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[UNREVISED COMMITTEE PRINT]
ABSORPTION OF EXCHANGE CHARGES
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
S E V E N T Y - E I G H T H CONGKESS
SECOND SESSION
ON
H. R. 3956
A
BILL
TO
AMEND
THE
FEDERAL
A M E N D E D , TO P R O V I D E T H A T
RESERVE
TOE
OF E X C H A N G E A N D C O L L E C T I O N
S H A L L NOT B E D E E M E D T H E
ACT,
AS
ABSORPTION
CHARGES
PAYMENT
O F I N T E R E S T ON D E P O S I T S
PART 13
F E B R U A R Y
9,
1944
Printed for the use of tlie Committee on Banking ancl Currency
UNITED
GOVERNMENT
#4473
STATES
PRINTING
WASHINGTON
OFFICE
: 1944
C O M M I T T E E
O N
B A N K I N G
A N D
B R E N T S P E N C E , Kentucky,
T H O M A S R F O R D , California
C U R R E N C Y
Chairman
J E S S E P. W O L C O T T , Michigan
P A U L B R O W N , Georgia
C H A R L E S L . G I F F O R D , Massachusetts
W R I G H T P A T M A N , Texas
F R E D L . C R A W F O R D , Michigan
W I L L I A M B. B A R R Y , New York
R A L P H A . G A M B L E , New York
A. S. M I K E M O N R O N E Y , Oklahoma
R O B E R T W . K E A N , New Jersey
J O H N H . F O L G E R , North Carolina
J E S S I E S U M N E R , Illinois
H . S T R E E T T B A L D W I N , Maryland
F R E D E R I C K C. S M I T H , Ohio
B R O O K S H A Y S , Arkansas
J O H N C. K U N K E L , Pennsylvania
L A V E R N R . D I L W E G , Wisconsin
T H O M A S R O L P H , California
R O G E R C. S L A U G H T E R , Missouri
H E N R Y O. T A L L E , Iowa
M A U R I C E J. S U L L I V A N , Nevada
B. J. M O N K I E W I C Z , Connecticut
M E R L I N H U L L , Wisconsin
WALLACE E . DINGUS, Clerk
II
ABSORPTION OF EXCHANGE CHARGES
W E D N E S D A Y , F E B R U A R Y 9, 1944
H O U S E OF REPRESENTATIVES,
COMMITTEE ON B A N K I N G AND CURRENCY,
Washington, I). C.
The committee met at 10:30 a. m., Hon. Brent Spence (chairman)
presiding.
The CHAIRMAN. The committee will come to order. I understand
M r . Dreibelbis wants to make a short statement.
M r . DREIBELBIS. M r . Chairman, I just wish to report that I have
delivered to M r . Dingus regulation Q of 1936 that M r . Brown asked
me to have inserted in the record; also the information Mr. Kean
asked me to get up yesterday.
The CHAIRMAN. You may have leave to insert them.
(The matter above referred to is as follows:)
Deposits
all
banks
excluding
mutual
savings
banks
Total interbank
deposits
June 30, 1940...
.
June 30, 1941
June 30, 1942
June 30, 1943
Percent increase 1943 over 1940.
^
10,188,000,000
10,948,000,000
10, 287,000,000
10, 895, 000,000
7
..
.
.
.
...
Due to
other
banks
Palm Beach, Fla. (population, 3,747):
First National Bank:
June 30:
1940
.
.
1941 . .
1942
1943
. . . . .
. . . .
New Orleans, La. (population 494,537):
American Bank & Trust Co. (converted to national
January 1944) :
June 30:
1940
1941...
1942
1943
Other principal banks in New Orleans:
Hibernia National Bank in New Orleans:
June 30:
1940 .
...
1941
1942
.
.
1943
.
National Bank of Commerce in New Orleans:
June 30:
1940
1941.
1942
1943.
.. ..
Whitney National Bank:
June 30:
1940
1941
1942
.
..
1943.
Percent
increase
over 1940
Total other
deposits
49,951,000,000
56, 524, 000, 000
62,024,000,000
85,188, 000, 000
70
Other
deposits
Percent
increase
over 1940
685
12, 218, 600
14,892,500
13, 521,500
22, 253,900
82
625
34, 472,800
30,891,000
31, 872, 500
43, 586,100
26
25
33, 775, 200
39. 035, 800
40, 426,000
49,179, 600
46
26,061, 700
31,086,100
25, 708, 700
34,124, 300
31
30,179,800
32, 949,400
33,782,600
52, 246,100
73-
33, 636, 300
39, 028,100
33, 862, 900
49, 414, 700
112, 526,600
118,488, 500
136,021,700
47 186, 324. 600
6&
1, 293,700
1,309,000
3,027, 200
10,153,300
2, 654, 900
4,832,400
15,106,800
19, 254,500
26,
31,
23,
33,
360,
824,
227,
005,
700
400
500
300
491
492
ABSORPTION
Deposits
all
banks
OF E X C H A N G E
excluding
mutual
CHARGES
savings
Due to
other
banks
Meridian, Miss, (population, 35,481):
First National Bank:
June 30:
1940
1941
. . .
.
1942
1943
National Stock Yards, III. (population, 244):
National Stock Yards National Bank:
June 30:
1940
1941
1942.
1943
. . .
banks—Continued
Percent
increase
over 1940
337,300
430,700
697,800
1.390,200
. .
32,961,300
41, 687, 900
59,895, 600
73, 754, 600
Other
deposits
Percent
increase
over 1940
312
3,089,300
3,386,800
4,041,800
5, 659,300
83
124
10,175,700
11,833,700
16,138,900
19, 095, 600
87
[From the Federal Reserve Bulletin, December 1935]
REGULATION
Q
(Re vised, effective January 1, 1936. Superseding Regulation Q, Series of 1935)
PAYMENT
OF I N T E R E S T
ON
DEPOSITS
CONTENTS
Authority for and scope of regulation.
Sec. 1. Definitions.
(a) Demand deposits.
(b) Time deposits.
(c) Time certificates of deposit.
(d) Time deposits, open account.
(e) Savings deposits.
(f) Interest.
Sec. 2. Demand deposits.
(a) Interest prohibited.
(b) Exceptions.
Sec. 3. Maximum rate of interest on time and savings
deposits.
(a) Maximum rate prescribed from time to time.
(b) Modification of contracts to conform to regulation.
(c) Member banks limited to maximum rate for
State banks.
(d) Savings deposits received during first 5 days
of month.
(e) Continuance of time deposit status.
(0 No interest after maturity or expiration of
notice.
AUTHORITY
Sec. 4. Payment of time deposits before maturity.
(a) Time deposits payable on a specified date.
(b) Time deposits payable after a specified pe*
riod.
