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FEDERAL RESERVE BOARD

WASHINGTON

T O

T H E FEDERAL RESERVE BOARD

X-7454

June

13 , 1933 .

SUBJECT: Topic f o r Conference of Governors:

Federal Reserve Exchange drafts

and Transfer draf ts .

Dear S i r :

There a r e inclosed herewith f o r your information two

copies o f a memorandum addressed t o t h e Board on t he question

whether t h e p r iv i l eg e of issuing Federal reserve exchange

d r a f t s and Federal reserve transfer draf ts should b e w i th -

drawn.

The Board i s desirous of discussing this question

with t h e Governors of the Fed era l re se rv e banks a t th e i r

next conference, and the matter i s hereby made a topic f o r

inc lus ion

i n t h e

program

o f t h e

conference.

Very truly yours,

Chester Morrill

Secretary

Inclosures.

TO THE

GOVERNORS

OF ALL

FEDERAL RESERVE BANKS.

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X-7454a

May 31, 1933.

Federal Reserve Board

Subj ect : Suggested to pi c f o r Gover-

nors' Conference: - Federal reserve

exchange

and

t r a n s f e r d r a f t s .

rom:

Mr.

Chase

-

Assistant Counsel

The

quest ion

h a s

been ra i sed

a s t o t h e

d e s i r a b i l i t y

of

withdrawing

t h e

p r iv i l ege

now

held

b y

member banks

of

issuing

Federal reserve exchange drafts and Federal reserve t ra ns fe r dr af ts ;

and i t h a s been suggested th at t h i s que st ion b e given considerat ion b y

t h e

Conference

of

Governors

of the

Federal reserve banks.

On

February

2 1 , 1 9 3 3 , t h e

Governor

of the

Federal Reserve

Bank of San Francisco telegraphed t o t h e Board a s follows:

I n view of the u n c e r t a i n t i e s of our legal

ob l igat ion

i n

connection with payment

o r

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 ou r bel ief

tha t

we

should withdraw

t h e

pr iv il eg e. Banks

availing themselves of use of exchange and t r ans fe r

d r a f t s a r e very few and under pres ent cond itio ns i t

i s

bel ieved

t h e

service

i s n o t

warranted

f o r t h e

ri sk s involved. Suggest ref ere nce to b e made t o

correspondence passing between Wyatt and Agnew on

t h i s sub jec t .

Use of

Federal Reserve exchange

and

t r a n s f e r d r a f t s was d i rected by Federal Reserve

Board under date April

25 , 1917 see

let ter X-102,

Under date of March 2 , 1 9 3 3 , t h e fol lowing reply was sent:

Your wire February

2 1

regarding privi lege

of

issuing Federal reserve exchange and t r a n s f e r d r a f t s .

I n

view

of

quest ions raised

i n

correspondence referred

t o i t

appears that subject

i s one to

which consideration

should b e given a s a matter of system policy by Gov-

ernors

1

Conference. Question

as to

what action should

b e taken i n meantime with respect t o withdrawal of

p r i v i l e g e

i n

individual cases

i s one

which Board feels

should

b e

considered careful ly

i n t h e

l i g h t

of any

disturbance that might b e caused i n present circumstances

b u t i f

after such considerat ion bank feels just i f ied

i n withdrawing privilege i n particular cases Board will

n o t

ob ja ct . Copies

of

correspondence

a r e

being sent

t o

a l l

other Governors

f o r

their information

i n

advance

of

next conference.

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A—

rtvtp.

* * 2 3 6

SoWever, i n view of the then e x i s t i ng banking emergency,

an d

since

i t wa s

necessary

t o

obtain addi t ional data

b y

correspondence,

t h e matter could no t be submitted t o t h e Governors f o r t h e i r c o n -

s ide ra t ion i n advance of their next conference, which was held on

April

19, 1933; and no

time

was

available during that conference

t o

consider

i t .

F or the information o f th e Board, t h e f a c t s r e l a t i n g t o

th is matter a r e se t ou t in t h i s memorandum.

ORIGIN

AMD

NATURE

OF

THESE DRAFTS

The use of Federal reserve t ransfer d raf t s and Federal

exchange drafts was inaugurated in 1917 , pursuant t o t h e Board's

l e t t e r of April 25 , 1917 , (X-102) a nd the inclosed memorandum and forms

(X-92 to X-96,

Incl .) copies

of

which

a r e

at tached here to .

As

stated

i n that memorandum, t h e nature of these d ra f t s i s a s follows:

A Federal reserve t ra nsf er d r af t i s drawn b y a member bank

on i t s own

Federa l r es er ve bank

a nd i s

payable only upon receipt

of

advice from

t h e

drawee Federal reserve bank

b y t h e

Federal reserve

bank

a t

which

i t i s

payable,

A Federa l r es er ve exchange dr a f t i s drawn by a member bank

on i t s own Feder al r es er ve bank a nd i s receivab le 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, although actually

payable only

a t t h e

drawee Federal reserve bank.

I n connection with both types of d r a f t , i t wa s contemplated

that t h e drawee Federal reserve bank, immediately upon receipt of

advice that

t h e

d r a f t

ha d

been drawn, would transfer

t h e

amount

of

t h e

draft from

t h e

drawer's account

t o a

special account

f o r t h e

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X-7454a

8

- 3 -

payment

o f the

dr af t when pres ente d. This fe at ur e di st in gu is he s thes e

dr af ts f rom ordinary dr af ts ,

i n

connection with which

no

such transfer

i s

made.

At f i r s t , t h e maximum amount f o r which an Exchange draft could

b e drawn was l imi ted t o $250. This l im i t was la te r increased t o $5,000

( s e e copy of Board ' s l e t t e r of August 1 2 , 1 9 1 8 , X-1121, attached hereto)

and i s now

$50,000

( s e e

copy

of

Board ' s l e t t e r

of

June

19 , 1925 ,

X-4362,

a t tached here to) .

The

minimum amount

f o r

which

a

Transfer draf t

may he

drawn

i s

$250.

As i s shown b y t h e above memorandum (X-92), t h e drawing of

these draf ts was intended to he a privilege supplementary t o t h e right

of

drawing ordinary hank drafts upon Federal reserve banks,

a nd i t

was

apparently originally contemplated that

t h e

privilege would

b e

extended t o a l l member banks.

I n view o f the fact that Exchange drafts were subject t o

immediate availabil i ty, t h e Federal reserve banks adopted t h e prac t ice

of

grant ing

t h e

p r i v i l e g e

of

drawing such drafts only

t o

member

banks whose applications

f o r t h e

p r i v i l e g e

h ad

been approved

b y t h e

Federal reserve bank. The Board recognized t hi s pr ac ti ce , a s i s shown

b y i t s l e t t e r o f June 19 , 1925 (X-4362). As an i l l u s t r a t i o n o f th is

prac t ice there i s attached hereto a copy o f Circular 69 of August

29 , 1925 , o f the

Federal Reserve Bank

of San

Francisco.

I n

some

cases

t h e

p r i v i l e g e

o f

drawing Transfer drafts

was

likewise

l imi ted

t o

banks whose applications

f o r t h e

p r i v i l e g e

h a d

been approved.

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X-7454a

UNCERTAIITTIES

AS TO

LEGAL RIGHTS

IN

COMECTION

WITH THESE DRAFTS.

As the

number

of

bank f a i lu r es incr eased ,

i t

became

apparent that certain troublesome questions arose i n connection

with these drafts i n t h e event of the insolvency o f the drawer

bank;

a nd in

order

t o

obta in

t h e

views

o f the

other Federal reserve

banks,

M r.

Agnew, Counsel

f o r t h e


of San

Francisco,

suggested to Mr* Hale, Cashier of that bank, t ha t h e address a l e t t e r

t o t h e

other Federal reserve banks stating

a

number

of

these ques-

t i o n s .

A

copy

of Mr.

Hale's letter, dated December

2 , 1 9 3 2 , i s a t -

tached hereto.

I n a l e t t e r t o t h e Board's General Counsel dated February 2 ,

1933, Mr.

Agnew statod that

t h e

principal legal quest ion underlying

t h e

various questions asked

by Mr.

Hale

was;

Does t h e issuance of an exchange draft by a member

bank,

t h e

rece ip t

of

not ice

of

such issuance

by a

Federal Reserve Bank and the charging o f the d r a f t by

t h e Federal Reserve Bank t o t h e member bank's account

consti tute such segregation

and

assignment

of the

funds necessary to pa y the d r a f t a s to requ i re t h e

Federal Reserve Bank t o honor and pay the draft upon

pre sent at i on, even af t er notice

o f

insolvency

of the

drawer?

Replies

to Mr.

Hale's letter were received from almost

a l l o f

t h e

Feder al res er ve banks. Copies

of

those repl ies

a r e

attached hereto.

Although n o t a l l o f t h e rep l i e s s t a te a def in i te conclus ion, t h e majori ty

express

t h e

opinion that

t h e

answer

t o t h e

underlying quest ion s tated

by

M r.

Agnew

i s

that , after receiving advice that

t h e

d r a f t

h a s

been iss ued

and af te r t ransferr ing funds f rom t h e account o f the drawer bajak to a

special account f o r t h e payment o f the d r a f t , t h e drawee Federal reserve

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X-7454a

••5*

bank should

n o t u s e t h e

funds

f o r a ny

other purpose, ancl

i s

j u s t i f i e d

i n

using them

f o r t h e

purpose

of

paying

t h e

draft even after notice

of the insolvency o f the drawer. The reasoning upon which this com*

elus ion i s reached, with which I an in agreement, i s s ta ted a s follows

by Mr, Wallace i n h i s memorandum dated December 20 , 1933 (which i s

attached hereto accompanying t h e reply o f the Federal Reserve Bank

of Richmond to Mr . H a l e ' s l e t t e r ) .

Applying

t h e

pr inc ip le s

o f the

above cases

t o

o u r

Circular

No. 142

r e l a t i n g

t o t h e

issuance

o f

Federal Reserve Exchange drafts,

I am

inc l ined

t o

t h e opinion that Federal Reserve Exchange drafts issued

under

t h e

c i r c u l a r

a r e

clearly assignments

o f the

fund

against which they a r e drawn, o r ra ther tha t t h e

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 cons t i tu te a n assignment when read i n

connection with

t h e

c i r c u l a r ,

f o r i n

that case

i t i s

pla in tha t t h e drawer o f t h e d r a f t i s placed upon notice

that when t h e d r a f t i s drawn and the advice given, i t s

account will

b e

charged.

The

c i rcu la r s t a te s tha t

F e d -

eral Reserve drafts

a r e

ent i re ly d i f f e r en t from ordinary

d r a f t s

a nd a r e

intended

t o

serve

a

di fferent purpose .

The c i rcular indica tes tha t th is d i f fe rence i s because

ordinary drafts drawn

on

Federal reserve banks

a r e

payable

only

on

presen ta t ion ,

and

consequently will

n o t b e r e -

ceived b y other Federal reserve banks f o r immediate

c r e d i t ,

b u t

tha t

t h e

Federal Reserve Exchange drafts will

b e received f o r immediate credit a t pa r by a ny other

Federal reserve bank

o r

branch subject ,

of

course,

t o

final payment b y t h e Federal reserve bank on which they

a r c

drawn.

M r.

Parker, counsel

f o r t h e


o f

Atlanta

and Mr. McConkey, counsel f o r t h e Federal Reserve Bank o f S t . Louis,

also reach this conclusion, adding that i n their opinion t h e t r a n s -

ac t ion i s analogous to one where t h e drawee bank issues i t s cash ie r ' s

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X-7454a

—6—

check o r c e r t i f i e s t h e or ig in al check. (Copies of the memoranda of

Mr.

Parker

and Mr.

McConkey

a r e

attached hereto accompanying

th e

r e p l i e s of t he ir Federal reserv e banks to Mr. Ha le ' s l e t t e r )

The

conclusion stated above, however, does

n o t

dispose

of

questions which may a r i s e a f f ec t i ng t h e Federal reserve bank t o

which

an

Exchange draft

i s

presented

f o r

payment, since that bank

may not know def ini te ly ( a ) whether t h e drawer h a s n o t i f i e d t h e

drawee Federal reserve bank,

or (b )

whether

t h e

drawee bank

h a s

actually made t h e t r a n s f e r on i t s books after receiving such notice,

ei ther because i t was no t i n possession of su ff ic ie n t funds with which

t o

make

t h e

t r a n s f e r

or fo r any

other reason.

I n

e i ther event ,

t h e

reasoning upon which t h e conclusion stated above i s based would

obviously

b e

inapp l i cab l e ,

and th e


t o

which

t h e

d r a f t

was

presented

f o r

payment might therefore

b e

faced with

a

l o s s i f i t paid t h e d r a f t on presenta t ion .

Mr.

Wallace discusses this question

a t

some length

i n h i s

l e t t e r of February 14, 1933 to Mr. Agnew, a copy of which i s attached

he re to . Of course, i f t h e Federal reserve bank t o which t h e d ra f t

i s

presented

f o r

payment were

t o

delay payment until

i t had com-

municated with t h e drawee Federal reserve bank and ascer ta ined that

funds were uncondit ionally available,

a l l

these questions might

b e

avoided, although i t would eeem th at t h i s procedure might i n some

cases

b e i n

conf l i c t wi th

t h e

provis ions

of the

c i r c u l a r ,

and th e

statement appearing o n t h e face of the d r a f t i t s e l f , th a t t h e funds

a r e

subject

t o

immediate a v a i l a b il i t y . Moreover,

as Mr,

Wallace

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X~7454a 2 4 1

- 7 -

points o u t i n h i s l e t t e r to Mr. Agnew, a r e fu s a l t o honor t h e

d r a f t ,

no

matter what

t h e

circumstances, would

be

most undesirable

from

t h e

standpoint

o f the

effect which such action would have

upon t h e per son s de al in g wit h Feder al re se rv e banks, sin ce t h e terms o f

t h e draft would indicate , a t l e a s t to a n ordinary business man, that

t h e Federal reserve bank h a d i n effect promised that t h e funds would

b e immediately and uncondit io nally ava ila ble . Technically, nei ther

t h e

paying

n o r t h e

drawee Federal reserve bank might

b e

l i a b l e

as a

matter of law because t h e d r a f t ha d no t been accepted b y t h e drawee,

b u t t h e result might b e hardship and p ra c t i c a l i n j u s t i c e t o t h e person

rece iving t h e d r a f t , M r. Wallace goes on to say:

The ope ra t ing o f f i ce rs o f the bank toll me that

these d ra f t s

a r e n o t

used

to any

large extent

by our

member banks* I n t ransfers f rom one bank t o another i t

i s

more convenient

t o u s e t h e

wi re t rans fe r ,

I

under-

stand that t h e d r a f t s a r e largely used when some individual

wishes

t o

purchase from

a

country bank exchange payable

a t some point a t which t h e bank has no correspondent.

