g of t h e bank, but i n f a c t were not so made.
In the A t l a n t a c a s e t h e q u e s t i o n i s whether or not tho member bank
may evade t h e s p i r i t of the F e d e r a l Reserve Act by r e f u s i n g to p r y
chocks p r e s e n t e d through t h e F e d e r a l Reserve Bank i f t h e drawer h a s
d i r e c t e d t h a t sr.ch checks shal,l not be p a i d to t h e F e d e r a l Reserve
Bank.
In any e v e n t , I see l i t t l e chance of our a v o i d i n g i
s e t t l e m e n t by l i t i g a t i o n of t h e p o i n t i n c o n t r o v e r s y . As you know,
our claim i n v o l v e s two l e t t e r s . The f i r s t of t h e s e l e t t e r s was
s e n t to t h e Farmers & Merchants N a t i o n a l Bank of Lake City on
October 7 t h , and under our time schedule was c h a r g e a b l e t o i t s
r e s e r v e account on Monday, October 1 1 t h . The check® "ip t h e l e t t e r
were c a n c e l l e d on October 8 t h . The bank was c l o s e d or. S a t u r d a y ,
October 9 t h . On October 11th the r e s e r v e aoco-mt was adequate to
meet t h i s l e t t e r , and we a c c o r d i n g l y charged the l e t t e r to t h e
r e s e r v e account and c r e d i t e d the banks from which the checks had
been r e c e i v e d .



r*
X-4975-e
-6-

We sent to t h e Receiver a statement showing t h a t t h i s
l e t t e r had "been charged to the r e s e r v e a c c o u n t , and no o b j e c t i o n
was made, and indeed the Receiver t r e a t e d the charge a s p r o p e r
u n t i l some time i n Lay when a demand was made upon u s f o r the amount
of t h i s l e t t e r . As soon a s the demand was made, we n o t i f i e d t h e
member "banks concerned t h a t i f t h e c o n t e n t i o n of the Receiver was
s u s t a i n e d , wo would charge them w i t h t h e amount of the chocks v/hich
had been, c o n t a i n e d i n t h i s l e t t e r . S e v e r a l of t h e member banks
n o t i f i e d u s t h a t they would not s t a n d the charge, but would l i t i g a t e
the q u e s t i o n v d t h u s r e g a r d l e s s of the r e s u l t of t h e l i t i g a t i o n between
o u r s e l v e s and the R e c e i v e r . I f e e l sure t h a t i f v.c u n d e r t o o k to
charge them v i t h t h e amounts of t h e i r checks i n t h i s l e t t e r t h e y would
l i t i g a t e t h e q u e s t i o n . , Of c o u r s e , we could accede to the demand of
t h e R e c e i v e r and not charge our member banks, t a k i n g t h e l o s s
o u r s e l v e s , bat even i f we d i d t h i s , I t h i n k the seine q u e s t i o n would
a r i s e i n f u t u r e c a s e s , and w i t h r e s p e c t t o t h e second l e t t e r of t h e
Farmers & Merchants N a t i o n a l Bank of Lake C i t y .
The second l e t t e r was sent to the Farmers & Merchants
N a t i o n a l Bank of Lake-City on October 8 t h , and t h e checks i n i t were
charged to the a c c o u n t s of t h e drawers on October S t h b e f o r e the c l o s i n g
of t h e bank. This l e t t e r was i n o r d i n a r y c o u r s e c h a r g e a b l e to the
f a i l e d bank on October 1 3 t h , but a f t e r c h a r g i n g t h e l e t t e r of October
7 t h , we had a b a l a n c e amounting to only approximately $7,000.00, and
the l e t t e r was approximately $30,000.00. We charged back t h e e n t i r e
amount of t h e checks c o n t a i n e d i n t h i s second l e t t e r and h e l d t h e
b a l a n c e i n o r d e r t h a t I might endeavor to decide a s t o whether o r not
i t should bo d i s t r i b u t e d as a -oart payment on account of the l e t t e r
or n o t . S e v e r a l member banks wrote to u s a s k i n g f o r i n f o r m a t i o n as
to t h e amount of t h e r e s e r v e b a l a n c e . On b e i n g n o t i f i e d of t h e s i t u a t i o n they claimed t h a t t h e r e s e r v e b a l a n c e should be e g p l i e d to t h e cash
l e t t e r , and n o t i f i e d u s t h a t they would h o l d u s l i a b l e i f we s u r r e n d e r e d
i t to t h e R e c e i v e r . The amount of checks r e c e i v e d froip t h e banks which
took t h i s p o s i t i o n i s s u f f i c i e n t to j u s t i f y them i n th$ e f f o r t to t e s t
t h e i r r i g h t s , and i f we abandoned our p o s i t i o n i n our c o n t r o v e r s y
w i t h t h e R e c e i v e r , I f e e l s u r e t h a t some of t h e s e banks would endeavor
to p r e s s t h e q u e s t i o n t o a s e t t l e m e n t .
Since t h i s q u e s t i o n h a s been under d i s c u s s i o n a n o t h e r member
bank- t h a t i s to say t h e N a t i o n a l Bank of F a y e t t e v i l l o h a s been closed*
In the case of t h e l a t t e r bank t h e r e a r c two l e t t e r s which were h a n d l e d
by i t j u s t b e f o r e i t s f a i l u r e , and which had not been a c t u a l l y charged
to i t s r e s e r v e account on t h e day of t h e f a i l u r e . We n o t i f i e d t h e member
banks concerned t h a t t h e Comptroller. d i s p u t e d our r i g h t to charge t h e s e
cash l e t t e r s t o t h e r e s e r v e a c c o u n t , and t h a t c o n s e q u e n t l y we c r e d i t e d
them w i t h t h e amount of t h e i r checks upon t h e c o n d i t i o n t h a t i f t h e
Comptroller 1 s p o s i t i o n v;as s u s t a i n e d wo would bo compelled to charge
back the amount of t h e i r checks.