(c) Time deposits payable after a specified notice.
(d) Payment in emergencies.
(e) Loans upon security of time deposits.
Sec.
Notice of withdrawal of savings deposits.
(a) Requirements regarding notice.
(b) Requirements regarding change of practice.
(c) Change of practice for purpose of discrimination.
(d) Requirements applicable although no interest paid.
(e) Loans upon security of savings deposits.
Appendix.
FOR AND SCOPE OF
REGULATION
This regulation is issued under authority of provisions of section 19 of the
Federal Reserve Act which, together with related provisions of law, are published
in the Appendix hereto.
This regulation relates to the payment of deposits and interest thereon by
member banks of the Federal Reserve System and not to the computation and
maintenance of the reserves which member banks are required to maintain against
deposits.
The rules concerning reserves of member banks are contained in.
Regulation D.
The provisions of this regulation do not apply to any deposit which is payable
only at an office of a member bank located outside of the States of the United
States and the District of Columbia.
SECTION
I.
DEFINITIONS
(а) Demand deposits.—1The term "any deposit which is payable on d e m a n d / '
hereinafter referred to as a "demand deposit," includes every deposit which is
not a "time deposit" or "savings deposit," as defined below.
(б) Time deposits.—The
term "time deposits" means "time certificates of
deposit" and "time deposits, open account," as defined below.
493ABSORPTION"OF E X C H A N G E
CHARGES
(c) Time certificates of deposit.—The term "time certificate of deposit" mean? a
deposit evidenced by a negotiable or nonnegotiable instrument which provides
on its face that the amount of such deposit is payable to bearer or to any specified
person or to his order—
(1) On a certain date, specified in the instrument, not less than 30 days
after the date of the deposit, or
(2) At the expiration of a certain specified time not less than 30 days after
the date of the instrument, or
(3) Upon notice in writing which is actually required to be given not less
than 30 days before the date of repayment,1 and
(4) I n all cases only upon presentation and surrender of the instrument.
(d) Time deposits, open account.—The
term "time deposit, open account,"
means a deposit, other than a "time certificate of deposit" or a "saving deposit,"
with respect to which there is in force a written contract with the depositor that
neither the whole nor any part of such deposit may be withdrawn, by check or
otherwise, prior to the date of maturity, which shall be not less than 30 days after
the date of the deposit,,2 or prior to the expiration of the period of notice which must
be given by the depositor in writing not less than 30 days in advance of withdrawal.3
(e) Savings deposits.—The term "savings deposit" means a deposit, evidenced
by a passbook, consisting of funds (i) deposited to the credit of one or more individuals, or of a corporation, association, or other organization operated primarily
for religious, philanthropic, charitable, educational, fraternal, or other similar
purposes and not operated for profit,4 or (ii) in which the entire beneficial interest
is held by one or more individuals or by such a corporation, association, or other
organization, and in respect to which deposit—
(1) The depositor is required, or may at any time be required, by the
bank to give notice in writing of an intended withdrawal not less than 30
days before such withdrawal is made;
(2) Withdrawals are permitted in only two ways, either (i) upon presentation of the passbook, through payment to the person presenting the passbook, or (ii) without presentation of the passbook, through payment to the
depositor himself but not to any other person whether or not acting for the
depositor.5
The presentation by any officer, agent, or employee of the bank of a passbook
or a duplicate thereof retained by the bank or by any of its officers, agents, or
employees is not a presentation of the passbook within the meaning of this
regulation except where the passbook is held by the bank as a part of an estate
of which the bank is a trustee or other fiduciary, or where the passbook is held
by the bank as security for a loan. If a passbook is retained by the bank, it
may not be delivered to any person other than the depositor for the purpose of
enabling such person to present the passbook in order to make a withdrawal,
although the bank may deliver the passbook to a duly authorized agent of the
depositor for transmittal to the depositor.
Every withdrawal made upon presentation of a passbook shall be entered in the
passbook at the time of the withdrawal, and every other withdrawal shall be
entered in the passbook as soon as practicable after the withdrawal is made.
(/) Interest.—The term "interest" means a payment, credit, service, or other
thing of value which is made or furnished by a bank as consideration for the use of
the funds constituting a deposit and which involves the payment or absorption
1 A deposit with respect to which the bank merely reserves the right to require notice of not less than 30
days before any withdrawal is made is not a "time certificate of deposit" within the meaning of the above
definition.
2 Deposits such as Christmas club accounts and vacation club accounts, which are made under written
contracts providing that no withdrawal shall be made until a certain number of periodic deposits have been
made during a period of not less than 3 months constitute "time deposits, open account," even though some
of the deposits are made within 30 days from the end of such period.
3 A deposit with respect to which the bank merely reserves the right to require notice of not less than 30
days before any withdrawal is made is not a "time deposit, open account," within the meaning of the above
definition.
4 Deposits in joint a-counts of two or more individuals may be classified as savings deposits if they meet
the other requirements of the above definition, but deposits of a partnership operated for profit may not
be so classified. Deposits to the credit of an individual of funds in which any beneficial interest is held by
a corporation, partnership, association, or other organization operated for profit or not operated piimarily
for religious, philanthropic, charitable, educational, fraternal, or other similar purposes may not be classified as savings deposits.
3 Presentation of a passbook may be made over the counter or through the mails; and payment may
be made over the counter, through the mails or otherwise, subject to the limitations of par. (2) above as to
the person to whom such payment may be made.
494
ABSORPTION" OF E X C H A N G E
CHARGES
by the bank of out-of-pocket expenses (i. e., expenses arising out of specific transactions for specific customers and definitely attributable to such transactions as
distinguished from overhead and general operating expenses), regardless of whether
such payment, credit, service, or other thing of value varies with or bears a substantially direct relation to the amount of the depositor's balance.
The term "interest" includes the payment or absorption of exchange and collection charges which involve out-of-pocket expenses, but does not include the payment or absorption of taxes upon deposits whether levied against the bank or the
depositor nor the payment or absorption of premiums on bonds securing deposits
where such bonds are required by or under authority of law.
Notwithstanding the foregoing, the payment or absorption of isolated items of
out-of-pocket expense in trivial amounts and not of a regularly recurrent nature,
where the charging of such items to customers would cause undue friction or misunderstanding, will not be deemed to be a payment of interest, provided that the
bank acts in good faith and, does not utilize the absorption of such items as a basis
for soliciting accounts or obtaining an advantage over competitors and provided
further that the bank maintains and makes available to the examiners authorized
to examine the bank a record showing the amounts of such items paid or absorbed
by it, the dates of such payment or absorption, and the names of the customers
for whom such items were paid or absorbed.
