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1032

FEDER L

RESERVE BO RD

WASHINGTON

X-3504

August 16, 1922.

SUBJECT:

Charging

Back of

o v e r ~ n t

Warrants

and

Checks

Previously

Paid

by Treasurer of

United

States.

Dear Sir:

n July 10,

1)22,

the B o ~ r d sent to a+l

Federal

Reserve

Banks a l a t t ~ r

(X-3471), s u j ~ c t

Amendment

to

Check

Collection

Circulars

Suggastad by Tre2l.sury Dep:1rtment

, dealing with the

Treasury s

practice with

regara.

to

the

b.ter ch:lrging back of

Governmant warrants o.nd

checks previously paid by tha

Treasurer

of the U n i t ~ d States. In t h i ~ connection t h e r ~ is enclosed

hareNith, for

your

information, co;y of a l t t r received today

from

the

Sacret;;.ry

of

the Treasury tr:msmitting copies

of

correspondence

b e t w ~ e n

t h e T r e a ~ u r y

D e p ~ r t m e n t ~

the National

City Bank

of

New York, setting f o r ~ ~ 1n f ~ l the

Treasury s

position with

regard

to

the

charging

back

of ·Government items,

the method of h:t.nd.ling

such it;ms Qy the

Federal

Reserve

Banks

· upon

charging back

:.md the respective functions of the Fadernl.

Il.eserva Ea.nks

and

the Treas;ury with regard

to

reclamation on

such items.

Very

truly yours

,

Vice Governor.

(Enclosure)

TO THE GOV3BNORS OF .ALL 11 . R. BLlGS

COPIES

TO

A G 3 N T S ~

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•

c 0 p y

THE

SECI&' TARY OF THE TREASURY

Washington

fit dear

Platt:

X-3504a

August 12,

1922.

Referring

,to previous correspondence

relative

to the Treasury s

practice

with regard

to the

later

charging

back

of

Government warrants and checks pre-

viously paid by the Treasurer

of

the United States, I

enclose

copies

of

recent correspondence between the

Treasury and the National City Bank, consisting

of

the

Bank s

letters of

July S, 1922, July 27, 1922,

and August

7 1922, and

my

letters of July 19,

1922 and

July

29;

1922. These letters set forth in full the

Treasury s

position

with regard to tha later

charging back

of

Government

items,

the method of handling such

items

by

the Federal Reserve Banks upon chargi?;lg back, and the

respective

functions

of the Federal Reserve Banks and

the

Treasury

with

regard to

reclamation

on such

items.

As there has recently been considerable misunderstanding

and difficulty regarding this matter,

mu.ch

of which has

been traceable

to the

action

of

the

National

City Bank,

I would suggest the advisability of sending copies

of

the

correspondence to

l l

the

Federal

Reserve Banks

in

connection

with

your previous

circular let tar on

this

subject dated July 10, 1922.

Bon.

Edmmd Platt,

Very

truly

yours,

Signed) A. w Mellon,

Secretary•

Vice-tJovernor,

Federal

Reserve

£oard,

Washington,

D

C.

5 enclosures.

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THE

NATIONAL CITY BJJ[[

Office of

tha

President

My dear Mr. Mellon:

of

New

York

New York,. August 7, 1922

I have

received

your

l t t r

of July

29th

regard

ing the form of credit advice used by us with

respect

to

w2.I rants

and

checks dravvn

on the

Treasury

of

the

United

S t : ; ~ . t e s o nd I delayed a reply

unti l

for the

~ p o s of our record a o n f i ~ t i o n of your defini-

t ion

of the capacity

in which the

Federal

Reserve

Danl:

acted

n such

matters

was

obtained

through

Mr Strong

who

advised me that a copy of your let ter had been

sent

to him.

That

confirmation

has now been received

s nd

I

am

plea5.,d. to

write

that.

with a ful l concurrence

of

counsel

we have

d e t e ~ i n e d

to

discontinue the

form

of credit advice whieh

was

obj

actionable

to you.

This matter

sto.nds

n

a

much clearer

l ight

tho.n

heretofore

and I want

to e x p r ~ s s my personal

appreciation

for

your cooperation in closing i t

thus

satisfactorily.

Yours

very truly

(Signed) c

E

Mitchell

Hon.

Andrew

W Mellon

S e c r e t ~ r y of

the

T r e ~ s u r y

Washington, D

c

President •

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·

(Copy)

THE SECRETARY

OF

THE TREASURY

Washington

July 29 ,

1922.