X-4976-e
-3-

If we acceded to the contention of the Receiver i n the
case of the Farmers & Merchants l l a t i o n - l Bank of Lake City we
would be compelled to accede to i t i n the case of the National
Bank of F a y e t t e v i l l e , and i n a l l subsequent cases, and I f e e l
reasonably c e r t a i n that sooner or l a t e r a member back would
f o r c e a d e c i s i o n of the question;.
In the Lake City case ?/e had no r e d i s c o u n t s . In the
F a y e t t e v i l l e case we have quite a largo l i n e of rediscounts, and
i f we undertook to charge back cash l e t t e r s upon tho ground that
they were unpaid, and to apply the reserve balance to the r e discounts, i t would create an impression that we are endeavoring
to p r o t e c t o u r s e l v e s at tho expense of member banks, .and t h i s
a t t i t u d e would, I think, create a most unfavorable impression
upon the member banks. For the reasons s t a t e d , the o f f i c e r s of
t h i s bank and myself f e e l that we are almost compelled to s e t t l e
the question which has been r a i s e d , but, of course, we would consider c a r e f u l l y any suggestions, which other Federal Deserve Banks
or t h e i r Counsel wished to make. If you think that the matter i s
of s u f f i c i e n t importance to j u s t i f y requesting- the Counsel f o r
other banks to meet f o r a conference. I should, of course, be del i g h t e d to have auch a conference, bnt i t seems to me that t h e
question i s s c a r c e l y broad enough to j u s t i f y the trouble and expense which the conference would e n t a i l , and that perhaps i t
might be s u f f i c i e n t to send a copy of the statement of f a c t s to
each of the other Counsel and i n v i t e t h e i r c r i t i c i s m .
I em very glad to say that I nm j u s t back from a very
enjoyable vacation at V i r g i n i a Beach, and I hope that you w i l l
soon be o f f upon yours, and w i l l come back f e e l i n g as f r e s h '
as I do. I have never quite given up hope t h a | you and Mrs.
Wyatt w i l l f i n d your way to Richmond some day.
The time for applying the c e r t i o r a r i i n the case of
Craven Chemical Company v. Federal Reserve Bank of Richmond
has expired, so I imagine that my opponents never thought of
r a i s i n g the j u r i s d i c t i o n a l question which we discussed i n
our former correspondence.




Very t r u l y yours,
M.Gr. Wallace,

Counsel.

CCPY

X-4976-f

3
August 17, 19P7.

Mr. M.G-. Wallace, Counsel,
F e d e r a l Reserve Ban!":,
Richmond, V i r g i n i a .
My dear Mr. Wallace:
R e f e r r i n g to your l e t t e r . - o f June 14th w i t h r e g a r d to t h e
claim made r g a i n s t your bank "by the r e c e i v e r of the. Farmers and Merc h a n t s N a t i o n a l Bank of Lake C i t y , I e n c l o s e f o r your i n f o r m a t i o n
a l e t t e r from Mr. Baker e x p r e s s i n g h i s views a s to t h e e f f e c t of
such l i t i g a t i o n on t h e t e s t ca.se wo have "been e x p e c t i n g or- t h e
l e g a l i t y of the a c t i o n cf c e r t a i n Alabama b a r k s i n stamping t h e i r
checks "not p a y a b l e through t h e F e d e r a l Reserve Bank of A t l a n t a . "
I d i s a g r e e v i t h Mr. B a k e r ' s views t h a t your case i s
not one of System importance, bocause I f e a r t h a t , i n d e c i d i n g
t h e r e a l n e t t e r a t i s s u e i n your c a s e , t h e Court i s v e r y l i k e l y
to go so f a r a s t o say t h a t a F e d e r a l r e s e r v e bank lias no r i g h t
under any c i r c u m s t a n c e s t o charge to the a c c o u n t s of drawee banks
checks which i t does not own but which i t i s merely h a n d l i n g under
R e g u l a t i o n J a s t h e agent of the banks from which they were r e c e i v e d
Such a r u l i n g would be a s e r i o u s blow to R e g u l a t i o n J and t o t h e
p r e s e n t check c o l l e c t i o n system, and I should r e g r e t very much to
see i t .
I have d i s c u s s e d with counsel of s e v e r a l of the o t h e r
F e d e r a l r e s e r v e banks the q u e s t i o n s i n v o l v e d i n t h i s case and a l l
of those^ w i t h whom I have d i s c u s s e d t h e q u e s t i o n e x p r e s s e d s e r i o u s
doubt a s to t h e r i g h t of a Federal r e s e r v e bank t o charge t o the
account of an i n s o l v e n t bank checks which a r e not owned a b s o l u t e l y
by t h e F e d e r a l r e s e r v e bank i t s e l f . H e r e t o f o r e I hfive r e f r a i n e d
from e x p r e s s i n g any views on t h i s m a t t e r , but I nojf f e e l t h a t I
should t e l l you t h a t I p e r s o n a l l y b e l i e v e t h a t thg C o m p t r o l l e r ' s
O f f i c e i s r i g h t and t h a t you a r e wrong i n t h i s p a r t i c u l a r cont r o v e r s y , and I f e a r t h a t i f you t r y a t e s t s u i t you w i l l l o s e i t .
The l o s s of such a s u i t would not d i s t u r b me very much, u n l e s s the
Court should r u l e , or say by way of dictum, t h a t the F e d e r a l r e s e r v e
bank has no r i g h t under any circumstances to charge t o the account
of the drawee bank a check which i t does not own i n i t s own r i g h t
but which i t merely h a n d l e s a s t h e agent of a n o t h e r bank from which
such chock was r e c e i v e d . In view of t h i s danger, I s i n c e r e l y hope
t h a t you w i l l r e c o n s i d e r t h e a d v i s a b i l i t y of t r y i n g such a t e s t case
and w i l l a d v i s e me of your f u r t h e r views i n t h e p r e m i s e s .