SECTION 2. DEMAND DEPOSITS
(a) Interest prohibited.-— Except as hereinafter provided, no member bank of the
Federal Reserve System shall, directly or indirectly, by any device whatsoever,
pay any interest on any demand deposit.
\b) Exceptions.—The
prohibition stated in subsection (a) above does not
apply t o —
(1) Payment of interest accruing before August 24, 1937, on any deposit
made by a savings bank as defined in section 12B of the Federal Reserve Act,
as amended,6 or by a mutual savings bank;
(2) Payment of interest accruing before August 24, 1937, on any deposit
of public funds 7 made by or on behalf of any State, county, school district,
or other subdivision or municipality, or on any deposit of trust funds, if the
payment of interest with respect to such deposit of public funds or of trust
funds is required by State law when such deposits are made in State banks;
(3) Payment of interest in accordance with the terms of any certificate of
deposit or other contract which was lawfully entered into in good faith before
June 16, 1933 (or, if the bank became a member of the Federal Reserve
System thereafter, before the date upon which it,became a member), which
was in force on such date, and which may not legally be terminated or modified by such bank at its option or without liability; but no such certificate of
deposit or other contract may be renewed or extended unless it be modified
to eliminate any provision for the payment of interest on demand deposits,
and every member bank shall take such action as may be necessary, as soon
as possible consistently with its contractual obligations, to eliminate from any
such certificate of deposit or other contract any provision for the payment of
interest on demand deposits.
SECTION 3. M A X I M U M
(а) Maximum
rate
RATE
prescribed
OF INTEREST
from
time
ON TIME
AND SAVINGS
to time.—Except
DEPOSITS
in accordance w i t h the
provisions of this regulation, no member bank shall pay interest on any time
deposit or savings deposit in any manner, directly or indirectly, or by any method,
practice, or device whatsoever.
No member bank shall pay interest on any time
deposit or savings deposit at a rate in excess of such applicable maximum rate as
the Board of Governors of the Federal Reserve System shall prescribe from time
to time; and any rate or rates which may be so prescribed by the Board will be
set forth in supplements to this regulation, which will be issued in advance of the
date upon which such rate or rates become effective.
(б)
Modification
of contracts
to conform
to regulation.—No
certificate of d e p o s i t
or other contract shall be renewed or extended unless it be modified to conform to
the provisions of this regulation, and every member bank shall take such action
« Sec. 12B (c) (7) of the Federal Reserve Act which defines the term "savings bank" is quoted in the
appendix hereto (p. 17).
7 Deposits of moneys paid into State courts by private parties pending the outcome of litigation are not
deposits of "public funds", within the meaning of the above provision.
495ABSORPTION"OF E X C H A N G E
CHARGES
as may be necessary, as soon as possible consistently with its contractual obligations, to bring all of its outstanding certificates of deposit or other contracts into
conformity with the provisions of this regulation.
(c) Member banks limited to maximum rate for State banks.—The rate of interest
paid by a member bank upon a time deposit or savings deposit shall not in any
case exceed (i) the applicable maximum rate prescribed pursuant to the provisions
of subsection (a) of this section, or (ii) the applicable maximum rate authorized
by law to be paid upon such deposits by State banks or trust companies organized
under the laws of the State in which such member bank is located, whichever
may be less.
(d)
Savings
deposits
received
during
first
5
days
of month.—A
member
bank
may pay interest on a savings deposit received during the first 5 days of any
calendar month at the applicable maximum rate prescribed pursuant to the provisions of subsection (a) of this section calculated from the first day of such calendar month until such deposit is withdrawn or ceases to constitute a savings deposit
under the provisions of this regulation, whichever shall first occur.
(e) Continuance of time deposit status.—A deposit which was a time deposit at
the date of deposit continues to be such until maturity although it has become
payable within 30 days, and interest at a rate not exceeding that prescribed pursuant to the provisions of subsection (a) of this section may be paid until maturity upon such deposit. A time deposit or a savings deposit with respect to
which notice of withdrawal has been given continues to be such until the expiration of the period of such notice, and interest may be paid upon such deposit
until the expiration of the period of such notice at a rate not exceeding that prescribed pursuant to the provisions of subsection (a) of this section. Interest at
a rate not exceeding that prescribed pursuant to the provisions of subsection (a)
of this section may be paid upon savings deposits with respect to which notice
of intended withdrawal had not actually been required or given. No interest
shall be paid by a member bank on any amount which, by the terms of any certificate or other contract or agreement or otherwise, the bank may be required to
pay within 30 days from the date on which such amount is deposited in such
bank.8
(/) No interest after maturity or expiration of notice.—After the date of maturity
of any time deposit, such deposit is a demand deposit, and no interest may be
paid on such deposit foi any period subsequent to such date. After the expiration of the period of notice given with respect tothe repayment of anj time deposit
or savings deposit, such deposit is a demand deposit and no interest may be paid
on such deposit for any period subsequent to the expiration of such notice, except
that, if the owner of such deposit advise the bank in writing that the deposit will
not be withdrawn pursuant to such notice or that the deposit will thereafter again
be subject to the contract or requirements applicable to such deposit, the deposit
will again constitute a time deposit or savings deposit, as the case may be, after
the date upon which such advice is received by the bank.
SECTION 4. PAYMENT OF TIME DEPOSITS BEFORE MATURITY]
(a) Time deposits payable on a specified date.—No member bank shall pay any
time deposit, which is payable on a specified date, before such specified date,
except as provided in subsection (d) of this section.
(b) Time deposits payable after a specified period.—No
member bank shall pay
any time deposit, which is payable at the expiration of a certain specified period,
before such specified period has expired, except as provided in subsection (d) of
this section.
(c) Time deposits payable after a specified notice.—No member bank shall pay
any time deposit, with respect to which notice is required to be given a certain
specified period before any withdrawal is made, until such required notice has
been given and the specified period thereafter has expired, except as provided in
subsection (d) of this section.
(d) Payment in emergencies.—In an emergency where it is necessary to prevent
great hardship to the depositor, a member bank may pay before maturity a
time deposit or the portion thereof neccssary to meet such emergency, provided
that before making such payment the depositor shall sign an application describing
fully the circumstances constituting the emergency which is deemed to justify
the payment of the deposit before maturity, which application shall be approved
8 Deposits, such as Christmas club accounts and vacation club accounts which are made under written
contracts providing that no withdrawal shall be made until a certain number of periodic deposits have been
made during a period of not less than 3 months constitute "time deposits, open account" even though some
of the deposits are made within 30 days from the end of such period.
496
ABSORPTION OF E X C H A N G E
CHARGES
by an officer of the bank who shall certify that, to the best of his knowledge and
belief, the statements in the application are true.
