Full text of Federal Reserve Bank of New York Circulars : 55. Checks Restricted as to Payment

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CIRCULAR N O . 55.

FEDERAL RESERVE BANK
O F NEW YORK

N E W Y O R K , November 18, 1916.
T o THE C A S H I E R :

CHECKS RESTRICTED AS TO PAYMENT.
SIR:

Since the inauguration of the intra-district collection system this bank has received from its
depositors a number of items which carry restrictive clauses such a s : "Payable in New York
exchange," or "Payable in exchange a t current rates," or similar phrases. While very few items
bearing such restrictions originate in this district, enough are received by our member
banks from outside districts to make it advisable for us to call the matter to their attention.
W e , therefore, give below the text of a communication received by us from the Federal Reserve
Board, as follows:
" T h e board has been informed t h a t in some of the districts a number of member
banks have induced depositors to draw checks upon them with the clause
'Payable in exchange a t current rates'
printed or stamped upon the face of the checks.
"Our counsel holds t h a t checks so payable are not valid negotiable instruments,
inasmuch as they are not made payable in a sum certain in money, as required by law,
b u t are made payable in domestic exchange. He is, therefore, of the opinion t h a t Federal
reserve banks have no authority, under the law, to charge such quasi-checks to the
accounts of member banks, b u t must accept payment in exchange according to the terms
of the check. T h e common law definition of a check is a written order for money drawn
on a bank or banker, and of a draft, a written order drawn by one person upon another,
directing the payment of money on account of the drawer.
"Section 16 of the Federal Reserve Act provides t h a t 'Every Federal reserve bank
shall receive on deposit at par from member banks * * * checks and drafts * * *"
b u t does not authorize Federal reserve banks to receive for credit or for collection
orders for exchange or other non-negotiable instruments.
" T h e board therefore advises all Federal reserve banks to notify their member
b a n k s t h a t such items cannot be received for collection or credit, and t h a t all instruments not payable expressly and unconditionally in money will be returned a t once t o
the senders."
In accordance with this ruling of the Federal Reserve Board, we therefore notify you t h a t
instruments of the character above described or those containing any other qualification or restriction which impairs or destroys their negoitabiHty cannot be received by this bank either for
collection or credit.
In view of the danger both to b a n k s and the public caused by the circulation of such instruments, we hope t h a t our member banks will cooperate with us by not forwarding such items
through our collection system.




Respectfully,
R. H .

TREMAN,

Deputy Governor.