You w i l l u n d e r s t a n d , of c o u r s e , t h a t t h i s i s merely an

expression of my o?.n personal views and not the views of the
Federal Reserve Board. Moreover, I hope you w i l l understand
very c l e a r l y that I have no desire to interfere^ with your
handling of any l i t i g a t i o n f o r the Federal Reserve Bank of
Richmond. I merely suggest the danger p o i n t e d out above,
in order that you may weigh the mettor and reach a conclusion
i n your own mind as to whether i t would he "better for your
hank to y i e l d to the Comptroller of the Currency i n t h i s part i c u l a r i n s t a n c e rather than to jeopardize the i n t e r e s t s of
the e n t i r e Federal Reserve System "by going to s u i t on a doubtful
question which may involve the l e g a l i t y of a very important prov i s i o n of Regulation J. If you have any doubts about the matter,
would i t not be b e t t e r to d i s c u s s t h i s question at a conference
of Counsel to a l l Federal reserve banks before t e s t i n g such a
question i n the courts?
I s i n c e r e l y hope that yen have not been as busy as
I have been t h i s summer and that you have been able to take a
l i t t l e v a c a t i o n . I am beginning to f e e l the need of one very
badly and hope to go away from the o f f i c e i n a few days.
With a l l best wishes, i am,
Cordially yours,

Walter Wyatt,
General Counsel,
WW MD




X-4576-g

COPY

244.
BIKES, H03T3TL3R & SIIIO
C0LW3FLL0H3 AT LAT
TJI'IC" TRUST BUILDINGCLEYLLAITD

June 18, 1927.

Dear Mr. TTyatt:
A f t e r s e v e r a l days of absence I r e t u r n t h i s morning and f i n d
your l e t t e r of June n i n t h , w i t h t h e correspondence s e n t by Mr. M. G.
Wallace of t h e F e d e r a l Reserve Bank of Richmond c o v e r i n g t r a n s a c t i o n s w i t h t h e Farmers and Merchants n a t i o n a l Bank of Lake C i t y .
In view cf the f a c t t h a t t h e r e does n o t seem to be a present
means of r a i s i n g our c o n t r o v e r s y in vbe A t l a n t a D i s t r i c t , I am
i n c l i n e d to b e l i e v e t h a t Mr. Wallace should g e t up h i s t e s t c a s e a s
soon a s he can and g a t t h e m a t t e r p r e s e n t e d to a F e d e r a l Court f o r
d e c i s i o n . Of c o u r s e t h i s does r a i s e some q u e s t i o n a s to t h e r i g h t
of F e d e r a l .Reserve b a n k s g e n e r a l l y to make c h a r g e s a g a i n s t t h e
r e s e r v e b a l a n c e s of members, b u t i t i s a s p e c i a l c a s e , and an adv e r s e d e c i s i o n on t h e f a c t s i n t h e s e two i u s t n c e s would not n e c e s s a r i l y conclude F e d e r a l Reserve banks from mazing c h a r g e s a g a i n s t
r e s e r v e b a l a n c e s of s o l v e n t banks or of banks a s to which t h e y had
no n o t i c e of s u s p e n s i o n .
In p r e s e n t i n g t h i s m a t t e r I hope Mr. Wallace w i l l do whatever he can to narrow t h e i s s u e to t h e f a c t s of h i s c a s e , so t h a t t h e
Court may not by i n a d v e r t e n c e express an o p i n i o n which would be
h e l d to conclude t h e l a r g e r q u e s t i o n , That i s to s a y , i f t h e f a c t
of t h e b a n k ' s suspension and t h e n o t i c e of i t should be h e l d by
t h e Court to t e r m i n a t e t h e r i g h t of t h e F e d e r a l Reserve bank to charge
t h e r e s e r v e b a l a n c e , . . I ' would b : s o r r y to have the Court go on and
e x p r e s s o b i t e r any doubt a s to t h e r i g h t to make such changes under
other conditions.
In view of the f a c t s of t h e s e c a s e s I am i n c l i n e d to a g r e e
w i t h I,ir. Wallace t h a t t h i s i s not a system m a t t e r , p a r t i c u l a r l y
s i n c e the c o n t r o v e r s y i s between the F e d e r a l r e s e r v e bank and t h e
Comptroller's o f f i c e .
Cordially yours,
(Signdd) S.e?'toa D. Baker
Mr. "."alter Wyatt,
O f f i c e of t h e General Counsel,
F e d e r a l Eeservo Bank,
Washington, D.C,




COPY

X-4976-h

FEDERAL RESERVE B M OF RICHMOND
June 14, 1927.

F e d e r a l Reserve Board,
Washington, B.C.
A t t e n t i o n of Mr. Walter Wyatt, General Counsel.
Dear S i r s ;
I have your l e t t e r of June 9 t h , and am very
g l a d to know t h a t you have forwarded to Mr. Baker c o p i e s
of my l e t t e r s r e l a t i n g to t h e claim made a g a i n s t t h i s bank
oy the R e c e i v e r of t h e Farmers & Merchants N a t i o n a l Bank of
Lake C i t y .
The R e c e i v e r and myself a r e endeavoring t o a g r e e
upon a s t a t e m e n t of f a c t s hoping to avoid any u n n e c e s s a r y
expense, or d e l a y , in t h e s e t t l e m e n t of t h i s q u e s t i o n .
I
have p r e p a r e d a d r a f t of such a s t a t e m e n t and forwarded i t to
t h e R e c e i v e r f o r h i s c o n s i d e r a t i o n . I e n c l o s e you a copy
t h i n k i n g t h a t Mr. Baker may d e s i r e to c o n s i d e r i t , nnd, to
s u g g e s t changes i n i t , o r a d d i t i o n s to i t . N a t u r a l l y , I should
welcome any s u g g e s t i o n s from him, or from y o u r s e l f .
I r e a d w i t h much i n t e r e s t the correspondence
"between t h e F e d e r a l Reserve Board and t h e F e d e r a l Reserve Bank
of A t l a n t a , and your o p i n i o n upon the s u b j e c t .
I remain,
Very t r u l y y o u r s ,
(Signed) M.0.Wallace
Counsel.
MOW:IB




2 4 5

COPY

X-49°6~i

FEDERAL RESERVE 3A2"< OF HlCHMOlD,
RICHMOED, YA.
Gentlemen:
The u n d e r s i g n e d member bank hereby acknowledges receipt- of
C i r c u l a r Fo. 143, cf t h e F e d e r a l Reserve Bank of Richmond, r e g a r d ing t h e " C o l l e c t i o n of Checks," e f f e c t i v e J u l y 1, 1925, s e t t i n g
f o r t h t h e terms and c o n d i t i o n s under which c a s h items a s s p e c i f i e d
in the c i r c u l a r w i l l be r e c e i v e d f o r c o l l e c t i o n from t h e u n d e r signed member by t h e F e d e r a l Reserve Sank of Richmond o r by
a n o t h e r F e d e r a l r e s e r v e bank f o r i t s a c c o u n t , which c i r c u l a r s u p e r sedes C i r c u l a r l'o. 131 of Juno 15, 1223.
Yours very t r u l y ,
Farmers & Merchants Nat Bank
Bank
Lake C i t y , 5. C
Location
2/3/23

