people of the States because they retained all power not expressly taken from them. It was agreed that certain express powers should be absolutely vested in the National Government alone. Certain powers were left vested in the States alone, other powers were to be exercised by either the Federal Government or the States. To carry out these ideas certain powers were forbidden to the National Government, other powers were forbidden to the State Governments. The powers vested in the Federal Government exclusively refer to foreign relations of the country-to such subjects as the maintenance of an army and navy, an exclusive regulation of currency, commerce, bankruptcy, post-office, weights and measures, and management of the Federal machinery necessary to enforce these powers. On the other hand the States alone were vested with the ordinary powers of Internal Government covering local, civil, criminal and private law relations. They are primarily bound to maintain local law and order and to properly protect and maintain local institutions. Concurrent powers conceded to the States and the Federal Government cover taxation, certain legislation where the State has the right to enforce laws until the Federal Congress has enacted similar and general legislation which supercedes the State enactments, and judicial powers where Congress might have legislated but has not done so within its constitutional limitations. The intention of the constitution makers was to repose all necessary authority in the Federal Government to deal as a nation with foreign nations, and through the constitutional powers granted to regulate properly such differences as might arise between the several States of the Union, while to the States and the citizens of the States were left all other private local matters of commercial and social interest. Advantages of the Dual Form of Government The powers granted to the Federal Government as incorporated in the warp and woof of our constitution are delegated powers and are defined and specifically enumerated in the constitution. The Federal Government has no authority other than that expressly set out in that written constitution. Whenever any question arises whether the Federal Government has power, the burden of proof is upon the Government to show that the power was expressly granted or necessarily implied because it is like a great corporation-it has no authority other than is specifically expressed, while on the other hand the opposite rule prevails in the case of a State. This is emphasized by many decisions of the Supreme Court. Every citizen occupies a double allegiance. He is a citizen of the United States, and is gov erned by the Constitution and laws of the United States. He is also a citizen of the State in which he resides, and is subject to the constitution and laws thereof. The Constitution makers, therefore, command the highest respect because they were able to frame a document, which, with the interpretation given its provisions by men of the Marshall, Story and Webster type has been effective in directing, with little friction, the course of this nation. It is a mystery only to those who do not understand our institutions, "how our Federal Government can exist when it has no right to interfere with the State or the individual citizens of a State outside of its constitutional limitation, and that it cannot interfere in any way to correct political or social wrongs which may exist in a State, unless the power has been expressly granted through the constitution to exercise its authority." In a nutshell the whole theory and trend of our dual government is that local government must be preserved for local affairs and Federal Government for National and international affairs only. Dangers of Centralized Federal Control Germany today is possibly the highest type of modern centralized government. Its citizens are component parts of a great machine, which plans, provides for and regulates the domestic concerns of its people. It is certainly far from our American ideals to Germanize this nation, and yet are we not sitting idly by in this intense commercial struggle gently complaining of the trend of things, desiring only cash money for "bread and the circus," unthinkingly asking for more centralizing Federal legislation? Are we not forgetful that nations thrive and grow strong only as citizens individually think straight, are self-reliant and voluntarily follow conservative lines of public and private living? We should not lose sight of the old constitutional land-marks. As good citizens it becomes our duty to speak out against selfish innovations that amount to constitutional revolutions. If we are going to re-cast our system of dual government, let us do it in a constitutional way, by amending this fundamental charter in the manner therein provided, not by insidious legislative enactments. United States Senator Lawrence Y. Sherman of Illinois, in an address on "The Need of Constitutional Restraints" said recently: "I am not of those who believe that a republican government ought to exist without constitutional restrictions on popular action. Sometimes it is precipitate action. It is against inadvised and crudely digested public action that many of the constitutional restrictions are directed. I believe such limitations are wise." SOME LEGAL ASPECTS AND IMPORTANT RECENT RULINGS REGARDING CABLE TRANSFERS AND RE-EXCHANGE Of the New York Bar (EDITOR'S NOTE: The author of the following article has had special opportunity, as counsel for a number of banking institutions of New York, to study the legal and technical questions arising out of foreign exchange transactions which have assumed greater importance because of the