262 U.S. 649 (1923), 823, Farmers & Merchants Bank of Monroe, North Carolina v. Federal Reserve Bank of Richmond, Virginia

Docket Nº:No. 823
Citation:262 U.S. 649, 43 S.Ct. 651, 67 L.Ed. 1157
Party Name:Farmers & Merchants Bank of Monroe, North Carolina v. Federal Reserve Bank of Richmond, Virginia
Case Date:June 11, 1923
Court:United States Supreme Court

Page 649

262 U.S. 649 (1923)

43 S.Ct. 651, 67 L.Ed. 1157

Farmers & Merchants Bank of Monroe, North Carolina


Federal Reserve Bank of Richmond, Virginia

No. 823

United States Supreme Court

June 11, 1923

Argued April 30, May 1, 1923




1. Many state banks, in satisfying checks drawn upon them by their depositors and sent through other banks for collection, were accustomed to remit by draft on their reserves elsewhere, and to make a small charge, called exchange, deducted from the remittance. The Federal Reserve Board, and the federal reserve banks, being forbidden to pay exchange charges but believing it their duty to accept checks on any bank for collection and to make par clearance and collection of checks universal throughout the United States, adopted the practice of causing checks drawn on state banks which refused par clearance to be presented to such banks at the counter for payment in cash. To protect North Carolina banks from serious loss of income which would ensue from this practice, both through reduction of exchange charges and through transference of income-producing assets to their vaults, the legislature of that state enacted, (Pub.Laws 1921, c. 20) that any check drawn

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upon a local bank (other than checks in payment of obligations to the federal or state governments) unless specified to the contrary on its face by the maker, should be payable, at the option of the drawee, in exchange drawn on the drawee's reserve deposits when such check was presented by or through any federal reserve bank, post office, or express company or their agents, and further that state banks might charge a fee, within specified limits, on remittances covering checks.


(a) That the North Carolina Act does not violate the provision of the federal Constitution, Art. I, § 10, cl. 1, which prohibits a state from making anything except gold and silver coin a tender in payment of debts. P. 659.

(b) That it does not deprive the respondent Federal Reserve Bank, without due process of law, of its right to engage in the business of collecting checks payable on presentation within its district (which it claims it may make a source of revenue), nor of its liberty of contract, by compelling it to accept payment in drafts, good or bad, and so driving it from that branch of business. The statute is not to be construed as authorizing payment in bad drafts, and is an exercise of police power not offensive to the due process clause. P. 660.

(c) That it does not deprive the Federal Reserve Bank of equal protection of the laws by obliging it to accept payment in drafts while leaving other banks free to demand cash, since it was reasonable classification for the legislature to limit the regulation to the particular existing condition sought to be remedied. P. 661.

(d) That it does not conflict with duties imposed by Congress on the Federal Reserve Board and the federal reserve banks. P. 662.

2. Neither § 13 nor any other provision of the Federal Reserve Act imposes on reserve banks any obligation to receive for collection checks for which it is impossible to obtain payment except by incurring serious expense, as by presenting them by special messenger at a distant place. P. 662.

3. In declaring that reserve banks may receive checks on nonmember banks "payable on presentation," the Federal Reserve Act, § 13, as amended, would seem to imply that the checks must be payable in cash or in such funds as are deemed by the reserve bank an equivalent. P. 663.

4. The federal reserve legislation does not impose on the Federal Reserve Board or the federal reserve banks a duty to establish in the United States a universal system of par clearance and collection of checks. P. 664.

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5. The contention that Congress imposed this duty is irreconcilable with the provision of the Hardwick Amendment to § 13 (Act of June 21, 1917, c. 32, § 4, 40 Stat. 232) allowing members and affiliated nonmembers to make a limited charge (except to federal reserve banks) for "payment of checks and . . . remission therefor by exchange or otherwise." P. 666.

6. The Hardwick Amendment in no way interferes with the right of a depositor in a nonaffiliated state bank to agree with his bank that his checks in certain cases (unless otherwise indicated on their face) should be payable, at its option, by exchange. P. 667.

183 N.Car. 546 reversed.

Certiorari to a decree of the Supreme Court of North Carolina reversing a decree which perpetually enjoined the respondent Federal Reserve Bank from refusing to accept payment of checks on petitioner banks in exchange drafts, as permitted by a North Carolina statute, and from returning, as dishonored, checks for which payment had been tendered only in that way.

BRANDEIS, J., lead opinion

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

The Legislature of North Carolina provided by § 2 of c. 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

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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 [43 S.Ct. 653] excess of one-eighth of one percent on remittances covering checks, the minimum fee on any remittance therefor to be 10 cents. Section 4 exempts from the operation of §§ 1 and 2 all checks drawn in payment of obligations to the federal or the state government. Whether this statute conflicts with § 13 of the Federal Reserve Act (December 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) 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. 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 § 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 eleven 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

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injunction. The supreme court of the state reversed the decree, 183 N.C. 546, and the case is here on writ of certiorari, 261 U.S. 610. 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 § 16 of the Federal Reserve Act (38 Stat. 268), 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.

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