Bate




By R. H. McEireen
P e e s i d e a t er Cashier ( Q f f i e i a l

COPY

£-497 o -J
June 14, 1927.
STATK/ISTT OF FACTS
1. The F e d e r a l Reserve Bank of Richmond, i s and was a t a l l times

h e r e i n a f t e r mentioned a t a n k i n g c o r p o r a t i o n , duly o r g a n i z e d under t h e jjederal
Reserve Act, h a v i n g i t s chief o f f i c e in Richmond, V i r g i n i a , and the d i s t r i c t ,
or t e r r i t o r y , a s s i g n e d to i t i n c l u d e d t h e S t a t e oi South C a r o l i n a .
2 . The Farmers & Merchants N a t i o n a l Bank of Lake City r a s a t a l l
times h e r o i n mentioned a N a t i o n a l banking a s s o c i a t i o n duly o r g a n i z e d under t i e
n a t i o n a l Bank Act, and had i t s o f f i c e in Laics C i t y , South C a r o l i n a , u n t i l i t
was c l o s e d and p l a c e d in l i q u i d a t i o n a s s t a t e d h e r e i n .
3. The F e d e r a l Reserve Bank of Richmond had f o r sometime p r i o r to the
c l o s i n g of t h e Farmers 3c Merchants N a t i o n a l Bank cf Lake C i t y r e c e i v e d on dep o s i t , or f o r c o l l e c t i o n , from banks which were members of t h e F e d e r a l Reserve
System and o+har F e d e r a l Reserve Banks, cnucka drawn upon t h e Farmors & Merc h a n t s n a t i o n a l Bar-k of Lake C i t y .

A l l of t n e s a i d cnccks v'erc r e c e i v e d xn

accordance w i t h , and s u b j e c t to t h e terms of R e g u l a t i o n J , s e r i e s of 19..4,
duly made and promulgated by t h e F e d e r a l Reserve Board, a copy of wnicn i s
h e r e t o a t t a c h e d and made a p a r t h e r e o f , and w i t h c i r c u l a r Mo. 143 i s s u e d by the
F e d e r a l Reserve Bank of Richmond, a copy of which i s h e r e t o a t t a c h e d , nnd made
a r>art h e r e o f , and w i t h the time schedule i s s u e d by t h e F e d e r a l Reserve rank
of Richmond, a copy of which i s h e r e t o -attached and made a p a r t h e r e o f .
4. A. copy of t h e s a i d c i r c u l a r 1-To. 143 had T^en s e n t to t n e Far.uei s
& Merchants N a t i o n a l Bank of Lake C i t y , and r e c e i p t t h e r e o f had been acknowledged by the Farmers & Merchants n a t i o n a l Bonk of £ako C i t y o o f o r e t h e times
h e r e i n a f t e r mentioned, a copy of which acknowledgment i s n o r e t o a t t a c h e d , and
made a p a r t h e r e o f .
5. I t had been the p r a c t i c e of the F e d e r a l Reserve Brnk of Richmond
to send on oach b u s i n e s s day to t h e Farmers & Merchants N a t i o n a l Bank of Lake



City checks drawn m e n i t , v h i c h had been r e c e i v e d by the f e d e r a l "'eserve Bank
of Richmond, a s above s t a t e d , and Then t h r e e b u s i n e s s days had e l a p s e d a f t e r
the d i s p a t c h of a l e t t e r c o n t a i n t a g such checks to charge t h e

amount t h e r e o f

to t h e r e s e r v e account m a i n t a i n e d by t h e F a r u e r s & Merchants n a t i o n a l Bank of
Lake C i t y w i t h the F e d e r a l Reserve Bank of Hichraond.

If the Farmers 1 Merchants

n a t i o n a l Bank of Lake C i t y was w i l l i n g to a c c e p t and pay such checks i t r e t a i n e d
them and charged then to the a c c o u n t s of t h e drawers.

If i t was u n w i l l i n g to

pay any, or a l l of such checks, i t r e t u r n e d such of them a s i t was w i l l i n g to
pay a f t e r c a u s i n g them to be duly p r o t e s t e d , i f p r o t e s t was r e q u e s t e d , and the
amount of a l l checks so r e t u r n e d was c r e d i t e d to t h e account of t h e Farmers &
Merchants n a t i o n a l Bank of Lake C i t y .
6. In t h e c o u r s e of conducting b u s i n e s s , a s s t a t e d above, t h e F e d e r a l
Reserve Bank of Richmond, d i d not d i s c l o s e to t h e Farmers & Merchants IT&tional
Bank of Lake C i t y t h e nair.es of p e r s o n s from whom the checks had been r e c e i v e d
except i n s o f a r a s t h i s knowledge could be o b t a i n e d from endorsements a p p e a r i n g
upon t h e checks.

The amount of a l l checks s e n t to t h e Farmers & Merchants

N a t i o n a l Bank of Lake C i t y was charged by t h e F e d e r a l E e s e r v e Bank of Richmond
to i t , in accordance w i t h t h e p r a c t i c e above s e t o u t , and c r e d i t e d by t h e
Farmers & Merchants n a t i o n a l Bank of Lake Ci by v6 t h e F e d e r a l Reserve Bank of
Richmond a s s t a t e d above, and a l l checks which were r e t u r n e d u n p a i d were r e t u r n e d by t h e Farmers & Merchants n a t i o n a l Bank of Lake City to the F e d e r a l Reservo Bank of Richmond, and when r e c o i v e d by the F e d q r a l Reserve Bank of Richmond were c r e d i t e d to t h e Farmers & Merchants n a t i o n a l Bank of Lake C i t y a s
above s e t o u t .
7 . On Thursday, October 7, 1326, t h e F e d e r a l Reserve Bank of R i c h mond s e n t to t h e Farmers & Merchants n a t i o n a l Bank of Lake C i t y a l e t t e r c o n t a i n ing checks drawn upon t h e l a t t e r amounting to $14,934.1-2.

ter i s hereto


attached.

