Farmers Merchants Bank of Monroe v. Federal Reserve Bank of Richmond, Va

• Citation: 43 S.Ct. 651,262 U.S. 649,67 L.Ed. 1157,30 A.L.R. 635
• Decision Date: 11 June 1923
• Docket Number: No. 823,823
• Parties: FARMERS' & MERCHANTS' BANK OF MONROE, N. C., et al. v. FEDERAL RESERVE BANK OF RICHMOND, VA
• Court: United States Supreme Court

262 U.S. 649

43 S.Ct. 651

67 L.Ed. 1157

FARMERS' & MERCHANTS' BANK OF MONROE, N. C., et al.

v FEDERAL RESERVE BANK OF RICHMOND, VA.

No. 823.

Argued April 30 and May 1, 1923.

Decided June 11, 1923.

[Syllabus from pages 649-651 intentionally omitted] Messrs. A. W. Smith, of Atlanta, Ga., and John J. Parker, of Charlotte, N. C., for petitioners.

Mr. Henry W. Anderson, of Richmond, Va., for respondent.

Mr. Justice BRANDEIS delivered the opinion of the Court.

The Legislature of North Carolina provided by section 2 of chapter 20, Public Laws of 1921, entitled 'An act to promote the solvency of state banks':

'That in order to prevent accumulation of unnecessary amounts of currency in the vaults of the banks and trust companies chartered by this state, all checks drawn on said banks and trust companies shall, unless specified on the face thereof to the contrary by the maker or makers thereof, be payable at the option of the drawee bank, in exchange drawn on the reserve deposits of said drawee bank when any such check is presented by or through any Federal Reserve Bank, post office, or express company, or any respective agents thereof.'

Section 1 authorizes banking institutions chartered by the state to charge a fee not in excess of one-eighth of 1 per cent. on remittances covering checks, the minimum fee on any remittance therefor to be 10 cents. Section 4 exempts from the operation of sections 1 and 2 all checks drawn in payment of obligations to the federal or the state government. Whether this statute conflicts with section 13 of the Federal Reserve Act (Act Dec. 23, 1913, c. 6, 38 Stat. 251, 263, as amended by Act Sept. 7, 1916, c. 461, 39 Stat. 752, and Act June 21, 1917, c. 32, § 4, 40 Stat. 232, 234 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 9796]) or otherwise with the federal Constitution is the question for decision.

The legislation arose out of the effort of the Federal Reserve Board to introduce in the United States universal par clearance and collection of checks through Federal Reserve Banks. See American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, 256 U. S. 350, 41 Sup. Ct. 499, 65 L. Ed. 983. The Federal Reserve Bank of Richmond serves the Fifth Federal Reserve District, which includes North Carolina. Upon the enactment of this statute the bank gave notice that it considered the legislation void under the federal Constitution; that, when presenting checks to North Carolina state banks for payment over the counter, it would refuse to accept exchange drafts on reserve deposits as required by section 2; and that it would return as dishonored checks for which only exchange drafts had been tendered in payment. Some checks were returned thus dishonored, and to enjoin such action this suit was brought in a court of the state by the Farmers' & Merchants' Bank of Monroe and 11 other state banks. Two hundred and seventy-one more joined later as plaintiffs. So far as appears, none of them was a member of the Federal Reserve system or was affiliated with it. The trial court granted a perpetual injunction. The Supreme Court of the state reversed the decree (183 N. C. 546, 112 S. E. 252), and the case is here on writ of certiorari (261 U. S. 610, 43 Sup. Ct. 361, 67 L. Ed. ——). Defendant admits that, if the North Carolina statute is constitutional, plaintiffs are entitled to an injunction.

To understand the occasion for the statute, its operation, and its effect, the applicable banking practice must be considered.¹ Par clearance does not mean that the payee of a check who deposits it with his bank for collection will be credited in his account with the face of the check if it is collected. His bank may, despite par clearance, make a charge to him for its service in collecting the check from the drawee bank. It may make such a charge, although both it and the drawee bank are members of the Federal Reserve system; and some third bank which aids in the process of collection may likewise make a charge for the service it renders. Such a collection charge may be made, not only to member banks by member banks, national or state, but it may be made to member banks also by the Federal Reserve Banks for the services which the latter render. The collection charge is expressly provided for in section 16 of the Federal Reserve Act (38 Stat. 268 [Comp. St. § 9799]), which declares that:

'The Federal Reserve Board shall, by rule, fix the charges to be collected by the member banks from its patrons whose checks are cleared through the Federal Reserve Bank and the charge which may be imposed for the service of clearing or collection rendered by the Federal Reserve Bank.'- Par clearance refers to a wholly different matter. It deals, not with charges for collection, but with charges incident to paying. It deals with exchange. Formerly, checks, except where paid at the banking house over t e counter, were customarily paid either through a clearing house or by remitting, to the bank in which they had been deposited for collection, a draft on the drawee's deposit in some reserve city. For the service rendered by the drawee bank in so remitting funds available for use at the place of the deposit of the check, it was formerly a common practice to make a small charge, called 'exchange,' and to deduct the amount from the remittance. This charge of the drawee bank the Federal Reserve Board planned to eliminate, and in so doing to concentrate in the 12 Federal Reserve Banks the clearance of checks and the accumulation of the reserve balances used for that purpose. The board began by efforts to induce the banks to adopt par clearance voluntarily.² The attempt was not successful. The board then concluded to apply compulsion. Every national bank is necessarily a member of the Federal Reserve system, and every state bank with the requisite qualifications may become such. Over members the board has large powers, as well as influence. The first step in the campaign of compulsion was taken in the summer of 1916, when the board issued a regulation requiring every drawee bank which is a member of the Federal Reserve system to pay without deduction, all checks upon it presented through the mail by the Federal Reserve Bank of the district. The operation of this requirement was at first limited in scope by the fact that the original act (section 13) authorized the Reserve Banks to collect only those checks which were drawn on member banks and which were deposited by a member bank of another Reserve Bank or the United States Few of the many state banks had then elected to become members. In September, 1916, section 13 was amended, so as to authorize a Reserve Bank to receive for collection from any member (including other Reserve Banks) also checks drawn upon nonmember banks within its district. Thereby the Federal Reserve Board was enabled to extend par clearance to a large proportion of all checks issued in the United States. But the regulation (J) then issued expressly provided that the Federal Reserve Banks would receive from member banks, at par, only checks on those of the nonmember banks whose checks could be collected by the Federal Reserve Bank at par. It was recognized that nonmembers were left free to refuse assent to par clearance. By December 15, 1916, only 37 of the state banks within the United States, numbering about 20,000, had become members of the system, and only 8,065 of the state banks had assented to par clearance.

Reserve Banks could not, under the then law, make collections for nonmembers. It was believed that if Congress would grant Federal Reserve Banks permission to make collection also for nonmembers, the board could offer to all banks inducements adequate to secure their consent to par clearance. A further amendment to section 13 was thereupon secured by Act of June 21, 1917, c. 32, § 4 (Comp. St. 1918, Comp. Ann. Supp. 1919, § 9796), which provided, among other things, that Federal Reserve Banks:

'Solely for the purposes of exchange or of collection, may receive from any nonmember bank * * * deposits of * * * checks * * * payable upon presentation: * * * Provided, such nonmember bank * * * maintains with the Federal Reserve Bank of its district a balance sufficient to offset the items in transit held for its account by the Federal Reserve Bank.'

To this provision, which embodied the legislation proposed by the Federal Reserve Board, there was added while in the Senate, another proviso, relating to the exchange charge, now known in a modified form as the Hardwick Amendment, which declares:

'That nothing in this or any other section of this act shall be construed as prohibiting a member or nonmember bank from making reasonable charges, to be determined and regulated by the Federal Reserve Board, but in no case to exceed 10 cents per $100 or fraction thereof, based on the total of checks and drafts presented at any one time, for collection or p yment of checks and drafts and remission therefor by exchange or otherwise; but no such charges shall be made against the Federal Reserve Banks.'

Thus a Federal Reserve Bank was authorized to receive for collection checks from nonmembers who maintained with it the prescribed balance, and strenuous efforts were then made to induce all state banks to so arrange. But the law did not compel state banks to do this. May refused; and they continued to insist on making exchange charges. On March 21, 1918, the Attorney General (31 Op. Attys., Gen. 245, 251) advised the President:

'The Federal Reserve Act, however, does not command or compel these state banks to forego any right they may have under the state laws to make charges in connection with the payment of checks drawn upon them. The act merely offers the clearing and collection facilities of the Federal Reserve Banks upon specified conditions. If the state banks refuse to comply with the conditions by insisting upon making charges against the Federal Reserve Banks, the result will simply be, so far as...