Such application shall be
retained in the bank's files and made available to the examiners authorized to
examine the bank.
Where a time deposit is paid before maturity the depositor
shall forfeit accrued and unpaid interest for a period of not less than 3 months
on the amount withdrawn if an amount equal to the amount withdrawn has
been, on deposit 3 months or longer, and shall forfeit all accrued and unpaid
interest on the amount withdrawn if an amount equal to the amount withdrawn has been on deposit less than 3 months.
When a portion of a time certificate of deposit is paid before maturity, the certificate shall be canceled and a
new certificate shall be issued for the unpaid portion of the deposit with the same
terms, rate, date, and maturity as the original deposit.
(e) Loans upon security of time deposits.—A member bank may make a loan
to the depositor upon the security of his time deposit provided that the rate of
interest on such loan shall be not less than 2 percent per annum in excess of the
rate of interest on the time deposit.
SECTION 5. NOTICE OF W I T H D R A W A L OF SAVINGS
DEPOSITS
(a) Requirements regarding notice.—A member bank shall observe the requirements set forth below in requiring notice of intended withdrawal of any savings
deposit, or in waiving such notice, or in repaying any savings deposit, or part
thereof, without requiring such notice, whether such notice of intended withdrawal is required to be given in each case bv the terms of the bank's contract
with the depositor or may, under such contract, be required by the bank at any
time at its option—
(1) If a member bank waive such notice of intended withdrawal as to
any amount or percentage of the savings deposits of any depositor, it shall
waive such notice as to the same amount or percentage of the savings deposits of every other depositor which are subject to the same requirement.
(2) If a member bank pay any amount or percentage of the savings deposits of any depositor, without requiring such notice, it shall, upon request
and without requiring such notice, pay the same amount or percentage of
the savings deposits of every other depositor which are subject to the same
requirement.
(3) If a member bank require such notice before the payment of any
amount or percentage of the savings deposits of any depositor, it shall require
such notice before the payment of the same amount or percentage of the
savings deposits of any other depositor which are subject to the same requirement.
A member bank is not prevented from paying during the next succeeding
interest period, without requiring notice of withdrawal, interest on a savings
deposit which has accrued during the preceding interest period, provided that it
shall, upon request and without requiring such notice, pay in the same manner
interest which has accrued during the preceding interest period on the savings
deposits of every other depositor.
(b) Requirements regarding change of practice.—No
member bank shall change
its practice with respect to the requiring or waiving of notice of intended withdrawal of savings deposits except after duly recorded action of its board of directors
or of its executive committee properly authorized, and no practice in this respect
shall be adopted which does not conform to the requirements of paragraphs
(1), (2), or (3) of subsection (a) of this section.
(c) Change of practice for purpose of discrimination.—No
change in the practice
of a member bank with respect to the requiring or waiving of notice of intended
withdrawal of savings deposits shall be made for the purpose of discriminating in
favor of or against any particular depositor or depositors.
(d) Requirements applicable although no interest paid.—A
member bank shall
observe the requirements of this section with respect to savings deposits even
though no interest be paid on such deposits.
(e) Loans
upon
security
of savings
deposits.—If
it is not the practice of a m e m -
ber bank to require notice of intended withdrawal of savings deposits, no restrictions are imposed by this regulation upon loans by such bank to its depositors
upon the security of such deposits. If it is the practice of a member bank to require notice of intended withdrawal of savings deposits or any amount or percentage thereof, such bank may make loans to its depositors upon the security of such
deposits and, in each such case, the rate of interest on such loan shall be not less
than 2 percent per annum in excess of the rate of interest on the savings deposit.
497ABSORPTION"OF EXCHANGE
CHARGES
APPENDIX
STATUTORY
PROVISIONS
Section 19 of the Federal Reserve Act, as amended by the Banking Act of 1933
and the Banking Act of 1935, provides in part as follows:
"SEC. 19. The Board of Governors of the Federal Reserve System is authorized, for the purposes of this section, to define the terms 'demand deposits, 'gross
demand deposits,' 'deposits payable on demand,' 'time deposits,' 'savings deposits,'
and 'trust funds,' to determine what shall be deemed to be a payment of interest,
and to prescribe such rules and regulations as it may deem necessary to effectuate
the purposes of this section and prevent evasions thereof: * * *.
*
*
*
*
*
*
*
" N o member bank shall, directly or indirectly, by any device whatsoever, pay
any interest on any deposit which is payable on demand: Provided, That nothing
herein contained shall be construed as prohibiting the payment of interest in
accordance with the terms of any certificate of deposit or other contract entered
into in good faith which is in force on the date on which the bank becomes subject
to the provisions of this paragraph; but no such certificate of deposit or other
contract shall be renewed or extended unless it shall be modified to conform to
this paragraph, and every member bank shall take such action as may be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided further. That this paragraph shall not apply to any
deposit of such bank which is payable only at an office thereof located outside of
the States of the United States and the District of Columbia: Provided further,
That until the expiration of two years after the date of enactment of the Banking Act of 1935 this paragraph shall not apply (1) to any deposit made by a
savings bank as defined in section 12B of this Act, as amended, or by a mutual
savings bank, or (2) to any deposit of public funds made by or on behalf of any
State, county, school district, or other subdivision or municipality, or to any
deposit of trust, funds if the payment of interest with respect to such deposit of
public funds or of trust funds is required by State law. So much of existing law
as requires the payment of interest with respect to any funds deposited by the
United States, by any Territory, District, or possession thereof (including the
Philippine Islands), or by any public instrumentality, agency, or officer of the
foregoing, as is inconsistent with the provisions of this section as amended, is
hereby repealed.
"The Board of Governors of the Federal Reserve System shall from time to
time limit by regulation the rate of interest which may be paid by member banks
on time and savings deposits, and shall prescribe different rates for such payment
on time and savings deposits having different maturities, or subject to different
conditions respecting withdrawal or repayment, or subject to different conditions
by reason of different locations, or according to the varying discount rates of
member banks in the several Federal Reserve districts. No member bank shall
pay any time deposit before its maturity except upon such conditions and in
accordance with such rules and regulations as may be prescribed by the said
Board, or waive any requirement of notice before payment of any savings deposit
except as to all savings deposits having the same requirement: Provided, That the
provisions of this paragraph shall not apply to any deposit which is payable only
at an ofiicc of a member bank located outside of the States of the United States
and the District of Columbia."
Section 24 of the Federal Reserve Act, as amended by the act of February 25,
1927, and the Banking Act of 1935, provides with respect to national banking
associations in part as follows:
"Any such association may continue hereafter as heretofore to receive time and
savings deposits and to pay interest on the same, but the rate of interest which
such association may pay upon such time deposits or upon savings or other
deposits shall not exceed the maximum rate authorized by law to be paid upon
such deposits by State banks or trust companies organized under the laws of the
State in which such association is located."