A copy of s a i d l e t -

The s a i d l e t t e r and checks were r e c e i v e d by t h e Farm-

-3-

X-4975-J

e r s & Merchants n a t i o n a l Bank of Lake C i t y on October 8, 1926, and t h e s i i n or
r e c e i p t a t t a c h e d to such l e t t e r was mailed by t h e Farmers & Merchants R a t i o n a l
Bank of LaJ.ce C i t y to t h e F e d e r a l He serve Bank of Richmond on October 8 t h .
copy of s a i d s l i p , or r e c e i p t , i s h e r o t o a t t a c h e d .
the Farmers

On October

.

A

, 1923,

Me: c h a n t s N a t i o n a l Bank c a n c e l l e d checks c o n t a i n e d in t h e s a i d

l e t t e r amounting to Fourteen Thousand F i n e Hundred D o l l a r s and S i x t y - t w o Cents
( § 1 4 , 8 0 0 . 5 2 ) , and charged them to the a c c o u n t s of the drawers and r e t u r n e d unp a i d checks amounting to T h i r t y - t h r e e D o l l a r s and F i f t y Cents ( $ 3 3 . 5 0 ) .

On

October 11, 1925, t h e F e d e r a l Heserve Bank of Richmond charged t h e r e s e r v e a c count of t h e Farmers & Merchants N a t i o n a l Bank of Lake C i t y w i t h t h e amount of
a l l checks c o n t a i n e d i n t h e above mentioned l e t t e r of October 7 t h , and on t h a t
day c r e d i t e d t n e amount of sucn checks to t h e banks from which t h e y had been r e ceived f o r c o l l e c t i o n .

Later checks, t o t a l l i n g T h i r t y - t h r e e D o l l a r s and F i f t y
said
Cents ( s 3 3 . 5 0 ) , which had been s e a t in t h e / l e t t e r were r e t u r n e d u n p a i d to t h e
F e d e r a l Reserve Bank of Richmond, and the amount of such checks was c r e d i t e d to
the Farmers 6 Merchants N a t i o n a l Bank of Lake City and charged to t h e bonks from
which t h e y had been r e c e i v e d .
8. At the opening of b u s i n e s s on October 1 1 t h t h e F e d e r a l Reserve
Bank of Richmond had to the c r e d i t of the Farmers & Merchants N a t i o n a l Bank of
Lake C i t y the sum of Twenty-two Thousand and E i g h t y - f i v e D o l l a r s and F i f t y - t w o
Cents (^22,085.52) and a f t e r c h a r g i n g t h e amount of t h e l e t t e r of October 7 t h
and c r e d i t i n g t h e amount of c e r t a i n c h e c k s , which wore r e t u r n e d u n p a i d , t h e r e
remained a t t h e c l o s e of b u s i n e s s on October 11th a b a l a n c e i n t h e r e s e r v e account of the Farmers & Merchants N a t i o n a l Bank of Seven Thousand Two Hundred
and T h i r t y - f i v o D o l l a r s and Six Cents ( $ 7 , 2 3 5 . 0 5 ) .
2. On F r i d a y , the 8 t h day of October, 1925, the F e d e r a l Reserve
Bank of Richmond s e n t to t h e Farmers & Merchants N a t i o n a l Bank of Lake City a
l e t t e r c o n t a i n i n g checks amounting to Twenty-one Thousand and F o r t y - o n e D o l l a r s



-4-

X-4976-j

350
and Two Cents ( $ 2 1 , 0 4 1 . 0 2 ) , a c o i y of which l e t t e r i s h e r e t o a t t a c h e d .

This

l e t t e r was r e c e i v e d 07 the Farmers i Merchants I f a t i o n a l Bank of Lake C i t y on the
9 t h day of October, 1923, and upon t h a t day t h e Farmers x y e r c h a n t s N a t i o n a l Sank
of Lace City r e t u r n e d to t h e F e d e r a l Reserve Bank of "Richmond t h e s l i p , or
r e c e i p t , a copy of which i s h e r e t o a t t a c h e d , and on t h e

day of Octohor,

1926 c a n c e l l e d and charged 00 t h e accounts of the drawers checks c o n t a i n e d in
the s a i d l e t t e r amounting to Twenty Thousand, Cno Hundred and Seventy D o l l a r s
and Seventy-one Cents ($20,170.71) (were cancellcci and charged to t h e accounts of
the drawers t h e r e o f by t h e Farmers & Merchants N a t i o n a l Bank of Lake C i t y ) , and
checks amounting to S i g h t Hundred and Seventy D o l l a r s and T h i r t y - o n e Cents
($870.31) were r e t u r n e d a s u n p a i d to t h e F e d e r a l Reserve Bank of

Richmond.

10. On Tuesday, the 12th day of October, 1326, the F e d e r a l Reserve
Bank of Richmond charged the amount of t h e checks c o n t a i n e d i n t h e l e t t e r of
October 8 t h to t h e account of t h e Farmers & Merchants N a t i o n a l Bank of Lake
C i t y , and l a t e r c r e d i t e d i t with a l l checks c o n t a i n e d i n such l e t t e r which were
returned unpaid.

On October 12, 1926

t h e r e appeared to t h e c r e d i t of t h e

Farmers & Merchants n a t i o n a l Bank of Lake C i t y in i t s r e s e r v e account on t h e
books of the F e d e r a l Reserve Bank of Richmond a b a l a n c e of Seven Thousand Two
Hundred and T h i r t y - f i v e D o l l a r s and Six Cents ( $ 7 , 2 3 5 . 0 6 ) .
11. The F e d e r a l Reserve Bank of Richmond charged t h e f u l l amount of
each of t h e checks c o n t a i n e d in i t s l e t t e r of October 8 t h back to the banks
from which t h e same had been r e c e i v e d f o r c o l l e c t i o n , and a d v i s e d such banks
t h a t a c t u a l and f i n a l payment f o r such checks had not been r e c e i v e d from the
Farmers & Merchants N a t i o n a l Bank of Lake C i t y , and l a t e r t h e F e d e r a l Reserve
Bank of Richmond n o t i f i e d such banks to which such checks had boon charged t h a t
i t was h o l d i n g t h e sum of Seven Thousand One Hundred and E i g h t y - s e v e n D o l l a r s
and S i g h t y - s i x Cents ( $ 7 , 1 8 7 . 8 6 ) , which appeared to the c r e d i t of t h e Farmers



& Merchants National Bank of Lake City in i t s reserve account, and that i t v/ould
d i s t r i b u t e the said sum as a *oart pa^-mont on account of the checks contained in
the l e t t e r of October 8th i f i t ao.?oared that such sum %as .applicable as a part
payment on account of the cheeks contained in the l e t t e r of October 8th
mentioned above.