Therefore,

as Mr.

Clements pointed

o u t , i t

seems that

t h e

chief use o f the d r a f t s a t present i s i n t h e very class

of

t ransac t ions

i n

which their

u s e i s

l i k e l y

t o

mislead

t h e

publ ic , a n d i t i s f a r from improbable that they may do

more harm than good when used under present conditions.

You

understand,

of

course, that

I

have

n o t

discussed

this matter with t h e sen io r o f f i ce rs o f t h e bank a nd c on-

sequently what

I

have said

i s

merely

an

expression

of my

individual views;

but I am

very po si ti ve t hat from

t h e

standpoint

of a

lawyer,

i f t he us e o f

these d ra f t s

i s

continued t h e circulars under which they a r e issued

a nd the

forms

o f t h e

drafts should

b e

carefully reviewed

i n t h e l i g h t o f t h e experience which we have had. in the

pas t

few

yea rs .

One of th e

ope ra t ing o f f i ce rs

o f the

bank

suggested to me tha t if no other revis ion was made, t h e form

of the

draft should

a t

l e a s t

b e

revised

t o t h e

extent

of changing t h e phraseology which indicates that any

Federal reserv e bank wi ll rec eive th 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 pa r and th e fo ll owi ng words added: ' Su bj ec t

never the less

t o

payment

b y t h e

Federal reserve bank upon

which i t i s drawn' .

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X-7454a

- 8 -

LITTLE

USE IS

MADE

OF

THESE DRAFTS

All of the replies which make any comment a s t o t h e extent

t o

which t ransfer d raf t s

and

exchange drafts

are now

used, in di ca te

that a t t h e present t ime their u s e i s very l imited ( s e e r e p l i e s o f

Federal Reserve Banks of Hew York, Atl an ta , Chicago, S t . Louis and

San Francisco) , and in some cases h a s been e nt ir el y dis con tinu ed

( s e e r e p l i e s of Federal Reserve Banks of Kansas City and Minneapolis).

The

principal reason given

f o r

thei r d i suse

i s t h e

practice, which

was inaugurated af ter t h e inaugurat ion of these d ra f t s in 1917, of

making fr ee tele graph ic t r an sf er s

of

funds, thus rendering

t h e

pr iv i lege

of issu ing these draf t s of l i t t l e p rac t i ca l va lue .

Several

o f the

repl ies suggest that ,

i n

view

o f the

small

extent t o which these drafts a r e used and in view o f the danger that

t h e i r

use may

r e s u l t

i n

f inanc ia l l o ss

o r

l i t i g a t i o n

t o t h e

Federal

reserve banks, i t would h e advisable t o discont inue the use o f d r a f t s

of both types.

F or

in s t ance ,

i n h i s

l e t t e r

of

February

2 , 1933 to t he

Board's

General Counsel, Mr. Agnew said:

I t

seems

to me, and to the

o f f i c e r s

of the

Federal Reserve Bank of San Francisco, tha t the

r i g h t to th e us e o f exchange and t r a n s f e r d r a f t s

i s

superf luous

and

that without imposing

any

hard -

ship upon member hanks

o r

c u r t a i l i n g

t h e

f a c i l i t i e s

o f fe red b y t h e Federal Reserve System to any appreciable

ex ten t , t he i r u s e could b e discont inued,

I n h i s

l e t t e r

of

February

14, 1933, to Mr .

Agnew,

M r.

Wallace

said:

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X~7454a

U f

z|

£ \

- 9 -

I have been con sid eri ng your sugge sti on th at t h e

use o f

these draf ts should

be

discontinued,

and

while

I

have

not had an

opportunity

t o

discuss

a l l

phases

of t he s i tua t ion wi th t h e execut ive of f icers o f t he bank,

I

myself have come

t o t h e

conclusion that

t h e

whole subject

i s so

f u l l

of

doubtful questions, both

of law and

policy,

tha t

i t

would certainly

b e

advisable e i ther

t o

discontinue

t he u se o f t he d r a f t s , o r a t l e a s t t o review t h e s i t u a t io n

c a r e f u l l y and endeavor t o eliminate some o f t he weak spots

i n t h e

system

a s i t

operates

a t

present .

The

r e p l i e s

to Mr.

Hale 's let ter also contain other similar

expressions

of

opinion.

I t appears moreover from t h e r e p l i e s to Mr. Hale ' s l e t te r

that there a r e other matters no t discussed i n those replies which

i t would b e advisable t o discuss i n connection with these drafts

i n t h e

event that

i t i s n o t

decided

t o

withdraw

t h e

p r iv i l eg e

of

issuing them.

F or

ins tance ,

M r.

Coleman, Deputy Governor

of the


of

Dal las s ta tes

a t t h e

conclusion

o f h i s

reply

to Mr. Hale ' s l e t te r tha t :

There a r e qui te a number of questions that immediately

occur

to one in

considering this matter

a n d i t

would

not be

p r ac t i cab l e i n a l e t t e r of this kind t o attempt t o discuss

a l l o f

them.

We do

beli eve that

t h e

matter

as now

handled

i n t h e

Federal Reserve System

i s

suscept ib le

t o

much

im -

provement , and we should b e glad t o join with you i n an attempt

t o

work

out a

plan

by

which these drafts could

b e

handled with

minimum risks t o Federal Reserve Banks.

I t i s accordingly respectfully suggested that t h e question

whether

t h e

p r iv i l eg e

o f

issuing these draf ts should

b e

withdrawn, should

be

made

a

top ic

f o r

discuss ion

a t t h e

next Conference

of

Governors,

and

that a copy of t h i s memorandum and attached papers be forwarded t o t he

Governors o f a l l Federal reserve banks f o r their information i n advance

of their next Conference. A l e t t e r f o r this purpose i s attached hereto.

Respectfu l ly ,

(s ) G,

Howland Chase

G. Howl and Chase,

Assistant Counsel.

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A — l U d «

WASHINGTON

T O

T H E


April

2 5 ,

1917.

Dear

S i r :

Following

t h e

l as t conference with

t h e

Governors

of the


i n

Washington

t h e

Committee

on Clearings of the Federal Reserve Board took up the m a t -

t e r o f Federal Reserve Exchange and has worked ou t a plan

which

t h e

Board

h a s

approved

t o

become operative

May 21.

An

explanation

of the

plan

and

sample forms,

a r e

enclosed

herewith

f o r

your information

and

guidance.

The


a r e

requested

t o

issue

a s soon a s poss ib le c i rculars t o their member banks em -

bodying

t h e

ru le s

and

recommendations which

a r e

applicable

t o

them,

i t

being unnecessary,

of

course,

t o

inform member

banks of such details a s concern t h e Federal reserve banks

only.

Respect ful ly ,

Governor.

Enclosures.

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F E D E R A L R E S E R V E D R A F T S .

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 ex-

tended to all member banks complying with the regulations formu-

lated by their Federal Reserve Banks.

The drawing of these drafts shall not interfere with

member banks drawing

the

ordinary checks

on

their Federal

Re-

serve Banks-

The 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

t

irr

.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

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draws© Fe de ra l Reserve Bant. Specimen forms

of

advice

a r e

enclosed with this circular.

The two

kind5

of

d ra f t s sha l l

b?

known

a s

Federal

'Reserve Exchange

and

Federal Reserve Transf er dr a f t s .

FEDERAL RESERVE EXCHANGE DR.-FT.

The Feder al Reserve Exchange

d ra f t s sha l l

b e t h e

draft drawn

by

a

member bank upon

i t s own

Federal

Reserve Bank

and

made receivable

f o r

immediate avai labi l i ty

a t p a r a t

any


b u t

a c t u a l -

l y payable only a t t h e drawee Fed -

eral Reserve Bank.

•They shall,

f o r t h e

present

and

until otherwise provided,

he-

drawn

f o r

amount

3

no t in

excess

of

250.00.

The drawing bank shall b e r e -

quired t o give advice by mail t o

i t s Federal Reserve Bank of the

total amount

of

drafts drawn each

day .

These drafts on a Federal Re-

serve Bank when received f o r im-

mediate avai lab i l i ty by another

shal l

be

l i s t e d

i n a

specia l le t ter

and

forwarded

t o t h e

drawee

F e d -

eral Reserve Bank

f o r

c red i t .

I f the t o t a l of the l e t t e r

ju s t i f i e s t he re can be an advice

by wire and entries made on the

day the letter goes forward.

FEDERAL RESERVE TRANSFER DRAFT.

The

Federa l Reserve Trans -

f e r

dra f t sha l l

b e t h e

draf t

drawn

by a

;r.en;ber bank upon

i t s

own


and

made payable

on

advice

of the

drawee

a t an y

Federal Reserve

Bank specified i n t h e d r a f t .

They shall,

f o r t h s

present,

bis

drawn

f o r

amounts

i n

excess

of

$250.00.

The drawing bank shall be

required t o give advice by

ir.ail to i t s Federal Reserve

E?.nk of th e numbers, amounts

and

tct.-.l payable

a t

each

..


of

d ra f t s

drawn each

d a y .

This advice

shall be under an authorized

signature and a duplicate

shall

be

forwarded

to t h e Fed -

eral Reserve Bank

a t

which

th e

d r a f t s

a r e

trade payable,

th e

duplicate advice

t o

contain

t h e

signature

in ink of o f -

f icers s igning

t h e

d r a f t s .

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X-92.

2 4 7

FEDERAL RESERVE TRANSFER DRAFT.

(Continued)

The drawee Federal Reserve Bank

shall, upon receipt

of

advice from

t h e

drawing member tank, telegraph t h e F e d -

eral Reserve Bank a t which t h e d ra f t s

were made payable, confirming

th e a d -

vice and author iz ing a t r a n s f e r of the

aggregate amount from

i t s

regular

a c -

count to an exchange account.

When sending a telegram t h e arrange-

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

shall

be

understood

t o

mean; Federal Reserve

Transfer Drafts drawn by pe r

their advice dated

t h e

aggre-

gate amount

of

which

i s n o t

more than

are good. Charge

o u r

account

and

cred i t

o u r

exchange

account with t h e total amount advised

i n

this telegram.

See

specimen tele-

gram enclosed with this circular.

For t he

purpose

of

simplifying

telegrams i t i s suggested that each


may

make

a

code

so that each o f i t s member banks can

be designated by one code word, t h e

f i r s t l e t t e r

of the

word

t o

indicate

t h e d i s t r i c t i n which t h e member bank

i s

located.

The drafts when paid, by th e Fed-

eral Reserve Bank specified

i n t he

d r a f t , s h a l l be marked pai d, l i s t e d i n

a

s p ec i a l l e t t e r

and

forwarded

t o t h e

drawee Federal Reserve Bank. The to ta l

of the l e t t e r s h a l l be charged to the

exchange account

of the

addressee.

Under existing regulations governing

t h e

Gold Settlement Fund

any Federal Reserve Bank can , a t any time, obtain a set t lement on

2. n e t balance due from an othe r Feder al Reserve Bank.

This plan shall become operative

on th e 2 1 s t day of May,

1917 .

Enclosures:

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A

1

CODE WORD

kS - 1

KERAMIC

F I R S T N A T I O N A L B A N K

x - 9 3 -

Waco, Texas.

To Federal Reserve Bank,

of Dallas.

We

have this

day

drawn checks

on

Federal

Reserve Transfer form

a s

li s t e d below payable

on ad -

vice from

you a t th e


of •

NUMBER AMOUNT NUMBER AMOUNT

TOTAL

Charge

our

account with total

and

arrange

f o r

payment.

Respectfu l ly ,

Cashier.

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X-94.

4 s - l

N A T I O N A L B A N K

T,v

aco, Texas

To

Federal Reserve Bank,

of

We

have this

day

drawn checks

on

Federal

Re-

serve Transfer form

a s

l i s t e d below payable

by you on

advice from t h e Federal Reserve Bank of Dallas.

E .

CODE WORD

KERAMIC

F I R S T

NUMBER

AMOUNT

NUMBER

AMOUNT

TOTAL

Signature

in ink and

t i t l e

of of f icers s igning any of

t h e

checks above listed.

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Waco, Texas

To Federal Reserve Bank

cf

Dallas.

Gentlemen:

We have t h i s day drawn checks on Federal Reserve Exchange

form, t h e total amount of which i s $ _ _ _ _ _

Dollars

Charge

o u r

account

t o

cover.

R. P.

DUPREE,

Cashier.

x-95


Waco, Texas

To


of Dallas.

Gentlemen:

We have t h i s day drawn checks on Federal Reserve Exchange

form,

t h e

total amount

of

which

i s

Dollars.

Charge our account t o cover.

R . P . DUPREE,

Cashier.

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2 5 1

X-96 .

FORM

April 12, 1917.

To


Chicago, 111.

Keramie Eclipse Animal Kronic Export Cursedly Slingcart.

Federal Reserve Bank of Dallas.

Decoded - Federal reserve transfer drafts

drawn by F i r s t N . B . , Waco,Tex. Amer.N. B .

p e r t h e i r advice dated April 10 th A p r i l ^ l l t h '

t h e

aggregate amount

of

which

i s n o t

more th an $15,030.00 $5,000.00

a r e

good. Charge

o u r

account $20,000.00

and

c r e d i t

o u r

exchange

account.

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2 5 2


WASHINGTON

T O

T H E FEDERAL RESERVE BOARD

August

12 , 1918 .

X-1121

Dear

S i r :

A t t he suggestion and upon invitat ion of the Federal

Reserve Bank of Cleveland, an inforrral meeting was held on August

7 t h , a t t h e

o f f i c e

of the


t o

discuss Federal

Reserve Exchange drafts.

The

meeting

w as

attended

by

represen ta -

t i v e s of s ix Federal Reserve Banks. The recommendations made, a

copy of which i s inclosed with t hi s le t t e r , have been considered

and approved by the Board.

( l )

Federa l Reserve Exchange Draf t s.