Section 12B (c) (7) of the Federal Reserve Act, as amended by the Banking
Act of 1935, provides as follows:
"(c) As used in this section—
*
*
*
*
*
*
*
"(7) The term "savings bank" means a bank (other than a mutual savings
bank) which transacts its ordinary banking business strictly as a savings bank
under State laws imposing special requirements on such banks governing the
94478—44—pt.. 13
2
498
ABSORPTION" OF E X C H A N G E
CHARGES
manner of investing their funds and of conducting their business: Provided, That
the bank maintains, until maturity date or until withdrawn, all deposits made
with it (other than funds held by it in a fiduciary capacity) as time savings
deposits of the specific term type or of the type where the right is reserved to the
bank to require written notice before permitting withdrawal: Provided
further,
That such bank to be considered a savings bank must elect to become subject to
regulations of the Corporation with respect to the redeposit of maturing deposits
and prohibiting withdrawal of deposits by checking except in cases wheie such
withdrawal is permitted by law on the effective date from specifically designated
deposit accounts totaling not more than 15 per centum of the bank's total
deposits."
SUPPLEMENT
TO R E G U L A T I O N
Q
(Issued by the Board of Governors of the Federal Reserve System Effective Jan. 1, 1936)
M A X I M U M RATES OF INTEREST PAYABLE ON TIME AND SAVINGS DEPOSITS BY M E M B E R
BANKS OF T H E F E D E R A L RESERVE SYSTEM
Pursuant to the provisions of section 19 of the Federal Reserve Act and section
3 of its Regulation Q, the Board of Governors of the Federal Reserve System
hereby prescribes the following maximum rates 1 of interest payable by member
banks of the Federal Reserve System on time and savings deposits:
(1) Maximum rate of
percent.—No member bank shall pay interest accruing
after January 31, 1935, at a rate in excess of 2}i percent per annum, compounded
quarterly,2 regardless of the basis upon which such interest may be computed—
(A) On any savings deposit,
(B) On any time deposit having a maturity date 6 months or more after
the date of deposit or payable upon written notice of 6 months or more,
(C) On any Postal Savings deposit which constitutes a time deposit,
except that a member bank may pay interest on any such deposits in accordance
with the terms of any certificate of deposit or other contract which was lawfully
entered into in good faith before December 18, 1934 (or, if the bank became a
member of the Federal Reserve System thereafter, before the date upon which
it became a member), which was in force on such date and which may not legally
be terminated or modified by such bank at its option or without liability.
(2) Maximum rate of 2 percent.-—No member bank shall pay interest accruing
after January 1, 1936, at a rate in excess of 2 percent per annum, compounded
quarterly, regardless of the basis upon which such interest may be computed—
(A) On any time deposit (except Postal Savings deposits which constitute
time deposits) having a maturity date less than 6 months and not less than
90 days after the date of deposit or payable upon written notice of less than
6 months and not less than 90 days,
except that a member bank may pay interest on such deposits in accordance
with the terms of any certificate of deposit or other contract which was lawfully
entered into in good faith before December 1, 1935 (or, if the bank became a
member of the Federal Reserve System thereafter, before the date upon which
it became a member), which was in force on such date and which may not legally
be terminated or modified by such bank at its option or without liability.
(3) Maximum rate of 1 percent.—No member bank shall pay interest accruing
after January 1, 1936, at a rate in excess of 1 percent per annum, compounded
quarterly, regardless of the basis upon which such interest may be computed—
(A) On any time deposit (except Postal Savings deposits wiiich constitute time deposits) having a maturity date less than 90 days after the date
of deposit or payable upon written notice of less than 90 days,
except that a member bank may pay interest on such deposits in accordance
with the terms cf any certificate of deposit or other contract which was lawfully
entered into in good faith before December 1, 1935 (or, if the bank became a
member of the Federal Reserve System thereafter, before the date upon which it
became a member), which was in force on such date and which may not legally
be terminated or modified by such bank at its option or without liability.
1 The maximum rates of interest payable by member banks of the Federal Reserve System on time and
savings deposits as presecribed herein are not applicable to any deposit which is payable only at an office
of a member bank located outside of the States of the United States and the District of Columbia.
2 This limitation is not to be interpreted as preventing the compounding of interest at other than quarterly
intervals, provided that the aggregate amount of such interest so compounded does not exceed the aggregate
amount of interest at the rate above prescribed when compounded quarterly.
499
ABSORPTION"
OF E X C H A N G E
CHARGES
The CHAIRMAN. NOW Mr. Crowley, I understand, wrants to m4ke
an informal statement and he has requested that he might be permitted to make his statement without interruption and to be interrogated at the conclusion of his statement.
M r . CRAWFORD. Mr. Chairman, may I ask this question.before M r .
Crowley proceeds? To keep the record in order, as the chairman outlined the other day, would it not be in order at this time to insert the
letter from Mr. Bell, Acting Secretary of the Treasury, on this bill,
dated January 29, 1944?
The CHAIRMAN. If the Federal Reserve Board desires to do that, they
may insert it.
Mr. RANSOM. Mr. Chairman, it is not our report. We did not request it. I understood it was in response to a request from you.
The CHAIRMAN. Well, it can be inserted. I asked all the Departments, gave them the privilege, as far as I was concerned, of filing a
report if they desired.
Mr. CRAWFORD. NOW let me ask the chairman a question: This
being from the Treasury and, as I understand the general procedure,
the Comptroller of the Currency operates under the Treasury, am I
to assume, then, that this statement will cover the position of the
Treasury, including the Comptroller of the Currency?
(After informal discussion.)
M r . HEXTER. Mr. Chairman, my name is Hexter; I am assistant
counsel in the Office of the Comptroller of the Currency. It is my
understanding this letter is intended to be the response of the Office
of Comptroller, as well as of the Treasury Department, to the two
requests.
The CHAIRMAN. Without objection, it may be filed.
(Letter above referred to is as follows:)
H o n . BRENT
Chairman,
SPENCE,
Banking
JANUARY 29, 1944.
and
House
Currency
Committee,
of Representatives,
Washington,
D.
C.
DEAR MR. SPENCE: This will acknowledge receipt of the letter of January 17
from your committee asking for the views of the Comptroller of the Currency
and the Treasury Department on H. R. 3956.
The statutory prohibition against payment of interest on demand deposits is
a wise provision.
To exempt from that prohibition the payment of interest when
in the form of absorption of exchange charges, as proposed in this bill, would
intensify the abuses which have developed in overcompetition for correspondent
bank balances. It would, moreover, further discriminate against small national
banks which, under the law, as compulsory members of the Federal Reserve
Sj^stem are prohibited from making such charges on the great majority of their
checks which are cleared through the Federal Reserve banks.