The said sum i s s t i l l held by the Federal He serve Bank of

Richmond pending the determination of t h i s case.

The d i f f e r e n c e between the

sum mentioned in t h i s paragraph and the balance mentioned in the paragraph next
preceding i s due to c e r t a i n e n t r i e s properly made in the reserve account of the
I'ermers J; LIerchants National Bank of Lake City denoting proper charges and
c r e d i t s concerning matters not involved in t h i s controversy.
12. On Saturday, October 9, 1926, a f t e r the c l o s e of b u s i n e s s the
d i r e c t o r s of the Farmers & 1.1 or chants r a t i o n a l Bank of Lake City r e s o l v e d to
c l o s e the bank, and on Sunday, October 10th, Mr. P. H. Arrowsmith, Attorney f o r
the Farmers & Her chants National Bank of Lake City, sent to the Federal Reserve
Bank of Richmond a telegram reading as f o l l o w s :
"Farmers & Merchants National L&].ce City c l o s e d
l a s t night t r y i n g to reorganise Monday morning w i l l you
send us Garrett to help."
This telegram was r e c e i v e d a t the o f f i c e of the Federal Reserve Bank
of Richmond at about 11:30 A. II. Sunday, October 10th, and the c o n t e n t s thereof
were immediately communicated to Mr. John T. Garrett, Manager of the Bank Rel a t i o n s Department of the Federal Reserve Bank of Richmond who l e f t Richmond
that night f o r Lake City, and arrived there on the morning of October 11th.
telegram was i n the hands of the proper o f f i c e r s of the f e d e r a l Reserve Bank
at the opening of b u s i n e s s on October 11th.

The Farmers & Merchants Rational

Bank of Lake City was not reorganised, or reopened, and on the




day of

» the Comptroller of the Currency appointed Thos. A. Early

The

-5-

X--4976-

as Receiver f o r the Farmers & Merchants National Bank of Lake City upon the
ground that the "bank was i n s o l v e n t .
13. On

, 1925, the Federal Reserve

Bank of Richmond sent to the r e c e i v e r a statement showing that i t had
transferred the balance of $7,187.06 mentioned above .to a suspense account,
and was holding the same, and the attached l e t t e r s exchanged between the
r e c e i v e r and the Federal Reserve Bonk of Richmond.

On May 11th, 1927 the

r e c e i v e r f o r tho f i r s t time demanded that the Federal Reserve Sank of Richmond
pay over to him the amount charged to the reserve account of the Farmers &
Merchants National Bank of Lake City on account of checks covt«ine-l in the
l e t t e r of October ?th.
14. The Farmers & Merchants National Bank of Lake City was a member
of the Federal Reserve System and had subscribed f o r and been a l l o t t e d 78
shares of the stock of the Federal Reserve Bank of Richmond, and had paid in
on s a i d subscription the sum of Thirty-nine Hundred Dollars ( $ 3 , 9 0 0 . 0 0 ) , and
dividends at the rate of 6$ from June 30, 1926 have accruod theyeon and are
unpaid.

The Receiver has surrendered to the Federal Reserve Bank of Richmond

the above Mentioned stock, and has demanded the surrender valy.3 t h e r e o f .
15. Any pa ty hereto may r e f e r to, or r e l y upon, any r e g u l a t i o n of
the Federal Reserve Board duly promulgated at the times mentioned above, and
a l l of such r e g u l a t i o n s so far as arc in any way a p p l i c a b l e to the abovj mentioned t r a n s a c t i o n s s h a l l be deemed a part of t h i s s t i p u l a t i o n .




X-497S

COPY

June 3, 1927.

Hon. Hewton D. Baker,
Union Trust Building,
Cleveland,
Ohio.
My dear Mr. Baker;
I cnclose f o r your information c o p i e s of certain correspondence between t h i s o f f i c e and Mr. M. G. Wallace,
Counsel f o r the Federal Reserve Bank of Richmond, regarding a
dispute "between that bank and tho Receiver of the Farmers & Merchants n a t i o n a l Bank of Lake City, which very l i k e l y w i l l l e a d to
l i t i g a t i o n over the r i g h t of Federal reserve banks to charge chocks
to the reserve accounts of member banks a f t e r such member banks
have been placed i n the hands of r e c e i v e r s .
I t occurs to me that t h i s may open up the whole
question of the r i g h t of Federal reserve banks, to charge checks
to the reserve accounts of member banks and that Mr. Wallace's
l i t i g a t i o n should e i t h e r be postponed or should be coordinated
with the l i t i g a t i o n which may a r i s e over member banks stamping
t h e i r checks "Hot payable through Federal reserve banks."
I
s h a l l appreciate i t very much indeed i f you w i l l k i n d l y l e t me
have your views about t h i s matter.
With a l l b e s t wishes, I am.
Cordially yours,
(Signed) Walter Wyatt,
General Counsel.
Enclosure:




COPY

X-4976-1

June 9 , 1327.

