The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
399 October 6 , 1915. The Federal Reserve Board, Washington, D. C. Sirs; The question has been raised whether Federal reserve banks may establish local agencies as well as branches, and if so, to what extent the operations of such banks may be carried on through such agencies• Section 3 of the’Federal Reserve Act provides that "each Federal reserve bank shall establish branch banks within the Federal reserve district in which it is located',' and it is provided in paragraph (e) of Section 14 that each Federal reserve bank shall have power "to establish agencies in such (foreign) case wheresoever it may deem best for the purpose of purchasing, selling , and collecting bills of exchange, etc." There is no provision,however,in the Federal Reserve Act wxpressly authorizing a Federal reserve bank to estab lish domestic agencies, and the question, therefore, re solves itself to a determination of the fact whether a Federal reserve bank has the implied power to exercise certain of its functions through agents in places other than at the offices of the bank itself. The power given in Section*3, quoted a.bove, to establish branches is not of itself authority to establish agencies, there being a clear distinction between a branch and an agency. In an opinion prepared by the Attorney General of the United States for the Secretary of the Treasury on May 11, 1911, it was stated in reference to a number of cases on this subject that: "These cases clearly indicate that the courts recognize a vital distinction between a mere agen cy for the transaction of a particular business and a branch bank wherein is'carried on a general banking business "That such a distinction does exist in fact is tbvious • An agency requires no' division of the capital stock, and the details of the business are few and are easily supervised by the officers 6 S 4 - 2 - 399 of the bank, while a branch bank requires, in effect, a division of the capital, the working fqrce is organized, and the business conducted as if it were a separate organization, and it com petes in all branches of the banking business with other banks in that locality the same as if it were an independent institution. " It is true that this distinction was pointed out by the Attorney General for the purpose of indicating that, though a particular bank might have the right to establish an agency, it could not because of that fact alone claim authority for establishing a branch, and in the case under consideration there is no question about the authority of a Federal reserve bank to establish a branch within its district, because such right is specifically authorized by Congress. The purpose in quoting from the opinion of the Attorney General as above is to illustrate the fact that the courts and text writers all recognize a clear distinction between a branch and an agency, and that, therefore, an express right to establish a branch does not of itself necessarily include the right to form an agency* But it seems clear that even though there is no ex press authority in the Federal Reserve Act which could be construed as authorizing a Federal reserve bank to form a domestic agency, nevertheless, the decisions of the various courts, including the Supreme Court of the United States, and the opinions of text writers and jurists all agree that a bank may lawfully establish an agency for the purpose of conducting certain particular transactions incident to the general business authorized in its charter* t The leading case on the question of the right of a bank to carry on a particular class of business through a m agency is the Bank of Augusta vs. Earle, 13,Pet. 519. The Bank of Augusta was incorporated by the State of Georgia with a general power to deal in bills of exchange- The principal office of the bank was located at Augusta, but an agency for the purpose of buying and selling bills of exchange was operated at Mobile, Alabama. The question for consideration for the court w^s whether a transaction completed at the agency was a legitimate transaction of the bank. I tp.*P OOi/ * - 3 399 In its opinion the court said: "The charter of the Bank of Augusta author izes it, in general terms, to deal in bills of exchange; and consequently, gives it the power to purchase foreign bills as well as inland; in other words, to purchase bills payable in another State. The power thus given, clothed the corporated with the right to make contracts out of the State, in so far as Georgia could confer it. For whenever it purchased a foreign bill, and forwarded it to an.agent to present for acceptance, if it was hon ored by the drawee, the contract of acceptance was necessarily made in another State; and the general power to purchase bills, without any restriction as to place, by its fair and natural import authorized the bank to make such' purchases, wherever it was found most convenient and profitable to the in stitution; and also to employ suitable agents for that purpose. The purchase of the bill in question was, therefore, the exercise of one of the powers v/hich the bank possessed under its charter; and was sanctioned by the law of Georgia creating the corporation, so far as that State could authorize a corporation to exercise its powers beyond the limits of its own jurisdiction." In the case of City Bank of Columbus vs. Beach, Fed. Case No. 2736, an^action was brought involving the validity of the discount of two bills of exchange made at an agency in Cleveland, Ohio, of the City Bank of Columbus, Ohio. The City Bank was a State corporation chartered under the laws of Ohio with power to buy,sell, and discount bills of exchange, and the agency was estab lished in Cleveland for the particular purpose of deal ing in bills of exchange. The Circuit Judge said in reference to the legality of the Cleveland agency that: "The acts under which the bank became a cor poration, conferred upon it the power to deal in exchange, without restriction, and hence the pur chase of bills at the city of Cleveland, for the purpose of remitting the proceeds of paper be longing to the bank collected at that place, or 399 4 even the dealing gererally in exchange at that place by an agent, with the funds thus collected and remitted, was not in contravention of the charter of the bank, or of any law of the State of Ohio. I think this case falls within the principle of the case of Bank of Augusta vs. Earle, 13 Pet. (38 U* S.) 519, and of Tombigbee R. Co* v. Kneeland,4 How, (45 U. S.) 16.” The Court also said: "The question, then, is resolved into the simple inquiry whether a State bank, having paver by its charter to deal in bills of exchange, without any express restriction as to,place, can lawfully establish an agency, for the purpose of *keying and selling bills of exchange, in a part of the State other th^n that of its location.;" which was answered in the affirmative. The Attorney General of the United States, in refer ring to these same caises, stated in his opinion that: "These authorities are conclusive of the proposition that a bank may maintain an agency, the power of v/hich is restricted to dealing in bills of exchange, or possibly to some other particular class of business incident to the bank ing business- In Bank of Augusta v. E^rle it was held that, though the Legislature of the State of Georgia did not undertake to authorize the corpora tion to do a banking business outside that State, yet the bank could transact a particular business in the State of Alabama through an agency." Morawets said, in Volume 1 of his work on Corporations, Section 387, that: "Banking corporations have implied authority to create agencies for special purposes, such as the redemption and purchase of bills of exchange and other securities, v/herever this may be ad vantageous in carrying on their business; but they have no right to establish branch banks in the absence of express authority conferred by charter." * > 4 4 399 5 - It seems evident, therefore, from these decisions of the courts, the various text writers, and from the opinion of the Attorney General which goes into this -whole subject at great length, that there is no legal objection to a banking corporation establishing agencies for special or particular purposes; though it is equally clear that they can not establish branch banks unless that right is expressly conferred on the parent bank by the charter creating it. The opinion of the Attorney General was filed for the specific purpose of determining whether a national bank could, under the National Bank Act, establish branch banks, and, though his opinion on that particular point was in the negative, nevertheless, it was plainly con ceded by him and the cases quoted in his opinion that the right to establish agencies to operate at places out side of the principal banking house was necessarily im plied in the authority to conduct a general banking bus iness . It is the opinion of this office that there is no legal objection to the establishment by Federal Reserve Banks of local agencies for the purpose of exercising certain special or particular powers authorized such banks' by law. Respectfully, M. C. ELLIOTT, Counsel. 10/28/15.