X-3504a

Dear

Mr Mi

tchall:

I

I

received

your l t t rs of

July 24 and

July 27,

1922

re-

garding

the form

of credit advice used by the

National

City Bank of

New York with respect to warrants and checks drawn on the Treasurer

of t ~ e United States. I note that your counsel

are

not satisfied on

the question as

to

whether the Federal Reserve Bank acts n a

private

or governmental capacity in handling ~ h items, and that

this

ques

t ion

is

in

their

opinion relevant, for the

reason

that the Federal

Government would not

be barred

by

the

statute

of

limitations and

in

case

of a forged endorsement ~ g h t bring

action

for recovery years

after

the

discovery of

the

forgery

when an

ordinary

i:ndividual

would

be

barred

by the lapse

of

time. The

Federal

Reserve Banks

do

not

pay Government warrants and

checks,

but

cash

them under Treasury

regUlations. The ~ e a ~ r e r of the United States, as the drawee of

Government warrants and checks, makes payment thereof, and

the

Government, rather than

the Federal

Reserve Bank, is the real party

at

interest

when the

question arises

of

recovery

on

warrants

and

checks paid on forged endorsements. I take

i t

to be clear that in

the absence of

a

statute expressly providing

otherwise,

the United

States Government would not be

barred

by the statute of l imitations,

or by

laches, and that

there might therefore be cases where i t

could

bring suit for

recovery

in respect

to

Government warrants and checks

which

had been

paid

on a

forged

endorsement,

evan

though

enough time

might have elapsed to bar recovery by private part ies similarly situa

ted. I

do

not

see

that

there is

any escape from this situation. The

Government is the

sovereign,

and from time immemorial this has been

the rule. I do

not

understand, however,

how

this contingency just i

fies the form of credit advice

used

by t:'le

National

City Bank of

New

York. The

l t t r of

October 3, 1921, from the

Cashier

of the bank

states that this clause reads as follows: -,: All instruments against

the Government of the

United States are credited'subjact to

final

pay

ment by the

Treasury

Department. Therefore, any item which

subsequently

may be

returned

unpaid

to

us

by

the

Department will be

charged

back

against your

account · As the

Treasury

has previously pointed

out,

the

fact

that

warra:J:l,ts

and checks

drawn

on

the Treasurer

of

the

United

States

must

be

credited subject to

f inal

payment

by the Treasury

De

partment is

not

unusual and does not

warrant

any discrimination as

between commercial items and Government

items.

In the nature of the

case, warrants and checks

must

be

subject

to

final

payment by the

drawee, and the terms and

conditions o n ~ i c h

the

Treasurer

of the

United States makes examination and payment are

set

forth in

paragraphs

35 to 38

of

Treasury

Department Circular

No. 176 dated May 15, 1922.

The second sentence

of

the

credit

advice refers

to

returned items, and

the. Treasury s

pract ice

in· this regard has already bean..

ful ly explained

in

previous

correspondence.

Under this practice, as

outlined

in

sub

division

2 of paragraph 37 of r e a ~ r y Department Circular No.

176

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1036

July

29,1922.

-2-

X-3504a

warrants

and checks paid by the Treasurer.

which

are subsequently

found

to

bear a

forged

e n d o r s ~ m e n t or

to bear

any

other material

alteration

or

defect

not discoverable upon

f i rs t

examination,

will

be

returned to

the Federal

Reserve

ank or

national

bank depositary

which

cashed the

item, but the

Federal Reserve

Bank

or

other depositary will not be

e x ~

pected

to

give credit therefor to the Treasurer

unti l i t

has actually

received reimbursement

therefor

from the person l iable on the f o r g e r ~

or alteration. The

term remitting ba. lk

11

as·

used in

this

paragraph

applies to the Federal R e s ~ r v e B ~ Y l k , rather than to the

bank

present

ing

the

i tern to the Federal Reserve :BBnk as has already been explained

in

w

le t te r of

July 19

but

even

as between the Federal Reserve

Bank

and the

bank

which presented the item the practice would be,

as

I

understand i t to

call

upon the presenting bank for

reimbursement,

and

not to

charge i t s account with

the item

under

any arbitrary procedure.

In other words, the 1 terns would not be charged back by the Federal

Reserve Bank

but

would

be

~ r e a t e d

in

substance

l ike collection

items.

In the

event

that

recovery. could

not be made in

this

manner

i t

would

of course, be necessary to

,bring

suit, and in ordinary course wi t

would be

brought

by the United

States,

rather

than

by

the Federal

Re-

serve Bank since the Federal Reserve Banks

act

in

such

matters for

account

of

the United States

a ~ d

the United States is the

real

party

· at

interest.

Under the

procefrare thus established the

items

cannot

properly be said to be

11

charged back , ~ the credit advice used by

the National City

Bank

of

New York

is therefore

incorrect

and mis

l e ~ i n g .