Mr. M. G-. Wallace, Counsel,
Federal Reserve Bank,
Richmond, Virginia*
My dear Mr. Wallace:
I have r e c e i v e d your l e t t e r of May 85th with f u r ther r e f e r e n c e to the controversy "between the Federal Reserve Bank
of Richmond and the Receiver of the Farmers & Merchants National
Bank of Lake City and have read same with much i n t e r e s t .
As you probably know, the Federal Reserve System
i s now threatened with l i t i g a t i o n over the question whether a member bank can d e f e a t the purposes of the par clearance system by
stamping on i t s checks the words M3Tot payable through Federal r e serve banks1'; and such l i t i g a t i o n i s very l i k e l y to i n v o l v e the quest i o n whether the Federal r e s e r v e banks may l a w f u l l y charge checks to
the reserve accounts of t h e i r member banks. In view of t h i s s i t u a t i o n , a court d e c i s i o n growing out of your controversy with the Compt r o l l e r of the Currency might a f f e c t the handling of t h i s other and
much more important question. I am, t h e r e f o r e , taking the l i b e r t y of
forwarding a copy of your l e t t e r s to Mr. Baker f o r h i s information
and am requesting suggestions from him as to the proper coordination
of your l i t i g a t i o n with that in which he may be involved on behalf
of the e n t i r e Federal Reserve System.
In order that you may know what t h i s i s a l l about,
I enclose f o r your information c o p i e s of c e r t a i n memoranda and
correspondence with r e f e r e n c e to member banks stamping t h e i r checks
"Hot payable through Federal reserve banks."
With a l l b e s t wishes, I am,
Cordially yours,
(Signed) Walter Wyatt,
General Counsel.
Enclosure:
WW:sad




X-4975-ir,

COPY
FZDE3AL RESERVE 3A1TK
OF RICHMOND

May 25, 1927.
Federal Reserve Board,
Washington, D. C.
Attention of Mr. Walter Wyatt, General Counsel.
My dear Mr. Wyatt:
Under date of March 1 s t , I wrote you g i v i n g you the f a c t s in a
controversy, which has a r i s e n between t h i s bank and the Farmers & Merchants
National Bank of Lake City.
The Comptroller of the Currency has r a i s e d another question
in connection with t h i s same bank. Under date of October 7th, we
sent to the Farmers & Merchants Rational Ban].: of Lake City a l e t t e r
containing checks aggregating $14,934.12. . These checks were r e c e i v e d
by the member bank on October 8th, and r e c e i p t was duly acknowledged.
The bank charged to the accounts of the drawers checks t o t a l l i n g $14,900.62
and returned checks t o t a l l i n g $33.50.
Under our time schedule, the amount of t h i s l e t t e r was chargeable
to the reserve account of the Farmers & Merchants Rational Bank on
October 11th.
On the night of Saturday, October 9th, the d i r e c t o r s
of the Farmers & Merchant's National Bank being threatened with a run on
the bank c l o s e d i t , and n o t i f i e d us that thoy had c l o s e d i t .
This
telegram was r e c e i v e d on Sunday, October 10th.
On Monday, October 11th,
there appeared to the c r c d i t of the f a i l e d bank a sum exceeding the amount
of the cash l e t t e r of October 7th, which was chargeable on October 11th.
We accordingly charged the amount of t h i s l e t t e r to the reserve account,
and c r e d i t e d the member banks from whom the checks i n the l e t t e r had been
r e c e i v e d . We have, of course, from time to time rendered statements
to the Receiver showing that t h i s charge was made. The Receiver did not
p r o t e s t a g a i n s t our a c t i o n u n t i l r e c e n t l y when a c t i n g under the d i r e c t i o n
of the Comptroller of the Currency, he n o t i f i e d us that he would demand
payment from us of the f u l l amount of the reserve balance of the f a i l e d
bank as i t stood at the opening of b u s i n e s s on October 11th. The Receiver
contends that we could not charge a cash l e t t e r to the reserve account of
the f a i l e d bank a f t e r r e c e i v i n g n o t i c e of i t s c l o s i n g , even though the l e t t e r
had been r e c e i v e d , and the checks in the l e t t e r c a n c e l l e d p r i o r to the
c l o s i n g . We, have, of course, r e f u s e d the R e c e i v e r ' s demand, and the Attorney
f o r the Receiver and myself are endeavoring to make up an agreed statement
of f a c t s upon which this' question and the other questions mentioned in
my l e t t e r of March 1st may be submitted to the Federal c o u r t s f o r determination.




Yours very truly,(signed) 1.1. G-. Wallace,
M. G. Wallace,
Counsel. •

o py
COPY

X-4976-n

April 7, 1927.

Mr. M. G. Wallace, Counsel,
Federal Reserve Bank,
Richmond, V i r g i n i a .
My dear Mr. Wallace:
I have r e c e i v e d and should have acknowledged more
promptly your l e t t e r of March 1st with r e f e r e n c e to the r i g h t of
a Federal reserve hank to charge to the account of an i n s o l v e n t
n a t i o n a l hank the amount of cash l e t t e r s forwarded to such bank
but not paid before i n s o l v e n c y .
As suggested in your l e t t e r t h i s o f f i c e would d e s i r e
to remain neutral on t h i s question f o r the present at l e a s t s i n c e
i t i s a controversy between the Comptroller of the Currency and
the Federal Reserve 3ank. I am very nruch i n t e r e s t e d , however,
and appreciate your c a l l i n g i t to my a t t e n t i o n . I s h a l l a l s o
appreciate i t i f you w i l l k i n d l y keep me advised as to the f u r t h e r
developments in t h i s c a s e .




With a l l b e s t wishes, I am,
Cordially yours,
Walter Wyatt,
General Counsel.

COPY

X-497o-o

o.r-iy

f e d e r a l 3 f $ 3 r v 2 bank of richmond.
March 1, 1927.
Federal Reserve Board,
Washington, B.C.
A t t e n t i o n of Mr. Walter

w

y a t t , General Counsel.