international problems created by the European war and the marked development of our foreign trade relations. Mr. Patterson dwells upon the significance of important recent cases and new guiding rules affecting foreign exchange, particularly those presented in the case of Strohmeyer & Arpe Company against the Guaranty Trust Company of New York wherein the contentions of the defendant were sustained by the Appellate Division of the New York Supreme Court.) The subject of foreign exchange is a very broad and intricate one and its mechanism is not generally understood by the merchants of this country. While much has been written upon the subject from a theoretical standpoint, comparatively few cases have found their way into the courts of this country for adjudication, and still fewer have eventuated in opinions by the judges of our higher courts. The fundamental law, however, of foreign exchange is as old as the law of merchants, and the custom governing the subject has been a matter of development since the earliest times. The Bible records an early financial transaction wherein Abraham purchased a burial ground for his wife Sarah: Book of Genesis, Chapter XXIII. Verse 16: "And Abraham weighed to Ephron the silver, which he had named in the audience of the sons of Heth, four hundred shekels of silver, current money with the merchant." The law of negotiable instruments has been construed by the courts of this country in thousands of decisions, eventually resulting in the enactment of the Negotiable Instruments' Law in the State of New York in the year 1897, which law has been substantially adopted in most of the other important States of the Union since that time. Decisions, however, appertaining to foreign exchange, as such, have been limited in their number, due, probably to the fact that the bankers of this country in the past have been reluctant to permit differences of opinion on the subject to drift into the courts and receive at their hands judicial settle ment. Important Decisions Relating to Cable Exchange and Re-exchange As a result of the unwillingness of the merchants and bankers of this country to submit their differences on questions of exchange as they arose to the courts for judicial construction, there is a pronounced dearth of authoritative legal interpretation of the subject. In view, therefore, of the infrequency of legal definition of questions of foreign exchange, it is a matter of comment and some coincidence that in the last few months the higher courts of this State have had occasion to pass upon two important features of the subject. Both opinions were rendered by the Appellate Division of the First Department of the State of New York-one involving cable exchange; the other, re-exchange. These two decisions are of peculiar significance at this time in view of the increased importance of foreign exchange as a hanking feature since the outbreak of the European war, inasmuch as exchange has so important a part in financing the credits of the European belligerents, as well as of the other nations of Europe, which have remained neutral, and have been obliged to turn from England, France and Germany to this country for some of their financial needs. A Case and Decision of First Impression In the case of the Strohmeyer & Arpe Company against the Guaranty Trust Company of New York, reported in New York Law Journal, March 25, 1916, the issue involved between the parties, briefly stated, was as follows: The plaintiff had purchased from the defendant Trust Company 75,000 Italian lire, as of October 23, 1914, to be remitted by cable to their clients in Genoa. The defendant, in consideration of the purchase at the prevailing rate on that day for lire, namely 5.20, agreed to effect the payment of 75,000 lire through its correspondent in Genoa, the Credito Italiano, to the person designated by the plaintiff to receive the payment. On the same day the defendant cabled its correspondent, the Credito Italiano, at Genoa, to effect the payment of the lire, but for some unknown reason the cable never reached Genoa. Some two weeks later the plaintiff called to the defendant's attention the fact that the credit had not been effected at Genoa, and thereupon the defendant repeated its cable and the payment was made by its correspondent in Genoa on the following day, November 11, 1914. Between October 23 and November 11, 1914, the rate of exchange had depreciated against Italian lire so that on the latter date the rate for Italian lire was 5.385, as against a rate of 5.20 on October 23d. Loss or Difference in Rate of Exchange Immediately after the credit was effected in Genoa, on November 11, 1914, the plaintiff presented a claim to the defendant for a sum of money equal to the difference in value, measured in American dollars, between 75,000 lire on October 23, 1914, and its purchase price on November 11, 1914. The claim of the plaintiff was based on its theory that the difference in value of 75,000 lire, pending its actual payment by cable in Genoa, was a loss or damage which should fall upon and be sustained by the defendant. The defendant offered to pay the interest which had accrued on the 75,000 lire in the Credito Italiano at Genoa between October 23 and November 11, 1914, refusing, however, to accede to the demand made for the difference in the rate of exchange. The material facts at issue were stipulated, leaving the question one of law for the Court to decide. The matter came up for trial at a Trial Term of the Supreme Court, resulting in an opinion by the Trial Term that the loss or difference in rate of exchange, as well as the accrued interest, should be met by the defendant Trust Company. The opinion of the lower court, however, was