Full text of Mimeograph Letters and Statements of the Board : Letter From Secretary Morrill re Topic for Conference of Governors: Federal Reserve Exchange Drafts and Transfer Drafts, Number X-7454, Volume 38, Page 234

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FEDERAL RESERVE BOARD
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE BOARD

X-7454
June 13, 1933.
SUBJECT:

Topic f o r Conference of Governors:
Federal Reserve Exchange d r a f t s
and T r a n s f e r d r a f t s .

Dear S i r :
There are inclosed herewith f o r your i n f o r m a t i o n two
copies of a memorandum addressed to the Board on the q u e s t i o n
whether the p r i v i l e g e of i s s u i n g Federal r e s e r v e exchange
d r a f t s and Federal r e s e r v e t r a n s f e r d r a f t s should be w i t h drawn.
The Board i s desirous of d i s c u s s i n g t h i s question
with the Governors of the Federal r e s e r v e "banks at t h e i r
next conference, and the matter i s hereby made a t o p i c f o r
i n c l u s i o n i n the program of the conference.
Very t r u l y y o u r s ,

Inclosures.

Chester M o r r i l l
Secretary

TO THE GOVERNORS OF ALL FEDERAL RESERVE BANKS.



X-7454a
May 31, 1933.
To:
From:

The Federal Reserve Board
Mr. Chase - A s s i s t a n t Counsel

Subject: Suggested t o p i c f o r Govern o r s ' Conference: - Federal r e s e r v e
exchange and t r a n s f e r d r a f t s .

The question has "been r a i s e d as t o the d e s i r a b i l i t y of
withdrawing t h e p r i v i l e g e now held by member "banks of i s s u i n g
Federal r e s e r v e exchange d r a f t s and Federal r e s e r v e t r a n s f e r d r a f t s ;
and i t has "been suggested t h a t t h i s question be given c o n s i d e r a t i o n by
the Conference of Governors of the Federal r e s e r v e banks.
On February 21, 1933, the Governor of the Federal Reserve
Bank of San Francisco telegraphed to the Board as f o l l o w s :
" I n view of the u n c e r t a i n t i e s of our l e g a l
o b l i g a t i o n i n connection with payment or dishonor
of Federal Reserve exchange and t r a n s f e r d r a f t s
i n event of suspension of drawer i t i s our b e l i e f
t h a t we should withdraw the p r i v i l e g e . Banks
a v a i l i n g themselves of use of exchange and t r a n s f e r
d r a f t s are very few and under present conditions i t
i s b e l i e v e d the service i s not warranted f o r the
r i s k s involved. Suggest r e f e r e n c e to be made t o
correspondence passing between Wyatt and Agnew on
t h i s s u b j e c t . Use of Federal Reserve exchange and
t r a n s f e r d r a f t s was d i r e c t e d by Federal Reserve
Board under date April 25, 1917 see l e t t e r X-102,"
Under date of March 2, 1933, the f o l l o w i n g r e p l y was s e n t :




"Your wire February 21 regarding p r i v i l e g e of
i s s u i n g Federal reserve exchange and t r a n s f e r d r a f t s .
In view of questions r a i s e d i n correspondence r e f e r r e d
to i t appears t h a t subject i s one t o which c o n s i d e r a t i o n
should be given as a matter of system p o l i c y by Gove r n o r s 1 Conference. Question as to what a c t i o n should
be taken i n meantime with r e s p e c t to withdrawal of
p r i v i l e g e i n i n d i v i d u a l cases i s one which Board f e e l s
should be considered c a r e f u l l y i n the l i g h t of any
d i s t u r b a n c e t h a t might be caused i n p r e s e n t circumstances
but i f a f t e r such c o n s i d e r a t i o n bank f e e l s j u s t i f i e d
i n withdrawing p r i v i l e g e i n p a r t i c u l a r cases Board w i l l
not o b j a c t . Copies of correspondence are being sent to
a l l other Governors f o r t h e i r i n f o r m a t i o n i n advance
of next c o n f e r e n c e . "

A— rtvtp.
**"
SoWever, i n view of the then e x i s t i n g "banking emergency,

2 3 6

and since i t was necessary to o b t a i n a d d i t i o n a l d a t a by correspondence,
the matter could not be submitted to the Governors f o r t h e i r cons i d e r a t i o n i n advance of t h e i r next conference, which was h e l d on
April 19, 1933; and no time was a v a i l a b l e d u r i n g t h a t conference t o
consider i t .
For the i n f o r m a t i o n of the Board, the f a c t s r e l a t i n g t o
t h i s matter are set out i n t h i s memorandum.
ORIGIN AMD NATURE OF THESE DRAFTS
The use of Federal reserve t r a n s f e r d r a f t s and Federal
exchange d r a f t s was inaugurated i n 1917, pursuant t o t h e Board's
l e t t e r of April 25, 1917, (X-102) and the inclosed memorandum and forms
(X-92 t o X-96, I n c l . ) copies of which are attached h e r e t o .

As s t a t e d

i n t h a t memorandum, the nature of these d r a f t s i s as f o l l o w s :
A Federal r e s e r v e t r a n s f e r d r a f t i s drawn by a member bank
on i t s own Federal r e s e r v e bank and i s payable only upon r e c e i p t of
advice from t h e drawee Federal r e s e r v e bank by the Federal r e s e r v e
bank a t which i t i s payable,
A Federal r e s e r v e exchange d r a f t i s drawn by a member bank
on i t s own Federal r e s e r v e bank and i s r e c e i v a b l e f o r immediate
a v a i l a b i l i t y at par at any Federal r e s e r v e bank, although a c t u a l l y
payable only a t the drawee Federal r e s e r v e bank.
I n connection with both types of d r a f t , i t was contemplated
t h a t the drawee Federal r e s e r v e bank, immediately upon r e c e i p t of
advice t h a t the d r a f t had been drawn, would t r a n s f e r the amount of
the d r a f t from the d r a w e r ' s account to a s p e c i a l account f o r t h e




X-7454a

8

-3payment of the d r a f t when p r e s e n t e d .

This f e a t u r e d i s t i n g u i s h e s t h e s e

d r a f t s from ordinary d r a f t s , i n connection with which no such t r a n s f e r
i s made.
At f i r s t , the maximum amount f o r which an Exchange d r a f t could
be drawn was l i m i t e d to $250.

This l i m i t was l a t e r increased t o $5,000

(see copy of Board's l e t t e r of August 12, 1918, X-1121, a t t a c h e d h e r e t o )
and i s now $50,000 (see copy of Board's l e t t e r of June 19, 1925, X-4362,
attached h e r e t o ) .

The minimum amount f o r which a T r a n s f e r d r a f t may he

drawn i s $250.
As i s shown by the above memorandum (X-92), the drawing of
these d r a f t s was intended t o he a p r i v i l e g e supplementary t o t h e r i g h t
of drawing ordinary hank d r a f t s upon Federal r e s e r v e banks, and i t
was a p p a r e n t l y o r i g i n a l l y contemplated t h a t t h e p r i v i l e g e would be
extended to a l l member banks.
In view of the f a c t t h a t Exchange d r a f t s were s u b j e c t t o
immediate a v a i l a b i l i t y , the Federal r e s e r v e banks adopted t h e p r a c t i c e
of g r a n t i n g the p r i v i l e g e of drawing such d r a f t s only t o member
banks whose a p p l i c a t i o n s f o r the p r i v i l e g e had been approved by t h e
Federal r e s e r v e bank.

The Board recognized t h i s p r a c t i c e , as i s shown

by i t s l e t t e r of June 19, 1925 (X-4362).

As an i l l u s t r a t i o n of t h i s

p r a c t i c e t h e r e i s attached h e r e t o a copy of C i r c u l a r 69 of August
29, 1925, of t h e Federal Reserve Bank of San F r a n c i s c o .

In some

cases the p r i v i l e g e of drawing Transfer d r a f t s was l i k e w i s e
l i m i t e d t o banks whose a p p l i c a t i o n s f o r t h e p r i v i l e g e had been approved.




X-7454a

UNCERTAIITTIES AS TO LEGAL RIGHTS IN COMECTION
WITH THESE DRAFTS.
As the number of "bank f a i l u r e s i n c r e a s e d , i t "became
apparent t h a t c e r t a i n troublesome questions arose i n connection
with these d r a f t s i n the event of the insolvency of the drawer
"bank; and i n order to o b t a i n the views of the o t h e r Federal r e s e r v e
"banks, Mr. Agnew, Counsel f o r the Federal Reserve Bank of San F r a n c i s c o ,
suggested to Mr* Hale, Cashier of t h a t "bank, t h a t he address a l e t t e r
to the other Federal r e s e r v e banks s t a t i n g a number of t h e s e questions.

A copy of Mr. H a l e ' s l e t t e r , dated December 2, 1932, i s a t -

tached h e r e t o .
I n a l e t t e r t o the Board's General Counsel dated February 2 ,
1933, Mr. Agnew s t a t o d t h a t the p r i n c i p a l l e g a l q u e s t i o n underlying
the v a r i o u s q u e s t i o n s asked "by Mr. Hale was;
"Does the issuance of an exchange d r a f t "by a member
"bank, t h e r e c e i p t of n o t i c e of such issuance "by a
Federal Reserve Bank and the charging of the d r a f t "by
the Federal Reserve Bank t o the member "bank's account
c o n s t i t u t e such segregation and assignment of the
funds necessary to pay the d r a f t as t o r e q u i r e t h e
Federal Reserve Bank to honor and pay the d r a f t upon
p r e s e n t a t i o n , even a f t e r n o t i c e of insolvency of t h e
drawer?"
Replies to Mr. H a l e ' s l e t t e r were r e c e i v e d from almost a l l of
the Federal r e s e r v e "banks.

Copies of those r e p l i e s are a t t a c h e d h e r e t o .

Although not a l l of the r e p l i e s s t a t e a d e f i n i t e conclusion, the m a j o r i t y
express the opinion t h a t the answer to the underlying q u e s t i o n s t a t e d "by
Mr. Agnew i s t h a t , a f t e r r e c e i v i n g advice t h a t the d r a f t has "been i s s u e d
and a f t e r t r a n s f e r r i n g funds from the account of the drawer bajak to a
s p e c i a l account f o r the payment of the d r a f t , the drawee Federal r e s e r v e



X-7454a

••5*
"bank should not use the funds f o r any other purpose, ancl i s j u s t i f i e d
i n u s i n g them f o r the purpose of paying t h e d r a f t even a f t e r n o t i c e
of the insolvency of the drawer.

The reasoning upon which t h i s com*

e l u s i o n i s reached, with which I an i n agreement, i s s t a t e d as f o l l o w s
by Mr, Wallace i n h i s memorandum dated December 20, 1933 (which i s
attached h e r e t o accompanying the r e p l y of the Federal Reserve Bank
of Richmond t o Mr. H a l e ' s l e t t e r ) .
"Applying the p r i n c i p l e s of the above cases to
our C i r c u l a r No. 142 r e l a t i n g t o t h e issuance of
Federal Reserve Exchange d r a f t s , I am i n c l i n e d to
the opinion t h a t Federal Reserve Exchange d r a f t s issued
under the c i r c u l a r are c l e a r l y assignments of the fund
a g a i n s t which they are drawn, or r a t h e r t h a t the
advice of drawing which, the drawer bank must give i s
s u f f i c i e n t to c o n s t i t u t e an assignment when read i n
connection with the c i r c u l a r , f o r i n t h a t case i t i s
p l a i n t h a t the drawer of t h e d r a f t i s placed upon n o t i c e
t h a t when t h e d r a f t i s drawn and the advice given, i t s
account w i l l be charged. The c i r c u l a r s t a t e s t h a t Fede r a l Reserve d r a f t s are e n t i r e l y d i f f e r e n t from ordinary
d r a f t s and are intended to serve a d i f f e r e n t purpose.
The c i r c u l a r i n d i c a t e s t h a t t h i s d i f f e r e n c e i s because
ordinary d r a f t s drawn on Federal r e s e r v e banks are payable
only on p r e s e n t a t i o n , and consequently w i l l not be r e ceived by other Federal r e s e r v e banks f o r immediate
c r e d i t , but t h a t the Federal Reserve Exchange d r a f t s w i l l
be received f o r immediate c r e d i t a t par by any o t h e r
Federal r e s e r v e bank or branch s u b j e c t , of course, t o
f i n a l payment by the Federal r e s e r v e bank on which they
arc drawn."
Mr. Parker, counsel f o r the Federal Reserve Bank of A t l a n t a
and Mr. McConkey, counsel f o r the Federal Reserve Bank of S t . Louis,
also reach t h i s conclusion, adding t h a t i n t h e i r opinion the t r a n s a c t i o n i s analogous to one where the drawee bank i s s u e s i t s c a s h i e r ' s




X-7454a
—6—
check or c e r t i f i e s the o r i g i n a l check.

(Copies of the memoranda of

Mr. Parker and Mr. McConkey are attached h e r e t o accompanying the
r e p l i e s of t h e i r Federal r e s e r v e banks to Mr. H a l e ' s l e t t e r )
The conclusion s t a t e d above, however, does not dispose of
questions which may a r i s e a f f e c t i n g the Federal r e s e r v e bank t o
which an Exchange d r a f t i s presented f o r payment, since t h a t bank
may not know d e f i n i t e l y (a) whether the drawer has n o t i f i e d the
drawee Federal r e s e r v e bank, or (b) whether the drawee bank has
a c t u a l l y made the t r a n s f e r on i t s books a f t e r r e c e i v i n g such n o t i c e ,
e i t h e r because i t was not i n possession of s u f f i c i e n t funds with which
to make the t r a n s f e r or f o r any other reason.

I n e i t h e r event, t h e

reasoning upon which t h e conclusion s t a t e d above i s based would
obviously be i n a p p l i c a b l e , and the Federal r e s e r v e bank t o which
the d r a f t was presented f o r payment might t h e r e f o r e be faced with a
l o s s i f i t paid the d r a f t on p r e s e n t a t i o n .
Mr. Wallace d i s c u s s e s t h i s question at some l e n g t h i n h i s
l e t t e r of February 14, 1933 to Mr. Agnew, a copy of which i s a t t a c h e d
hereto.

Of course, i f t h e Federal r e s e r v e bank to which the d r a f t

i s presented f o r payment were to delay payment u n t i l i t had communicated with the drawee Federal r e s e r v e bank and a s c e r t a i n e d t h a t
funds were u n c o n d i t i o n a l l y a v a i l a b l e , a l l these questions might be
avoided, although i t would eeem t h a t t h i s procedure might i n some
cases be i n c o n f l i c t with t h e p r o v i s i o n s of the c i r c u l a r , and t h e
statement appearing on the f a c e of the d r a f t i t s e l f , t h a t t h e funds
are s u b j e c t t o immediate a v a i l a b i l i t y .




Moreover, as Mr, Wallace

X~7454a

2 4 1

-7p o i n t s out i n h i s l e t t e r to Mr. Agnew, a r e f u s a l t o honor the
d r a f t , no m a t t e r what the circumstances, would "be most u n d e s i r a b l e
from the standpoint of the e f f e c t which such a c t i o n would have
upon the persons d e a l i n g with Federal r e s e r v e "banks, since the terms of
the d r a f t would i n d i c a t e , at l e a s t t o an ordinary b u s i n e s s man, t h a t
the Federal r e s e r v e bank had i n e f f e c t promised t h a t t h e funds would
be immediately and u n c o n d i t i o n a l l y a v a i l a b l e .