Effective September 3 r d , t h e l i m i t of drawings of such

dra f t s sha l l be inc rea sed from $250 t o $5,000. Fed eral Reserve

Banks paying Exchange drafts of other Federal Reserve Banks, will

be

permitted

t o

deduct

t h e

amount paid from

t h e

t o t a l c r e d i t s

r e -

ported

i n t h e

Gold Settlement clearing

f o r t h e day . The

daily tranr-

script, forwarded

t o

each Federal Reserve Bank, should show

t h e

items

credi ted for the day and a deduction therefrom of th e Exchange drafts

paid f o r i t s account. The n et credit should agree with t h e f igures

reported i n t h e Gold Settlement clearings.

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- 2 -

1-1121

(2) The Board deems i t des i rab le f o r t h e Reserve Banks

t o adopt t h e recommendation of the Committee, that a l l Reserve Banks

give immediate credit f o r Clearing House items on th e day such items

a r e rec eiv ed from ot he r Federa l Reserve Banks, t h e balances s o c r e d i t -

ed to be included i n t h e credit balances reported f o r set t lement

through t h e Gold Fund clearings. The a c tua l payment f o r such balances

would then be made on the same day as set t lement i s received by the

paying Federal Reserve Bank f o r t h e checks and other items i t co l l ec t s ,

( 3 ) With res pect t o t h e recommendation that a more detailed

ana lys i s be made of the • f l o a t

1

s i tua t ion ( i . e . , t h e extent t o which

immediate credit h a s been given upon un co ll ec te d ite ms) th er e i s i n -

closed herewith

a

memorandum prepared

by the

S ta t i s t i ca l Div i s ion

based upon

t h e

inf orma tion which

i t h a s a t

hand.

The

Board

i s

wi l l i ng

t o

have

a

more detailed study

of

this question made,

but to do so

wi l l

requi re

a

c a l l

f o r t h e

nec es sa ry da ta from each Federa l Reserve Bank

a n d i t i s

believed that such study could best

be

made

a t t h e

d i f f e r e n t

Federal Reserve Banks.

Very truly yours.

Governor.

Inclosures .

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0 0 2 1

X-1121-a

Washington, August 7 , 1918 .

Federal Reserve Board,

Washington,

D. C.

Gentlemen:

At a

meeting held

i n t h e

Treasury Department Building

i n t h e

Board Room of th e Federal Reserve Board, August 7 , 1918 , a t which t he

following were present:

Mr. M. J . Fleming, Asst. Cashier, Federal Reserve Bank,

Cleveland.

Mr. S. H.

Hendricks, Cashier, Federal Reserve Bank,

New York.

M r.

Pier re

J a y ,

Federal Reserve Agent,

New

York.

Mr. F . J .

Carr, Asst. Cashier, Federal Reserve Bank,

Chicago.

M r. Chas. A . Peple, Deputy Governor, Federal Reserve Bank,

Richmond.

M r.

Thos. Gamon,

j r . ,

Asst. 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 that

t h e

l i m i t f o r t h e drawings of Federal Reserve exchange drafts be increased

from $250

t o

$5,000

and

that Federal Reserve Banks holding Federal

Reserve exchange drafts

of

other Federal Reserve Banks

be

permitted

t o deduct such Federal Reserve exchange drafts from t h e to ta l c red i t s

reported t o t h e Federal Reserve Board i n t h e Gold Settlement EUnd each

day .

In order t o bring about a daily sett lement f o r clearing house

items, i t i s recommended that a l l Federal Reserve Banks give immediate

credi t

f o r

clearing house items

the day

re ceived from othe r Federal

R e-

serve Banks, without regard t o t h e time of day received, inasmuch as t he

balance so created i s reported t o t h e Gold Settlement Fund a t t h e close

of

business

bu t i s

r ea l ly s e t t l ed

t h e

following

day

when

t h e

checks

have been collected.

I t i s

voted that

t h e


be

asked

t o

cause

a

more detailed analysis

of the

f lo a t s i t u a t io n

i n

each Federal

R e-

serve Bank t o be made, f o r such period a s t h e Board may deem advisable,

i n

order th at the re

nay be a

more exa&fr knowledge

a s t o

what constitutes

a

large amount

of

f lo a t

now

appearing

i n t h e

statement

of the

Federal

Reserve system and i n order that each Federal Reserve Bank may study i n

a

more

de ta i led way methods of e l imina t ing i t s own f l oa t .

Respectfully,

M. J .

FLEMING.

Chairman.

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WASHINGTON

OFFICIAL CORRESPONDENCE

T O y

AHLCLO

T H E FEDERAL RESERVE BOARD '

June 19, 1925.

SUBJECT: In cr eas ing Limit Federa l Reserve Exchange D r a f t .

Dear

S i r :

The


h a s

approved

the

ac

t i o n

of t h e

recent Governors

*

conference

i n

voting

to r a i s e t h e l im i t on the Federal reserve exchange

d r a f t from $5,000 t o $50,000. This pr iv il eg e a f -

forded

t o

member banks becomes effective August

1 ,

1925.

The reserve hanks a r e expected to exercise

care i n checking u p t h e permits extended to member

banks

t o

draw exchange drafts before passing credit

on any:

.such d r a f t

and to

make telegraphic inquiry

i n

an y questionable case. The Board understands that

whenever a Federal reserve bank withdraws a permit

i t

w i l l immediately advi se

a l l


banks.

Very truly yours,

Vice Governor.

To Governors o f a l l F.R.Bank&j

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256

X-7454-b

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 h a s

occurred

t o u s

that many perplexing problems might arise

i n

connection with exchange

and


i n t h e

event

of

suspension

of the bank issuing these drafts before such drafts were presented f o r

payment.

Thinking this problem may have arisen i n y o u r d i s t r i c t , o r that

you had

given some thought

t o

what action

y o u

would take,

we a r e

l i s t i n g

a

number

of

questions which have occurred

to us and

would appreciate your

comments thereon.

I . I n t h e event of insolvency of a member bank i n i t s own

d i s t r i c t ,

1 .

Would

a

Federal reserve bank have

any

obl igat ion

t o p a y t h e

holder

i n d u e

course

of

such

a

d r a f t ,

i f

presented t o i t a f t e r t h e suspension o f th e member bank?

2 . Assuming i t might refuse to pa y the d r a f t so

presented, would i t have t h e r i g h t t o reverse i t s

e n t r i e s

and

credi t back

t h e

amount

o f the

d r a f t

t o t h e

reserve account?

3 . I f t he answer t o 2 i s i n t h e aff i rmative, would

i t

th en have

t h e

r i g h t

t o

apply such funds against

any

exist ing indebtedness

of the

member bank

t o t h e

reserve

bank,

o r

would

i t b e

necessary

t o

repay

t h e

funds

to the

receiver?

l i e What would b e t h e pos i t i on of the two respect ive Federal

reserve 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

issuing bank

i n

ano ther d i s t r i c t ,

1 . I f t he

paying reserve bank

ha d no t

rece ived 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 o f the suspension o f the bank?

2 . I f

such telegraphic advice

h a d

been sent

bu t ha d

been overlooked

b y t h e

paying department

o f t h e

Federal

reserve bank

i n

question?

( i n connection with this question, t h e form of t r a n s f e r d r a f t p r o -

vided would seem

t o

clear ly ind icate that

t h e

bank

o f th e

d i s t r i c t

i n

which

i t i s

issued

i s t h e

drawee, although

i t

s t a t es t ha t

t h e

dra f t wi l l

b e

paid

by

another specified bank.)

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X-7454-b

2 5 7

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

—2—

I I I . What would be th e pos i t ion of the two respective Federal

reserve banks should

one

re se rv e bank giv e cr e di t

f o r a n

exchange

draf t a f te r suspens ion

of an

issuing bank

i n

ano the r d i s t r i c t ,

1 . I f i t h a d n o t

received telegraphic advice

o f s u s -

pension

o f t h e

drawing bank?

2 . I f

such tel egr aph ic advice

h ad

been sent

bu t ha d

been overlooked b y t h e paying department o f the Federal

reserve bank i n question?

(With reference t o both I I a nd I I I , i t should b e borne i n mind that

a

Federal reserve bank might

pa y ou t

funds agai nst cr ed it given

t o

i t s

member bank before such draft

o r

not ice

o f i t s

payment

ha d

reached t h e Federal reserve bank o f the d i s t r i c t i n which i t wa s

issued.)

Some of these questions present tw o sides, namely, t h e proper

action which should b e taken b y a Federal reserve bank o f t h e d i s t r i c t i n

which

t h e

drawing bank

i s

loca ted ,

and the

action which should

b e

taken

b y

a reserve bank of another district should such items b e presented t o i t f o r

payment o r c red i t .

We are

wr i t ing

t o a l l o f t h e


i n

t h i s

r e -

spect

a s i t i s o u r

fee l ing tha t

t h e

usefulness

o r

service

o f

these ins t ru -

ments

to our

member banks

i s

quite problematical ,

and a

recons ide ra t ion

a t

th is

time might lead t o t h e conclusion that i t would b e advisable t o discontinue

t h e s e f a c i l i t i e s .

Tours very truly,

(Signed)

W. M.

Hale

C A S H I E R .

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X-7454-c ^ 5 8

FEDERAL RESERVE BANK

OF

HEW

YORK

0

0

P

Y

December

9 , 1933 .

Mr. W. M. Hale,

Cashier, Federal Reserve Bank of San Francisco,

San Francisco, Cal i for nia .

Dear

Mr.

Hale:

We a r e i n rece ip t of your l e t t e r of December 2 regarding

t h e

paying

of

exchange

and


i n t h e

case

of

suspended

banks.

I n

t h i s d i s t r i c t

we

have only

two

banks which

a r e

authorized

t o u s e t r a n s f e r d r a f t s and th ree banks which a r e authorized t o u s e exchange

d r a f t s .

Wo

have, the ref ore ,

no t

been very much concerned regarding

t h e

problems which y o u br ing up i n connection with these drafts . I t would

appear

t o u s

t h a t l i t t l e r i s k

i s

involved

i f

ins t ruc t ions governing

t h e

issuance and paying of exchange and t r a n s f e r d r a f t s a r c followed.

When

a

member bank issues

a

t r a n s f e r d r a f t

i t

sends

t o

both i t s Federal Reserve bank and also t o t h e Federal Reserve bank on which

t h e

d r a f t

i s

drawn,

an

advice covering such d r a f t . Upon re ce ip t

of

such

advice from one of our member banks we immediately charge their account

and

cr ed it Tra nsf er Dr af t Account. Af ter such

an

entry

h a s

been made

we bel ieve tha t we a re obl iga ted t o pay t he d r a f t even though t h e drawee

bank

h a s

suspended.

Exchange drafts a r e accepted by any Federal Reserve bank

f o r

c o l l e c t i o n

and

immediate availabil i ty

a t

par#

I f any

exchange draft

i s n o t co l l ec ted f o r a n y reason, i t would b e charged back t o t h e endorsing

bank

i n t h e

same manner

as any

ot he r cash it em . However,

as we

also

rece ive

an

advice from

ou r

member bank when they draw

an

exchange draft,

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2 5 9

X-7454-c

Mr. W. M.

Hale, Cashier

- 2 ~

December

9 , 1932 .

an

ontry

i s

immediately made upon receipt

of

advice,

and we

believe

we

a r e

obl igated

to p ay

such draft af ter

t h e

en t ry

i s

made even though

i t i s

presented t o u s a f t e r t h e bank h a s suspended.

Inasmuch a s only a few banks i n o u r d i s t r i c t u s e exchange and

t r a n s f e r d r a f t s t o a very limited extent, i t would be no hardship t o d i s -

continue such drafts

i n

t h i s d i s t r i c t .

Very truly yours,

(Signed) J . M. Rice

J . M.

Rice,

Assistant Deputy Governor,

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X-7454-&

C

FEDERAL RESERVE BAKK OF PHILADELPHIA 0

925 Chestnut Street P

Y

Decenter

13 , 1932 .

Mr.

William

M.

Hale, Cashier,

Federal Reserve Bank of San Francisco,

San Francisco, Cal i fo rni a .

Dear

Mr.

Hale:

This will acknowledge receipt of your l e t t e r o f December 2 n d ,

and we are answering your que stio ns se ria tim ;

I . ( l ) A

Fe de ra l r es er ve bank would

b e

obl iged,

a t

least moral ly,

to pay

th e holder in d u e course of an exchange draft i f presented t o i t after suspension

of the member bank, i f t h e advice of the member bank h ad been received and the

funds s e t aside f o r that purpose, prior t o r ece ip t of suspension notice.

( 2 ) I f t h e

reserve bank could refuse

to pay the

d r a f t

so

presented ,

i t

undoubtedly would have t h e r i gh t t o reverse i t s e n t r i e s and credit back t h e amount

t o t h e reserve account.

(3) In ou r

opinion

i f

such en tr ie s were rev ers ed

a


undoubtedly would have t h e r i gh t t o apply such funds against any exist ing indebted-

ness of the member bank, a s such reversal would simply b e a r e s t o r a t i o n o f t h e a c -

count

t o i t s

or iginal condi t ion.

I I . ( l ) T h e

r e s p o n s i b i l i t y

of the

paying reserve bank would

n o t b e

governed

b y th e

quest ion

of

whether

i t h a d

received telegraphic advice

of the

suspension

of

th e drawing bank, b u t would depend rather upon t h e ques t ion of whether or no t the

paying bank h ad received te legraphic inst ruct ions f rom t h e reserve bank in t h e d ig

t r i c t of the drawing member to p ay t h e d r a f t . Payment without such in st ru ct io ns

places fu l l respons ib i l i ty upon

t h e

paying bank.

(2) Sec # 1 .

I I I . ( l ) I t

would seem that

no

question should arise covering this point ,

a s

exchange drafts

a r c

acceptable

a t p a r

subject

t o

final payment.

I f

te legraphic

o r

other advice

of

suspension

t o t h e

reserve bank

i n t h e

d i s t r i c t

o f t h e

member

had

n o t been received, t h e debi t i n t h e account certainly would b e good and would p r o -

vide funds to p ay t h e d r a f t . If no debi t h ad been made t h e draft would be d i s -

honored i n ordinary course.

