Farmers & Merchants Bank of Monroe v. Federal Reserve Bank of Richmond
Headline: North Carolina law allowing state banks to pay presented checks by exchange drafts is upheld, limiting federal reserve banks’ duty to collect at par and protecting local banks’ income.
Holding: The Court held that North Carolina’s statute allowing drawee banks to pay presented checks by exchange drafts (unless the drawer objects) does not conflict with the Federal Reserve Act or the Federal Constitution, and is valid.
- Allows state banks to accept payment by exchange drafts unless the drawer objects.
- Limits federal reserve banks’ obligation to collect checks at par from nonconsenting state banks.
- Protects small banks’ exchange income and reduces forced cash holdings.
Summary
Background
A group of North Carolina state banks sued after the Federal Reserve Bank of Richmond began refusing exchange drafts and returning checks it considered dishonored. North Carolina had passed a law letting a drawee bank, unless the drawer objects on the check’s face, pay checks presented through a Federal Reserve Bank, the post office, or an express company by an exchange draft on its reserve deposits. The state trial court enjoined the Federal Reserve Bank, but the State Supreme Court reversed and the case reached the United States Supreme Court.
Reasoning
The central question was whether the state law conflicts with the Federal Reserve Act or the Constitution. The Court said the statute does not violate the Constitution’s tender clause because it presumes the drawer’s consent unless otherwise indicated, and it is a lawful exercise of the State’s power to protect bank solvency. The Court rejected due process and equal protection challenges. It also held the Federal Reserve Act does not require reserve banks to receive and collect every presented check at par; the Act uses “may receive,” and section 16’s par requirement applies to member-bank deposits. The Hardwick Amendment’s allowance for reasonable exchange charges further showed Congress did not intend universal compulsory par clearance.
Real world impact
As a result, North Carolina banks may be paid by customary exchange drafts in the specified situations unless a drawer requires cash. Federal reserve banks are not compelled by the Act to collect every check at par from nonconsenting state banks, which preserves state banks’ exchange income and reduces pressure that might force them to hold more cash.
Dissents or concurrances
Two Justices dissented. Their views are noted but not elaborated in detail in the opinion, and they disagreed with the Court’s conclusions about federal duties under the Reserve Act.
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