Technically, n e i t h e r

the paying nor the drawee Federal r e s e r v e bank might be l i a b l e as a
matter of law because the d r a f t had not been accepted by the drawee,
but the r e s u l t might be hardship and p r a c t i c a l i n j u s t i c e to t h e person
r e c e i v i n g the d r a f t ,

Mr. Wallace goes on to say:

"The o p e r a t i n g o f f i c e r s of the bank t o l l me t h a t
these d r a f t s are not used t o any l a r g e extent by our
member banks* In t r a n s f e r s from one bank t o another i t
i s more convenient to use the wire t r a n s f e r , I u n d e r stand t h a t t h e d r a f t s are l a r g e l y used when some i n d i v i d u a l
wishes to purchase from a country bank exchange payable
at some p o i n t at which the bank has no correspondent.
T h e r e f o r e , as Mr. Clements pointed o u t , i t seems t h a t t h e
chief use of the d r a f t s at present i s i n the very c l a s s
of t r a n s a c t i o n s i n which t h e i r use i s l i k e l y to mislead the
p u b l i c , and i t i s f a r from improbable t h a t they may do
more harm than good when used under p r e s e n t c o n d i t i o n s .
"You understand, of course, t h a t I have not d i s c u s s e d
t h i s matter with t h e senior o f f i c e r s of t h e bank and consequently what I have s a i d i s merely an expression of my
i n d i v i d u a l views; but I am very p o s i t i v e t h a t from the
standpoint of a lawyer, i f the use of these d r a f t s i s
continued the c i r c u l a r s under which they are issued
and the forms of t h e d r a f t s should be c a r e f u l l y reviewed
i n the l i g h t of t h e experience which we have had. i n t h e
p a s t few y e a r s . One of the operating o f f i c e r s of t h e bank
suggested to me t h a t i f no other r e v i s i o n was made, the form
of t h e d r a f t should at l e a s t be r e v i s e d to the extent
of changing the phraseology which i n d i c a t e s t h a t any
Federal r e s e r v e bank w i l l r e c e i v e t h i s d r a f t f o r immediate
a v a i l a b i l i t y a t par and the following words added: ' S u b j e c t
n e v e r t h e l e s s to payment by the Federal r e s e r v e bank upon
which i t i s drawn'."



€% 4 O
X-7454a
-8-

LITTLE USE IS MADE OF THESE DRAFTS
All of the r e p l i e s which make any comment as to the extent
t o which t r a n s f e r d r a f t s and exchange d r a f t s are now used, i n d i c a t e
t h a t at t h e p r e s e n t time t h e i r use i s very l i m i t e d (see r e p l i e s of
Federal Reserve Banks of Hew York, A t l a n t a , Chicago, S t . Louis and
San F r a n c i s c o ) , and i n some cases has "been e n t i r e l y discontinued
(see r e p l i e s of Federal Reserve Banks of Kansas City and Minneapolis).
The p r i n c i p a l reason given f o r t h e i r disuse i s the p r a c t i c e , which
was inaugurated a f t e r the inauguration of these d r a f t s i n 1917, of
making f r e e t e l e g r a p h i c t r a n s f e r s of f u n d s , thus r e n d e r i n g the p r i v i l e g e
of i s s u i n g t h e s e d r a f t s of l i t t l e p r a c t i c a l v a l u e .
Several of the r e p l i e s suggest t h a t , i n view of t h e small
extent to which t h e s e d r a f t s are used and i n view of the danger t h a t
t h e i r use may r e s u l t i n f i n a n c i a l l o s s or l i t i g a t i o n t o the Federal
r e s e r v e "banks, i t would he advisable to d i s c o n t i n u e the use of d r a f t s
of both t y p e s .
For i n s t a n c e , i n h i s l e t t e r of February 2 , 1933 t o t h e Board's
General Counsel, Mr. Agnew s a i d :
" I t seems to me, and t o the o f f i c e r s of t h e
Federal Reserve Bank of San F r a n c i s c o , t h a t the
r i g h t t o the use of exchange and t r a n s f e r d r a f t s
i s superfluous and t h a t without imposing any h a r d ship upon member hanks or c u r t a i l i n g the f a c i l i t i e s
o f f e r e d by the Federal Reserve System t o any a p p r e c i a b l e
e x t e n t , t h e i r use could be d i s c o n t i n u e d , "
I n h i s l e t t e r of February 14, 1933, to Mr. Agnew, Mr. Wallace
said:




X~7454a
-9-

U f,

z|

£ \

"I have "been considering your suggestion t h a t t h e
use of t h e s e d r a f t s should "be d i s c o n t i n u e d , and while
I have not had an opportunity to d i s c u s s a l l phases
of the s i t u a t i o n with the executive o f f i c e r s of the bank,
I myself have come to the conclusion t h a t the whole s u b j e c t
i s so f u l l of doubtful q u e s t i o n s , both of law and p o l i c y ,
t h a t i t would c e r t a i n l y be advisable e i t h e r to d i s c o n t i n u e
the use of the d r a f t s , or at l e a s t to review the s i t u a t i o n
c a r e f u l l y and endeavor to e l i m i n a t e some of the weak spots
i n t h e system as i t operates a t p r e s e n t .
The r e p l i e s to Mr. H a l e ' s l e t t e r a l s o c o n t a i n other s i m i l a r
expressions of opinion.
I t appears moreover from the r e p l i e s t o Mr. H a l e ' s l e t t e r
t h a t t h e r e are other m a t t e r s not discussed i n those r e p l i e s which
i t would be advisable t o d i s c u s s i n connection with these d r a f t s
i n the event t h a t i t i s not decided t o withdraw the p r i v i l e g e of
i s s u i n g them.

For i n s t a n c e , Mr. Coleman, Deputy Governor of the

Federal Reserve Bank of D a l l a s s t a t e s at the conclusion of h i s r e p l y
t o Mr. H a l e ' s l e t t e r t h a t :
"There are q u i t e a number of q u e s t i o n s t h a t immediately
occur to one i n considering t h i s matter and i t would not be
p r a c t i c a b l e i n a l e t t e r of t h i s kind t o attempt t o d i s c u s s
a l l of them. We do b e l i e v e t h a t the m a t t e r as now handled
i n t h e Federal Reserve System i s s u s c e p t i b l e t o much improvement , and we should be glad to j o i n with you i n an attempt
to work out a p l a n by which these d r a f t s could be handled with
minimum r i s k s to Federal Reserve Banks."
I t i s accordingly r e s p e c t f u l l y suggested t h a t the q u e s t i o n
whether the p r i v i l e g e of i s s u i n g these d r a f t s should be withdrawn, should
be made a t o p i c f o r d i s c u s s i o n at t h e next Conference of Governors, and
t h a t a copy of t h i s memorandum and attached papers be forwarded to the
Governors of a l l Federal r e s e r v e banks f o r t h e i r i n f o r m a t i o n i n advance
of t h e i r next Conference.




A l e t t e r f o r t h i s purpose i s a t t a c h e d h e r e t o .
Respectfully,
(s) G, Howland Chase
G. Howl and Chase,
A s s i s t a n t Counsel.

FEDERAL RESERVE BOARD

A—lUd«

WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE BOARD

April 25, 1917.
Dear S i r :
Following the l a s t conference with the Governors
of the Federal reserve banks i n Washington the Committee
on Clearings of the Federal Reserve Board took up the matt e r of Federal Reserve Exchange and has worked out a plan
which the Board has approved t o become ope ra tive May 21.
An explanation of the plan and sample forms, are enclosed
herewith f o r your information and guidance.
The Federal reserve banks a r e requested t o issue
as soon as p o s s i b l e c i r c u l a r s t o t h e i r member banks embodying the r u l e s and recommendations which a r e a p p l i c a b l e
to them, i t being unnecessary, of course, to inform member
banks of such d e t a i l s as concern t h e Federal reserve banks
only.
Respectfully,

Governor.

Enclosures.




FEDERAL

RESERVE

DRAFTS.

There shall be two special forms of drafts on each
Federal Reserve Bank which will b« available for immediate
credit at other Federal Reserve Banks.
The privilege of drawing these drafts shall be extended to all member banks complying with the regulations formulated by their Federal Reserve Banks.
The drawing of these drafts shall not interfere with
member banks drawing the ordinary checks on their Federal Reserve BanksThe special drafts provided for in this circular must
be drawn on forms approved by the Federal Reserve Bank of which
the drawing bank is a member.

The forms are to be similar to

the specimens enclosed herewith.
Any Federal Reserve Bank may, if in the judgment of
its officers it becomes necessary, make a reasonable charge
against neither banks drawing' the-se- drafts for the purpose of
effecting transfers of funds, such charge not to exceed the
rate for transfers prevailing at the tirr.e the drafts are drawn.
p •
All of these drafts shsfll- be - immediately- charged to
the drawing member bank's account on receipt of advice by the




draws© Federal Reserve Bant.

Specimen forms of advice a r e

enclosed with t h i s c i r c u l a r .
The two kind5 of d r a f t s s h a l l b? known as "Federal
'Reserve Exchange" and "Federal Reserve T r a n s f e r " d r a f t s .
FEDERAL RESERVE EXCHANGE DR.-FT.

FEDERAL RESERVE TRANSFER DRAFT.

The "Federal Reserve Exchange"
d r a f t s s h a l l be t h e d r a f t drawn by
a member bank upon i t s own Federal
Reserve Bank and made r e c e i v a b l e f o r
immediate a v a i l a b i l i t y a t par a t
any Federal Reserve Bank but a c t u a l l y payable only a t the drawee Fede r a l Reserve Bank.

The "Federal Reserve Transf e r " d r a f t s h a l l be the d r a f t
drawn by a ;r.en;ber bank upon i t s
own Federal Reserve Bank and
made payable on advice of the
drawee a t any Federal Reserve
Bank s p e c i f i e d in the d r a f t .

•They s h a l l , f o r the present
and u n t i l otherwise provided, hedrawn f o r amount3 not in excess of

They s h a l l , f o r t h s p r e s e n t ,
bis drawn f o r amounts in excess
of $250.00.

$250.00.

The drawing bank s h a l l be r e quired to give advice by mail t o
i t s Federal Reserve Bank of t h e
t o t a l amount of d r a f t s drawn each
day.
These d r a f t s on a Federal Reserve Bank when received f o r immediate a v a i l a b i l i t y by another
s h a l l be l i s t e d in a s p e c i a l l e t t e r
and forwarded t o the drawee Fede r a l Reserve Bank f o r c r e d i t .
If the t o t a l of the l e t t e r
j u s t i f i e s there can be an advice
by wire and e n t r i e s made on the
day the l e t t e r goes forward.




The drawing bank s h a l l be
required to give advice by
ir.ail to i t s Federal Reserve
E?.nk of the numbers, amounts
and tct.-.l
payable a t each
.. Federal Reserve Bank of d r a f t s
drawn each day.
This advice
shall be under an authorized
signature and a d u p l i c a t e
shall be forwarded to the Fede r a l Reserve Bank a t which the
d r a f t s are trade payable, the
duplicate advice to contain
the s i g n a t u r e i n ink of o f f i c e r s signing the d r a f t s .

X-92.
2 4 7
FEDERAL RESERVE TRANSFER DRAFT.
(Continued)
The drawee Federal Reserve Bank
s h a l l , upon r e c e i p t of advice from the
drawing member tank, t e l e g r a p h t h e Fede r a l Reserve Bank a t which the d r a f t s
were made payable, confirming the advice and a u t h o r i z i n g a t r a n s f e r of the
aggregate amount from i t s r e g u l a r a c count t o an exchange account.
When sending a telegram the a r r a n g e ment of the code words f o r name of bank,
date of advice and aggregate amount
s h a l l be in the order given and s h a l l
be understood t o mean; Federal Reserve
Transfer D r a f t s drawn by
per
t h e i r advice dated
the aggregate amount of which i s not more than
are good. Charge
$
our account and c r e d i t our exchange
account with the t o t a l amount advised
in t h i s telegram. See specimen t e l e gram enclosed with t h i s c i r c u l a r .
For the purpose of s i m p l i f y i n g
telegrams i t i s suggested t h a t each
Federal Reserve Bank may make a code
so t h a t each of i t s member banks can
be designated by one code word, the
f i r s t l e t t e r of the word t o i n d i c a t e
t h e d i s t r i c t in which t h e member bank
is located.
The d r a f t s when pa id, by the Fede r a l Reserve Bank s p e c i f i e d in the
d r a f t , s h a l l be marked pa id, l i s t e d in
a s p e c i a l l e t t e r and forwarded t o t h e
drawee Federal Reserve Bank. The t o t a l
of the l e t t e r s h a l l be charged t o the
exchange account of the a d d r e s s e e .
Under e x i s t i n g r e g u l a t i o n s governing the Gold Settlement Fund
any Federal Reserve Bank can, a t any time, obtain a s e t t l e m e n t on
2. net balance due from another Federal Reserve Bank.
This plan s h a l l become o p e r a t i v e on the 21st day of May,
1917.

Enclosures:


1

A
CODE WORD
KERAMIC

x-93-

kS - 1
FIRST

NATIONAL

BANK

Waco, Texas.
To Federal Reserve Bank,
of D a l l a s .
We have t h i s day drawn checks on Federal
Reserve Transfer form as l i s t e d "below payable on advice from you a t the Federal Reserve Bank of
•
NUMBER

AMOUNT

NUMBER

AMOUNT

TOTAL
Charge our account with t o t a l and arrange f o r payment.




Respectfully,
Cashier.

E.

CODE WORD
KERAMIC

X-94.

4s-l
FIRST

NATIONAL

BANK

T,v

aco, Texas

To Federal Reserve Bank,
of
We have t h i s day drawn checks on Federal Reserve Transfer form as l i s t e d below payable by you on
advice from the Federal Reserve Bank of D a l l a s .
NUMBER

AMOUNT

NUMBER

TOTAL
Signature in ink and t i t l e
of o f f i c e r s signing any of
the checks above l i s t e d .




AMOUNT

FIRST

NATIONAL

BANK
Waco, Texas

To Federal Reserve Bank
cf D a l l a s .
Gentlemen:
We have t h i s day drawn checks on Federal Reserve Exchange
form, the t o t a l amount of which i s $ _ _ _ _ _
Dollars
Charge our account to cover.
R. P. DUPREE,
Cashier.

x-95
FIRST

NATIONAL

To Federal Reserve Bank
of D a l l a s .

BANK
Waco, Texas

Gentlemen:
We have t h i s day drawn checks on Federal Reserve Exchange
form, the t o t a l amount of which i s
Dollars.
Charge our account t o cover.




R. P. DUPREE,
Cashier.

2 5 1
X-96.

FORM
April 12, 1917.
To Federal Reserve Bank,
Chicago, 111.
Keramie Eclipse Animal Kronic Export Cursedly S l i n g c a r t .
Federal Reserve Bank of D a l l a s .
Decoded - Federal reserve t r a n s f e r d r a f t s
drawn by
F i r s t N.B., Waco,Tex. Amer.N. B.
per t h e i r advice dated
the aggregate amount of which
i s not more than
are good.
account.