( 2 ) I t i s o u r opinion that i f telegraphic advice h ad been received, b u t

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X-7454-d £ > 5

Mr. fr.u M. Halo, Cashier - 2 - 12/13/32

FHBank

of San

Francisco.

overlooked b y t h e paying department, there would he no ob l iga t ion t o p a y t h e e x -

change draft presented

and

responsibility would attach only

i f t h e

paying bank

had nade an act ua l payment from funds der ived through a debit made t o t h e reserve

account after notice

of

suspension

had

been received even though overlooked.

I n our

opinion

t h e

whole situation

i s

governed

b y t h e

following major points:

1 . I f t h e

drawing member's' Fed era l re se rv e bank

h a s

received notice that

drafts have been drawn, either on exchange o r t r a n s f e r f o m , a nd h a s acted upon

that advice

t o t h e

extent

of

se t t ing as ide

t h e

funds prior

t o

rece ip t

of

notice

of

suspension, then such drafts should

be

honored. Under

any

other circumstances

such drafts should

b e

returned.

2 . A

Federal re ser ve bank

of

another dis tr ic t should

not pay a

t r a n s f e r

draf t wi thout spec i f ic ins t ruc t ions to do so from t h e reserve bank i n t h e d i s t r i c t

of the

drawing ban k. Under

any

other circumstances

i t

makes payment

a t i t s own

r i sk .

3 . A Fede ral re se rv e bank allowin g immediate cr ed it f o r a n exchange draft

o r ig ina t ing

i n

another district assumes

no

r i s k

in so

doing, unless

i t

permits

withdrawal

o f the

c red i t

by an

i r respons ible endorser .

I f t h e

exchange draft

i s

dishonored a t t h e paying reserve bank, t h e endorsing reserve bank certainly ha s

th e

r igh t

t o

r e t u rn

i t t o i t s

depositor.

I believe your suggestion i s a good one - th e recons ide ra t ion of th is

service

a nd the

p r a c t i c a b i l i t y

o f i t s

e li mi na ti on with out embarrassment

t o t h e

member banks.

Very truly yours,

(Signed)

C. A.

Mcllhenny

C. A. Mcllhenny,

Cashier.

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\

X-7454-e

C

0

P

Y

FEDERAL RESERVE BAH OF RICHMOND

January

9, 1933

Mr. W

e

M, Hale, Cash ier,


San

Francisco,

C a l .

Dear

M r.

Hale:

•When your l e t t e r of December 2 , 1932 , ra i s ing

several questions with reference t o Federal reserve e x -

change

and

t r a n s f e r d r a f t s ,

was

received

I

asked

our

counsel , M r. Wallace, f o r h i s opinion, inasmuch as t h e

problems involved seemed to be pr imari ly legal ra ther

than operat ing.

M r. Wallace was quite busy a t t h e time and did

n o t submit h i s opinion until December 20th. I was away

from

t h e

bank

t h e

l a s t

t e n

days

of

December

and

t h i s

i s

t h e

f i r s t oppor tun i t y

I

have

had to

read

t h e

opinion

and

rep ly t o your l e t t e r .

A copy of Mr. Wallace's opinion i s enclosed

herewith,

an d i f t h e

opinion holds

- and I can see no

reason w hy i t w i l l n o t - i t does n o t seem to me t h a t i t

w i l l be necessary f o r t h e Federal reserve banks t o a l t e r

the i r present prac t i ces .

I

w i l l

b e

very glad

t o

have

your opinion regarding

t h e

subjec t

and

would also like

t o

know t h e r e s u l t s of your inquiries addressed t o t h e other

Federal reserve banks.

Yours very truly,

(Signed)

J . S .

Walden,

J r .

J . S . Walden, J r . ,

Controller

2 G 2

JSW:N

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2 6

X-7454-f

FEDERAL RESERVE BAM OF RICHMOND

COPY

December

20, 1932

Mr. <J. S. Walden, J r . , Co nt ro ll er Fede ral Reserve Exchange Dr af ts

M. G. Wallace, Counsel. and Federal Reserve Transfer

Draf t s .

Dear M r. Walden:

I have before me a letter dated December 2nd addressed to you

by Mr . Hale, Cashier o f t h e Federal Reserve Bank of San Francisco. A l l

o f t h e

questions asked

by Mr .

Hale appear

t o

depend upon

t h e

determin-

a t i on

of one

poin t ; tha t

i s t o s a y ,

whether

o r n o t t h e

types

of

d r a f t s

mentioned by h im are under t h e circumstances a n assignment o f t h e funds

i n t h e drawee bank. The d r a f t s i n quest ion a r e , technical ly speaking,

checks, sin ce th ey a r e drawn on a bank o r banker and payable on demand.

Section 189 of the Negotiable Instrument Law reads a s fol lows;

A

check

o f

i t se l f does

n o t

operate

as an

assignment

of any

pa r t o f t h e funds t o t h e c r e d i t of the drawer with t h e bank, and

t h e bank i s n o t l i a b l e t o t h e holder unless and u n t i l i t accepts

o r

c e r t i f i e s

t h e

check.

Subs t an t i a l l y

t h e

same rule

i s

applied

t o

d r a f t s

b y

Section

127 of the

Negotiable Instrument

Law.

You wi l l note th at under t h e above i t i s s ta ted tha t a check

i s no t o f i t s e l f a n assignment of any par t o f t h e funds t o t h e credi t

of the drawer. I t h a s , however, been held b y t h e Supreme Court of the

United States and many other courts that a check may operate as an

assignment

o f t h e

fu nd s ag ai ns t which

i t i s

drawn when

i t i s

clear t h a t

t h e

drawer intended that

i t

should

so

opera te ;

(See

Fourth Street

National Bank v . Yardley, 165 U. S . 63 4) , a nd , of course, when t h e draw-

ee h as accepted a chock, while t h e accepted check cannot b o said t o

opera te , s t r i c t ly speaking ,

as an

assignment

o f t h e

funds

i n t h e

hands

o f t h e drawee, i t does render t h e drawee liable t o t h e holder .

The

above general principles

a r e

almost universally accepted;

b u t the re i s considerable confusion as t o just what i s s u f f i c i e n t t o

denote that t h e drawer intended t h e check t o operate as an assignment

and also some doubt as t o just what action o n t h e pa r t of the drawee

i s

s u f f i c i e n t

t o

indica te

a n

unequivocal acceptance

o f t h e

check

of the

drawer.

An

i l l u s t r a t i o n

of

th i s unce r t a in ty

i s t o b e

found

i n t h e

case

of Equitable Trust Company of Now York v . First National Bank of Tr in i -

d a d , Colorado, 275 U. S . 359 , 48 S . C t . 16 7) . In that 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

7/17/2019 frsbog_mim_v38_0234.pdf


X-7454-f 2

December

20, 1932

Mr . J . S .

Walden,

J r . ,

Co nt ro ll er Fede ral Reserve Exchange Dr af ts

and

M. G.

Wallace, Counsel. Federal Reserve Tra nsfe r Dr a ft s.

—2—

f o r t h e

p ro tec t ion

and

payment

of

drafts drawn

b y t h e

former

o n t h e

Bance Commerciale Italians.. A d r a f t was drawn under t h e arrangement and

del ivered

t o a

hol de r . Knauth, Nachod,

an d

Kuhne were advised

o f t h e

drawing o f t h e d r a f t and in turn advised their I tal ian correspondent ,

which debited Knauth, Nachod,

and

Kuhne,

and

cred i ted

t h e

amount

of the

d r a f t t o a spec ial account termed dr af ts payable . The d r a f t w a s p r e -

sented,

b u t i n t h e

meantime Knauth, Nachod,

and

Kuhne

had

been adjudicated

bankrupts. The Ital ian bank therefore dishonored t h e d r a f t an d t h e Tr in i -

dad

bank, having been compelled

t o

take

i t u p ,

claimed that

t h e

funds

o f

Knauth, Nachod, and Kuhne on deposit with t h e Italian bank, which had

upon receipt

o f t h e

advice

o f t h e

drawing

o f t h e

draft been deducted

from t h e general account and cred i ted t o a special account were impressed

with

a

t r u s t

i n

favor

o f t h e

holder

o f t h e

d r a f t ,

o r

e l se

had

been

a s -

signed

and

t r a n s f e r r e d

t o i t . The

Circuit Court

of

Appeals sustained

t h e

claim o f t h e First National Bank of Trinidad, b u t t h e case w as taken t o

t h e

Supreme Court

o f t h e

United States

an d t h e

decision reversed, J ust -

i c e Stone and Justice MoReynolds dissenting. I n t h e opinion o f t h e court

by Mr .

Justice Holmes much stress

i s

laid upon

t h e

fac t t ha t ne i the r

t h e

purchaser o f t h e d r a f t n o r t h e First National Bank of Trinidad were part-

i e s t o o r

knew

of the

arrangement between Knauth, Nachod,

and

Kuhne

and

t h e I t a l ia n bank, and that there was no arrangement that an y p a r t i c u l a r

fund should

be s e t

as ide

b u t t h e

method

of

bookkeeping between

t h e New

York bankers a n d t h e I ta l ian bank w as adopted purely a s a mat ter of con-

venience,

and

tha t

i t h a d

been

t h e

p r a c t i c e

o f t h e

I ta l ian bank

t o c a n -

c e l such advices whenever requested to do so without inqui ry as to who

was the

holder

o f t h e

d r a f t s

o r

what

had

become

o f

them.

The

fact that

this case

w as

decided

i n t h e

Circuit Court

of

Appeals

in one way and re-

versed b y t h e Supreme Court o f t h e United States b y a divided court i s

of

i t s e l f s u f f i c i e n t

t o

indicate that thero

i s

some un ce rt ai nt y

i n a l l

such cases an d t h a t t h e caso a t b a r represen ts a border line case*

Applying

t h e

p r i n c i p l e s

o f t h e

above cases

to o u r

Circu lar

No.

142

r e l a t i n g

t o t h e

issuance

o f

Federal Reserve Exchange drafts,

I •

am incl ined t o t h e opinion that Federal Reserve Exhange drafts issued

under

t h e

c i r c u l a r

a r e

clearly assignments

of the

fund against which

they a r e drawn, o r ra ther that t h e 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

cons t i t u t e

a n

assignment when read

i n

connection with t h e c i r c u l a r , f o r i n that case i t i s p la in tha t t h e drawer

o f t h e

d r a f t

i s

placed upon notice that when

t h e

d r a f t

i s

drawn

an d t h e

advice given, i t s account w i l l b e charged. The c i r c u la r s t a t es t ha t F e d -

eral Reserve drafts a r e en t i re ly d i f f er en t f rom ord inary dr af t s an d a r e

intended

t o

serve

a

d i f feren t purpose .

Th e

ci r cu l ar ind icates tha t th i s

d i f f e rence

i s

because ordinary drafts drawn

on


a r e

payable only

o n

p resen ta t ion ,

and

consequently will

n o t b e

received

b y

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Ac-' *

X-7454-f

December 20, 1932

Mr . J . S . Walden, J r . , Co ntr oll er Federa l Reserve Exchange Dr af ts and

IvI. G.

Wallace, Counsel. Federa l Reserve Tra nsf er Dr af t s.

- 3 -

other Federal reserve banks f o r immediate credit, b u t t h a t t h e Federal

Reserve Exchange drafts will b e received f o r immediate credit a t p a r

by any

other Federal reserve bank

o r

branch subject ,

of

course,

t o

f i n a l

payment

b y t h e


on

which they

a r e

drawn.

I t i s f u r -

ther provided that these draf ts

may

only

b e

drawn

b y

banks which have

th er et of or e obtained permi ssion . This seems t o imply that t h e Federal

re se rv e bank w i l l e xo rci se some degree of r e s p o n s i b i l i t y i n t h e matter

other than that of a mere drawee, and th i s r e spons ib i l i t y appea r s to be

defined under

t h e

heading Advices

of

Drafts Drawn,

i n

which

i t i s

said,

The t o t a l o f t h e amount of this advice wi l l be charged t o t h e reserve

account o f t h e member

1

bank upon re ce ip t and credi ted t o a special account

f o r t h e payment of such d r a f ts when pre sen ted . I t seems to me, the re fo re ,

t ha t i n author iz ing t h e issuance of these d r a f t s t h e Federal reserve bank

h a s

def ini te ly under taken that upon receipt

of a

proper advice

t h e

amount

o f t h e

d r a f t w i l l

b e

credi ted

t o a

special account

and

held

f o r t h e p a y -

ment

of

such d r a f t s when pre sen ted , which

of

necessity means held

f o r t h e

account o f t h e holder o f t h e draf t ra ther than f o r t h e account of the

drawer. While I be l ieve tha t t h e ci rcular impl ies that a Federal reserve

bank, of course, would no t bo obliged t o charge t h e amount o f t h e d ra f t

t o t h e c r e d i t o f t h e drawer bank unless i t h ad funds su f f i c i en t t o s u p -

port t h e charge, never theless , i f such fun ds were av ai la bl e, i t would b e

obliged

t o

f u l f i l l

i t s

cont rac t

and

charge

t h e

account

o f t h e

drawer bank

an d

hold

t h e

funds

i n a

special account

f o r t h e

special purpose

of

paying

t h e

draft when presented, which would

of

necessity mean hold

t h e

funds

as due and

payable

t o t h e

lawf ul holder

o f t h e

draft whoever

h e

might

b e .

Applying this pr inciple t o t h e quest ions i n t h e f i r s t s e c t i o n

of Mr. H a le ' s l e t t e r , i t appears to me:

(1 )

That

a

Federal reserve bank would

bo

obliged

t o p a y t h e

amount held

f o r t h e

payment

o f t h e

d r a f t

i n

quest ion

t o t h e

lawful

holder

o f t h e

d ra f t r ega rd l e s s

o f

anything that

had

occurred after

t h e


had

charged

t h e

drawer

o f t h e

draf t wi th

t h e funds an d credited thorn t o t h e especial account.

(2 ) I f I am mistaken i n t h e above conclusion an d t h e funds

should n o t b e paid t o t h e holder o f t h e d r a f t , I th ink i t clear

that then t h e funds would b e 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 accordingly.

( 3 ) I f t h e funds were n o t payable t o t h e holder o f t h e d r a f t ,

they would consti tute

a

mere general debt

t o t h e

original drawer,

and

would,

of

course,

be

subjec t

t o a l l

r i g h t s

of

o f f s e t

as any

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2 5 K

X-7454-f

Dccenber 20, 1932

Mr . J . S .