My dear Mr. Wyatt:
Under date of October 8, 19HC, t h i s oank sent to the
Farmers & Merchants National Bank of Lake City, South Carolina, a cash
l e t t e r c o n t a i n i n g checks aggregating $20,170.71. These checks were
r e c e i v e d by the Farmers & Merchants National Bank of Lake City on the
f o l l o w i n g day, and were c a n c e l l e d and charged to the accounts of the
drawers. Under our time schedule, the amount of t h i s cash l e t t e r was
normally chargeable to the reserve balance of the Farmers & Merchants
National Bank of Lake City on October 11th, but o n October 10th that
bank was c l o s e d by order of the Comptroller of the Currency upon
the ground that i t was i n s o l v e n t .
At the time of i t s c l o s i n g , i t had in our hands a n e t reserve
balance of $7,187.86. We charged back the amount of the checks contained
in our l e t t e r of October 8th to the several member banks from which
they had been r e c e i v e d , but at the same time we n o t i f i e d them, or some
of them, that we were holding the reserve balance, which we thought was
a p p l i c a b l e as a part payment on the cash l e t t e r .
We f i l e d our claim with the Receiver, but the o f f i c e of the
Comptroller of the Currency has h e l d that we are not e n t i t l e d to apply
the reserve b a l a n c e upon the cash l e t t e r .
I r e a l i z e that your o f f i c e would probably d e s i r e to be neutral
in the case of a controversy between the Comptroller of the Currency,
and a Federal Reserve Bank, e s p e c i a l l y as I b e l i e v e , i t i n v o l v e s , an
i n t e r p r e t a t i o n of the Regulations, but I am w r i t i n g you the f a c t s in
order that you may have them before you.
As you know, paragraph 4, s e c t i o n 5 of Regulation J reads in
part as f o l l o w s :




X

"Checks r e c e i v e d by a Federal reserve bank on i t s
member or nonmember c l e a r i n g banks w i l l o r d i n a r i l y be f o r warded or presented d i r e c t to such banks, and such banks w i l l
be required to remit or pay t h e r e f o r at par in cash or bank
d r a f t acceptable to the c o l l e c t i n g Federal reserve "ban1-, or
at the option of such Federal reserve bpnk to authorize such
Federal reserve bank to charge t h e i r r e s e r v e accounts or
c l e a r i n g accounts; provided, however, that any Federal
reserve bank may reserve the r i g h t i n i t s check c o l l e c t i o n
c i r c u l a r to charge such iten.s to the reserve account or
c l e a r i n g account of any such bank at any time when in any
p a r t i c u l a r case the Federal r e s e r v e bank deems i t necessary
to do so."

- 2 -

follows:

X-4976-c

We had i s s u e d our c i r c u l a r No. 143, which read in part as
"Checks r e c e i v e d by us drawn on our member banks w i l l
be forwarded i n cash l e t t e r s d i r e c t to such banks and each
member bank w i l l be required e i t h e r to remit therefor in
immediately a v a i l a b l e funds or to provide funds a v a i l a b l e
to us to meet such cash l e t t e r s within the agreed t r a n s i t time
to and from the member bank. Therefore, the amount of any cash
l e t t e r to a member bank i s chargeable against a v a i l a b l e funds
in the reserve account of such member at the e x p i r a t i o n of
such t r a n s i t t i n e , which date w i l l be shown on each cash
l e t t e r . The r i g h t i s reserved, however, to charge a cash
l e t t e r to the reserve account of a member bank at any time
when in any p a r t i c u l a r case we deem i t necessary to do so."

The p o s i t i o n taken by the Comptroller of the Currency i s
that the reserve balance i s not a proper o f f s e t on t h e amount of
the cash l e t t e r because with respect to the cash l e t t e r , we were
a c t i n g as agents o n l y , and the amount due upon i t i s due to the
member banks, whereas the amcunt due to the f a i l e d bank on account of
i t s r e s e r v e balance i s due from us in our own r i g h t to the e s t a t e of
the f a i l e d bank. I b e l i e v e t h i s p o s i t i o n would have much strength
i f i t were not f o r the p r o v i s i o n s of the Regulations, and of the
c i r c u l a r , but my p o s i t i o n i s that the Regulations, and the c i r c u l a r ,
operate as a contract between o u r s e l v e s and the f a i l e d bank, and
under t h i s c o n t r a c t , the reserve balance was e x p r e s s l y a p p l i c a b l e
to payment f o r cash l e t t e r s .
If the reserve balance had equalled, or exceed, the cash
l e t t e r the mere f a c t that the bank had been c l o s e d by the Comptroller
of the Currency b e f o r e we had e x e r c i s e d our r i g h t to charge the amount
of the cash l e t t e r against the reserve balance would not a l t e r the
f a c t that the amount of the cash l e t t e r was a b s o l u t e l y chargeable against
the reserve balance, and i f the amount of the cash l e t t e r was chargeable
against the reserve balance, the f a c t that the reserve balance did not
equal to the amount of the cash l e t t e r could not a l t e r our r i g h t , or
the r i g h t s of member banks. In other words, the Receiver standing in
the shoes of the f a i l e d bank can take no advantage from the f a c t that
the f a i l e d bank should have placed us in funds s u f f i c i e n t to cover
the e n t i r e cash l e t t e r , and claim that we l o s e our r i g h t to a part
because the f a i l e d bank did not p l a c e in our hands s u f f i c i e n t funds
to discharge the whole o b l i g a t i o n .
I t seems to me that the p o s i t i o n of the Comptroller of the
Currency draws i n t o question the r i g h t and duty of a Federal Reserve
Bank in every case in which there i s a f a i l u r e of a member bank a f t e r
the checks in a cash l e t t e r are c a n c e l l e d , and b e f o r e the e l a p s e of the timp
allowed f,or remittance, or f o r charging the cajfe. l e t t e r to the account of




359
X-4976-o
the f a i l i n g bank. I t , therefore, seems to me that i t i s important that we
reach some s e t t l e m e n t , and I have advised the o f f i c e r s of the "bank that I
think we should frame a t e i t case, and they have authorized me to n o t i f y
the Comptroller of the Currency that we s h a l l i n s i s t upon the a p p l i c a t i o n
of the reserve balance, or, in any event, refuse to pay i t over u n t i l the
r i g h t s of the e s t a t e of the f a i l e d bank and of the member banks whose items
Were in the cash l e t t e r Lave been j u d i c i o u s l y determined.
In view of the f a c t that the question i s one which concerns
p r i m a r i l y Federal Reserve Banks who do not employ the remittance system in
d e a l i n g w i t h member banks, the matter i s probably not of s u f f i c i e n t importance
to be c a l l e d a "System matter", but as I s t a t e d above, I am reporting i t
to you in order that .you may know what we are doing, and, of course, i f
you wish to give us any suggestions or advice, wo should be d e l i g h t e d .
With b e s t personal regards, I remain,
Very t r u l y yours,
(SGD.) M. G. Wallace,
Counsel
mow ib