A p r i l 10th
$15,030.00

April^llth'
$5,000.00

Charge our account $20,000.00 and c r e d i t our exchange

252
FEDERAL RESERVE BOARD
WASHINGTON
A D D R E S S OFFICIAL CORRESPONDENCE TO
T H E FEDERAL RESERVE B O A R D

August 12, 1918.
X-1121
Dear S i r :
At the suggestion and upon i n v i t a t i o n of the Federal
Reserve Bank of Cleveland, an inforrral meeting was held on August
7th, a t the o f f i c e of the Federal Reserve Board t o d i s c u s s Federal
Reserve Exchange d r a f t s .

The meeting was attended by r e p r e s e n t a -

t i v e s of s i x Federal Reserve Banks.

The recommendations made, a

copy of which i s inclosed with t h i s l e t t e r , have been considered
and approved by the Board.
(l)

Federal Reserve Exchange D r a f t s .

E f f e c t i v e September 3rd, the l i m i t of drawings of such
d r a f t s s h a l l be increased from $250 t o $5,000.

Federal Reserve

Banks paying Exchange d r a f t s of other Federal Reserve Banks, w i l l
be permitted t o deduct the amount paid from the t o t a l c r e d i t s r e ported in the Gold Settlement c l e a r i n g f o r t h e day.

The d a i l y tranr-

s c r i p t , forwarded t o each Federal Reserve Bank, should show t h e items
c r e d i t e d f o r t h e day and a deduction therefrom of t h e Exchange d r a f t s
paid f o r i t s account.

The net c r e d i t should agree with t h e f i g u r e s

reported in the Gold Settlement c l e a r i n g s .




-2-

(2)

1-1121

The Board deems i t d e s i r a b l e f o r the Reserve Banks

t o adopt the recommendation of the Committee, t h a t a l l Reserve Banks
give immediate c r e d i t f o r Clearing House items on t h e day such items
a r e received from o t h e r Federal Reserve Banks, t h e balances so c r e d i t ed t o be included in t h e c r e d i t balances reported f o r s e t t l e m e n t
through t h e Gold Fund c l e a r i n g s .

The a c t u a l payment f o r such balances

would then be made on the same day a s s e t t l e m e n t i s received by the
paying Federal Reserve Bank f o r the checks and o t h e r items i t c o l l e c t s ,
(3)

With respect to the recommendation t h a t a more d e t a i l e d

a n a l y s i s be made of the • f l o a t 1 s i t u a t i o n ( i . e . , t h e e x t e n t t o which
immediate c r e d i t has been given upon u n c o l l e c t e d items) t h e r e i s i n closed herewith a memorandum prepared by the S t a t i s t i c a l Division
based upon t h e information which i t has a t hand.

The Board i s w i l l i n g

t o have a more d e t a i l e d study of t h i s question made, but t o do so w i l l
r e q u i r e a c a l l f o r the necessary data from each Federal Reserve Bank
and i t i s believed t h a t such study could best be made a t t h e d i f f e r e n t
Federal Reserve Banks.
Very t r u l y yours.

Governor.

Inclosures.




X-1121-a

0 0 2 1

Washington, August 7, 1918.
Federal Reserve Board,
Washington, D. C.
Gentlemen:
At a meeting held in t h e Treasury Department Building in t h e
Board Room of the Federal Reserve Board, August 7, 1918, a t which the
following were p r e s e n t :
Mr. M. J . Fleming, A s s t . Cashier, Federal Reserve Bank,
Cleveland.
Mr. S. H. Hendricks, Cashier, Federal Reserve Bank,
New York.
Mr. P i e r r e Jay, Federal Reserve Agent,
New York.
Mr. F. J . Carr, A s s t . Cashier, Federal Reserve Bank,
Chicago.
Mr. Chas. A. Peple, Deputy Governor, Federal Reserve Bank,
Richmond.
Mr. Thos. Gamon, j r . , A s s t . Cashier, Federal Reserve Bank,
Philadelphia.
Mr. C. C. Bullen, Cashier, Federal Reserve Bank, Boston.
I t i s recommended t o t h e Federal Reserve Board t h a t the
l i m i t f o r t h e drawings of Federal Reserve exchange d r a f t s be increased
from $250 t o $5,000 and t h a t Federal Reserve Banks holding Federal
Reserve exchange d r a f t s of other Federal Reserve Banks be permitted
t o deduct such Federal Reserve exchange d r a f t s from t h e t o t a l c r e d i t s
reported t o t h e Federal Reserve Board i n the Gold Settlement EUnd each
day.
In order t o bring about a d a i l y s e t t l e m e n t f o r c l e a r i n g house
items, i t i s recommended t h a t a l l Federal Reserve Banks give immediate
c r e d i t f o r c l e a r i n g house items t h e day received from other Federal Reserve Banks, without regard t o the time of day r e c e i v e d , inasmuch a s the
balance so created i s reported t o t h e Gold Settlement Fund a t t h e close
of business but i s r e a l l y s e t t l e d the following day when t h e checks
have been c o l l e c t e d .
I t i s voted t h a t the Federal Reserve Board be asked t o cause
a more d e t a i l e d a n a l y s i s of t h e " f l o a t " s i t u a t i o n i n each Federal Reserve Bank t o be made, f o r such period a s the Board may deem a d v i s a b l e ,
in order t h a t t h e r e nay be a more exa&fr knowledge a s t o what c o n s t i t u t e s
a l a r g e amount of " f l o a t " now appearing in the statement of the Federal
Reserve system and i n order t h a t each Federal Reserve Bank may study in
a more d e t a i l e d way methods of e l i m i n a t i n g i t s own " f l o a t " .




Respectfully,

M. J . FLEMING.
Chairman.

FEDERAL RESERVE BOARD
WASHINGTON
A D D R E S S OFFICIAL CORRESPONDENCE T O
T H E FEDERAL RESERVE B O A R D

y
&

AHLCLO
'

June 19, 1925.

SUBJECT:

I n c r e a s i n g Limit Federal Reserve Exchange D r a f t .

Dear S i r :
The Federal Reserve Board has approved the
ac t i o n of the r e c e n t Governors * conference i n v o t i n g
to r a i s e t h e l i m i t on t h e Federal r e s e r v e exchange
d r a f t from $5,000 to $50,000. This p r i v i l e g e a f forded to member banks becomes e f f e c t i v e August 1,
1925.
The r e s e r v e hanks a r e expected to e x e r c i s e
care i n checking up the permits extended to member
banks to draw exchange d r a f t s b e f o r e p a s s i n g c r e d i t
on any: .such d r a f t and to make t e l e g r a p h i c i n q u i r y i n
any questionable c a s e . The Board understands t h a t
whenever a Federal r e s e r v e bank withdraws a permit
i t w i l l immediately advise a l l other Federal r e s e r v e
banks.
Very t r u l y yours,

Vice Governor.

To Governors of a l l F.R.Bank&j




X-7454-b

256

FHDBHAL EESE2VE BJfflX OF SAH JSUUTCISCO
December 2 , 1932
Copy of l e t t e r t o a l l Federal Reserve Banks
I t has occurred to us t h a t many p e r p l e x i n g problems might a r i s e
i n connection with exchange and t r a n s f e r d r a f t s i n t h e event of suspension
of the bank i s s u i n g t h e s e d r a f t s b e f o r e such d r a f t s were presented f o r
payment.
Thinking t h i s problem may have a r i s e n i n your d i s t r i c t , or t h a t
you had given some thought t o what a c t i o n you would t a k e , we are l i s t i n g a
number of q u e s t i o n s which have occurred to u s and would a p p r e c i a t e your
comments t h e r e o n .
I . In t h e event of insolvency of a member bank i n i t s own
district,
1. Would a Federal r e s e r v e bank have any o b l i g a t i o n
to pay t h e holder i n due course of such a d r a f t , i f
presented to i t a f t e r t h e suspension of the member bank?
2 . Assuming i t might r e f u s e t o pay the d r a f t so
p r e s e n t e d , would i t have the r i g h t t o r e v e r s e i t s
e n t r i e s and c r e d i t back the amount of the d r a f t t o t h e
r e s e r v e account?
3. I f the answer to 2 i s i n the a f f i r m a t i v e , would
i t then have the r i g h t t o apply such funds a g a i n s t any
e x i s t i n g indebtedness of the member bank t o t h e r e s e r v e
bank, or would i t be necessary t o repay the funds to the
receiver?
l i e What would be the p o s i t i o n of the two r e s p e c t i v e Federal
r e s e r v e banks should one reserve bank pay a t r a n s f e r d r a f t a f t e r
suspension of an i s s u i n g bank i n another d i s t r i c t ,
1. I f the paying r e s e r v e bank had not r e c e i v e d t e l e graphic advice from the d i s t r i c t i n which the d r a f t was
issued of the suspension of the bank?
2 . I f such t e l e g r a p h i c advice had been sent but had
been overlooked by the paying department of t h e Federal
r e s e r v e bank i n question?
( i n connection with t h i s q u e s t i o n , the form of t r a n s f e r d r a f t p r o vided would seem t o c l e a r l y i n d i c a t e t h a t the bank of the d i s t r i c t
i n which i t i s issued i s the drawee, although i t s t a t e s t h a t t h e
d r a f t w i l l be paid by another s p e c i f i e d bank.)




X-7454-b

257

Copy of l e t t e r t o a l l Federal Reserve Banks
—2—

I I I . What would "be the p o s i t i o n of the two r e s p e c t i v e Federal
r e s e r v e banks should one r e s e r v e "bank give c r e d i t f o r an exchange
d r a f t a f t e r suspension of an i s s u i n g bank i n another d i s t r i c t ,
1. I f i t had not received t e l e g r a p h i c advice of s u s pension of the drawing bank?
2. I f such t e l e g r a p h i c advice had been sent but had
been overlooked by the paying department of t h e Federal
r e s e r v e bank i n question?
(With r e f e r e n c e t o both I I and I I I , i t should be borne i n mind t h a t
a Federal r e s e r v e bank might pay out funds a g a i n s t c r e d i t given t o
i t s member bank b e f o r e such d r a f t or n o t i c e of i t s payment had
reached the Federal r e s e r v e bank of the d i s t r i c t i n which i t was
issued.)
Some of these questions p r e s e n t two s i d e s , namely, the proper
a c t i o n which should be taken by a Federal r e s e r v e bank of t h e d i s t r i c t i n
which the drawing bank i s l o c a t e d , and the a c t i o n which should be taken by
a r e s e r v e bank of another d i s t r i c t should such items be presented t o i t f o r
payment or c r e d i t .
We are w r i t i n g t o a l l of t h e Federal r e s e r v e banks i n t h i s r e spect as i t i s our f e e l i n g t h a t the u s e f u l n e s s or s e r v i c e of t h e s e i n s t r u ments to our member banks i s q u i t e p r o b l e m a t i c a l , and a r e c o n s i d e r a t i o n at t h i s
time might l e a d t o the conclusion t h a t i t would be advisable t o d i s c o n t i n u e
these f a c i l i t i e s .




Tours very t r u l y ,
(Signed)

W. M. Hale
CASHIER.

X-7454-c
FEDERAL RESERVE BANK OF HEW YORK

^ 5 8
0

0

P

Y

December 9, 1933.
Mr. W. M. Hale,
Cashier, Federal Reserve Bank of San Francisco,
San F r a n c i s c o , C a l i f o r n i a .
Dear Mr. Hale:
We a r e i n r e c e i p t of your l e t t e r of December 2, r e g a r d i n g
the paying of exchange and t r a n s f e r d r a f t s i n t h e case of suspended
banks.
In t h i s d i s t r i c t we have only two "banks which are authorized
to use t r a n s f e r d r a f t s and t h r e e "banks which are authorized t o use exchange
drafts.

Wo have, t h e r e f o r e , not been very much concerned r e g a r d i n g the

problems which you b r i n g up i n connection with t h e s e d r a f t s .

I t would

appear t o us t h a t l i t t l e r i s k i s involved i f i n s t r u c t i o n s governing t h e
issuance and paying of exchange and t r a n s f e r d r a f t s arc followed.
When a member bank i s s u e s a t r a n s f e r d r a f t i t sends to
both i t s Federal Reserve bank and a l s o to the Federal Reserve bank on which
the d r a f t i s drawn, an advice covering such d r a f t .

Upon r e c e i p t of such

advice from one of our member banks we immediately charge t h e i r account
and c r e d i t T r a n s f e r D r a f t Account.

A f t e r such an e n t r y has been made

we b e l i e v e t h a t we a r e o b l i g a t e d t o pay the d r a f t even though the drawee
bank has suspended.
Exchange d r a f t s are accepted by any Federal Reserve bank
f o r c o l l e c t i o n and immediate a v a i l a b i l i t y at par#

I f any exchange d r a f t

i s not c o l l e c t e d f o r any reason, i t would be charged back t o the endorsing
bank i n the same manner as any other cash item.

However, as we a l s o

r e c e i v e an advice from our member bank when they draw an exchange d r a f t ,



X-7454-c
Mr. W. M. Hale, Cashier

-2~

259

December 9, 1932.

an o n t r y i s immediately made upon r e c e i p t of advice, and we "believe we
are o b l i g a t e d t o pay such d r a f t a f t e r the e n t r y i s made even though i t i s
presented t o us a f t e r the bank has suspended.
Inasmuch as only a few "banks i n our d i s t r i c t use exchange and
t r a n s f e r d r a f t s to a very l i m i t e d e x t e n t , i t would "be no h a r d s h i p to d i s continue such d r a f t s i n t h i s d i s t r i c t .




Very t r u l y y o u r s ,
(Signed)

J . M. Rice

J . M. Rice,
A s s i s t a n t Deputy Governor,

X-7454-&
C
FEDERAL RESERVE BAKK OF PHILADELPHIA
925 Chestnut S t r e e t

0

P

Y

Decenter 13, 1932.

Mr. William M. Hale, Cashier,
Federal Reserve Bank of San Francisco,
San Francisco, C a l i f o r n i a .
Dear Mr. Hale:
This w i l l acknowledge r e c e i p t of your l e t t e r of December 2nd,
and we are answering your questions s e r i a t i m ;
I.
(l)
A Federal r e s e r v e "bank would be obliged, at l e a s t morally, t o pay
the holder i n due course of an exchange d r a f t i f p r e s e n t e d t o i t a f t e r suspension
of the member bank, i f the advice of the member bank had been received and the
funds set a s i d e f o r t h a t purpose, p r i o r t o r e c e i p t of suspension n o t i c e .
(2)
If t h e r e s e r v e bank could r e f u s e to pay the d r a f t so p r e s e n t e d , i t
undoubtedly would have t h e r i g h t to r e v e r s e i t s e n t r i e s and c r e d i t back the amount
to the r e s e r v e account.
(3)
In our opinion i f such e n t r i e s were r e v e r s e d a Federal r e s e r v e bank
undoubtedly would have the r i g h t t o apply such funds a g a i n s t any e x i s t i n g indebtedness of the member bank, as such r e v e r s a l would simply be a r e s t o r a t i o n of the a c count to i t s o r i g i n a l c o n d i t i o n .
II.
(l)
The r e s p o n s i b i l i t y of the paying r e s e r v e bank would not be governed
by the q u e s t i o n of whether i t had received t e l e g r a p h i c advice of the suspension of
the drawing bank, but would depend r a t h e r upon t h e q u e s t i o n of whether or not the
paying bank had r e c e i v e d t e l e g r a p h i c i n s t r u c t i o n s from the r e s e r v e bank i n the dig
t r i c t of the drawing member to pay the d r a f t . Payment without such i n s t r u c t i o n s
places f u l l r e s p o n s i b i l i t y upon the paying bank.
(2)

Sec #1.