As a matter of fact, sava

for

the one question as to the effect

of lapse of

time

the

procedure

would be

the

same as

with

commercial

items, and

on the

question of the

lapse

of time

i t

would, of course, be

the

policy of the

Treasury

to

rrDve

at

the

ear l iest

possible

moment

after

discovery

of

the forgery or alteration. The Treasury cannot undertake

that

the Government

in these

matters

will be

barred

by lapse of time,

but even assuming a casa where there

might

be a

sufficient lapse of

time to bar private part ies , the

result

would be a suit brought in

regular

marm.er by the

Government of

the Unittid States, and not an

ar

bitrary charging back

of the item through

the channels from which

i t

was

received.

I

wish

that

you would

consider the

matter

further in the l ight

of the considerations suggested by this

let ter

and

advise

me i f i t is

not possible under

the

prevail ing

conditions

to

discontinue the use

of

the credit advice

in

question.

n

this

connection

I shQu.ld l ike to

refer to

your

Cashier's

le t ter

of

December

1 ~ ,

1921

from

which

the

Treasury

upderstood that notwi thsta.nding

the point

raised by counsel

the

N a t i o n ~ l City Bank

wou,ld

change i t s forms

as

soon

as the Federal

Reserve : B ~ changed

i t s circular

• .

Yours

very truly,

(Signed) A.W. Mellon,

Secretary.

C. E. Mitchell,

Esq.,

President,

The

1

Nat1onal City Bank of New York

New

York

N.

Y.

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X-3504C .

THE

N TION L CITY B NK

Office of

the

President

Hon

• ..1\ndrew W. Mellon

Secretary of the Treasury,

Washington D. c.

My dear

Mr. Mellon:

of

New

York

New York

July 27 1922·.

1037

Referring further to your

let ter

of July 19, regarding the

form

of

advice whioh

we

use when remitting

the

proceeds of Government

warrants

and checks paid by· the Treasury of the United States,· I

have conferred with our

counsel,

upon whose d e ~ i n i t e advice you

will

realize

that we mu.st rely. I had hoped that your let ter would

definitely close the

matter in

their minds

but

i t appears that

While i t

did

dispose

of

the

f i rs t

q u ~ s t i o n raised in our

let ter

of

July

3, i t

does not seem

to

have

satisfied

them on the question as

to whether the Federal Reserve

:Bank

acts n a

private

or Governmental

capacity when

i t

pays these items.

: This

question

in

their

opinion

is

relevant for

the

reason

that by;dacision of ·the Supreme Court, the Federal Government

is

not

barred

~ Y

the

StA-tute

of

LimHations, and

in

case

of

a forged

prior

e n d o r s e ~ e n t

might,

i f

i t

saw

f i t bring

:m action for r::covery

several :years

after i t

otherwise would be b_\.rred. Consequently

if the

federal

Reserve a ~ acts as a Governmental

agent

in this

r ~ s p e c t :

i t would have the

san1e p o ~ v e r ::.nC. we ~ \ r e

::..dvised that i t

probably is not p o s s i l ~ for tha Government to depl·ive i tself

of

this power

without express

law to that effect.

i

feel

sure you understand the difficulty of our position.

We do not want you to interpret us as doubting ~ i t h e r th3 good n -

tentions.

t

)our

Department

or

of

the Federal

Reserve

Ba11k

:md

we

would be only too

glad

to acquiesce and

discontinue the

use of

this

stamp -bu t we do not wish

to

assume

any

unnecessary risk with.

re-

spect to collection items •

• .If you have at hand ny decisions or

opinions

showing thJ.t

the Fdderal' Reserve :Sank

in

receiving

this

type of paper for

col-

lection

is

acting in a private ~ d not a Governmental

capacityt

so that the usual commercial laws will apply between this Barik

and i t I will be very glad to recaive them.

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X 3504a

New Y o r l ~ -

.:;·uly

27

1922.

..

2 .-

On

raceipt

of

your

reply

to

this

let ter I

can

assure

you the

nutter will

be def ini te ly closed.

Yours

very

truly

SigntJd) C. E. Mitchell

President

1038

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~ · ·

X 3504a

·THE SECRETARY

OF

THE TBEASURY

Washington

PERSONAL

·

July 19,

1922.

My dear'

JK:r

·Mitchell:

I have received

from your

cashier a l e t t e r

dated July

,

1922, with.further reference to a form of

credit

advice used

by

the National City

~ a t i k

of New York which

contains

an

objectionable

statement ng.

rding

the charging back of Government warrants and

checks

previously paid by

the Treasurer of

the United States.

'Ihis

credit advice

has

result3d in many diff icult ies with

foreign banks,

and

has been tha

cause of

some

embarrassment to the Government of

the

United

States.

I had supposed

that

i t s use was discontinued

some

time

ago

by your bank,

but

i t

noV'T

appears

that

i t

is

s t i l l

in

use and that the bank does not yet

regard

the

question

as set t led .