Waldon,

J r . ,

Co nt ro ll er . Federa l Reserve Exchange Dr af ts

and

M. G. Wallace, Counsel. Federal Reserve Tran sfer Dr a f ts .

- 4 -

othcr indebtedness. I n other words, i t appears t o n o t h a t no

theory could b e adopted under which such funds were n o t ei ther

payable

t o t h e

holder

o r

payable

t o t h e

drawer.

I t

could never

b e

said that

a

spec ia l t ru s t

had

a r i sen ,

b u t

that that t rus t

w as f o r t h e u se an d b e n e f i t o f t h e drawer o f t h e d r a f t and not

f o r t h e

holder

o f i t .

Answering

t h e

questions

i n

Sect ion

I I . I

wish

t o s a y

t h a t

I

an n o t very famil iar with th e u se o f Federal Reserve Transfer drafts, b u t

I

understand t ha t such d r a f t s , l ik e Federal Reserve Exchange d r a f t s ,

a r e

issued only under a general authority from a Federal reserve bank of a

d i s t r i c t an d a r e payable by another specified Federal reserve bank, and

t ha t

i t i s

usual

f o r t h e


of the

d i s t r i c t

i n

which

t h e

d r a f t

i s

issued

t o

wire

a n

advice

t o t h e


b y

which t h e d r a f t i s payable.

The

questions night

i n

some degree

b e

a f f e c t e d

b y t h e

forris

of

advice us ed . However, assuming t h a t

t h e

advice

i s a

d e f i n i t e i n s t r u c t -

i o n t o p ay t h e

d r a f t

f o r t h e

account

o f t h e


of the

i s s u i n g d i s t r i c t ,

n y

answers

t o t h e

questions

i n

Sect ion

I I .

would

b e :

( 1 ) I f t h e

paying Federal reserve bank

had no t

received te le-

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

t h e suspension o f t h e drawee bank, then t h e paying reserve bank

should p a y t h e d r a f t , and having paid i t , could charge i t t o t h e

account

o f t h o

reserve bank

i n t h e

d i s t r i c t

of

issue, because

t h e

paying bank would

in so

doing

a c t o n t h e

express ins t ruct ion

of

t h e Federal reserve bank i n t h e d i s t r i c t of issue, which instruct-

i o n h ad n o t boon countermanded. The pos i t i on o f t h e reserve bank

i n t h e

d i s t r i c t

o f

is su e would depend upon what in s t r uc t ions

i t

had

received

and

what

i t h ad

done.

I f i t had

been instructed

t o

s e t aside funds and had done s o , i t could, I think, apply these

funds

t o t h e

payment

o f t h e

draft , even

t

hough

t h e

drawer bank

had

subsequently suspended.

( 2 ) I f t h e advice o f suspension had been received, b u t over-

looked

b y t h e

paying reserve bank,

i t s

position would

b e t h e

same

as i f i t h ad

been received,

b u t h ad

been wilful ly ignored.

For

t h e reasons given above, I do no t think that a more general a d -

vice

of

suspension should

b e

t r ea t ed

b y t h e

paying Federal

r e -

serve bank

a s a

stop-payment order

on

such draf t s ;

b u t , i f t h o

paying Federal reserve bank should receive express directions

from

t h o

reserve bank

i n t h e

d i s t r i c t

of

issue

t o

stop payment

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X-7454-f 267

December

20, 1932

Mr . J . S ,

Faldcn,

J r . ,

Co nt ro ll er . Fede ral Reserve Exchange Dr af ts

and

M. G. Yiallace, Counsel. Fede ral Reserve Tr ans fe r D r a f t s .

of the

d r a f t ,

t h e

order should

be

obeyed;

and i f the

paying

F e d -

er al rese rve banlc f ai le d t o obey t h e order, i/vhether because i t

w as overlooked o r f o r sane other reason, i t would b e responsible

t o t h e


of the

d i s t r i c t

o f

issue

f o r t h e c o n -

sequences.

The

r i g h t s

of the

holder

i n

such cases would

o f

course

depend upon

t h e

circumstances under which

t h e

d r a f t

w as

issued

and

what advice

t h e

drawee bank

h a d

given

t h e

Federal reserve

bank of i t s own d i s t r i c t and what had boon done upon this advice.

My

answers

t o t h e

questions propounded

i n

Section

I I I . ,

vjhich,

of

course,

a r e

pred icated

o n t h e

assumption that

I a n

correct

in my

view

that Federal Reserve Exchange drafts constitute complete assignments

and

t r a n s f e r s i f advice o f t h e drawing h a s been properly given and acted

upon, a r e :

( 1 ) I t

does

n o t

appear

to me

that re ceip t

of

te legraphic

advice

b y a

Federal reserve bank other than

the one on

which

t h e Federal Reserve Exchange draft i s drawn i s ma t e r i a l . I f

t h e Federal reserve 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 ransfer before receiv ing

t h e

advice

of

suspension,

t h e

funds

would bo hold f o r t h e c red i t o f t h e holder o f t h e d r a f t r e -

gardless of whether that holder was another Federal reserve bank

o r

some other person

an d t h e

holder's knowledge

o f t h e

complet-

i o n o f t h e

assignment would

n o t b e

ma t e r i a l ;

b u t

inasmuch

a s

t h e Federal reserve bank i n t h e other district would probably

n o t know whether a n advice o f t h e drawing had been given o r

n o t , an d i f

given, whether

o r n o t t h e

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

to b e

charged

to i t s

account

and

amount transferred t o t h e especial account, i t seems to me

t ha t a Federal reserve bank i n another district should from

motives

of

prudence avoid paying

ou t any

funds

i f i t

knew t h a t

t h e

drawer bank

had

suspended,

f o r

since such drafts

a r e s u b -

j e c t

t o

final payment, there would always

b e a

p o s s i b i l i t y

that when presented

t o t h e


o n

which

drawn, they would

be

refused because either

t h e

advice

o f t h e

drawing h ad n o t been given properly, o r , i f given, because

t h e drawer bank had no funds ava ila ble •

(2 ) In

l ine with

t h e

opinion which

I

have expressed above

t h e

s i t u a t i o n

i s t h e

same

i n a l l

cases,

f o r

advice

b y

t e l e -

graph h a s been given and wi l fu l ly ignored , I n other words,

any person receiving notice and then overlooking i t i s i n t h e

sane si tuat ion

as i f h e had

received

i t and

de l ibe ra t e ly

ignored

i t .

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X-7454-f

Deceriber 20 , 1932

Mr , J , S .

Walden,

J r . ,

Co nt ro ll er . Federa l Reserve Exchange Dr af ts

and

M, G, Wallace, Counsel. Federa l Reserve Tra nsf er D r a f t s .

—6—

You wi l l not ice , of course, that a l l of iny answers above a r e

based upon t h e assumption t h at t h e con tr ac ts under which Fede ral R e-

serve Exchange drafts and Federal Reserve Transfer drafts a r e issued

a r e such a s t o consti tute then assignments o f t h e funds against which

they

a r e

drawn, provided

due

not ice

o f t h e

drawing

i s

given

t o t h e F e d -

eral reserve bank

i n t h e

d i s t r i c t

of

i s sue ,

and a

de f in i t e appropr i a t -

i o n o f t h e

funds ir.tiie hands

o f

that bank

i s

made before

t h e

suspension

of the

drawing bank,

I

fe e l f a i r l y conf ident th a t th i s cons t ruc t ion

would

b e

placed

o n t h e

d r a f t s

i f t h e

question should ever

b e

l i t i g a t e d ;

b u t , a s y o u

w i l l

se e

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

a n

unequivocal opinion.

I f t h e

Federal reserve

banks desired

t o

avoid

a n y

po ssi ble doubt, then they should ref us e

payment

of

such dr af t s

i f

thoy

had

received not ice that

t h e

drawing

bank

had

suspended,

and

unless

t h e

r ece ive r

o f t h e

drawing bank

an d t h e

holder

o f t h e

draft could agree

a s t o

t h e i r r i g h t s ,

t h e

Federal reserve

bank should f i l e

a

b i l l

of

in t e rp l eade r

and pay

into court

t h e

amount

o f t h e

d r a f t

i n

order that

t h e

court might determine whether

t h e

money

belonged

t o t h e

r ece ive r

o f t h e

drawing bank

o r t o t h e

holder .

Very truly yours,

(Signed)

M. 6 ,

Wallace

M. G.

Wallace,

Counsel,

MGW R

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FSD2RAL 2353273 BSIK

OP

ATLANTA

Off ice

of

Cashier

December

15, 1932

Mr. W. M.

Hale, Cashier,


San Francisco, Cal i for nia .

Dear Mr. Hale:

This will acknowledge receipt

of

your favor

of the 2nd

instant

presen t ing

a

number

of

perplexing problems which

y o u

bel ieve

may

a r i s e

i n

connection with

th e u se o f

exchange

and


i n t h e

event

of

suspension

o f t h e

bank issuing such drafts before

t h e

d r a f t s

a r e

presented

f o r payment.

A

ve ry small number

of

banks

of


are now

authorized

t o issue exchange drafts and none a r e authorized t o i s sue t r ans fe r d ra f t s .

Thus

f a r ,

probably

due to

good fortune,

we

have

no t had to

deal

with any problems o f t h e nature suggested i n your l e t t e r , though we rea l i ze

that situations might develop that would call

f o r

d e f i n i t e

and

probably

quick handling o f matters resul t ing from t h e issue of exchange drafts in t h e

event

of

suspension

of the

member bank

b y

which they were drawn.

Instead of undertaking t o answer your letter myself, I submitted

i t t o o u r counsel , Mr. Robert S . Parker , and he has favored me with a n e x -

pression

o f h i s

opinion concerning

a l l t h e

problems your letter presents.

I am enclosing a copy of Mr. Parker * s l e t t e r , and I agree with t h e opinions

h e h a s

expressed.

Several years a g o , j u s t how long ago I do not r e c a l l , we d i s -

continued

th e u se o f

t ransfer d raf t s because

we

considered them entirely

unnecessary

i n

view

of the

f a c t t hat member banks

a r e

afforded ample faci l -

i t i e s f o r t h e t r a n s f e r of funds through t h e medium of our private wire system.

I am

inc l ined

t o

think that

th e u se o f

exchange drafts should

also b e discontinued because as you s t a t e t he i r u se fu lness i s quite problemat-

i c a l ,

and I

be l i eve the i r

u s e

involves

to o

many hazards

and

risks that more

than of fs et whatever l i t t l e service they may be to th e very limited number of

member banks o f t h e e nt i r e Fed eral Reserve System which a r e using them.

a l l

After y o u have heard from/the Federal Reserve Banks, i f you

f ind i t convenient to d o so , please l e t me have a summary o r br ie f synopsis

of their views.

Yours very truly,

(Signed) M. W. Bell

X-7454-g

c

269

o

p

Y

M. W.

Bell

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p<7f i

X-7454-h

'*

J

COLQUITT, PARKER, TEOUTMAN & ARKWRIGHT C O P Y

Attorneys

at Law

Suite

1607

William-Oliver

3 1 d g .

ATLANTA

December

12 , 1932 .

Mr. M. W.

Be ll , Cashier,

Federal Reserve Bank of Atlanta,

Atlanta, Georgia.

Dear Mr. Bell:

At

your request

I

have read

t h e

let ter concerning

Federal reserve exchange drafts which

Mr.

Hale, Cashier

of

t h e Federal Reserve Bank of San Francisco wrote y o u under date

of

December

2n d . In Mr .

H a l e ' s l e t t e r

h e

also makes reference

t o t r a n s f e r d r a f t s , but I understand from you tha t th e us e o f

such last mentioned drafts h a s been discontinued.

You have asked me to ind icate th e way i n which, i n

my opinion, M r. Hale's questions should b e answered.

In my opinion t h e r i g h t s of the drawer, drawee, payee

o r other holder of an exchange draft would b e determinable b y

reference

t o

your Circular

Ho. F~4,

which sets

o u t t h e

terms

and

conditions under which such drafts

may be

issued.

I t i s

contemplated that when

one of

these d ra f t s

i s

drawn

b y a

bank

t o

which permission

so to do has

been given,

t h e drawer gives written advice t o t h e Federal Reserve Bank

upon a form supplied b y t h e Reserve Bank. Immediate ly upon

rece ip t

o f

such advice,

t h e

reserve account

o f t h e

drawer

i s

charged with

t h e

amount

o f t h e

d r a f t

and

the re

i s a

correspond-,

i n g c r e d i t t o a special account, which i s maintained f o r t h e

payment

o f t h e

draft upon presentation.

I am of t h e

opinion that,

t o a l l

i n t e n t s

and

purposes,

an

exchange draft should

b e

t r e a t e d

a s t h e

cer t i f i ed check

on

t h e


t h e

cer t i f i ca t io n be ing e f f ec t ive

as o f t h e time when t h e advice of the drawing h a s been received.

I f

this analogy

i s

correctly drawn, then

t h e

answers

to Mr.

Hale's questions should be , in my opinion, a s follows:

I

1 . I n t h e

event

o f t h e

insolvency

of a

member bank,

t h e


of th e

District would rest under

no

obl igat ion to p ay t h e holder in d u e course of an exchange draft

7/17/2019 frsbog_mim_v38_0234.pdf


Mr. M. 7.

Bel l

- #2.

X-7454-h

12-12-33.

i f t h e same were presented t o i t a f t e r t h e suspension of the

drawer unless

i t h a d ,

p r io r

t o t h e

rece ip t

o f the

not ice

o f s u s -

pension, received advice that

t h e

d r a f t

h ad

been drawn.

I f

i t h a d received advice of the drawing of the d ra f t p r io r t o

notice of suspension, then I think that t h e d ra f t , upon pre sen ta-

tion, should

be

paid

out of the

special fund, even though presented

af t e r no t i ce

of

suspension.

2 . I am of th e opinion that af ter you had cred i ted

t h e

amount

of a

d r a f t

t o t h e

special account created

f o r t h e

payment

of

d r a f t s when pres ente d,

you

could

n o t

t h e r e a f t e r

r e -

verse your entries and credit back t h e amount of the d r a f t to the

Reserve account

o f the

drawer.

3 . I think that t h e special account re fe rr ed t o i n

your Circular, vhich account i s earmarked f o r t h e purpose of

paying exchange drafts upon presentation, could

no t be

applied

t o

t h e

payment

of an

indebtedness

of the

member bank

t o t h e

Reserve

Bank. I t fol lows that t h e funds i n this account could not be

paid t o t h e rece iver b u t should b e re t a ined b y t h e Reserve Bank

f o r t h e

purpose

of

paying

t h e

draft upon presentat ion.