III.
(l)
I t would seem t h a t no question should a r i s e covering t h i s p o i n t , as
exchange d r a f t s a r c acceptable at par s u b j e c t t o f i n a l payment. I f t e l e g r a p h i c or
other advice of suspension to the r e s e r v e bank i n the d i s t r i c t of t h e member had
not been r e c e i v e d , the d e b i t i n the account c e r t a i n l y would be good and would p r o vide funds to pay t h e d r a f t . If no debit had been made t h e d r a f t would be d i s honored i n ordinary course.
(2)

I t i s our opinion t h a t i f t e l e g r a p h i c advice had been r e c e i v e d , but




X-7454-d
Mr. fr.u M. Halo, Cashier
FHBank of San F r a n c i s c o .

-2-

£>5

12/13/32

overlooked by the paying department, t h e r e would he no o b l i g a t i o n to pay the exchange d r a f t presented and r e s p o n s i b i l i t y would a t t a c h only i f the paying bank
had nade an a c t u a l payment from funds derived through a d e b i t made t o the reserve
account a f t e r n o t i c e of suspension had been received even though overlooked.
In our opinion the whole s i t u a t i o n i s governed by t h e following major p o i n t s :
1. I f the drawing member's' Federal reserve bank has received n o t i c e t h a t
d r a f t s have been drawn, e i t h e r on exchange or t r a n s f e r f o m , and has acted upon
t h a t advice to t h e extent of s e t t i n g aside the funds p r i o r to r e c e i p t of n o t i c e
of suspension, then such d r a f t s should be honored. Under any other circumstances
such d r a f t s should be r e t u r n e d .
2. A Federal r e s e r v e bank of another d i s t r i c t should not pay a t r a n s f e r
d r a f t without s p e c i f i c i n s t r u c t i o n s to do so from the r e s e r v e bank i n the d i s t r i c t
of the drawing bank. Under any other circumstances i t makes payment at i t s own
risk.
3. A Federal r e s e r v e bank allowing immediate c r e d i t f o r an exchange d r a f t
o r i g i n a t i n g i n another d i s t r i c t assumes no r i s k i n so doing, u n l e s s i t permits
withdrawal of the c r e d i t by an i r r e s p o n s i b l e endorser. I f the exchange d r a f t i s
dishonored at the paying r e s e r v e bank, the endorsing r e s e r v e bank c e r t a i n l y has
the r i g h t to r e t u r n i t to i t s d e p o s i t o r .
I b e l i e v e your suggestion i s a good one - the r e c o n s i d e r a t i o n of t h i s
service and the p r a c t i c a b i l i t y of i t s e l i m i n a t i o n without embarrassment to the
member banks.




Very t r u l y yours,
(Signed)

C. A. Mcllhenny

C. A. Mcllhenny,
Cashier.

2G2
\

FEDERAL RESERVE BAH OF RICHMOND

X-7454-e
C
0
P
Y

January 9, 1933

Mr. We M, Hale, Cashier,
Federal Reserve Bank of San Francisco,
San Francisco, Cal.
Dear Mr. Hale:
•When your l e t t e r of December 2, 1932, r a i s i n g
s e v e r a l questions with r e f e r e n c e t o Federal r e s e r v e exchange and t r a n s f e r d r a f t s , was received I asked our
counsel, Mr. Wallace, f o r h i s opinion, inasmuch as t h e
problems involved seemed t o be p r i m a r i l y l e g a l r a t h e r
than operating.
Mr. Wallace was q u i t e busy a t the time and did
not submit h i s opinion u n t i l December 20th. I was away
from the bank t h e l a s t t e n days of December and t h i s i s
the f i r s t o p p o r t u n i t y I have had t o read t h e opinion and
r e p l y t o your l e t t e r .
A copy of Mr. Wallace's opinion i s enclosed
herewith, and if t h e opinion holds - and I can see no
reason why i t w i l l not - i t does not seem t o me t h a t i t
w i l l be n e c e s s a r y f o r t h e Federal r e s e r v e banks t o a l t e r
t h e i r p r e s e n t p r a c t i c e s . I w i l l be v e r y glad t o have
your opinion regarding the s u b j e c t and would a l s o l i k e t o
know t h e r e s u l t s of your i n q u i r i e s addressed t o t h e o t h e r
Federal r e s e r v e banks.
Yours very t r u l y ,
(Signed)

J . S. Walden, J r .
J . S. Walden, J r . ,
Controller

JSW:N




26
X-7454-f
FEDERAL RESERVE BAM OF RICHMOND
COPY
December 20, 1932
Mr. <J. S. Walden, J r . , C o n t r o l l e r

Federal Reserve Exchange D r a f t s

M. G. Wallace, Counsel.

and Federal Reserve Transfer
Drafts.

Dear Mr. Walden:
I have b e f o r e me a l e t t e r dated December 2nd addressed t o you
by Mr. Hale, Cashier of t h e Federal Reserve Bank of San F r a n c i s c o . A l l
of t h e questions asked by Mr. Hale appear t o depend upon t h e determina t i o n of one p o i n t ; t h a t i s t o say, whether or not the t y p e s of d r a f t s
mentioned by him a r e under t h e circumstances an assignment of t h e funds
i n the drawee bank. The d r a f t s i n question a r e , t e c h n i c a l l y speaking,
checks, since t h e y are drawn on a bank or banker and payable on demand.
Section 189 of t h e Negotiable Instrument Law reads as f o l l o w s ;
"A check of i t s e l f does not operate as an assignment of any
p a r t of t h e funds t o the c r e d i t of the drawer with t h e bank, and
the bank i s not l i a b l e t o the holder u n l e s s and u n t i l i t accepts
or c e r t i f i e s t h e check."
S u b s t a n t i a l l y t h e same r u l e i s applied t o d r a f t s by Section 127 of t h e
Negotiable Instrument Law.
You w i l l note t h a t under the above i t i s s t a t e d t h a t a check
i s not of i t s e l f an assignment of any p a r t of t h e funds t o t h e c r e d i t
of the drawer. I t has, however, been held by t h e Supreme Court of t h e
United S t a t e s and many o t h e r courts t h a t a check may o p e r a t e as an
assignment of t h e f u n d s a g a i n s t "which i t i s drawn when i t i s c l e a r t h a t
the drawer intended t h a t i t should so o p e r a t e ; (See Fourth S t r e e t
National Bank v . Yardley, 165 U. S. 634), and, of course, when t h e drawee has accepted a chock, while t h e accepted check cannot bo said t o
o p e r a t e , s t r i c t l y speaking, as an assignment of t h e funds i n t h e hands
of t h e drawee, i t does render t h e drawee l i a b l e t o t h e h o l d e r .
The above general p r i n c i p l e s are almost u n i v e r s a l l y accepted;
but t h e r e i s considerable confusion as t o j u s t what i s s u f f i c i e n t t o
denote t h a t the drawer intended the check t o operate as an assignment
and a l s o some doubt as t o j u s t what a c t i o n on t h e p a r t of t h e drawee
i s s u f f i c i e n t t o i n d i c a t e an unequivocal acceptance of t h e check of t h e
drawer. An i l l u s t r a t i o n of t h i s u n c e r t a i n t y i s t o be found i n t h e case
of Equitable Trust Company of Now York v . F i r s t National Bank of T r i n i dad, Colorado, 275 U. S. 359, 48 S. Ct. 167). In t h a t case t h e F i r s t
National Bank of Trinidad had an arrangement with Knauth, Nachod, and
Kuhne, bankers of New York, under which t h e l a t t e r had agreed t o arrange



X-7454-f
December 20, 1932
Mr. J . S. Walden, J r . , C o n t r o l l e r

Federal Reserve Exchange D r a f t s and

M. G. Wallace, Counsel.

Federal Reserve Transfer D r a f t s .
—2—

f o r t h e p r o t e c t i o n and payment of d r a f t s drawn by t h e former on t h e
Bance Commerciale I t a l i a n s . . A d r a f t was drawn under t h e arrangement and
d e l i v e r e d t o a h o l d e r . Knauth, Nachod, and Kuhne were advised of t h e
drawing of t h e d r a f t and i n t u r n advised t h e i r I t a l i a n correspondent,
which debited Knauth, Nachod, and Kuhne, and c r e d i t e d t h e amount of t h e
d r a f t t o a s p e c i a l account termed " d r a f t s p a y a b l e . " The d r a f t was p r e sented, but i n t h e meantime Knauth, Nachod, and Kuhne had been a d j u d i c a t e d
bankrupts. The I t a l i a n bank t h e r e f o r e dishonored t h e d r a f t and t h e T r i n i dad bank, having been compelled t o take i t up, claimed t h a t t h e f u n d s of
Knauth, Nachod, and Kuhne on deposit with the I t a l i a n bank, which had
upon r e c e i p t of t h e advice of the drawing of the d r a f t been deducted
from the general account and c r e d i t e d t o a s p e c i a l account were impressed
with a t r u s t i n f a v o r of t h e holder of t h e d r a f t , or e l s e had been a s signed and t r a n s f e r r e d t o i t . The C i r c u i t Court of Appeals s u s t a i n e d t h e
claim of the F i r s t National Bank of Trinidad, but the case was t a k e n t o
the Supreme Court of t h e United S t a t e s and t h e d e c i s i o n r e v e r s e d , J u s t i c e Stone and J u s t i c e MoReynolds d i s s e n t i n g . I n t h e opinion of t h e court
by Mr. J u s t i c e Holmes much s t r e s s i s l a i d upon t h e f a c t t h a t n e i t h e r t h e
purchaser of t h e d r a f t nor t h e F i r s t National Bank of Trinidad were p a r t i e s t o or knew of the arrangement between Knauth, Nachod, and Kuhne and
the I t a l i a n bank, and t h a t t h e r e was no arrangement t h a t any p a r t i c u l a r
fund should be s e t a s i d e but t h e method of bookkeeping between t h e New
York bankers and t h e I t a l i a n bank was adopted p u r e l y as a m a t t e r of convenience, and t h a t i t had been the p r a c t i c e of t h e I t a l i a n bank t o cancel such advices whenever requested t o do so without i n q u i r y as t o who
was t h e holder of t h e d r a f t s or what had become of them. The f a c t t h a t
t h i s case was decided i n t h e C i r c u i t Court of Appeals i n one way and r e versed by t h e Supreme Court of the United S t a t e s by a divided c o u r t i s
of i t s e l f s u f f i c i e n t t o i n d i c a t e t h a t t h e r o i s some u n c e r t a i n t y i n a l l
such cases and t h a t t h e caso a t bar r e p r e s e n t s a border l i n e case*
Applying the p r i n c i p l e s of t h e above cases t o our C i r c u l a r No.
142 r e l a t i n g t o t h e issuance of Federal Reserve Exchange d r a f t s , I •
am i n c l i n e d t o t h e opinion t h a t Federal Reserve Exhange d r a f t s issued
under the c i r c u l a r a r e c l e a r l y assignments of the fund a g a i n s t which
they are drawn, or r a t h e r t h a t the advice of drawing which t h e drawer
bank must give i s s u f f i c i e n t t o c o n s t i t u t e an assignment when read i n
connection with t h e c i r c u l a r , f o r i n t h a t case i t i s p l a i n t h a t t h e drawer
of t h e d r a f t i s placed upon n o t i c e t h a t when t h e d r a f t i s drawn and t h e
advice given, i t s account w i l l be charged. The c i r c u l a r s t a t e s t h a t Fede r a l Reserve d r a f t s are e n t i r e l y d i f f e r e n t from o r d i n a r y d r a f t s and are
intended t o serve a d i f f e r e n t purpose. The c i r c u l a r i n d i c a t e s t h a t t h i s
d i f f e r e n c e i s because o r d i n a r y d r a f t s drawn on Federal r e s e r v e banks a r e
payable only on p r e s e n t a t i o n , and consequently w i l l not be r e c e i v e d by



2-

Ac-' *

X-7454-f
December 20, 1932
Mr. J . S. Walden, J r . , C o n t r o l l e r

Federal Reserve Exchange D r a f t s and

IvI. G. Wallace, Counsel.

Federal Reserve Transfer D r a f t s .
-3-

other Federal r e s e r v e banks f o r immediate c r e d i t , but t h a t t h e Federal
Reserve Exchange d r a f t s w i l l be received f o r immediate c r e d i t a t par
by any other Federal r e s e r v e bank or branch s u b j e c t , of course, t o f i n a l
payment by the Federal r e s e r v e bank on which they are drawn. I t i s f u r t h e r provided t h a t t h e s e d r a f t s may only be drawn by banks which have
t h e r e t o f o r e obtained p e r m i s s i o n . This seems t o imply t h a t t h e Federal
r e s e r v e bank w i l l exorcise some degree of r e s p o n s i b i l i t y i n t h e matter
other t h a n t h a t of a mere drawee, and t h i s r e s p o n s i b i l i t y appears t o be
defined under t h e heading "Advices of D r a f t s Drawn," i n which i t i s s a i d ,
"The t o t a l of t h e amount of t h i s advice w i l l be charged t o t h e r e s e r v e
account of t h e member1 bank upon r e c e i p t and c r e d i t e d t o a s p e c i a l account
f o r t h e payment of such d r a f t s when p r e s e n t e d . " I t seems to me, t h e r e f o r e ,
t h a t i n a u t h o r i z i n g t h e issuance of t h e s e d r a f t s t h e Federal r e s e r v e bank
has d e f i n i t e l y undertaken t h a t upon r e c e i p t of a proper advice t h e amount
of t h e d r a f t w i l l be c r e d i t e d t o a s p e c i a l account and held f o r t h e payment of such d r a f t s when p r e s e n t e d , which of n e c e s s i t y means held f o r t h e
account of t h e holder of t h e d r a f t r a t h e r t h a n f o r t h e account of t h e
drawer. While I b e l i e v e t h a t t h e c i r c u l a r implies t h a t a Federal r e s e r v e
bank, of course, would not bo obliged t o charge t h e amount of t h e d r a f t
t o t h e c r e d i t of t h e drawer bank u n l e s s i t had funds s u f f i c i e n t t o support t h e charge, n e v e r t h e l e s s , i f such funds were a v a i l a b l e , i t would be
obliged t o f u l f i l l i t s c o n t r a c t and charge t h e account of t h e drawer bank
and hold the funds i n a s p e c i a l account f o r t h e s p e c i a l purpose of paying
the d r a f t when p r e s e n t e d , which would of n e c e s s i t y mean hold the funds
as due and payable t o t h e l a w f u l holder of t h e d r a f t whoever he might b e .
Applying t h i s p r i n c i p l e t o t h e questions i n t h e f i r s t s e c t i o n
of Mr. H a l e ' s l e t t e r , i t appears t o me:
(1) That a Federal r e s e r v e bank would bo obliged t o pay t h e
amount held f o r t h e payment of t h e d r a f t i n q u e s t i o n t o t h e l a w f u l
holder of t h e d r a f t r e g a r d l e s s of anything t h a t had occurred a f t e r
t h e Federal r e s e r v e bank had charged the drawer of t h e d r a f t w i t h
the funds and c r e d i t e d thorn t o the e s p e c i a l account.
(2) If I am mistaken i n the above conclusion and t h e funds
should not be paid to the holder of t h e d r a f t , I t h i n k i t c l e a r
t h a t t h e n t h e f u n d s would be t r a n s f e r r e d t o t h e general account of
t h e drawer and disposed of a c c o r d i n g l y .
(3) I f t h e f u n d s were not payable t o t h e holder of t h e d r a f t ,
they would c o n s t i t u t e a mere general debt t o t h e o r i g i n a l drawer,
and would, of course, be s u b j e c t t o a l l r i g h t s of o f f s e t as any




25K
X-7454-f
Dccenber 20, 1932
Mr. J . S. Waldon, J r . , C o n t r o l l e r .