founded upon the theory that the contract between the parties was one for the transmission of money; that the defendant had contracted to transmit on October 23d the then value in American dollars of 75,000 lire; and that it did not until two weeks later actually deliver for the plaintiff's account something less than that. The Appellate Division, by Mr. Justice Scott, in reviewing the lower court's opinion, pointed out the erroneous reasoning of the trial judge, reversing his decision and sustaining the contention of the defendant trust company that it was liable only for the interest which the 75,000 lire already had earned in Genoa, pending the actual receipt of the cable. Definition of "Cable Transfers" In passing it might be well to point out that both parties had agreed upon a definition of "cable transfers," which was accepted by the Court, and is as follows: "Cable transfers mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary described in the cable; and the seller of a cable transfer contracts that the cable directing the transfer will be delivered to the cable company upon the day of purchase unless otherwise indicated in the contract." Cable Transfer a Contract For Sale of Credit The Appellate Division, in criticising and reversing the opinion of the Court below, uses the following language: "We are of opinion that this decision rests upon an erroneous view of the nature of a cable transfer, and that the supposed analogy of a common carrier transmitting merchandise is not appropriate, for there was here no failure to deliver in Genoa the 75,000 lire contracted for, but only a delay in making such delivery. Technically speaking there is a marked distinction between issuing a draft, or traveler's check, or transferring money by cable, and receiving money for actual transmission. * The very term 'cable transfer' precludes the idea that an actual transmission of money is contemplated. What the seller of a cable transfer does is to sell a sum of money, or a credit for a sum of money, payable at the place indicated in the contract. What the buyer does is to purchase a credit available at such place. * * * As we regard the transaction, it was complete on October 23d when the cable transfer was sold. The money paid for it became defendant's money, against which plaintiff received defendant's obligation that payment would be made in Genoa." It will be seen, therefore, that the higher courts of New York State have defined a cable transfer to be a contract for the sale of a credit The Recent Case Involving Questions of The case involving re-exchange arose in the action of Gross against Mendel, reported in the New York Law Journal, February 16, 1916. The opinion of the Appellate Division is written by Mr. Justice McLaughlin. In this action the plaintiffs were citizens of New York State and the defendants were doing business in London. It seems the defendants, at London, England, accepted a bill of exchange drawn by and payable to the plaintiffs,、 on August 15, 1914, at Leipzig, Germany, for a certain number of marks, German money. When the bill of exchange was presented for payment at the time and place where the same was payable, it was not paid and was thereupon protested. The plaintiffs brought an action to recover damages from the defendants, alleging, as the measure of damages for the failure to pay the accepted bill, the value of the German marks converted into United States money, on the basis of the par of exchange. The defendants contended that the recovery should be founded upon the rate of exchange prevailing at the time of trial. The Appellate Division, however, refused to take either view of the case, and held that the facts, which had been stipulated by the parties, created a situation that ordinarily would have involved a question of re-exchange had it not been for the existence of the European war, which prevented the plaintiffs, at the time of the dishonor of the bill, from re-drawing in Berlin on the defendants in London for the corresponding amount of pounds Sterling on the date of dishonor. The Appellate Division refused to follow the rule, which would seem to sustain the contention of the defendants, laid down in the case of Hawes vs. Woolcock (26 Wis., 629), preferring to follow, as the opinion states, the rule laid down in Pavenstedt vs. New York Life Insurance Company (203 N. Y., 91), - which limits the recovery in a case of this kind to a sum sufficient to purchase the amount, of foreign money at the time and place of the Value of Foreign Currency for Customs Purposes The Appellate Division, in this recent case of Gross against Mendel, also refused to take judicial notice of the value of foreign currency as established by the Secretary of the Treasury for customs purposes. The Appellate Division, in its opinion, writes: "When the defendants refused payment of the bills of exchange, which they had accepted, the plaintiffs, except for the war then existing between England and Germany, could have immediately drawn upon them at London for the number of pounds which would have purchased at Leipzig, Germany, the number of marks called for, together with the protest fees. This is what is termed 're-exchange.' * * * "Plaintiffs, being unable to redraw, did what they had a right to do, brought an action in this jurisdiction, and they ought to recover here in United States money an amount which, at the time of the default, would have purchased what the defendants agreed to pay, together with the interest and protest fees." Theory of Re-exchange Transaction The definition of re-exchange, approved by the Court of Appeals in Pavenstedt against the New York Life Insurance Company, supra, and most frequently quoted, is