Legislative approval of exchange absorption, such as is contained in this measure, is not, therefore, in the interest of sound banking.
It is our opinion that the bill should not be enacted.
No commitment can be made at this time as to the relationship of H. R. 3956
to the program of the President.
Very trulv vours,
Acting
Secretary
D . W . BELL,
of the
Treasury.
The CHAIRMAN. NOW, Mr. Crowley, you may proceed.
500
ABSORPTION" OF E X C H A N G E
CHARGES
STATEMENT OF LEO T. CROWLEY, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. CROWLEY. Mr. Chairman and members of the committee,
we had worked on a written statement which I wanted to present
to the committee, but I felt this thing had been prolonged so long that
you men certainly had had enough opportunity to visualize what it is
&11 about, and I did not want to burden you with a lot of unnecessary
detail.
I appreciate the friendship this committee has always had for the
Federal Deposit Insurance Corporation. It has been a nonpartisan
committee in support of all of the legislation and tilings to help us.
I also want to say, insofar as my associates in the Federal Reserve
are concerned, that I am sorry there has always been between us that
marked difference of opinion regarding the banking system. I do
not take that as a personal difference, because they are all good
friends of mine; but I do disagree with them very emphatically upon
this exchange charge and I want to go on record as saying that I favor
the Brown bill. I think, in favoring the Brown bill, that I am making
a very definite contribution to the continuance of the dual banking
system in this country—the right of directors and management to use
ordinary discretion in the conduct and affairs of their business. I do
not believe that any group of men, no matter how wise they may be
or how honest (hey may be, should have the power so that they might
regulate the life and the death, the thought and the actions of the
banking system to the extent that they attempt to do in this regulation, or in this determination of their regulation.
The amount involved in this, as I understand it, is about $8,000,000.
In a banking system of $100,000,000,000, you would have to stretch
your imagination a long way to say the effect of that would destroy
the soundness of a banking system with $100,000,000,000 in deposits.
1 think, inevitably, that involved in this is the question of branch
banking; the question of State rights. And as you know from my
past testimony here, my attitude on that has always been that the
matter should be left to the States to determine the kind of banking
system they want; and the thing I have always opposed was the
extension of branch banking over State lines by any direct or indirect
method. I think also involved in this is the question of correspondent
bank accounts. All of those things, in my mind, go one-two-three.
WE tried to get the Federal Reserve not to inject this regulation
at tliis time, in the midst of a war, when everyone is busy. When
they addressed these letters to the chairmen of the Banking and
Currency Committees of both Houses, which was done on August 6,
I think it was just about the time everyone was struggling with
subsidy and about the time they were getting ready to go away ori
their vacation.
I think, too, the manner in which this thing has been handled, has
put this committee on the defensive; because my understanding, in
I the beginning, was that they would not do this without l ^ r n a t i ^ i i f g
e members of this committee and the members of the Senate com] miTt.ee. M y understanding is that they went to Mr. Spence and said
\ they would like to have a short hearing in order to discuss this matter,
and then it developed into a lengthy hearing here. But the impression
1 got from the Federal Reserve Board was that this was brought up
501ABSORPTION"OF EXCHANGE
CHARGES
at the request of this committee. I also now understand that .this
hearing; was_started_.at the...req.iies.t of the Federal .Reserve .Board.
Now thislaw was enacted in 1933 and 1935. It has' Beeh^on the
statute books for a great many years. Personally, I think it is very
unfortunate that we have all had to waste our time during a war to
discuss a thing of this nature. There has been discussed here the
question of production credit loans, cooperative credit loans, whether
we would be better off to do this, or to do that, and disregard this
regulation. I do not think two wrongs make a right. I feel whatever
rights the banking system has under this system here, if they have any
rights coming to them, they should have them.
I have always rejected and deeply resented regulation by legal
interpretations of administrative laws, and I think that is what this
is, and I want to put myself on record as being in favor of the Brown
bill. And I think you men, if you vote this bill out, will be making a
very, very definite contribution to free enterprise and to the rights of
management, and you definitely will serve the necessities of the banking system supervisors of this country; for they have no right to step
oyer the foul line by interpreting legislation m an aclimmstratiye way,
without first coming to Congress and letting them discuss this thingoil its merits.
In the beginning, they said the thing involved in this was the
question of absorption of exchange. Later, as you men went on, you
could see that definitely linked to this is the question of par clearance.
Now for 25 years they have been trying to get par clearance through
this committee and through the courts; in some way, to force par
clearance on the banks of this country, but neither your committee
nor any other committee has ever been willing to do it. I have no
objection to coming up here on a par clearance bill and meeting it
head on if they let us know what it is; but I do object trying to link
that in and getting it in some indirect way, and I feel very definitely
that is what is involved here.
In our State bank system, I have always been a strong believer in
respecting the rights of the State supervisors, and I have always
believed that you cannot regulate to the place where you are going
to do the thinking for management; that management must not
backfire on their responsibility for their operations. And I think
it is time wasted on this thing here, in comparison to the amount
involved, as it is perfectly silly to talk about that being an unsound
practice in a banking system of $100,000,000,000. I think it has
been exaggerated terribly.
I am not going to take a lot of your time. You men know my
philosophy as to a sound and unsound banking system. You men
have been kind to Federal Deposit Insurance; you have been .kind
to mepersonally. I' could "go "on and' elaborate "here for hours as to
why I believe these things must be stopped, but I want to finish and
will answer any questions you ask me. I think what is involved here
is something a whole lot deeper than this question of $8,000,000.
I will be very happy, Mr. Chairman, to answer any questions you
want to ask me.
Mr. FORD. I would like to ask one question. Mr. Crowley, I have
a tremendous amount of respect for your opinion. You have done a
magnificent job in the F. D. I. C., but you would not say that you could
502
ABSORPTION" OF E X C H A N G E
CHARGES
not tell a bank it would have to cancel a loan that they made, would
you?
Mr. CROWLEY. YOU mean we would tell them to cancel a loan?
Mr. FORD. If you went into their portfolio and found their judgment was bad, you would not want to be deprived of the right of
telling them that was a bad loan and they would have to take it
out?
Mr. CROWLEY. I think all the right we have on that is the right to
take such information as the bank may be able to give us and, if we
feel the loan cannot be paid, we would simply make a report to the
board of directors and suggest that they charge that loan off out of their
profits. We do not tell them they have to call that loan, or that they
should not have made that loan; it is just a matter of whether it
should be carried as a good asset, or not.
Mr. FORD. But you do not want them to carry that in the bank's
assets?