Federal Reserve Exchange D r a f t s and

M. G. Wallace, Counsel.

Federal Reserve Transfer D r a f t s .
-4-

o t h c r indebtedness. In o t h e r words, i t appears t o no t h a t no
t h e o r y could be adopted under which such funds were not e i t h e r
payable t o t h e holder or payable t o t h e drawer. I t could never
be s a i d t h a t a s p e c i a l t r u s t had a r i s e n , but t h a t t h a t t r u s t
was f o r t h e use and b e n e f i t of t h e drawer of t h e d r a f t and not
f o r t h e holder of i t .
Answering t h e questions i n Section I I . I wish t o say t h a t I
an not v e r y f a m i l i a r with t h e use of Federal Reserve Transfer d r a f t s , but
I understand t h a t such d r a f t s , l i k e Federal Reserve Exchange d r a f t s , are
issued only under a g e n e r a l a u t h o r i t y from a Federal r e s e r v e bank of a
d i s t r i c t and are payable by another s p e c i f i e d Federal r e s e r v e bank, and
t h a t i t i s u s u a l f o r t h e Federal r e s e r v e bank of the d i s t r i c t i n which
the d r a f t i s issued t o wire an advice t o the Federal r e s e r v e bank by
which t h e d r a f t i s p a y a b l e .
The questions n i g h t i n some degree be a f f e c t e d by t h e forris of
advice used. However, assuming t h a t the advice i s a d e f i n i t e i n s t r u c t ion t o pay the d r a f t f o r t h e account of t h e Federal r e s e r v e bank of t h e
issuing d i s t r i c t , ny answers t o t h e questions i n Section I I . would b e :
(1) If t h e paying Federal reserve bank had not received t e l e graphic advice from t h e d i s t r i c t i n which t h e d r a f t was issued of
the suspension of t h e drawee b a n k , then the paying r e s e r v e bank
should pay the d r a f t , and having paid i t , could charge i t t o t h e
account of tho r e s e r v e bank i n t h e d i s t r i c t of i s s u e , because t h e
paying bank would i n so doing a c t on t h e express i n s t r u c t i o n of
t h e Federal r e s e r v e bank i n t h e d i s t r i c t of i s s u e , which i n s t r u c t ion had not boon countermanded. The p o s i t i o n of t h e r e s e r v e bank
i n the d i s t r i c t of issue would depend upon what i n s t r u c t i o n s i t
had received and what i t had done. If i t had been i n s t r u c t e d t o
s e t a s i d e funds and had done so, i t could, I t h i n k , apply t h e s e
funds t o t h e payment of t h e d r a f t , even t hough t h e drawer bank
had subsequently suspended.
(2) If t h e advice of suspension had been r e c e i v e d , b u t overlooked by t h e paying r e s e r v e bank, i t s p o s i t i o n would be t h e same
as i f i t had been r e c e i v e d , b u t had been w i l f u l l y ignored. For
the reasons given above, I do not t h i n k t h a t a more general adv i c e of suspension should be t r e a t e d by t h e paying Federal r e serve bank as a stop-payment order on such d r a f t s ; b u t , i f t h o
paying Federal r e s e r v e bank should r e c e i v e express d i r e c t i o n s
from tho r e s e r v e bank i n t h e d i s t r i c t of issue t o stop payment



X-7454-f

267

December 20, 1932
Mr. J . S, Faldcn, J r . , C o n t r o l l e r .

Federal Reserve Exchange D r a f t s and

M. G. Yiallace, Counsel.

Federal Reserve T r a n s f e r D r a f t s .

of the d r a f t , t h e order should be obeyed; and i f t h e paying Fede r a l r e s e r v e banlc f a i l e d t o obey the o r d e r , i/vhether because i t
was overlooked or f o r sane o t h e r reason, i t would be r e s p o n s i b l e
t o t h e Federal r e s e r v e bank of the d i s t r i c t of i s s u e f o r the consequences. The r i g h t s of the holder i n such cases would of course
depend upon t h e circumstances under which the d r a f t was issued
and what advice the drawee bank had given the Federal r e s e r v e
bank of i t s own d i s t r i c t and what had boon done upon t h i s a d v i c e .
My answers t o t h e questions propounded i n Section I I I . , vjhich,
of course, a r e p r e d i c a t e d on t h e assumption t h a t I an c o r r e c t i n my view
t h a t Federal Reserve Exchange d r a f t s c o n s t i t u t e complete assignments and
t r a n s f e r s i f advice of t h e drawing has been p r o p e r l y given and acted
upon, a r e :

*

(1) I t does not appear t o me t h a t r e c e i p t of t e l e g r a p h i c
advice by a Federal r e s e r v e bank other t h a n t h e one on which
t h e Federal Reserve Exchange d r a f t i s drawn i s m a t e r i a l . If
t h e Federal r e s e r v e bank on which t h e Federal Reserve Exchange
d r a f t was drawn had received t h e advice of drawing and made a
t r a n s f e r b e f o r e r e c e i v i n g t h e advice of suspension, t h e funds
would bo hold f o r t h e c r e d i t of t h e holder of the d r a f t r e g a r d l e s s of whether t h a t holder was another Federal r e s e r v e bank
or some o t h e r person and the h o l d e r ' s knowledge of t h e completion of t h e assignment would not be m a t e r i a l ; but inasmuch as
t h e Federal r e s e r v e bank i n t h e other d i s t r i c t would probably
not know whether an advice of t h e drawing had been given or
n o t , and i f g i v e n , whether or not the drawing bank had funds
s u f f i c i e n t t o permit t h e d r a f t t o be charged t o i t s account and
t h e amount t r a n s f e r r e d t o t h e e s p e c i a l account, i t seems t o me
t h a t a Federal r e s e r v e bank i n another d i s t r i c t should from
motives of prudence avoid paying out any funds i f i t knew t h a t
the drawer bank had suspended, f o r since such d r a f t s are subj e c t t o f i n a l payment, t h e r e would always be a p o s s i b i l i t y
t h a t when presented t o t h e Federal r e s e r v e bank on which
drawn, they would be r e f u s e d because e i t h e r t h e advice of t h e
drawing had not been given p r o p e r l y , o r , i f given, because
t h e drawer bank had no funds a v a i l a b l e •
(2) I n l i n e with
the s i t u a t i o n i s the
graph has been given
any person r e c e i v i n g
sane s i t u a t i o n as i f
ignored i t .




t h e opinion which I have expressed above
same i n a l l cases, f o r advice by t e l e and w i l f u l l y ignored, I n other words,
n o t i c e and t h e n overlooking i t i s i n t h e
he had received i t and d e l i b e r a t e l y

X-7454-f
Deceriber 20, 1932
Mr, J , S. Walden, J r . , C o n t r o l l e r .

Federal Reserve Exchange D r a f t s and

M, G, Wallace, Counsel.

Federal Reserve T r a n s f e r D r a f t s .
—6—

You w i l l n o t i c e , of course, t h a t a l l of iny answers above a r e
based upon t h e assumption t h a t t h e c o n t r a c t s under which Federal Reserve Exchange d r a f t s and Federal Reserve Transfer d r a f t s a r e issued
are such as t o c o n s t i t u t e t h e n assignments of t h e funds a g a i n s t which
t h e y are drawn, provided due n o t i c e of t h e drawing i s given t o t h e Fede r a l r e s e r v e bank i n t h e d i s t r i c t of i s s u e , and a d e f i n i t e a p p r o p r i a t ion of the f u n d s ir.tiie hands of t h a t bank i s made b e f o r e t h e suspension
of the drawing bank, I f e e l f a i r l y c o n f i d e n t t h a t t h i s c o n s t r u c t i o n
would be placed on t h e d r a f t s i f t h e question should ever be l i t i g a t e d ;
b u t , as you w i l l see from t h e cases t o which I r e f e r r e d , i t i s almost
impossible t o express an unequivocal o p i n i o n . If t h e Federal r e s e r v e
banks d e s i r e d t o avoid any p o s s i b l e doubt, t h e n they should r e f u s e
payment of such d r a f t s i f thoy had received n o t i c e t h a t t h e drawing
bank had suspended, and u n l e s s the r e c e i v e r of t h e drawing bank and t h e
holder of t h e d r a f t could agree as t o t h e i r r i g h t s , t h e Federal r e s e r v e
bank should f i l e a b i l l of i n t e r p l e a d e r and pay i n t o c o u r t t h e amount
of t h e d r a f t i n order t h a t t h e court might determine whether t h e money
belonged t o t h e r e c e i v e r of t h e drawing bank or t o t h e h o l d e r .
Very t r u l y yours,
(Signed)

M. 6 , Wallace
M. G. Wallace,
Counsel,

MGW R




X-7454-g

.269

c

o
FSD2RAL 2353273 BSIK OP ATLANTA
O f f i c e of
Cashier

p

Y

December 15, 1932

Mr. W. M. Hale, Cashier,
Federal Reserve Bank of San Francisco,
San Francisco, C a l i f o r n i a .
Dear Mr. Hale:
This w i l l acknowledge r e c e i p t of your f a v o r of the 2nd i n s t a n t
p r e s e n t i n g a number of p e r p l e x i n g problems which you b e l i e v e may a r i s e i n
connection with the use of exchange and t r a n s f e r d r a f t s i n t h e event of
suspension of the bank i s s u i n g such d r a f t s b e f o r e the d r a f t s are presented
f o r payment.
A very small number of banks of t h i s d i s t r i c t are now authorized
to i s s u e exchange d r a f t s and none are authorized t o i s s u e t r a n s f e r d r a f t s .
Thus f a r , probably due to good f o r t u n e , we have not had to deal
with any problems of the nature suggested i n your l e t t e r , though we r e a l i z e
t h a t s i t u a t i o n s might develop t h a t would c a l l f o r d e f i n i t e and probably
quick handling of m a t t e r s r e s u l t i n g from the i s s u e of exchange d r a f t s i n the
event of suspension of the member bank by which they were drawn.
Instead of undertaking t o answer your l e t t e r myself, I submitted
i t t o our counsel, Mr. Robert S. Parker, and he has favored me with an exp r e s s i o n of h i s opinion concerning a l l the problems your l e t t e r p r e s e n t s .
I am enclosing a copy of Mr. Parker * s l e t t e r , and I agree with the opinions
he has expressed.
Several y e a r s ago, j u s t how long ago I do not r e c a l l , we d i s continued the use of t r a n s f e r d r a f t s because we considered them e n t i r e l y
unnecessary i n view of the f a c t t h a t member banks are a f f o r d e d ample f a c i l i t i e s f o r the t r a n s f e r of funds through the medium of our p r i v a t e wire system.
I am i n c l i n e d to t h i n k t h a t the use of exchange d r a f t s should
also be discontinued because as you s t a t e t h e i r u s e f u l n e s s i s q u i t e problemati c a l , and I b e l i e v e t h e i r use involves too many hazards and r i s k s t h a t more
than o f f s e t whatever l i t t l e s e r v i c e they may be to the very l i m i t e d number of
member banks of the e n t i r e Federal Reserve System which are u s i n g them.
all
A f t e r you have heard from/the Federal Reserve Banks, i f you
f i n d i t convenient t o do so, p l e a s e l e t me have a summary or b r i e f synopsis
of t h e i r views.




Yours very t r u l y ,
(Signed)
M. W. B e l l

M. W. B e l l

X-7454-h
COLQUITT, PARKER, TEOUTMAN & ARKWRIGHT
Attorneys at Law
S u i t e 1607 William-Oliver 31dg.
ATLANTA
December 12, 1932.
Mr. M. W. B e l l , Cashier,
Federal Reserve Bank of A t l a n t a ,
A t l a n t a , Georgia.
Dear Mr. B e l l :
At your request I have read the l e t t e r concerning
Federal r e s e r v e exchange d r a f t s which Mr. Hale, Cashier of
the Federal Reserve Bank of San Francisco wrote you under d a t e
of December 2nd. In Mr. H a l e ' s l e t t e r he a l s o makes r e f e r e n c e
to " t r a n s f e r d r a f t s , " but I understand from you t h a t the use of
such l a s t mentioned d r a f t s has been d i s c o n t i n u e d .
You have asked me t o i n d i c a t e the way i n which, i n
my opinion, Mr. H a l e ' s questions should be answered.
In my opinion the r i g h t s of the drawer, drawee, payee
or other h o l d e r of an exchange d r a f t would be determinable by
r e f e r e n c e t o your C i r c u l a r Ho. F~4, which s e t s out the terms
and c o n d i t i o n s under which such d r a f t s may be i s s u e d .
I t i s contemplated t h a t when one of t h e s e d r a f t s i s
drawn by a bank to which permission so to do has been given,
the drawer gives w r i t t e n advice to t h e Federal Reserve Bank
upon a form supplied by the Reserve Bank. Immediately upon
r e c e i p t of such advice, the r e s e r v e account of the drawer i s
charged with t h e amount of the d r a f t and t h e r e i s a correspond-,
ing c r e d i t to a s p e c i a l account, which i s maintained f o r the
payment of the d r a f t upon p r e s e n t a t i o n .
I am of the opinion t h a t , to a l l i n t e n t s and purposes,
an exchange d r a f t should be t r e a t e d as the c e r t i f i e d check on
the Federal Reserve Bank, the " c e r t i f i c a t i o n " being e f f e c t i v e
as of the time when t h e advice of the drawing has been r e c e i v e d .
If t h i s analogy i s c o r r e c t l y drawn, t h e n the answers t o Mr.
H a l e ' s questions should be, i n my opinion, as f o l l o w s :
I
1.
In the event of t h e insolvency of a member bank,
the Federal Reserve Bank of the D i s t r i c t would r e s t under no
o b l i g a t i o n to pay the holder i n due course of an exchange d r a f t



p < 7 fJ i
'*
COPY

X-7454-h
12-12-33.