I I

This division of Mr. Ha 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 o f which by member banks i n t h i s D i s t r i c t ha s

been discontinued. I t may b e , however, that some o f the Federal

Reserve Banks s t i l l permit t h e i r members

t o

issue such dr a ft s .

I have made no par t ic u la r s tudy o f the l e g a l e f f e c t of t r ans fe r

d r a f t s b u t bel ieve that t h e general principles discussed i n s u b -

d iv i s ion

I

would

b e

con t ro l l i ng ,

v i z . , i f t h e

drawee Federal

Reserve Bank charged

t h e

amount

o f the

d r a f t

t o t h e

account

of

t h e

drawer prior

t o

not ice

of

suspension

and

c red i t ed

t h e

amount

of the d r a f t i n a special account, then i t should b e paid despite

t h e

fact that

t h e

drawer might have closed prior

t o t h e

actual

p resen ta t ion o f the d r a f t to the drawee. I f the re i s a ny doubt

about this proposition, such doubt would, in my opinion, b e removed

i n a ny case where telegraphic advice had been given t o t h e Federal

Reserve Bank specified

a s t h e

bank

t o

make payment.

I l l

I t follows from t h e above that, in my opinion, t h e

placing

o f the

amount

of a

t r a n s f e r d r a f t

i n t h e

special account

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X-7454-h

Mr. M. W.

Bel l

- # 5 .

12-12-32.

p r i o r

t o

rece ip t

of

not ice

of

suspension

of the

drawer would

render t h e drawee Federal Reserve Bank liable f o r t h e payment

o f t h e

draf t , a l though ,

i f t h e

Federal Reserve Bank designated

as t h e

'bank

to p ay

actually knew

o f t h e

suspension

o f t h e

drawer

when i t made payment, t h e si tuat ion might b e changed.

SUMMARY.

As

s t a t ed he re to fo re ,

i f we ca n

properly analogize

one of

these d ra f t s ,

t h e

amount

of

which

h a s

been charged

to t h e

account o f t h e drawer, t o a check which bears t h e c e r t i f i c a t i o n

o f t h e Federal Reserve Bank, then, a t l e a s t in so fear a s concerns

exchange drafts,

I

feel reasonably sure that

t h e

answers

se t o u t

above a r e c o r r e c t . I am no t so sure of my ground i n t h e case

of a t r an sf er d r af t . Pra ct i ca l ly regarded , however, i t seems t o

me

tha t

no

Federal Reserve Bank would

pay one of

these draf t s

unless i t h a d received telegraphic advice from t h e drawee Federal

Reserve Bank.

I f ,

after receiving telegraphic advice,

i t

paid

t h e

d r a f t ,

I

think that

t h e

drawee Reserve Bank should

p ay t h e

same even though before presentation

i t h a d

received advice that

t h e drawer h a d suspended.

I

might

add

that

I do no t

think that that part

of

Regula-

t i o n

J

which prohibits

t h e

making

of

charges

t o

members' reserve

accounts after advice of suspension, e t c . would affect o r control

a

s i t u a t i o n

i n

which

t h e

reserve account

h ad

actually been charged

with

t h e

amount

of a

d ra f t p r io r

t o

not ice

of

suspension even

though t h e d r a f t i t s e l f h ad n o t been presented f o r payment.

Trust ing that

t h e

above will

be of

some service

to you

and Mr. Hale, I am

Sincerely yours,

Robt.

S .

Parker.

RSP/w.

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X-7454-i

3 7 3

FEDERAL HESEBVE

B M OF

CHICAGO

230

South LaSalle Street

December

8, 1932

Mr. W. M.

Hale, Cashier


of San

Francisco

San

Francisco, Ca l i fo rni a

Dear Mr. Hale:

We

have your l e t t e r

of

December

2 , i n

which

y ou

make

inquiry

as to our

views regarding

t h e

pos i t i on

of a

Federal reserve

bank

i n

connection with exchange

and

t ransfer draf t s i s sued

by a

member bank i n t h e event of the member bank having suspended business

previous t o t h e payment of the d r a f t s .

The

conditions governing

t h e

issuance

of

Federal reserve

exchange drafts

and

Federal reserve transfer drafts provide that

t he

member bank is sui ng e i t he r form

of

draft send

a

special advice

t o i t s

Federal reserve bank on t he date such drafts a r e issued authorizing

t h e Federal reserve bank t o charge i t s reserve balance with t h e to ta l

amount

of the

advice,

i t

bei ng understood that

t h e

amount

b e s e t

aside

i n a

special account

f o r t h e

specific purpose

of

paying

t h e

d r a f t s

d e s -

cribed

i n t h e

advice

i f and

when presented

f o r

payment. According ly,

i t i s o u r

opinion that such funds should

not be

applied

f o r a n y

other

purpose. I t i s also our opinion that , i n view of the funds i n question

having been so segregated, a Federal reserve bank would b e obligated

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

t h e

member bank

h ad

suspended business

previous

t o t h e

presentment

of the

d r a f t .

Our opinion a s above expressed would likewise apply t o

i nqu i r i e s i n your second paragraph, as we do not bel ieve that e i ther

t h e rece ip t of not ice o r f a i l u r e t o receive notice of the c los ing of

t h e

drawer bank

b y t h e

paying Federal re ser ve bank would af f e c t

t he

pos i t ion

o f t he

paying Federal reserve bank; that

i s ,

once

t h e

charge

h a s

been roade

by t h e

drawee Federal reserve bank

t o t h e

reserve

a c -

count

of the

drawer member bank,

i t i s ou r

view that

t h e

segregation

of the

funds

i s f o r th e

specific purpose

of

putting drawee Federal

reserve bank i n funds t o honor t h e draf t descr ibed i n t h e advice i f

and when t h e d r a f t i s presented f o r payment. Hot ic e of suspension

of the drawer member bank subsequently received would n o t change t h e

r i gh t s of the pa r t i e s .

If we

understand your thir d questio n co rr ec tl y,

t h e

f o r e -

going conclusions apply

t o i t , I n

view

of the

fac t tha t

t h e

member

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X-7454-i

Mr. W. M. Hale

San

Francisco

- 2 -

12-8-32

bank drawing

an

exchange draft

may

f a i l

t o

n o t i f y

t h e

drawee Federal

r e -

serve bank t o charge i t s account with such amount, obviously t h e same

r i sk a t t aches

t o

permitting- withdrawal

of a

balance created

by a

credi t

represent ing a Federal reserve exchange draft on a reserve bank of an-

o the r d i s t r i c t

as to any

other item credited subject

t o

final payment.

The necess i ty o r usefu lness of these forms of exchange

h a s

been discussed

a t

length

in our

bank

on

many occasions,

an d ,

while

there may be a fe w member banks in o u r d i s t r i c t t ha t de r ive a d e f i n i t e

ben ef i t from th is servic e,

i t i s

very much

a

quest ion

in o u r

mind

as to

whether or no t they should n o t both b e dispensed with, as our records

indica te t h e major i ty of our member banks that make u se o f e i t h e r of

these forms of exchange do no t understand t h e purpose f o r which they

were intended; that i s , tha t t h e ordinary draf t on us would serve th e

purpose

i n

most cases.

We

shal l ap preciate

i t i f y o u

wi l l

l e t u s

know

t h e r e -

s u l t s of your survey on th is s ubject .

Very truly yours,

(Signed) J . H . Dil lard

J . H . Di l l a rd ,

Deputy Governor

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X-7454-j

C

FEDERAL RESERVE BAH OF ST. LOUIS 0

P

Y

December 9, 1932.

Mr. W. M. Hale, Cashier,


San Francisco, Ca l i f orn ia .

Dear Mr. Hale:

We

have your l e t t e r

of

December

2 . We

discon-

tinued th e f a c i l i t y of Federal Reserve t ra ns fer dr af ts i n

August of 1918 for the reason that i n June of that year th e

inaugurat ion of f r ee t e l eg raph i c t r ans f e r s , in o u r judgment,

terminated any need f o r t h e t r ans f e r d r a f t s . Thi s f a c i l i t y

h as n o t since been extended to our member banks.

Pr io r t o t h e rece ip t of your l e t t e r we informally

discussed t h e quest ions raised and i t was our f ee l i ng t ha t i f

an exchange draft was presented a f te r t h e insolvency of the

member bank drawing i t tha t we would decline payment await-

i n g au thor i t y of p rope r j u r i sd i c t i on . I t was always felt that

t h e balance provided f o r t h e payment of such draf ts was a fund

created f o r a specif ic purpose and could not be credited back

t o t h e reserve account nor be used t o offset indebtedness of

th e in so lv en t member ban k.

Since receipt of your l e t t e r t h e matter h as

been presented to our Counsel f o r h i s cons idera t ion and a

copy o f h i s opinion i n respect thereto i s enclosed.

Yours very truly,

(Signed)

0 . M.

Attebery,

0. M.

Attebery,

Deputy Governor.

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X-7454-k

C

0

December 8, 193 2. P

Y

Memorandum

f o r M r .

Attebery:

I n considering t h e questions suggested by t h e Federal Reserve

Bank of San Francisco, i n l e t t e r of December 2 , 1 932 , we will have t o

di f feren t ia te between t h e ordinary draft and the Federal Reserve e x -

change draft .

I n

t h i s

t o w i t ;

I n t h e ord inary draf t , t h e drawee, i f he ha s received no

notice o f the insolvency of the drawer, honors o r dishonors t h e d ra f t

as of the

time

i t i s

presented

and

either pays

i n

money

o r

furn ishes

t h e

payee with other exchange.

I n the

l a t t e r case ,

t h e

drawee becomes

a debtor t o t h e payee instead of to the drawer. The t r ansac t ion , a s

between t h e drawer and the drawee, i s complete as and from t h e moment

t h e d r a f t i s presented.

Whereas, when t h e Federal Reserve exchange drafts a r e used,

t h e drawer, simultaneously with t h e issu ing of the d r a f t , n o t i f i e s t h e

drawee that such a d r a f t h a s been issued i n favor o f the named payee,

and

upon receipt

by th e


of the

advice

of the

issuance

of

such dr af t s ,

th e

Federal Reserve Bank charges

t h e

amount

against t h e reserve account of the drawer an d c r e d i t s t h e amount t o

a special account f o r t h e payment of the drafts when presented. The

amount o f the d r a f t i s withdrawn from t h e account of t?ie drawer t h e

moment

t h e

amount

i s

c red i t ed

t o t h e

special account

and

thereupon

becomes

th e

funds

of the

payee

as and

when

t h e

d r a f t

i s

actual ly

presented. A t rans act io n s imi la r to one where t h e drawee bank issues

i t s Cashier 's check o r c e r t i f i e s t h e original check.

(1 )

From

t h e

foregoing,

i t

would follow that

i n t h e

event

of the

insolvency

o f the

drawer before

t h e

ac tua l d ra f t

was

presented,

t h e answer t o sub-sect ion I of Paragraph (L ) would be i n th e a f f i rmat ive ;

f o r , i t s ac t s i n charging t h e drawer's account had tak en pla ce before i t

received any not ice of insolvency of tlie drawer, and the drawee bank

thereby became

a

stakeholder

of a

certain fund

to be

turned over

t o

th e

holder

of the

dr a ft when pre sen ted .

(2 ) Answering t h e second sub-section of Paragraph ( l ) , t h e

drawee bank, after i t h a d charged t h e d r a f t t o t h e account of the

drawer

and had

placed

t h e

funds

i n a

special account

f o r t h e

payment

of

t h e

draft, would have

no

r igh 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 question remained outstanding.

(3 )

Answering

the 3 r d

sub-sect ion

of

Paragraph

( l ) , s o

long

a s the

draft remained outstanding,

th e

drawee

- th e


would no t have t h e r igh t to use the special fund to pa y the indebtedness

of the borrowing bank t o t h e Reserve Bank. Ne it he r could t h e special

fund be applied t o t h e payment of the indebtedness o f the drawee bank

t o t h e

Reserve bank.

I f

l a t e r ,

t h e

Receiver

of the

drawer bank should

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^ 8 |

X~7454~k

,

—2—

become t h e holder in due course of the d r a f t i n quest ion, and should

present

i t f o r

payment,

~ f o r , t h e

funds paid

on the

draft would come

into

th e

hands

of the

Receiver af ter

t h e

drawer

had

f a i l e d

and i t

would h e like other funds coming into t h e hands of the Receiver from

other sources, - the funds could not he applied t o t h e payment of the

indebtedness

of the

Trust

t o t h e


a

c r e d i t o r

of

t h e Trust.

I believe t h e foregoing answers th e questions l isted under

sect ions

I I a nd I I I .

Very truly yours,

(Signed) J a s . G. McCorikey,

General Counsel.

C O P Y

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X-7454-1

C

0

P

Y

FEDERAL

BE

SERVE

BAH OF

MI1HEAPOLIS

December

28, 1932

Mr. W. M. Hale, Cas hier ,

Federal Reserve Banlc,

San

Francisco, Cal ifor nia .

Dear Mr. Hale:

Upon receipt

of

your le t ter

of

December

2

addressed

to Mr.

Zieraer,

t h e

questions included therein were submitted

t o

our

counsel,

who

today gives answer thereto

a s p e r

copy

of

l e t t e r

herewith . We re gr et th at your communication was not sooner

answered.

You

wi ll observe from coun sel 's le t t e r th at

we a re n ot

using exchange

o r

11

t ran sfer d r af t s ; the refore spec i f ic answers

t o your questions a r e n o t made.

With

t h e

Compliments

of the

Season,

Very truly yours,

(Signed) Harry Yaeger

Harry Yaeger,

Deputy Governor.

HY:EO

Enc.

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X-7454-m 2 7 9

C

0

P

Y

800

Security Building

Minneapolis

December 28 , 193 2 .

Mr.

Harry Yaeger,

Deputy Governor.

Please pardon

o ur

delay

i n

answering your memorandum dated

December

6, 1932

with reference

t o t h e

letter dated December

2, 1932

from

Mr.

Hale, cashier

of the


of San

Francisco.

Your bank does n o t u se t h e

11

exchange o r t r ans fe r d ra f t

of the

type referred

to in Mr .

H a l e ' s l e t t e r .