Mr. CROWLEY. We do not want them to carry an asset that we feel
is lost, as a valuable asset. But I do not think that has anything
to do with this thing here.
Mr. FORD. In my mind, I connect the two things up in principle.
I think if you can regulate a bank
Mr. CROWLEY. We do not object, in this instance of exchange, to
going in and sitting down with the banker who is using this to the
detriment of his bank and discussing it with him and showing him that
he should not do it to that extent.
I think this whole question of supervision gets back to the respect
and the influence that you have with your individual banker and the
board of directors, to cooperate with them. We cannot run the
banking system from Washington.
Mr. FORD. I do not believe that is the question that is involved, Mr.
Crowley, but I think you have got to have some kind of a general
regulation to cover this. Now if they were going to have to take up
each specific case—if the Brown bill is passed, of course that lets it
out; but, under the present circumstances, they have to go in and
take up every specific case and crack down on that. That is what
these fellows are objecting to. And the ones that are actually using
the exchange thing as a method of securing benefit, or a profit, or a
return, while at the present time it may only be $8,000,000, I can
conceive of it being $800,000,000.
Mr. CROWLEY. NO; I do not agree with you on that; because I do
not think there is any danger of it growing to that extent; because
you understand they have had that practice now for a great many
years and, if they had wanted to, all of your banks could have been
in the same category as these little 2,100 banks. But they did not
do it.
Mr. FORD. I know, but it was a very important factor in the days
when they paid interest. They paid higher interest than they ought
to; then they absorbed exchange and some of them, even, almost
installed a nursery to try to get money into their banks. That is
what I do not want to bring back.
Mr. CROWLEY. Let me say this You know the things that were
passed in your banking laws in 1933 and 1935 appeared to be necessary
at that time; but many of the reasons for some of the legislation that
was passed back in 1933 and 1935 have been eliminated. There is
503ABSORPTION"OF E X C H A N G E
CHARGES
nothing so sacred about not paying any interest to a depositor, for
his deposits; and we do permit interest to be paid on time deposits.
Of course we regulate them and say they cannot pay beyond a certain
amount, as a maximum; but 99 percent of your banks are already
paying much less than the regulation calls for. What I am getting
at is that it looked at the time that we put that in that perhaps the
bidding for funds might have been part of the weakness in our banking
system. That was when you could send money East and get an
exorbitant rate of interest.
But there have been regulations passed and laws passed and you
have the Securities and Exchange Commission and the Reserve
Board that have been given control over that thing. It might be
well, some time soon, to kind of take a look at the bank legislation
{Sat^ Wpassed in 1933 and 1 9 ^ We did that at a time when there
wasagreat emergency on and maybe we went a little too far on some
of these regulations, and it may be that we are really holding back
some of the credit flow of this country, and it is not what it should be
in some of the small communities, and that a lot of the restrictions
we passed then, because we were faced with this emergency in 1933
and 1935, are not necessary now. There is no reason why we should
not take a look at this thing again.
M r . FORD. I agree with you, but I do not like to be chipping away
at this and giving an advantage to one group and denying it to another.
M r . CROWLEY. Let us assume we do abuse the powers we have in
the classifying of loans: Because we do that and have that authority, is there any reason for injecting another regulation on top of the
banking system that we do not need?
Mr. FORD. Well, it is a question of opinion whether we need it or
not. I agree with you that probably the entire banking laws of 1933
and 1935 ought to get an overhauling; that in view of S. E. C. and all
of the other restrictive measures we passed, maybe it would be a good
thing; but I do not believe we are going to cure any of this by willynilly opening the door.
Mr. CROWHLEY. I do not think you are opening the gates at all.
Here are 2,100 little banks involved that have been carrying on this
practice for 25 years; the whole thing amounts to $8,000,000, and that
is the largest part of their net income. Now, we are going to take
that away from them on the theory that it represents an unsound
contribution to the banking system. It doesn't make sense.
Mr. FORD. I know, but what are the gross deposits in those little
banks. That is the thing I am worrying about.
Mr. CROWLEY. About $2,000,000,000 in a system of 100 billion.
The deposits are so small that again it makes my argument all the
stronger; because you cannot say they have any great influence for
unsound operation in your banking system.
M r . FORD. Well a sore throat is not a dangerous thing, but it can go
into the flu, you know.
¥ Mr. CROWLEY. But any time they want to advocate something, all
[ they have to do is to talk about "this is unsound" and "that is unLsound," and you bring up that old bogy question.
*
Mr. BARRY. M r . Crowley, in your experience in the banking
business, was the word "exchange" ever used to mean "interest"?
M r . CROWLEY. NO; that never figured. I do not think the little
banks ever considered, or the big banks either, that the absorption
504
ABSORPTION"
OF E X C H A N G E
CHARGES
of exchange was interest on deposits. This absorption has been going
on for a long, long time, long before your regulations went into effect.
Mr. BARRY. And when this definition of interest was agreed on
between the F. D. I. C. and the Federal Reserve Board, at that time
was it contemplated that definition of interest would include exchange?
Mr. CROWLEY. Back when they first issued their regulation, we
did not go along on it because we would not agree on the definition.
They then got it out and that is the time Congressman and Senators
and the White House requested them to withdraw that regulation.
Mr. BARRY. SO far as you know, this committee was never faced
with the clear issue of whether or not exchange should he defined as
interest?
Mr. CROWLEY. NO, ancl I do not think there is anything in the
testimony on the Bank Act of 1933 or 1935 that indicates that,
either.
Mr. FORD. Just at that point: Did not we have a discussion on that
a couple of years ago and finally decided the best thing to do to get
rid of it was to permit the Board to determine and say what was and
what was not "interest"?
Mr. CROWLEY. NO. I do not want to say positively, but I do not
think it was ever officially before this committee since the law was
enacted, except in an unofficial way at the time we agreed to postpone the regulation.
Mr. ROLPH. Right along the line of what happened in 1935, Congressman Doughton, chairman of the Ways and Means Committee of
this House, appeared before this committee on January 24 and I
would like to read the first paragraph of his statement:
In 1933 when I voted for the Banking Act, which contained the provision
prohibiting banks from paying interest on demand deposits, I had no idea that
10 years later this law would be used to disrupt the charging of exchange by the
many hundreds of small banks in this country which have engaged in this practice
for years and are dependent upon it as a chief source of income. H a d there been
any indication that this provision would be so misconstrued, I would have insisted
upon an amendment such as that proposed in the pending bill. I did not do so
simply because there was nothing in the language of the provision or the legislative record to suggest to me that the power to regulate interest charges could
be stretched to include regulation in the field of exchange charges. So far as
I know, that interpretation was never discussed or considered.