Mr. M. 7. B e l l - #2.

i f t h e same were presented to i t a f t e r t h e suspension of the
drawer u n l e s s i t had, p r i o r to the r e c e i p t of the n o t i c e of s u s pension, received advice t h a t the d r a f t had been drawn. I f
i t had r e c e i v e d advice of the drawing of the d r a f t p r i o r t o
n o t i c e of suspension, then I think t h a t the d r a f t , upon p r e s e n t a t i o n , should "be paid out of the s p e c i a l f u n d , even though presented
a f t e r n o t i c e of suspension.
2 . I am of the opinion t h a t a f t e r you had c r e d i t e d
the amount of a d r a f t to the s p e c i a l account c r e a t e d " f o r the
payment of d r a f t s when p r e s e n t e d , " you could not t h e r e a f t e r r e verse your e n t r i e s and c r e d i t back the amount of the d r a f t to the
Reserve account of the drawer.
3. I t h i n k t h a t the " s p e c i a l account" r e f e r r e d to i n
your C i r c u l a r , vhich account i s "earmarked" f o r the purpose of
paying exchange d r a f t s upon p r e s e n t a t i o n , could not be applied to
the payment of an indebtedness of the member bank t o the Reserve
Bank. I t f o l l o w s t h a t the funds i n t h i s account could not be
paid t o t h e r e c e i v e r but should be r e t a i n e d by t h e Reserve Bank
f o r the purpose of paying the d r a f t upon p r e s e n t a t i o n .
II
This d i v i s i o n of Mr. H a l e ' s l e t t e r r e l a t e s t o t r a n s f e r
d r a f t s , the use of which by member banks i n t h i s D i s t r i c t has
been d i s c o n t i n u e d . I t may be, however, t h a t some of t h e Federal
Reserve Banks s t i l l permit t h e i r members t o i s s u e such d r a f t s .
I have made no p a r t i c u l a r study of the l e g a l e f f e c t of t r a n s f e r
d r a f t s but b e l i e v e t h a t the general p r i n c i p l e s discussed i n subd i v i s i o n "I" would be c o n t r o l l i n g , v i z . , i f the drawee Federal
Reserve Bank charged t h e amount of t h e d r a f t t o t h e account of
the drawer p r i o r t o n o t i c e of suspension and c r e d i t e d the amount
of the d r a f t i n a s p e c i a l account, then i t should be paid d e s p i t e
the f a c t t h a t the drawer might have closed p r i o r t o the a c t u a l
p r e s e n t a t i o n of the d r a f t to the drawee. I f t h e r e i s any doubt
about t h i s p r o p o s i t i o n , such doubt would, i n my opinion, be removed
i n any case where t e l e g r a p h i c advice had been given t o t h e Federal
Reserve Bank s p e c i f i e d as the bank t o make payment.
Ill
I t follows from the above t h a t , i n my opinion, the
p l a c i n g of the amount of a t r a n s f e r d r a f t i n the s p e c i a l account



X-7454-h

Mr. M. W. B e l l - #5.

12-12-32.

p r i o r to r e c e i p t of n o t i c e of suspension of the drawer would
render the drawee Federal Reserve Bank l i a b l e f o r the payment
of the d r a f t , although, i f the Federal Reserve Bank designated
as the 'bank to pay a c t u a l l y knew of the suspension of the drawer
when i t made payment, the s i t u a t i o n might be changed.

SUMMARY.
As s t a t e d h e r e t o f o r e , i f we can p r o p e r l y analogize
one of t h e s e d r a f t s , the amount of which has been charged to the
account of t h e drawer, to a check which b e a r s the c e r t i f i c a t i o n
of the Federal Reserve Bank, then, a t l e a s t i n so fear as concerns
exchange d r a f t s , I f e e l reasonably sure t h a t the answers set out
above a r e c o r r e c t . I am not so sure of my ground i n t h e case
of a t r a n s f e r d r a f t . P r a c t i c a l l y regarded, however, i t seems t o
me t h a t no Federal Reserve Bank would pay one of t h e s e d r a f t s
u n l e s s i t had received t e l e g r a p h i c advice from t h e drawee Federal
Reserve Bank. I f , a f t e r r e c e i v i n g t e l e g r a p h i c advice, i t paid
the d r a f t , I t h i n k t h a t the drawee Reserve Bank should pay the
same even though b e f o r e p r e s e n t a t i o n i t had received advice t h a t
the drawer had suspended.
I might add t h a t I do not t h i n k t h a t t h a t p a r t of Regulat i o n J which p r o h i b i t s the making of charges to members' r e s e r v e
accounts a f t e r advice of suspension, e t c . would a f f e c t or c o n t r o l
a s i t u a t i o n i n which the r e s e r v e account had a c t u a l l y been charged
with the amount of a d r a f t p r i o r to n o t i c e of suspension even
though the d r a f t i t s e l f had not been presented f o r payment.
T r u s t i n g t h a t the above w i l l be of some s e r v i c e to you
and Mr. Hale, I am
Sincerely yours,

Robt. S. P a r k e r .
RSP/w.




X-7454-i

3 7 3

FEDERAL HESEBVE B M OF CHICAGO
230 South LaSalle S t r e e t

December 8, 1932
Mr. W. M. Hale, Cashier
Federal Reserve Bank of San Francisco
San F r a n c i s c o , C a l i f o r n i a
Dear Mr. Hale:
We have your l e t t e r of December 2, i n which you make
inquiry as to our views regarding the p o s i t i o n of a Federal r e s e r v e
bank i n connection with exchange and t r a n s f e r d r a f t s issued by a
member bank i n the event of the member bank having suspended b u s i n e s s
previous to the payment of the d r a f t s .
The conditions governing the issuance of Federal r e s e r v e
exchange d r a f t s and Federal r e s e r v e t r a n s f e r d r a f t s provide t h a t the
member bank i s s u i n g e i t h e r form of d r a f t send a s p e c i a l advice t o i t s
Federal r e s e r v e bank on the date such d r a f t s are issued a u t h o r i z i n g
the Federal r e s e r v e bank to charge i t s r e s e r v e balance with the t o t a l
amount of the advice, i t being understood t h a t the amount be set aside
i n a s p e c i a l account f o r the s p e c i f i c purpose of paying the d r a f t s d e s cribed i n the advice i f and when presented f o r payment. Accordingly,
i t i s our opinion t h a t such funds should not be applied f o r any other
purpose. I t i s a l s o our opinion t h a t , i n view of the funds i n question
having been so segregated, a Federal reserve bank would be o b l i g a t e d
to pay a holder i n due course of such a d r a f t i f and when presented
t o i t f o r payment, although the member bank had suspended b u s i n e s s
previous to the presentment of the d r a f t .
Our opinion as above expressed would l i k e w i s e apply t o
i n q u i r i e s i n your second paragraph, as we do not b e l i e v e t h a t e i t h e r
the r e c e i p t of n o t i c e or f a i l u r e to r e c e i v e n o t i c e of the c l o s i n g of
the drawer bank by the paying Federal r e s e r v e bank would a f f e c t the
p o s i t i o n of the paying Federal r e s e r v e bank; t h a t i s , once the charge
has been roade by the drawee Federal reserve bank t o the r e s e r v e a c count of the drawer member bank, i t i s our view t h a t the s e g r e g a t i o n
of the funds i s f o r the s p e c i f i c purpose of p u t t i n g drawee Federal
reserve bank i n funds to honor the d r a f t described i n the advice i f
and when the d r a f t i s presented f o r payment. Hot i c e of suspension
of the drawer member bank subsequently r e c e i v e d would not change the
r i g h t s of the p a r t i e s .
If we understand your t h i r d q u e s t i o n c o r r e c t l y , t h e f o r e going conclusions apply t o i t , In view of the f a c t t h a t the member




X-7454-i

Mr. W. M. Hale
San Francisco

-2-

12-8-32

bank drawing an exchange d r a f t may f a i l to n o t i f y the drawee Federal r e serve "bank t o charge i t s account with such amount, obviously the same
r i s k a t t a c h e s to permitting- withdrawal of a balance c r e a t e d by a c r e d i t
r e p r e s e n t i n g a Federal r e s e r v e exchange d r a f t on a r e s e r v e bank of another d i s t r i c t as to any other item c r e d i t e d subject to f i n a l payment.
The n e c e s s i t y or u s e f u l n e s s of these forms of exchange
has been discussed at l e n g t h i n our bank on many occasions, and, while
t h e r e may be a few member banks i n our d i s t r i c t t h a t d e r i v e a d e f i n i t e
b e n e f i t from t h i s s e r v i c e , i t i s very much a q u e s t i o n i n our mind as to
whether or not they should not both be dispensed w i t h , as our records
i n d i c a t e the m a j o r i t y of our member banks t h a t make use of e i t h e r of
these forms of exchange do not understand the purpose f o r which they
were intended; t h a t i s , t h a t the ordinary d r a f t on us would serve the
purpose i n most c a s e s .
We s h a l l a p p r e c i a t e i t i f you w i l l l e t us know the r e s u l t s of your survey on t h i s s u b j e c t .




Very t r u l y yours,
(Signed)

J . H. D i l l a r d

J . H. D i l l a r d ,
Deputy Governor

X-7454-j
FEDERAL RESERVE BAH OF ST. LOUIS

C

0

P

Y

December 9, 1932.

Mr. W. M. Hale, Cashier,
Federal Reserve Bank,
San F r a n c i s c o , C a l i f o r n i a .
Dear Mr. Hale:
We have your l e t t e r of December 2. We d i s c o n tinued the f a c i l i t y of "Federal Reserve t r a n s f e r " d r a f t s i n
August of 1918 f o r the reason t h a t i n June of t h a t year the
inauguration of f r e e t e l e g r a p h i c t r a n s f e r s , i n our judgment,
terminated any need f o r the t r a n s f e r d r a f t s . This f a c i l i t y
has not since been extended to our member banks.
P r i o r to the r e c e i p t of your l e t t e r we i n f o r m a l l y
discussed the questions r a i s e d and i t was our f e e l i n g t h a t i f
an exchange d r a f t was presented a f t e r the insolvency of the
member bank drawing i t t h a t we would d e c l i n e payment awaiting a u t h o r i t y of proper j u r i s d i c t i o n . I t was always f e l t t h a t
the balance provided f o r the payment of such d r a f t s was a fund
created f o r a s p e c i f i c purpose and could not be c r e d i t e d back
to the r e s e r v e account nor be used to o f f s e t indebtedness of
the insolvent member bank.
Since r e c e i p t of your l e t t e r the matter has
been presented to our Counsel f o r h i s c o n s i d e r a t i o n and a
copy of h i s opinion i n respect t h e r e t o i s enclosed.




Yours very t r u l y ,
(Signed)

0. M. Attebery,

0. M. Attebery,
Deputy Governor.

X-7454-k
C
0
December 8, 1932.
P
Memorandum f o r Mr. Attebery:

Y

In considering the questions suggested "by t h e Federal Reserve
Bank of San F r a n c i s c o , i n l e t t e r of December 2, 1932, we w i l l have t o
d i f f e r e n t i a t e between the ordinary d r a f t and the Federal Reserve exchange d r a f t . In t h i s to wit;
I n the ordinary d r a f t , the drawee, i f he has received no
n o t i c e of t h e insolvency of the drawer, honors or dishonors the d r a f t
as of the time i t i s presented and e i t h e r pays i n money or f u r n i s h e s
the payee with o t h e r exchange. In the l a t t e r case, the drawee becomes
a debtor to the payee i n s t e a d of to the drawer. The t r a n s a c t i o n , as
between the drawer and the drawee, i s complete as and from the moment
the d r a f t i s p r e s e n t e d .
Whereas, when the Federal Reserve exchange d r a f t s are used,
the drawer, simultaneously with the i s s u i n g of the d r a f t , n o t i f i e s the
drawee t h a t such a d r a f t has been issued i n favor of the named payee,
and upon r e c e i p t "by the Federal Reserve Bank of the advice of the
issuance of such d r a f t s , the Federal Reserve Bank charges the amount
against the r e s e r v e account of the drawer and c r e d i t s the amount to
a special account f o r the payment of the d r a f t s when p r e s e n t e d . The
amount of t h e d r a f t i s withdrawn from the account of t?ie drawer the
moment the amount i s c r e d i t e d to the s p e c i a l account and thereupon
becomes the funds of the payee as and when the d r a f t i s a c t u a l l y
prese n te d . A t r a n s a c t i o n s i m i l a r to one where the drawee bank i s s u e s
i t s C a s h i e r ' s check or c e r t i f i e s the o r i g i n a l check.
(1) From the f o r e g o i n g , i t would follow t h a t i n the event
of the insolvency of the drawer b e f o r e the a c t u a l d r a f t was p r e s e n t e d ,
the answer to s u b - s e c t i o n I of Paragraph (L) would be i n the a f f i r m a t i v e ;
f o r , i t s a c t s i n charging the drawer's account had taken place "before i t
received any n o t i c e of insolvency of tlie drawer, and the drawee bank
thereby became a stakeholder of a c e r t a i n fund to be turned over t o
the holder of the d r a f t when p r e s e n t e d.
(2) Answering the second sub-section of Paragraph ( l ) , the
drawee bank, a f t e r i t had charged the d r a f t t o the account of the
drawer and had placed the funds i n a s p e c i a l account f o r the payment of
the d r a f t , would have no r i g h t t o reverse i t s e n t r i e s so long as the
d r a f t i n q u e s t i o n remained outstanding.
(3) Answering the 3rd s u b - s e c t i o n of Paragraph ( l ) , so long
as the d r a f t remained outstanding, the drawee - the Federal Reserve Bank
would not have the r i g h t to use the s p e c i a l fund to pay the indebtedness
of the borrowing bank t o the Reserve Bank. Neither could the s p e c i a l
fund be applied to the payment of the indebtedness of the drawee bank
to the Reserve bank. If l a t e r , the Receiver of the drawer bank should



^ 8 |
X~7454~k

—2—
"become the holder i n due course of the d r a f t i n q u e s t i o n , and should
present i t f o r payment, ~ f o r , the funds paid on the d r a f t would come
i n t o the hands of the Receiver a f t e r the drawer had f a i l e d and i t
would he l i k e other funds coming i n t o the hands of the Receiver from
other sources, - the funds could not he applied t o the payment of the
indebtedness of the Trust to the Federal Reserve Bank, a c r e d i t o r of
the Trust.
I "believe the foregoing answers the questions l i s t e d under
sections I I and I I I .
Very t r u l y yours,
(Signed)

J a s . G. McCorikey,
General Counsel.

COPY




,

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FEDERAL BE SERVE BAH OF MI1HEAPOLIS

December 28, 1932

Mr. W. M. Hale, Cashier,
Federal Reserve Banlc,
San Francisco, C a l i f o r n i a .
Dear Mr. Hale:
Upon r e c e i p t of your l e t t e r of December 2 addressed
to Mr. Zieraer, the questions included t h e r e i n were submitted to
our counsel, who today gives answer t h e r e t o as per copy of l e t t e r
herewith. We r e g r e t t h a t your communication was not sooner
answered.
You w i l l observe from c o u n s e l ' s l e t t e r t h a t we are not
using "exchange" or 11 t r a n s f e r " d r a f t s ; t h e r e f o r e s p e c i f i c answers
to your questions are not made.
With the Compliments of the Season,
Very t r u l y yours,
(Signed)

Harry Yaeger

Harry Yaeger,
Deputy Governor.
HY:EO
Enc.