given by Mr. Justice Byles, the well-known English jurist, and is as follows: "Re-exchange is the difference in the value of a bill, occasioned by its being dishonored in a foreign country in which it was payable. The existence and amount of it depend on the rate of exchange between the two countries. The theory of the transaction is this: A merchant in London indorses a bill for a certain number of Austrian florins, payable at a future date in Vienna. The holder is entitled to receive in Vienna, on the day of the maturity of the bill, a certain number of Austrian florins. Suppose the bill to be dishonored. The holder is now, by the custom of merchants, entitled to immediate and specific redress, by his own act, in this way. He is entitled, being in Vienna, then and there to raise the exact number of Austrian florins, by drawing and negotiating a crossbill, payable at sight, on his indorser in London, for as much English money as will purchase in Vienna the exact number of Austrian florins, at the rate of exchange on the day of dishonor; and to include in the amount of that bill the interest and necessary expenses of the transaction. This cross bill is called in French the 'retraite.' The amount for which it is drawn is called in low Latin 'ricambium,' in Italian 'ricambio,' and in French and English 'reexchange.' If the indorser pay the cross or re-exchange bill, he has fulfilled his engagement of indemnity. If not, the holder of the original bill may sue him on it, and will be entitled to recover in that action the amount of the 'retraite or cross bill, with the interest and expenses thereon. The amount of the verdict will thus be an exact indemnity for the non-payment of the Austrian florins in Vienna the day of the maturity of the original bill." Review of Issues Involved in Recent Cases Thus, it will be seen that in the recent case of Gross against Mendel, the Appellate Division had before it a state of facts which, on account of the war between Germany and England, did not permit of re-exchange, as such, but, in applying the rule of damages, it limited them to an amount measured by what the plaintiffs could have redrawn upon the defendant at London on the date of dishonor, if it had attempted to exercise its right so to do. The defendant Mendel, therefore, was unable to benefit by the fall of exchange in the value of marks between the date of dishonor of the bill and the actual trial of the action. The rule of the Pavenstedt case, decided by case, the Court of Appeals, and of the recent Gross Necessity of Clearly Formulated Legal Rules While there are some other decisions of the courts of the United States affecting foreign exchange other than those cited in this article, the case of Strohmeyer & Arpe against the Guaranty Trust Company, involving cable exchange, and the case of Gross against Mendel, involving re-exchange, have been discussed at length because of their pertinency at this time, in view of the war, and because of their recent origin. For that reason any one interested in the subject of foreign exchange may well be repaid for a careful reading of these opinions. If this country is to take its proper place as a financial factor in the money markets of the world, it is imperative that the legal rules governing foreign exchange transactions shall be properly formulated by the courts of this country, and it is hoped that, as the increased commercial importance of the United States develops itself, the problems of foreign exchange presented to the courts of the country for adjudication may be satisfactorily solved and decided in accordance with the accepted views of international bankers and the rule of reason. STRENGTH OF THE INVESTMENT MARKET One of the most interesting features of the present financial situation is the abundance of money available for investment. Apparently the supply of new issues, especially of municipal and other tax exempt securities as well as public utility bonds is not sufficient to satisfy the demand. The success of the recent issue of $55,000,000 New York City 44 per cent. bonds is a fair indication of the sound conditions prevailing in the investment market. Not only is there ready absorption of foreign owned securities sold outright in this market, especially the gilt edged bonds liquidated under the British mobilization plan, but no difficulty is experienced in placing new offerings of domestic corporations and of foreign governments. The avidity with which the recent issue of $75,000,000 Canadian Government 5 per cent. bonds were marketed is a case in point. In quick succession investors have absorbed such first-class issues as the $27,000,000 New York State bonds; $40,000.000 American Telegraph & Telephone notes; $50,000,000 Midvale Steel bonds; $15,000, coo Braden Copper bonds; $19,000,000 Erie convertible bonds and other new offerings. For the three months of January, February and March industrial corporations and railroads bave sold bonds, notes and stocks aggregating $770,978,300 which represents an increase of 71 per cent. as compared with last year. Notwithstanding the fears entertained in 1914 as to a collapse in prices of fixed investments the New York Stock Exchange added in 1915 to its list $451,800,000 newly issued bonds not including the $500,000,000 Anglo-French bonds and not taking into account nearly half a billion of other loans made to foreign countries. In the face of a steady absorption of European holdings exceeding one and a half billions of dollars in amount the average price of 40 active bonds listed on the New York exchange on April 13th was 86.65 as compared with the average price of 84.16 on the same date last year and the highest average of 87.62 reached in 1915. |