We

have

not had an

opportunity

t o

examine forms

of the

d ra f t r e fe r red

to by Mr.

Hale,

nor are we

advised

o f t h e

form

of

notice given

by a

member bank

t o

i t s respective Federal reserve bank when such a d r a f t h a s been drawn.

Accordingly, o u r 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 si n g out

of th i s p rac t i ce i s probably of l i t t l e , i f an y , value.

However,

as we

understand

t h e

p r a c t i c e ,

a

t r ans fe r d ra f t

of

this type would probably

b e

taken

t o

cons t i t u t e

an

equitable assign-

ment,

t o t h e

extent

of the

amount

of the

d r a f t ,

o f t h e

member bank's

re se rv e ba la nc e. When t h e member bank drawing t h e d r a f t h ad no t i f i ed

i t s Federal reserve bank of that fact , then we are incl ined t o think

t h e

effect would

b e t h e

same

as i f th e

member bank

had

given

a

par t i a l

assignment

o f i t s

reserve balance

and had

n o t i f i e d

i t s

reserve bank

of

such assignment.

I n

other words, after such notice,

t h e

reserve bank

would have t o hold t h e amount of the d r a f t f o r t h e benef i t of the owner

thereof.

I f o u r

understanding

i s

co r rec t ,

t h e

answer

t o t h e

questions

put in Mr.

Hale'

s

letter would

b e

that

t h e

Reserve Bank cashing

o r

giving credi t

f o r

such

a

draft would

b e

protected

i n a l l

cases provided

t h e drawee Reserve Bank h ad received notice of such drawing and at the

time of such notice there were sufficient funds i n t h e reserve account

t o p ay t h e

same.

The

questions presented

by Mr.

Hale suggest that

t h e

pract ice

under consideration i s rather anomalous from t h e legal viewpoint and

might result i n l i t i g a t i o n and possible loss t o a Federal reserve bank.

UELAim

UBLAIID

UELAMD

&

UELAHD

Attorneys

&

Counselors

SU/MGr

By

Sigurd Ueland

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X~7454~n

C

0

P


OF

KMSAS CITY

Y

December 10 , 1932

Mr. W. M.

Hale,

Cashier, Federal Reserve Bank of San Francisco,

San Francisco, Cal i fo rni a ,

Dear M r. Hale:

T h i s w i l l . r ep ly t o your l e t t e r of December 2 ,

with reference

t o t h e

perplexing problems which arise

i n

connection with the use o f exchange and t r a n s f e r d r a f t s ,

and while o u r experience has no doubt been somewhat similar

t o your own, we have had a very l imited use o f s uch 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 actual experience under conditions

s e t

f o r t h

i n

your l e t t e r .

We

o f f e r e d

o u r

member banks these facilities

i n

1917 and 1918, and while a few banks av ai le d themselv es of such

f a c i l i t i e s

f o r a

time, they gra dua lly disc onti nued u n t i l during

t h e pas t f ive o r s i x years we have had bu t one bank using

such f a c i l i t i e s , which bank discont inued the i r u s e about a

year

ago , and a t

this time

we

have

no

bank using them.

I n

view

of the fac t tha t we have had so l i t t l e p r a c t i c a l e xp er ie nc e i n

t h i s r e spec t ,

we

h e s i t a t e

t o

express opinions

o n t h e

ra ther

involved hyp oth et i cal quest ions stat ed i n y o u r l e t t e r and doubt

i f

such opinions would

be of

value

t o y o u .

We

note t ha t

y o u

have taken t h is ma tte r

u p

with

a l l

Federal reserve banks and tha t i t i s your feel ing that t h e u s e f u l -

ness

o f t h e

ins t ruments

t o

member banks

i s

qui te problemat ica l

and

a recons ide ra t ion a t this time might lead t o t h e conclusion that

i t would b e advisable t o d i s c on t in u e such f a c i l i t i e s . We h e a r t i l y

agree with this suggestion and as a matter of fact have n o t embodied

s u c h f a c i l i t i e s

i n o u r

g e n e r a l l e t t e r s

i n

recent years,

and

have

ra ther d iscouraged the i r

u s e

when

we

have

h ad

spec i f i c inqu i r i e s

wi th reference t o such service.

Trust ing that t h e informat ion furnished wi l l be of

i n t e r e s t to yo u , and with kind personal regards, I arn

Yours very truly,

(Signed) • J . W. Helm

J . W.

Helm,

Deputy Governor and Cashier.

JWH-s

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C O P Y


OF

DALLAS

X-7454-o

281

December 8, 1932

Mr. W. M.

Hale, Cashier


San

Francis co, Ca l if orni a

Dear M r. Bale:

We have your l e t t e r of December 2 , 1 9 3 2 , addressed t o

Mr. R. R.

G i l b e r t ,

who i s a t

present away from

t h e

hank

o n h i s v a -

cat ion .

Bef ore aiswering

t h e

s p e c i f i c i n q u i r i e s

i n

your let ter

w e s e t for th below br ief ly t h e mechanical operations followed i n


i n t h e

issuance

of

exchange

an d

t r a n s f e r d r a f t s ,

a s

well

a s t h e

p r a c t i c e

of

other Federal Reserve Banks

i n

handling

such drafts presented t o them f o r payment:

FEDERAL RESERVE EXCHANGE DRAFTS.

Ce rta in sp ec if ie d banks i n t h i s d i s t r i c t a r e authorized .

by us to

issue Federal Reserve exchange drafts, this authority

b e -

i n g

g iven af ter fu l l considera t ion

by our

committee

as t o t h e

bank ' s f in anc ia l condit ion . Per iod ical ly t h e condit ion o f t h e banks

having been given this authority

i s

reviewed.

The

names

of a l l

banks

i n

th i s d i s t r i c t au tho r i zed

by us to

issue such dr af t s

a r e f u r -

nished t o each Federal Reserve Bank.. On th e date such, d r a f t s a r e

issued b y t h e member bank, t h e bank i s supposed t o give u s deta i led

advice

of the

number

a n d

amount

o f t h e

d r a f t

so

is su ed . Upon re ce ip t

of this advice from a member bank we immediately charge i t s reserve

account an d s e t u p a suspense account oil our general 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 SPE-

CIAL NOTICE.

FEDERAL RESERVE TRANSFER DRAFTS.

Member banks

i n


a r e

au thor ized

t o

issue

Federal Reserve t ransfer d raf t s af ter s imi lar cred i t inves t igat ion of

t h e

member bank

t o

whom such privilege

i s

gra nte d. Other Fede ral

Reserve Banks

a r e n o t

advised

of the

banks

i n

th i s d i s t r i c t au tho r -

ized t o issue Federal Reserve t ransfer drafts . On th e date such

d r a f t s a r e issued t h e member bank issuing same i s supposed t o give

u s

detailed advice over

t h e

s ignature

i n i n k o f t h e

off icer s ign ing

said draft , showing t h e number, amount a n d t h e Federal Reserve Bank

t o which such draft i s made pa ya bl e. Immediately upon r e c e ip t of

such advice

we

charge

t h e

reserve account

o f t h e

member bank

f o r t h e

amount

o f t h e

d r a f t

an d

credit such amount into

a

suspense account

on our gen era l le dg er . Immediately -ypon pr es en ta ti on t o a n y other


of a

Federal Reserve t ransfer draft

w e a r e

7/17/2019 frsbog_mim_v38_0234.pdf


i l r .

Hkle,

San

jprandigco, d a l i f .

- 2 *•

X-7454-o

282

given advice b y wire o f t h e presen ta t ion of such item f o r payment,

a n d i n t h e event we have n o t t h e re t o fo re s e t as ide 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 this draft

we, of

course, immediately

so

n o t i f y

t h e


t o

whom

t h e

d r a f t

h a s

been pr es en te d

f o r

payment

i n

time

f o r

tha t bank

t o reve rse i t s c r e d i t .

GENERAL DISCUSSION

Apparently there

i s no

agreement between Fed er al Reserve

Banks

a s 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

draf ts . Fur thermore ,

i n s o f a r a s o u r

d i s t r i c t

i s

concerned,

we do

n o t have a n y regula t ion def in ing t h e r i g h t s and obl iga t ions of the

member bank and Federal Reserve Bank with respect t o these items.

Our c i r c u l a r i n connection with these items consists only of d e t a i l -

e d

in st ru ct io ns concerning

t h e

issuance

of

such items.

We

thi nk t hat uniform agreements d ef in in 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 a nd uniform circulars

de f in ing t h e r i g h t s and liabilities between Federal Reserve Banks

and their member banks should certainly b e worked o u t a n d p u t into

fo rc e

i f t h e

p r a c t i c e

of

permitt ing issuance

o f

these d ra f t s

i s t o

b e

continued.

Assuming that

our

member banks issuing such drafts gives

u s t h e notice which they a r e supposed t o give , a n d assuming further that

th is not ice i s received and their reserve accounts a r e charged prior

t o t h e

suspension

o f the

member bank involved,

we

answer your questions

a s f

ollow s:

I . I . Ye s

2 . We do n ot bel ieve tha t t h e Federal Reserve Bank

would have t h e r i g h t t o r e f u s e t o p a y t h e draft when

presented, and t h e re fo re i t would n o t have t h e r ight

t o reverse t h e entry.

3. The

answer

t o

this quest ion

i s

covered

by the

answer

to I . 2 .

I I . 1 . We do no t

think that

t h e

p o s i t i o n

o f the

paying

Reserve Bank would b e a f f e c t e d b y t h e suspension of

t h e issuing bank, provided t h e d e t a i l s o f t h e plan

h a d

been carr ied in to e ffec t ,

f o r t h e

reason that ,

i n o u r

opinion,

i f t h e

d e t a i l s

h a d

been perfected

t h e

issuing bank

had

made

a n

assignment

o f t h e

funds

.against which t h e d r a f t was drawn.

2. The answer t o this quest ion i s covered i n t h e

answer t o I I . 1 .

I I I . 1 . I f t h e

mechanics

o f the

p lan

h a d

been carried

fu l ly in to e f fec t p r io r

t o t h e

suspension

of t h e i s -

suing bank, we do not bel ieve tha t t h e p o s i t i o n of

either Federal Reserve Bank would b e a f f e c t e d .

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X-7454-0

M r.

Hale,

San

Francisco, Cal i f .

- 3 -

I I I . 2 . The

answer

t o

this quest ion

i s

covered

b y

t h e

answer

t o I I I . 1 .

We

believe that under existing

law a

tank

may

assign

funds, provided i t clearly evidences a n i n t e n t i o n to do so and

th at such funds having been assig ned bef or e

a

bank closed would

n o t b e a f f e c t e d b y t h e c los ing o f the bank. Th is , we th ink, i s

t h e

case where

t h e

mechanics

o f the

arrangement

a r e

f u l l y

c a r -

r i e d

o u t

p r i o r

t o

sus pen sio n. However,

t h e

v i c e

i n t h e

present

p r a c t i c e ,

i t

seems

t o u s , i s i n t h e

fact that issuing banks might

•under given circumstances issue such drafts without notifying

t h e

Federal Reserve Bank o f th e d i s t r i c t i n which i t i s loca ted , and

thus

no

assignment would take place prior

t o

suspension;

a nd in

th at event seri ou s questions would a r i s e a s t o t h e r i g h t s of both

t h e

paying Federal Reserve Bank

a n d t h e


of

t h e d i s t r i c t i n which t h e issuing bank teas located.

There a x e qui te a number of questions that immediately

occur

t o o n e i n

considering this matter

a n d i t

would

n o t b e

prac -

t i c a b l e i n a l e t t e r of this kind t o attempt t o discuss a l l of

them. We do bel ieve tha t t h e matter as now handled i n t h e Federal

Reserve System

i s

suscept ib le

t o

much improvement,

and we

should

b e glad t o jo in wi th you in a n attempt t o work out a plan b y which

these drafts could

b e

handled r/ith minimum risks

t o

Federal Reserve

Banks.

Yours very truly,

(Signed) R. B. Coleman

R. B.

Coleman

Deputy Governor

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C O P Y

FEDERAL RESERVE BANK OF RICHMOND

F e b r u a r y 1 4 , 1 9 3 3

M r. Albert C. Agnew, Counsel,


San

Francisco,

C a l .

My

dear

M r.

Agnew:

I

received your le t ter

of

February

2nd

enclosing

a

copy

of

your

l e t t e r

o f t h e

same date

to Mr .

Wyatt.

Of

course,

I

appreciate highly

t h e

comments which

yo u

made

on my

opinion addressed

to Mr .

TH&lden.

As I

under-

stand i t , ne i the r o f us f e e l a t a l l confident a s t o what would be t h e

r i g h t s o f the va r ious pa r t i e s i n a case i n which a bank upon which a F e d-

eral Reserve exchange draft

was

drawn

had

received notice

o f the

issuance

of the

d r a f t

and had

segregated

a

fund su f f i c ien t

to pa y i t o r ha d

received

notice bu t ha d no t actually segregated a fund, and c e r t a i n l y i t would b e

highly desirable t o remove t h e doubt on this point i f i t i s prac t i cab le .

The

Managing Director

of our

Charlotte Branch

was in

town

a few

days

ago and in a

discussion with

me

brought

u p

another aspect

of

Federal

Reserve exchange drafts t o which 1 had never given much consideration. I n

my l e t t e r to Mr . Walden I was thinking only o f the p o s i t i o n o f the Federal

reserve bank upon which

t h e

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

this ci ty; that

i s t o s a y , I don't care what happens a s long a s i t don't happen t o m e .

M r. Clements, Managing Director of our Charlotte Branch, however, asked me

what

I

thought would

b e t h e

pos i t ion

of the

bona fide holder

of

such

a

draf t

i f i t

appeared that

t h e

member bank which drew

i t h a d n o t

n o t i f i e d

t h e F e d -

eral reserve bank

o f th e

drawing

o f the

d r a f t

or had

n o t i f i e d

t h e

Federal

reserve bank ba t had no available balance which could b e charged when t h e

advice was rece ived. Of course, viewing this solely a s a question of law,

t h e

answer seems fairly simple.

The

draft could

n o t b e

t r e a t e d

as an

assignment

of

funds

i n t h e

hands

of the

Federal reserve bank because there

were no funds t o t r a n s f e r . I t could no t be regarded a s giving t h e holder a

r igh t of ac t ion aga ins t t h e Federal reserve bank because obviously t h e Federal

reserve bank ha s no r e l a t i o n t o t h e draft except that of drawee, and has

never accepted

o r

c e r t i f i e d

t h e

d r a f t .