UELAMD & UELAHD
Attorneys & Counselors

X-7454-m
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0
P

2 7 9

Y

800 S e c u r i t y Building
Minneapolis
December 28, 1932.
Mr. Harry Yaeger,
Deputy Governor.

P l e a s e pardon our delay i n answering your memorandum dated
December 6, 1932 with r e f e r e n c e to the l e t t e r dated December 2, 1932
from Mr. Hale, c a s h i e r of the Federal Reserve Bank of San F r a n c i s c o .
Your bank does not use the 11 exchange" or " t r a n s f e r " d r a f t
of the type r e f e r r e d t o i n Mr. H a l e ' s l e t t e r . We have not had an
opportunity to examine forms of the d r a f t r e f e r r e d to by Mr. Hale,
nor are we advised of the form of n o t i c e given by a member bank to
i t s r e s p e c t i v e Federal r e s e r v e bank when such a d r a f t has been drawn.
Accordingly, our opinion as to the r i g h t s and l i a b i l i t i e s a r i s i n g out
of t h i s p r a c t i c e i s probably of l i t t l e , i f any, v a l u e .
However, as we understand the p r a c t i c e , a t r a n s f e r d r a f t
of t h i s type would probably be taken to c o n s t i t u t e an e q u i t a b l e a s s i g n ment, to the e x t e n t of the amount of the d r a f t , of the member b a n k ' s
r e s e r v e b a l a n c e . When the member bank drawing the d r a f t had n o t i f i e d
i t s Federal r e s e r v e bank of t h a t f a c t , then we are i n c l i n e d to t h i n k
the e f f e c t would be the same as i f the member bank had given a p a r t i a l
assignment of i t s r e s e r v e balance and had n o t i f i e d i t s r e s e r v e bank of
such assignment. I n other words, a f t e r such n o t i c e , the r e s e r v e bank
would have to hold the amount of the d r a f t f o r the b e n e f i t of the owner
thereof.
I f our understanding i s c o r r e c t , the answer to the q u e s t i o n s
put i n Mr. Hale' s l e t t e r would be t h a t the Reserve Bank cashing or
giving c r e d i t f o r such a d r a f t would be p r o t e c t e d i n a l l cases provided
the drawee Reserve Bank had received n o t i c e of such drawing and at the
time of such n o t i c e t h e r e were s u f f i c i e n t funds i n the r e s e r v e account
to pay the same.
The questions presented by Mr. Hale suggest t h a t the p r a c t i c e
under c o n s i d e r a t i o n i s r a t h e r anomalous from the l e g a l viewpoint and
might r e s u l t i n l i t i g a t i o n and p o s s i b l e l o s s to a Federal r e s e r v e bank.

SU/MGr




UELAim & UBLAIID

By Sigurd Ueland

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FEDERAL RESERVE BANK OF KMSAS CITY

P
Y

December 10, 1932
Mr. W. M. Hale,
C a s h i e r , Federal Reserve Bank of San F r a n c i s c o ,
San F r a n c i s c o , C a l i f o r n i a ,
Dear Mr. Hale:
This w i l l . r e p l y t o your l e t t e r of December 2 ,
with r e f e r e n c e t o the p e r p l e x i n g problems which a r i s e i n
connection w i t h the use of exchange and t r a n s f e r d r a f t s ,
and while our experience has no doubt been somewhat s i m i l a r
t o your own, we have had a very l i m i t e d use of such f a c i l i t i e s
i n t h i s d i s t r i c t and no a c t u a l experience under c o n d i t i o n s
set f o r t h i n your l e t t e r .
We o f f e r e d our member "banks t h e s e f a c i l i t i e s i n
1917 and 1918, and while a few banks a v a i l e d themselves of such
f a c i l i t i e s f o r a time, they g r a d u a l l y d i s c o n t i n u e d u n t i l d u r i n g
the p a s t f i v e or s i x y e a r s we have had but one bank u s i n g
such f a c i l i t i e s , which bank d i s c o n t i n u e d t h e i r use about a
year ago, and at t h i s time we have no bank u s i n g them. In view
of the f a c t t h a t we have had so l i t t l e p r a c t i c a l experience i n
t h i s r e s p e c t , we h e s i t a t e to express opinions on the r a t h e r
involved h y p o t h e t i c a l q u e s t i o n s s t a t e d i n your l e t t e r and doubt
i f such opinions would be of value to you.
We note t h a t you have taken t h i s m a t t e r up w i t h a l l
Federal r e s e r v e banks and t h a t i t i s your f e e l i n g t h a t the u s e f u l ness of t h e i n s t r u m e n t s to member banks i s q u i t e p r o b l e m a t i c a l and
a r e c o n s i d e r a t i o n at t h i s time might l e a d to the c o n c l u s i o n t h a t
i t would be a d v i s a b l e to d i s c o n t i n u e such f a c i l i t i e s . We h e a r t i l y
agree with t h i s s u g g e s t i o n and as a m a t t e r of f a c t have not embodied
such f a c i l i t i e s i n our g e n e r a l l e t t e r s i n r e c e n t y e a r s , and have
r a t h e r discouraged t h e i r use when we have had s p e c i f i c i n q u i r i e s
with r e f e r e n c e to such s e r v i c e .
T r u s t i n g t h a t the i n f o r m a t i o n f u r n i s h e d w i l l be of
i n t e r e s t to you, and with kind p e r s o n a l r e g a r d s , I arn


JWH-s


Yours very t r u l y ,
(Signed) • J . W. Helm
J . W. Helm,
Deputy Governor and C a s h i e r .

X-7454-o

COPY
FEDERAL RESERVE BANK OF DALLAS

281

December 8, 1932
Mr. W. M. Hale, Cashier
F e d e r a l Reserve Bank
San F r a n c i s c o , C a l i f o r n i a
Dear Mr. Bale:
We have your l e t t e r of December 2, 1932, addressed t o
Mr. R. R. G i l b e r t , who i s a t p r e s e n t away from the hank on h i s v a cation.
Before aiswering t h e s p e c i f i c i n q u i r i e s i n your l e t t e r
we s e t f o r t h below b r i e f l y the mechanical o p e r a t i o n s followed i n
t h i s d i s t r i c t i n t h e issuance of exchange and t r a n s f e r d r a f t s , a s
well as t h e p r a c t i c e of other Federal Reserve Banks i n handling
such d r a f t s p r e s e n t e d to them f o r payment:
FEDERAL RESERVE EXCHANGE DRAFTS.
C e r t a i n s p e c i f i e d "banks i n t h i s d i s t r i c t a r e a u t h o r i z e d .
by us to i s s u e Federal Reserve exchange d r a f t s , t h i s a u t h o r i t y bei n g given a f t e r f u l l c o n s i d e r a t i o n by our committee as to the
b a n k ' s f i n a n c i a l c o n d i t i o n . P e r i o d i c a l l y the c o n d i t i o n of t h e banks
having been given t h i s a u t h o r i t y i s reviewed. The names of a l l
banks i n t h i s d i s t r i c t authorized by us to i s s u e such d r a f t s a r e f u r nished to each F e d e r a l Reserve Bank.. On t h e d a t e such, d r a f t s a r e
i s s u e d by t h e member bank, t h e bank i s supposed to give us d e t a i l e d
advice of the number and amount of t h e d r a f t so i s s u e d . Upon r e c e i p t
of t h i s advice from a member bank we immediately charge i t s r e s e r v e
account and s e t up a suspense account oil our g e n e r a l ledger f o r t h e
amount of such d r a f t , WHEN THESE DRAFTS ARE PRESENTED TO OTHER
FEDERAL RESERVE BANKS IMMEDIATE CREDIT IS GIVER THEREFOR, BUT THE
DRAFTS ARE HANDLED FOR COLLECTION IN THE ORDINARY WAY WITHOUT SPECIAL NOTICE.
FEDERAL RESERVE TRANSFER DRAFTS.
Member banks i n t h i s d i s t r i c t a r e a u t h o r i z e d t o i s s u e
F e d e r a l Reserve t r a n s f e r d r a f t s a f t e r s i m i l a r c r e d i t i n v e s t i g a t i o n of
t h e member bank to whom such p r i v i l e g e i s g r a n t e d . Other Federal
Reserve Banks a r e not advised of the banks i n t h i s d i s t r i c t a u t h o r i z e d to i s s u e Federal Reserve t r a n s f e r d r a f t s . On the d a t e such
d r a f t s a r e i s s u e d t h e member bank i s s u i n g same i s supposed to give
u s d e t a i l e d advice over t h e s i g n a t u r e i n ink of the o f f i c e r s i g n i n g
s a i d d r a f t , showing t h e number, amount and t h e F e d e r a l Reserve Bank
to which such d r a f t i s made p a y a b l e . Immediately upon r e c e i p t of
such advice we charge the r e s e r v e account of t h e member bank f o r t h e
amount of the d r a f t and c r e d i t such amount i n t o a suspense account
on our g e n e r a l l e d g e r . Immediately -ypon p r e s e n t a t i o n t o any other
Federal Reserve Bank of a Federal Reserve t r a n s f e r d r a f t we a r e



X-7454-o
ilr. Hkle, San jprandigco, d a l i f . - 2 *•

282

given advice by wire of t h e p r e s e n t a t i o n of such item f o r payment,
and i n the event we have not t h e r e t o f o r e s e t a s i d e i n t h e suspense
account on our general ledger a sum s u f f i c i e n t t o meet t h i s d r a f t
we, of course, immediately so n o t i f y t h e F e d e r a l Reserve Bank to
whom the d r a f t has "been presented f o r payment i n time f o r t h a t "bank
to reverse i t s credit.
GENERAL DISCUSSION
Apparently t h e r e i s no agreement "between Federal Reserve
Banks as t o t h e i r r e s p e c t i v e l i a b i l i t i e s i n connection with such
d r a f t s . Furthermore, i n so f a r as our d i s t r i c t i s concerned, we do
not have any r e g u l a t i o n d e f i n i n g the r i g h t s and o b l i g a t i o n s of the
member "bank and Federal Reserve Bank with r e s p e c t to t h e s e i t e m s .
Our c i r c u l a r i n connection with t h e s e items c o n s i s t s only of d e t a i l ed i n s t r u c t i o n s concerning t h e issuance of such i t e m s .
We t h i n k t h a t uniform agreements d e f i n i n g t h e r i g h t s and
l i a b i l i t i e s a s between Federal Reserve Banks and uniform c i r c u l a r s
d e f i n i n g t h e r i g h t s and l i a b i l i t i e s between F e d e r a l Reserve Banks
and t h e i r member banks should c e r t a i n l y be worked out and put i n t o
f o r c e i f the p r a c t i c e of p e r m i t t i n g issuance of t h e s e d r a f t s i s to
be continued.
Assuming t h a t our member banks i s s u i n g such d r a f t s gives
us t h e n o t i c e which they a r e supposed t o g i v e , and assuming f u r t h e r t h a t
t h i s n o t i c e i s received and t h e i r r e s e r v e accounts a r e charged p r i o r
to the suspension of the member bank involved, we answer your questions
a s f ollows:




I.

I.

Yes

2. We do not b e l i e v e t h a t t h e F e d e r a l Reserve Bank
would have the r i g h t t o r e f u s e t o pay the d r a f t when
p r e s e n t e d , and t h e r e f o r e i t would not have t h e r i g h t
t o r e v e r s e the e n t r y .
3 . The answer to t h i s question i s covered by t h e
answer to I . 2.
II.

1 . We do not t h i n k t h a t the p o s i t i o n of the paying
Reserve Bank would be a f f e c t e d by the suspension of
t h e i s s u i n g bank, provided t h e d e t a i l s of t h e p l a n
had been c a r r i e d i n t o e f f e c t , f o r t h e reason t h a t ,
i n our opinion, i f the d e t a i l s had been p e r f e c t e d
t h e i s s u i n g bank had made an assignment of t h e funds
.against which t h e d r a f t was drawn.
2. The answer to t h i s question i s covered i n t h e
answer t o I I . 1.

III.

1 . I f t h e mechanics of the p l a n had been c a r r i e d
f u l l y i n t o e f f e c t p r i o r to the suspension of the i s s u i n g bank, we do not b e l i e v e t h a t t h e p o s i t i o n of
e i t h e r Federal Reserve Bank would be a f f e c t e d .

X-7454-0
Mr. Hale, San F r a n c i s c o , C a l i f .
III.

- 3 -

2. The answer to t h i s question i s covered by
t h e answer t o I I I . 1.

We "believe t h a t under e x i s t i n g law a t a n k may a s s i g n
f u n d s , provided i t c l e a r l y evidences an i n t e n t i o n to do so and
t h a t such funds having been assigned b e f o r e a "bank closed would
not be a f f e c t e d by the c l o s i n g of the bank. T h i s , we t h i n k , i s
t h e case where t h e mechanics of t h e arrangement a r e f u l l y c a r r i e d out p r i o r t o suspension. However, the v i c e i n t h e p r e s e n t
p r a c t i c e , i t seems to u s , i s i n t h e f a c t t h a t i s s u i n g banks might
•under given circumstances i s s u e such d r a f t s without n o t i f y i n g the
F e d e r a l Reserve Bank of the d i s t r i c t i n which i t i s l o c a t e d , and
thus no assignment would take p l a c e p r i o r to suspension; and i n
t h a t event s e r i o u s questions would a r i s e as to t h e r i g h t s of both
t h e paying Federal Reserve Bank and the F e d e r a l Reserve Bank of
the d i s t r i c t i n which the i s s u i n g bank teas l o c a t e d .
There axe q u i t e a number of questions t h a t immediately
occur t o one i n considering t h i s matter and i t would not be p r a c t i c a b l e i n a l e t t e r of t h i s kind to attempt t o d i s c u s s a l l of
them. We do b e l i e v e t h a t t h e matter as now handled i n t h e Federal
Reserve System i s s u s c e p t i b l e to much improvement, and we should
be glad to j o i n with you i n an attempt to work out a p l a n by which
t h e s e d r a f t s could be handled r/ith minimum r i s k s t o F e d e r a l Reserve
Banks.