The correspondence has been

going

on since early las·i; f a l l and

thera

have

been several l e t te rs from yc1u· cashier,

particularly

l e t te rs d::::.ted December 15, 1921, March 16, 1922, and June 21, 1922,

indicating that the National City Ecnk would

discontinue

the usa

of

i t s

stamp as soon

as

the Federal R e s e ~ v ~ ~ n k of New York re-

vised i t s check

collsction

circ1:,J. . .r. Thi:3 revision was made a

couple of months ago, gnd thd F Jci;;r :.1 R;;serve , ~ a n k at th2.t time ad-

vi

sad the

Treasury

thJ..t tho Ns..tion::J. City BDnk had ::>.ctually given

up the obj sction::1. tle form of ad.vic<3. 1ipp;;..rently this J:u.s not been

done. In these

circtunstancas

I should

ap:praciate

i t i f

you

would

give

the m : ~ t t e r

your

personal

: : ~ . t < o . : m t i o n ,

in

order

that

i t

T JE'.::f

be

sett led once ~ for a l l .

The

Treasuryrs

procedure

in

r a s p ~ c t to

returned items has

been many t±mes explained in le t tars to the N ~ t i o n n l City Eank, and

the regulations of the

Treasury

~ n d of the Federal FBaerve Bank of

New

York have been revisad in order to stata th.3 s i

u2.tion

in as

clear and

ddfini te

terms

as

possible. As

to

the

spacif ic

qu.,;·stions

raisad

in

your

Cashier's le t te r

of July

6,

the

tarm remitting bank''

USdd

in

Section 37 (2) of

Treasury Department Circular

No. 1{6,

as amended and

supplemented

May 15, 1922, means the Federal

Reserve

B:mk rather

than the

bank which has

transmitted the

paper to

the

Federal Reserva Bank.

On

the second

question,

as

to

w ~ e t h e r

the

Reserve

Banks in dealing with this type of paper

are

acting in a

Governmental or privat.:l capacity , I do not quite understand. what

is me.mt nor wh::.t

rel:.:.tion

the

inquiry

has to the

matter

under

discussion.

I t

is c lear , of course,

that under

Section

15

of

the Federal Reserve Act,

the

Federal Reserve

~ s act as

d e p o s ~ ~

taries and f iscal agents of the United

States,

~ d their

duties

as

depositaries

and

f iscal agents

in respect

to the

payment of Gov-

e ~ e n t w ~ r n t s

and

chacks are set

forth

in

the

provisions

of. the

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July

19, 1922.

X 3504a

- 2 -

aforesaid Treasury Department Circular No. 176. Tha

Federal

R ~ s e r v e anks

also

act

for

thair

member b::mks

in

connaction

with

1010

the

collection of

checks and simil:::Lr

items, ;; nd thair

responsibili t ies

n this r e ~ r d are

usually

set forth

in

their

own c ~ r c u l a r s .

Very truly

yours,

Signed) A. W. Mellon,

Secratary.

C. E. Mitchell,

Esq.,

President,

The N:::Ltional City

Batik

of

New

York,

New York,

N. Y

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..

{Copy

THE NATIONAL. CITY BANK OF NEWYORK

New

York, July S, 1922.

In

~ e p l y i n g

please quote init ials

C:BL-T

· X-3504a

BOn, A. w. Mellon,

Secretary of the Treasury,

Washington, D. C.

Dear Sir:

RE:-Checks and warrants drawn

on

the

r e a ~ r a r of

the

United States.

We are glad to acknowledge your letter

of

June 1922,

g1v1ng

assurance

that

i t is

your intention to treat checks and

warrants drawn

on

the Government

in

accordance with the

usual

commercial practice, and

referring us

to

Sections

35

to 38 of

Treasury Department Circular 176,

dated

May 15, 1922.

t

is gratifying

to

tl'lis Ban:: to

note

your stand with

respect

to

the

p9.ymant

of

Government checks and

warrants.

However,

under present banking

pract-ice,

as .you know, a great proportion

of this paper is

collected

through

tue Federal

Reserve Banks,

which in certain respects act as an agency

of

the G o v e r ~ ~ e n t .

This has raised

t w o ~ q u e s t i o n s :

first , w ~ e t h e r the remi tting bank

referred to

in

Section 37 2) is to

be

interpr0ted

as

the

Federal

Reserve B a n k ~ or the bank which has transmitted

the

paper to the

Reserve Bank, and second, whether

the

Reserve Banks

in dealing

with tnis

type

of paper are acting in a sovernmental or

private

capacity?

V Te

would

like

very

much

to conform

to

your

desire

and

discontinue

at

once

the

use of the

stamp

referred

to

in

former

correspondence, which

is

subject to so much criticism from our

foreign correspondents. Our counsel. however,

do

not feel free

to advise that coursa

until they

know

the

attitude of

the

Depart

ment

of the

Treasury on the points mentioned.

Yours vQry

truly,

(Signad)

N.

c. Lenfestey,

Cashier.

10lt

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