M r.

Clements called

my

a t t e n t i o n ,

however,

t o t h e

fac t tha t

t h e

forms used bear

i n

very conspicuous letters

t h e

words Fed era l Rese rve Exchange,

a nd the

posit ive s tatement that

any

Federal reserve bank o r branch wil l receive th is dr af t f o r immediate avail-

a b i l i t y a t p a r . T he c i rcu la r of the Federal Reserve Bank of Richmond, which

i s , I

assume, substantial ly s imilar

t o

tha t

i n u s e b y


banks, expressly provides that

t h e

d ra f t s w i l l

b e

received

b y

other Federal

reserve banks

and

th ei r branches subje ct ,

of

course,

t o

final payment

by

t h e Federal reserve bank upon which i t i s drawn. An experienced banker or a

careful lawyer would immediately recognize that a d r a f t may be rece ivable f o r

immediate availabil i ty

by any

Federal reserve bank,

b u t

t h a t

t h e

funds which

a r e

thus made available will

b e

paid only conditionally

a nd the

payee

of

t h e

d r a f t

o r

other person receiving

t h e

payment will

b e

nevertheless bound

a s endorser o f 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, pointed o u t with much force that a business man, and

X-7454~p

<\S:

7/17/2019 frsbog_mim_v38_0234.pdf


Mr. Albert C. Agnew,


San

Francisco,

C a l .

probably many ba nk er s, examining

t h e

d r a f t

and

knowing that

t h e

p r i v i l e g e

of

drawing these drafts was granted t o member banks only a t t h e d i s c r e t i o n of

t h e Fed era l re se rv e bank of t he ir d i s t r i c t , would probably conclude tha t t h e

Federal reserve bank upon which

t h e

d r a f t

was

drawn

h ad

assumed some responsi-

b i l i t y

i n t h e

mat t e r .

The

drawee Federal reserve bank could probably success-

fully demonstrate that i t s r e s p o n s i b i l i t y was conditioned entirely upon t h e

r ece ip t by i t o f due no t i ce of the drawing of the d r a f t and upon t h e existence

of a

balance

t o t h e

c r e d i t

of the

drawer

o f t h e

draft when

t h e

no t i ce

w a s r e -

ceived.

The

holder

of the

draft , however,

who had

taken

i t f o r

value upon

th e

assurance that t h e amount o f i t nould b e made immediately available to h im a t

any


or

branch would probably f e e l th at t h i s c ondi tio n

a s

to t h e

payment

of the

d r a f t

was

ra ther un jus t .

M r. Clements p u t t h e matter to me somewhat i n t h i s way: Suppose that

y o u were a broker i n Cal i fo rn ia and a man from South Carolina sent you a Fed-

eral Reserve exchange draft containing

t h e

posi t ive statement that

th e

amount

o f i t

would

b e

made immediately available

to y o u a t p a r b y t h e

Federal Reserve

Bank of San Francisco, a n d re ly ing on this assurance y o u accepted t h e draf t

an d placed i t i n your local bank, an d when t h e proceeds became available t o

that bank, released securi t ies

o r

goods

to t h e

person

who had

given

you the

d r a f t ;

and a

week later

y o u

received

a

not ice that

t h e

bank which drew

t h e

d r a f t was insolvent an d that t h e d r a f t h ad been dishonored and was returned t o

you , and you

were obliged

t o

take

i t u p a s

endorser ,

and

when

y o u

consulted

your attorney

y o u

discovered that

t h e

draft which

you had

taken

on a

form

prepared

b y a

Federal reserve bank purported

to b e

issued with

t h e

consent

and

au tho r i ty of a Federal reserve bank was no bet ter than t h e check of an unknown

individual, except

f o r t h e

fact that your bank could obtain immediate credit

f o r i t

from

a

Federal reserve bank, when

a s a

matter

of

f a c t

y ou

usual ly

o b -

tained immediate credit

f o r

checks

of

individuals which

y o u

deposi ted

i n

your

bank an d d id n o t know that banks could n o t obtain immediate credit on such

checks from Fed era l re se rv e banks.

I n

other words,

t h e

fact that many,

i f no t

most, banks give immediate credit

t o

their customers

f o r

checks deposited with

them, means that Federal Reserve exchange drafts differ from ordinary checks

i n t h e

hands

of

individuals only

i n

poin ts

t o

which

t h e

ind iv idual

i s

usually

i n d i f f e r e n t ;

b u t t h e

entire form

of th e

d r a f t

i s

such

as t o

suggest

t o t h e

individual that i t h a s a value which makes i t much more sa f e and des i r ab le .

than t h e check of an ind iv idual .

I was

obliged

t o

confess that

i f I

were

t h e

business

man

which

Mr.

Clements mentioned,

I

should feel that

t h e

Federal Reserve System

h ad a t

leas t

given me good reason t o expect that I would receive money f o r my d r a f t , and had

allowed

i t s

nahe

in a way

l i k e l y

t o

mislead

t h e

ordinary business

man.

While, as I say , in my former memorandum I d id n o t give much considera-

t ion

t o t h e

consequences which might follow from

th e u s e o f

these d ra f t s

b y i n -

dividuals

, iny

view that

th e

cou rts would proba bly tr e a t them

a s

assignments

of

an y funds i n t h e hands of the Fed er al reserve bank upon which the y were temms

largely based upon t h e conviction that t h e court would feel that t h e holder of a

X-7454-p

285

- 2 - February 14, 1933

7/17/2019 frsbog_mim_v38_0234.pdf


M r. Albert C. Agnew, X-7454-p

federal Reserve Bank

of San

Francisco

?

San

Francisco,

C al . ' - 3 -

February

14, 1933

d r a f t

h a d a t

le as t some so rt

of

claim, legal

or

equi table , aga ins t

t h e

Federal

reserve bank,

and

would endeavor

t o

give

t o t h e

d r a f t

a s

much effect

a s

could

h e

given t o i t wi thout v io la t ion of the plain language of the circular under which

i t was

issued.

I t i s , o f

course, entirely within

t h e

bounds

of

p o s s i b i l i t y t h a t

some court would go much f ur th er than ei th er you or I expect and hold that i n -

asmuch a s t h e p r i v i l e g e of issuing these drafts was granted only t o a selected

fe w

banks,

t h e

Federal reserve bank which authorized

t h e

issuance would

b e

held

estopped t o deny that i t ha d funds in i t s hands t o meet t h e d r a f t . Such a

decision would, of course, b e contrary t o t h e plain language o f the c i r c u l a r and

would

b e

agains t

t h e

l i n e

of

dec isi ons which hold th at

a

bank cannot agree

t o

p a y drafts drawn on i t by a customer regardless of whether o r n o t that customer

h a s

funds

on

depos i t ;

b u t , a s w e

know, co ur ts have sonetimes c ar r i ed

t h e

doctrine

of

estoppel

t o

extremes when

i t

appeared that

i t was

necessary

t o d o s o t o p r e -

vent

a

result that amounted

to a n

imposture.

Another point along

t h e

same line

h a s

occurred

to me ,

which

i s

prob-

ably of cons iderable in teres t to yo u . The Federal reserve bank which gives i n n

mediate credit

f o r one o f

these draf ts

may

have

t h e

draf t re turned

b y t h e

drawee

Federal reserve bank after

a

lapse

of

several days,

and may

discover that

t h e

bank which deposited t h e d r a f t h a s f a i l e d a s well a s t h e drawer. I n such a case

t h e

Federal reserve bank which made

t h e

proceeds

of the

draft immediately avail-

able wil l

b e i n t h e

p o s i t i o n

o f the

bus iness

man

which

I

mentioned above.

Of

course, t h e risk which t h e Federal reserve bank takes i s identical with that

which they take upon ordinary checks,

t h e

proceeds

of

which under

t h e

time

schedules became available

i n t h e

reserve account before actual returns

a r e r e -

ceived; b u t t h e time element i s l i k e l y to be much longer i n t h e case of Federal

Reserve exchange drafts than i n t h e case of checks. I realize, however, that

t h e

s i t u a t i o n

o f the


of San

Francisco

a n d t h e

f a c t th at inch

o f i t s business i s done i n t h e grea t open space s ren der a l l elements of transi t

time much more important to you than to us a nd to the Eastern Federal reserve

banks.

I

have been considering your suggestion that

t h e us e of

these draf ts

should

be

discontinued,

and

while

I

have

not had an

opportuni ty

t o

discuss

a l l

phases of the s i tua t ion wi th t h e execut ive off icers o f the bank, I myself have

come

t o t h e

conclusion that

th e

whole subject

i s s o

f a l l

of

doubtful quest ions,

both

of law and

pol i cy , tha t

i t

would certainly

b e

advisable e i ther

t o

discon-

t inue th e us e of th e d r a f t s , o r a t l e a s t t o review t h e s i t u a t i o n c a r e fu l l y and

endeavor

t o

eliminate some

of the

weak spots

i n t h e

system

a s i t

operates

a t

present*

I

bel ieve tha t

t h e u s e o f

these draf ts

was

or ig ina l ins t i tu ted be fore

t h e system of wi re t rans fe rs had been introduced, or certainly before that system

ha d been elaborated t o i t s present extent , and I am s t rongly inc l i ned t o t h e opin-

i o n

tha t

t h e

c i r c u l a r

was

drawn

i n a

time when there

was a

tendency

t o

assume

a l -

most a s a n axiom that a draft drawn b y a bank which was a member o f t h e Federal

Reserve System, and c e r t a i n l y one drawn by a member o f th e System which h a d r e -

ceived permission from

i t s


t o u s e t h e

dra f t s , cou ld

b e a c -

cepted with H tble car no doubt that i t would b e paid; and, therefore, t h e object of the Qystan was

7/17/2019 frsbog_mim_v38_0234.pdf


287

X-7454-p

Mr.

Albert

C.

Agnew,


of San

Francisco,

San

Francisco,

C a l . - 4 -

February

14, 1933

merely t o g ive ava i l ab i l i t y t o a draft which was regarded a s cer ta in ly u l t imate ly

co l le ct ib le . Unfor tunately, present condit ions

no

longe r j u s t i f y

t h e

major prem-

i s e

upon which

t h e

system

of

Federal Reserve exchange drafts

was , I

believe, based

The

opera t ing of f icers

of the

bank tel l

me

that these dr af ts

a re no t

used

to any large extent by our member banks. I n t ransfers f rom one bank t o another i t

i s more convenient t o us e t he wi re t ransfer . I understand that t h e d r a f t s a re

largely used when some individual wishes t o purchase from a country bank exchange

payable a t some point a t which t h e bank has no correspondent. Therefore, as Mr.

Clements pointed

o u t , i t

seems that

t h e

chief

use of the

d r a f t s

a t

-present

i s i n

t h e

very class

of

t r ansac t i ons

i n

which their

u s e i s

l i k e l y

t o

mislead

t h e

public,

a nd i t i s f a r

from improbable th at they

may do

more harm than good when used under

present condit ions.

You understand, of course, that I have n o t discussed this matter with t he

senior of f i cers

of the

bank

and

consequently what

I

have said

i s

merely

an

expres -

sion

of my

ind ivi dua l views;

but I am

very po si ti ve t hat from

t h e

standpoint

of a

lawyer,

i f the use of

these draf t s

i s

continued

t h e

circulars under which they

a re

issued

and the

forms

of the

drafts should

b e

carefully reviewed

i n t h e

l i gh t

of the

experience which we have ha d i n t he past few years . One of th e operat ing off icers

of t he bank suggested to me tha t if no other revis ion was made, t h e form of t h e

draft should

a t

l e a s t

be

revi sed

t o t h e

extent

of

changing

t h e

phraseology which

indicates that

any

Federal rese rve bank wi ll re cei ve th i s dr af t

f o r

immediate

a v a i l a b i l i t y a t pa r and the fol low ing words added: Subj ect ne ve rt he le ss t o p a y -

ment

by t he

Federal reserve bank upon which

i t i s

drawn.

I n

your l e t t e r

to Mr.

Wyatt

y o u

suggest

t h e

adv i sab i l i t y

of

taking

up

with

t h e


t h e

question

of

authorizing Federal reserve banks

t o

discontinue t he us e o f exchange and tr an sf er d r a f t s . Since each Federal reserve

bank a t present h a s power t o withdraw t h e p r iv i l ege of i ss u in g Feder al fieserve e x -

change drafts from

any

member bank,

i t

would seem that each Federal reserve bank

could

a t

present discontinue

the use of

drafts drawn

o n i t

merely

b y

revoking

t he

pr iv i l ege

of

drawing from

a ny a nd a l l o f i t s

members.

One


could

n o t

discont inue

t h e

p rac t i ce

of

giving immediate availabil i ty

t o

drafts drawn

on another Federal res erv e bank without se rio usl y di st ur bi ng t h e condi t ions in the

d i s t r i c t i n which t h e drawee Federal reserve bank was loca ted , a nd i t seems to me

th e Federal reserve banks a r e i n more danger of lo ss from d r a f t s drawn on other F e d -

eral reserve banks than they

a r e

from

t h e us e o f

drafts drawn

on

themselves.

I t

therefore occurs

to me

tha t

a

considerat ion

of

this matter

b y t h e

Governors,

perhaps

by t he

Committee

on

Collections would

b e

appropriate ,

and

af ter such

c o n -

s idera t ion

i t

might

b e

poss ib le

t o

recommend

t o t h e

Board that

t h e

entire system

be discontinued b y a l l Federal reserve banks, o r el se that such modi fica tion s i n

i t might b e made as to eliminate some of th e d i f f i cu l t i e s wh ich are now apparent.

I am

sending

a

copy

of

t h i s l e t t e r

to Mr.

Wyatt,

a s I

know

h e

wi l l

b e

7/17/2019 frsbog_mim_v38_0234.pdf


X-7454-p

Mr.

Albert

C.

Agnew,


of San

Francisco,

San

Francisco,

G a l . - 5 -

February

14, 1933.

i n t e res t ed

i n t h e

subject ;

and I

think that

you

have earned

t h e

thanks

of the

System

by

br ing ing

u p f o r

d iscuss ion

a

po int which very obvio usly needs ca re fu l

review

and

reconsidera t ion .

Very truly yours,

M. G-. Wallace,

Counsel.

MOW E

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