Yours very t r u l y ,
(Signed)

R. B. Coleman
R. B. Coleman
Deputy Governor

X-7454~p

COPY
FEDERAL RESERVE BANK OF RICHMOND

<\S:
February 1 4 , 1933

Mr. A l b e r t C. Agnew, Counsel,
Federal Reserve Bank of San F r a n c i s c o ,
San F r a n c i s c o , Cal.
My dear Mr. Agnew:
I received your l e t t e r of February 2nd enclosing a copy of your
l e t t e r of t h e same d a t e t o Mr. Wyatt. Of course, I a p p r e c i a t e highly t h e
comments which you made on my opinion addressed to Mr. TH&lden. As I understand i t , n e i t h e r of u s f e e l a t a l l confident as t o what would "be t h e
r i g h t s of the v a r i o u s p a r t i e s i n a case i n which a bank upon which a Fede r a l Reserve exchange d r a f t was drawn had received n o t i c e of the issuance
of the d r a f t and had segregated a fund s u f f i c i e n t t o pay i t or had received
n o t i c e but had not a c t u a l l y segregated a f u n d , and c e r t a i n l y i t would be
highly d e s i r a b l e t o remove t h e doubt on t h i s p o i n t i f i t i s p r a c t i c a b l e .
The Managing Director of our C h a r l o t t e Branch was i n town a few
days ago and i n a d i s c u s s i o n with me brought up another aspect of Federal
Reserve exchange d r a f t s t o which 1 had never given much c o n s i d e r a t i o n . In
my l e t t e r to Mr. Walden I was t h i n k i n g only of the p o s i t i o n of t h e Federal
r e s e r v e bank upon which the d r a f t was drawn; probably I was unconsciously
following a maxim which used to be much used by a lawyer i n t h i s c i t y ; t h a t
i s to s a y , "I d o n ' t c a r e what happens a s long as i t d o n ' t happen t o me."
Mr. Clements, Managing D i r e c t o r of our C h a r l o t t e Branch, however, asked me
what I thought would be the p o s i t i o n of the bona f i d e holder of such a d r a f t
i f i t appeared t h a t t h e member bank which drew i t had not n o t i f i e d t h e Fede r a l r e s e r v e bank of t h e drawing of t h e d r a f t or had n o t i f i e d the Federal
r e s e r v e bank bat had no a v a i l a b l e balance which could be charged when the
advice was r e c e i v e d . Of course, viewing t h i s s o l e l y a s a question of law,
t h e answer seems f a i r l y simple. The d r a f t could not be t r e a t e d as an
assignment of funds i n the hands of the Federal r e s e r v e bank because t h e r e
were no f u n d s to t r a n s f e r . I t could not be regarded a s g i v i n g t h e holder a
r i g h t of a c t i o n a g a i n s t t h e Federal r e s e r v e bank because obviously t h e Federal
r e s e r v e bank has no r e l a t i o n to the d r a f t except t h a t of drawee, and has
never accepted or c e r t i f i e d the d r a f t . Mr. Clements c a l l e d my a t t e n t i o n ,
however, to t h e f a c t t h a t the forms used bear i n very conspicuous l e t t e r s
the words "Federal Reserve Exchange," and the p o s i t i v e statement t h a t any
Federal r e s e r v e bank or branch w i l l r e c e i v e t h i s d r a f t f o r immediate a v a i l a b i l i t y a t p a r . The c i r c u l a r of the Federal Reserve Bank of Richmond, which
i s , I assume, s u b s t a n t i a l l y s i m i l a r t o t h a t i n use by other Federal r e s e r v e
banks, expressly provides t h a t the d r a f t s w i l l be r e c e i v e d by other Federal
r e s e r v e banks and t h e i r branches " s u b j e c t , of course, t o f i n a l payment by
the Federal r e s e r v e bank upon which i t i s drawn." An experienced banker or a
c a r e f u l lawyer would immediately recognize t h a t a d r a f t may be r e c e i v a b l e f o r
immediate a v a i l a b i l i t y by any Federal r e s e r v e bank, but t h a t the f u n d s which
a r e thus made a v a i l a b l e w i l l be paid only c o n d i t i o n a l l y and t h e payee of
the d r a f t or other person r e c e i v i n g t h e payment w i l l be n e v e r t h e l e s s bound
as endorser of t h e d r a f t t o repay t h e funds i f t h e d r a f t i s dishonored. Mr.
Clements, however, p o i n t e d out with much f o r c e t h a t a b u s i n e s s man, and



X-7454-p
Mr. Albert C. Agnew,
Federal Reserve Bank of San F r a n c i s c o ,
San F r a n c i s c o , Cal.

285

- 2-

February 14, 1933

probably many bankers, examining the d r a f t and knowing t h a t t h e p r i v i l e g e of
drawing t h e s e d r a f t s was granted to member banks only a t the d i s c r e t i o n of
the Federal r e s e r v e "bank of t h e i r d i s t r i c t , would probably conclude t h a t t h e
Federal r e s e r v e bank upon which the d r a f t was drawn had assumed some r e s p o n s i b i l i t y i n the m a t t e r . The drawee Federal r e s e r v e bank could probably successf u l l y demonstrate t h a t i t s r e s p o n s i b i l i t y was conditioned e n t i r e l y upon the
r e c e i p t by i t of due n o t i c e of the drawing of the d r a f t and upon the existence
of a balance t o t h e c r e d i t of the drawer of the d r a f t when the n o t i c e was r e ceived. The holder of the d r a f t , however, who had taken i t f o r v a l u e upon the
assurance t h a t the amount of i t nould be made immediately a v a i l a b l e to him a t
any Federal r e s e r v e bank or branch would probably f e e l t h a t t h i s c o n d i t i o n as
to the payment of the d r a f t was r a t h e r u n j u s t .
Mr. Clements put t h e matter t o me somewhat i n t h i s way: Suppose t h a t
you were a broker i n C a l i f o r n i a and a man from South Carolina sent you a Fede r a l Reserve exchange d r a f t containing the p o s i t i v e statement t h a t the amount
of i t would be made immediately a v a i l a b l e t o you a t par by the Federal Reserve
Bank of San F r a n c i s c o , and r e l y i n g on t h i s assurance you accepted t h e d r a f t
and placed i t i n your l o c a l bank, and when the proceeds became a v a i l a b l e to
t h a t bank, r e l e a s e d s e c u r i t i e s or goods to the person who had given you the
d r a f t ; and a week l a t e r you received a n o t i c e t h a t the bank which drew the
d r a f t was i n s o l v e n t and t h a t the d r a f t had been dishonored and was r e t u r n e d t o
you, and you were obliged to take i t up as endorser, and when you consulted
your a t t o r n e y you discovered t h a t the d r a f t which you had taken on a form
prepared by a Federal r e s e r v e bank purported to be i s s u e d w i t h the consent and
a u t h o r i t y of a F e d e r a l r e s e r v e bank was no b e t t e r than the check of an unknown
i n d i v i d u a l , except f o r t h e f a c t t h a t your bank could o b t a i n immediate c r e d i t
f o r i t from a Federal r e s e r v e bank, when a s a matter of f a c t you u s u a l l y obtained immediate c r e d i t f o r checks of i n d i v i d u a l s which you deposited i n your
bank and did not know t h a t banks could not obtain immediate c r e d i t on such
checks from Federal r e s e r v e banks. I n other words, t h e f a c t t h a t many, i f not
most, banks give immediate c r e d i t to t h e i r customers f o r checks deposited with
them, means t h a t Federal Reserve exchange d r a f t s d i f f e r from ordinary checks
i n the hands of i n d i v i d u a l s only i n p o i n t s to which the i n d i v i d u a l i s u s u a l l y
i n d i f f e r e n t ; but the e n t i r e form of the d r a f t i s such as to suggest t o t h e
i n d i v i d u a l t h a t i t has a value which makes i t much more s a f e and d e s i r a b l e .
than t h e check of an i n d i v i d u a l .
I was obliged t o confess t h a t i f I were the b u s i n e s s man which Mr.
Clements mentioned, I should f e e l t h a t the Federal Reserve System had a t l e a s t
given me good reason t o expect t h a t I would r e c e i v e money f o r my d r a f t , and had
allowed i t s nahe i n a way l i k e l y t o mislead the ordinary b u s i n e s s man.
While, as I say, i n my former memorandum I did not give much considerat i o n t o t h e consequences which might f o l l o w from the use of t h e s e d r a f t s by i n d i v i d u a l s , iny view t h a t the courts would probably t r e a t them as assignments of
any funds i n t h e hands of the Federal r e s e r v e bank upon which they were temms
l a r g e l y based upon t h e conviction t h a t the court would f e e l t h a t the holder of a




Mr. Albert C. Agnew,
f e d e r a l Reserve Bank of San Francisco ?
San Francisco, Cal.
'

X-7454-p
- 3 -

February 14, 1933

d r a f t had a t l e a s t some s o r t of claim, l e g a l or e q u i t a b l e , a g a i n s t the Federal
r e s e r v e "bank, and would endeavor to give t o the d r a f t as much e f f e c t as could he
given to i t without v i o l a t i o n of the p l a i n language of the c i r c u l a r under which
i t was i s s u e d . I t i s , of course, e n t i r e l y within the "bounds of p o s s i b i l i t y t h a t
some court would go much f u r t h e r than e i t h e r you or I expect and hold t h a t i n asmuch as the p r i v i l e g e of i s s u i n g t hese d r a f t s was granted only t o a s e l e c t e d
few "banks, t h e Federal r e s e r v e bank which authorized t h e issuance would be held
estopped t o deny t h a t i t had funds i n i t s hands t o meet the d r a f t . Such a
d e c i s i o n would, of course, be contrary t o the p l a i n language of the c i r c u l a r and
would be a g a i n s t t h e l i n e of d e c i s i o n s which hold t h a t a bank cannot agree t o
pay d r a f t s drawn on i t by a customer r e g a r d l e s s of whether or not t h a t customer
has funds on d e p o s i t ; b u t , as we know, courts have sonetimes c a r r i e d the d o c t r i n e
of estoppel to extremes when i t appeared t h a t i t was necessary to do so to p r e vent a r e s u l t t h a t amounted t o an imposture.
Another p o i n t along the same l i n e has occurred to me, which i s probably of considerable i n t e r e s t to you. The Federal r e s e r v e bank which gives inn
mediate c r e d i t f o r one of these d r a f t s may have the d r a f t r e t u r n e d by the drawee
Federal r e s e r v e bank a f t e r a lapse of s e v e r a l days, and may discover t h a t the
bank which deposited t h e d r a f t has f a i l e d as well as t h e drawer. In such a case
the Federal r e s e r v e bank which made the proceeds of the d r a f t immediately a v a i l a b l e w i l l be i n t h e p o s i t i o n of the b u s i n e s s man which I mentioned above. Of
course, t h e r i s k which t h e Federal r e s e r v e bank takes i s i d e n t i c a l w i t h t h a t
which they take upon ordinary checks, the proceeds of which under the time
schedules became a v a i l a b l e i n the r e s e r v e account b e f o r e a c t u a l r e t u r n s a r e r e ceived; but the time element i s l i k e l y to be much longer i n t h e case of Federal
Reserve exchange d r a f t s than i n the case of checks. I r e a l i z e , however, t h a t
the s i t u a t i o n of t h e F e d e r a l Reserve Bank of San Francisco and t h e f a c t t h a t inch
of i t s b u s in e s s i s done i n the "great open spaces" render a l l elements of t r a n s i t
time much more important to you than to us and t o the E a s t e r n Federal r e s e r v e
banks.
I have been considering your suggestion t h a t the use of the se d r a f t s
should be d i s c o n t i n u e d , and while I have not had an o p p o r t u n i t y t o d i s c u s s a l l
phases of the s i t u a t i o n with t h e executive o f f i c e r s of t h e bank, I myself have
come to the conclusion t h a t the whole s u b j e c t i s so f a l l of d o u b t f u l q u e s t i o n s ,
both of law and p o l i c y , t h a t i t would c e r t a i n l y be a d v i s a b l e e i t h e r t o discont i n u e the use of t h e d r a f t s , or a t l e a s t t o review the s i t u a t i o n c a r e f u l l y and
endeavor to e l i m i n a t e some of the weak spots i n the system as i t o p e r a t e s a t
present*
I b e l i e v e t h a t the use of the se d r a f t s was o r i g i n a l i n s t i t u t e d b e f o r e
the system of wire t r a n s f e r s had been introduced, or c e r t a i n l y b e f o r e t h a t system
had been e l a b o r a t e d t o i t s p r e s e n t e x t e n t , and I am s t r o n g l y i n c l i n e d to the opinion t h a t the c i r c u l a r was drawn i n a time when t h e r e was a tendency to assume a l most as an axiom t h a t a d r a f t drawn by a bank which was a member of t h e Federal
Reserve System, and c e r t a i n l y one drawn by a member of the System which had r e ceived permission from i t s Federal r e s e r v e bank to use t h e d r a f t s , could be a c cepted with H tble car no doubt that i t would be paid; and, therefore, the object of the Qystan was



287
X-7454-p
Mr. Albert C. Agnew,
Federal Reserve Bank of San Francisco,
San Francisco, Cal.

-4-

February 14, 1933

merely to give a v a i l a b i l i t y to a d r a f t which was regarded as c e r t a i n l y u l t i m a t e l y
c o l l e c t i b l e . U n f o r t u n a t e l y , p r e s e n t conditions no longer j u s t i f y the major premi s e upon which the system of Federal Reserve exchange d r a f t s was, I b e l i e v e , based
The o p e r a t i n g o f f i c e r s of the bank t e l l me t h a t these d r a f t s are not used
to any l a r g e extent by our member banks. In t r a n s f e r s from one bank to another i t
i s more convenient t o use the wire t r a n s f e r . I understand t h a t the d r a f t s are
l a r g e l y used when some i n d i v i d u a l wishes to purchase from a country bank exchange
payable at some point at which the bank has no correspondent. Therefore, as Mr.
Clements pointed o u t , i t seems t h a t the chief use of the d r a f t s at -present i s i n
the very c l a s s of t r a n s a c t i o n s i n which t h e i r use i s l i k e l y to mislead the p u b l i c ,
and i t i s f a r from improbable t h a t they may do more harm than good when used under
present c o n d i t i o n s .
You understand, of course, that I have not discussed t h i s matter with the
senior o f f i c e r s of the bank and consequently what I have said i s merely an e x p r e s sion of my i n d i v i d u a l views; but I am very p o s i t i v e t h a t from the standpoint of a
lawyer, i f the use of these d r a f t s i s continued the c i r c u l a r s under which they are
issued and the forms of the d r a f t s should be c a r e f u l l y reviewed i n the l i g h t of the
experience which we have had i n the past few y e a r s . One of the o p e r a t i n g o f f i c e r s
of the bank suggested t o me t h a t i f no other r e v i s i o n was made, the form of the
d r a f t should at l e a s t be r e v i s e d to the extent of changing the phraseology which
i n d i c a t e s t h a t any Federal r e s e r v e bank w i l l r e c e i v e t h i s d r a f t f o r immediate
a v a i l a b i l i t y at par and the following words added: "Subject n e v e r t h e l e s s to payment by the Federal r e s e r v e bank upon which i t i s drawn."
In your l e t t e r to Mr. Wyatt you suggest the a d v i s a b i l i t y of t a k i n g up
with the Federal Reserve Board the question of a u t h o r i z i n g Federal r e s e r v e banks to
discontinue the use of exchange and t r a n s f e r d r a f t s . Since each Federal r e s e r v e
bank at present has power to withdraw the p r i v i l e g e of i s s u i n g Federal fieserve exchange d r a f t s from any member bank, i t would seem t h a t each Federal r e s e r v e bank
could at present d i s c o n t i n u e the use of d r a f t s drawn on i t merely by revoking the
p r i v i l e g e of drawing from any and a l l of i t s members. One Federal r e s e r v e bank
could not d i s c o n t i n u e the p r a c t i c e of giving immediate a v a i l a b i l i t y to d r a f t s drawn
on another Federal r e s e r v e bank without s e r i o u s l y d i s t u r b i n g the c o n d i t i o n s i n the
d i s t r i c t i n which t h e drawee Federal r e s e r v e bank was l o c a t e d , and i t seems to me
the Federal r e s e r v e banks are i n more danger of l o s s from d r a f t s drawn on other Fede r a l reserve banks than they are from the use of d r a f t s drawn on themselves. I t
t h e r e f o r e occurs to me t h a t a c o n s i d e r a t i o n of t h i s matter by the Governors,
perhaps by the Committee on Collections would be a p p r o p r i a t e , and a f t e r such cons i d e r a t i o n i t might be p o s s i b l e t o recommend to the Board t h a t the e n t i r e system
be discontinued by a l l Federal r e s e r v e banks, or e l s e t h a t such m o d i f i c a t i o n s i n
i t might be made as t o e l i m i n a t e some of the d i f f i c u l t i e s which are now apparent.
I am sending a copy of t h i s l e t t e r to Mr. Wyatt, as I know he w i l l be




X-7454-p
Mr. Albert C. Agnew,
Federal Reserve Bank of San Francisco,
San Francisco, Gal.

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February 14, 1933.

i n t e r e s t e d i n the s u b j e c t ; and I t h i n k t h a t you have earned the thanks of the
System by b r i n g i n g up f o r d i s c u s s i o n a point which very obviously needs c a r e f u l
review and r e c o n s i d e r a t i o n .
Very t r u l y yours,

M. G-. Wallace,
Counsel.
MOW E