That is Representative Doughton, chairman of the Ways and
Means Committee of the House of Representatives, who made that
statement right here before this committee.
Mr. CROWLEY. Congressman, I think many, many of the members
of this committee at that time would have felt the same way.
Mr. ROLPH. YOU said in your remarks that the discussion in
connection with this legislation went far afield of just the simple
little language in the bill, and a great deal of stress has been laid on the
expenses of the banks. Many exhibits have been introduced into the
record here showing the returns to the bank from this exchange, and
showing in many instances that it is the difference between profit and
loss.
Mr. CROWLEY. That is right.
Mr. ROLPH. NOW in addition to this exchange item which, as I see it,
means keeping a good many of the banks in the black, I understand the
banks of this country are performing a wonderful service to the
Government, for which they get no remuneration at all, that is, in
505
ABSORPTION"
OF E X C H A N G E
CHARGES
handling the sale of bonds. And do not you think it would be very
unwise to interfere with that marvelous war effort and clamp down on
the banks at this time, and that to enforce this regulation would be a
great disservice to the conutry?
Mr. CROWLEY. I agree with you.
Mr. ROLPH. D O not you think so?
Mr. CROWLEY. I agree with you.
Mr. ROLPH. As a matter of fact, when I was out home during the
summer recess, a number of bankers spoke to me about the expenses in
connection with all of these different activities of the Government, and
I want to say, if for no other reason, if those banks are sound, when
they are faced with this situation, we should pass this bill out unanimously and put a stop to this practice of interfering constantly with
the management of these small banks.
Mr. BROWN. Many of the banks of the Middle West are affected,
too.
Mr. ROLPH. Yes; all over the country.
Mr. CROWLEY. And that is not only in just this particular regulation, but I think if this committee brings this bill out it is going to
have a very wholesome effect on your whole banking system and your
whole supervisory system. I think it is going to do a lot of good for
your State supervisors and their rights and interests, as well.
Mr. ROLPH. I do not know whether you realize the tremendous
amount of work the banks have to do in handling ration coupons.
, They getjjjjttle remu
from the Government, but the expense
^is nve or six times what they get out^of rt.
Mr. "CROWLEY. That is right; Tligree witk^QU.
Mr. ROLPH. Thank you very much.
Mr. PATMAN. Mr. Chairman, I want to ask a question. Mr.
Crowley, I have given this matter serious thought. On account of
your interest and especially Mr. Brown's interest, I have been trying
to see your viewpoint; I have been doing my very best to do it.
There are some things that bother me along that line that I just do
not have reconciled and do not understand to the extent that I can
come to your viewpoint right now. Possibly you can help me.
If the banks are spending money in the bond drives and in taking
care of the coupons have expenses that they should not be compelled
to absorb, I think the Government should stand that expense, but we
should do it directly.
Mr. ROLPH. The banks are not complaining; the banks are glad to
do it, but it is a very great expense to them.
Mr. PATMAN. I say if it is putting too much of a burden on them,
the Government should pay that cost; but we should do it directly;
we should not do it in some round-about, indirect way that is really
a subsidy.
Mr. KEAN. But the banks do get a deposit when they sell bonds to
their customers.
Mr. PATMAN. Well the banks are pretty well taken care of; they
are pretty well provided for, and it won't be long before the banks
will be in a very vulnerable position, when the point is reached, as it
doubtless will be reached, that they will own so many Government
securities that the interest on those Government securities will
amount to as much as their entire capital stock is. And when they
94473—44—pt. 13
3
506
ABSORPTION" OF E X C H A N G E
CHARGES
reach that point, they are in a very vulnerable position, and some
fellow might get up over here on the floor of the House and say "Why
pay these fellows a billion and a half or two billion dollars of interest;
why not buy them up and buy the stock, and save all this interest
every year." And the banks are getting in a very vulnerable position. They are doing it for a patriotic reason, I admit, and they are
to be commended for the work they are doing.
Mr. ROLPH. They are doing a fine job.
Mr. PATMAN. But we cannot give them everything, you know.
Now I was very much impressed with the testimony of the witness
from North Carolina, who said he could not invest his reserves in
Government bonds of any type or character, but he could place those
reserves with a correspondent bank who could, in turn, invest them,
and that by favoring his correspondent bank that way and the
correspondent bank profiting by reason of that favor, the correspondent bank would absorb certain charges for him, the local bank.
Now where those reserves cannot be invested by the local bank and
can be handled in that way, it impressed me as being a very fair and
reasonable thing to let him do that, and I think I would be inclined
to vote for any bill that would permit him to do that in a case like
that. But the point I am getting to is where the bank can invest
its reserves—and there are many different ways the Treasury has
provided for it to invest its reserves, not only in three-eights percent,
but seven-eighths, and also in 2 percent and even 2% percent bonds,
' in certain instances—and can get their money back instantly, if they
: need it, I cannot understand why the correspondent bank would ac| cept an account from the local bank unless the correspondent bank
1 in some way, directly or indirectly, made money on that account.
Can you explain why they would?
j
Mr. CROWLEY. Let me say this to you, Mr. Patman, in answer to
j that question. As far as I am concerned, my principal objection is I
I do not think you can satisfy the rights of those 2,100 banks by giving
j them a lolly pop.
I
Mr. PATMAN. What do you mean by "giving them a lollypop"?
i
Mr. CROWLEY. They very definitely have some rights as citizens of
! this country and as managers of this banking system, and whether we
! pay them three-eighths of 1 percent or 5 percent for their money, I
I do not believe that ordinarily you have any justification in taking
| from them their rights as citizens because you are going to give them
I something to pay for that right.
1
Mr. PATMAN. Yes; but, Mr. Crowley, all the banks asked us to pass
that law to make it unlawful for interest to be paid on demand deposits; the banks themselves asked for that type of interference.
Mr. CROWLEY. I think we are getting involved in what they do
with their funds and what the correspondent banks do with their
funds; I think we are getting involved in something other than what is
before us in this bill.
Mr. PATMAN. I do not think so. Let me make it a little plainer.
Here is a bank in Texarkana, Tex., my home town. That bank can
send its funds, we will say, to a Dallas bank or to a St. Louis bank;
take its reserves and not invest them in Government bonds but send
them to St. Louis, we will say. Now do you you think that St. Louis
bank would expect to make a little profit out of that; otherwise, they
would not absorb the exchange charges for the Texarkana bank?
507
ABSORPTION"
OF E X C H A N G E
CHARGES
Mr. CROWLEY. I think that any bank, when it accepts a deposit
from you, or when any man sells you something they expect to make
a profit out of you. And I have some evidence to show that on your
service charges, they figure your balances and things like that in
determining your service charge. Yet we are not in here telling the
banking system: "You cannot make a service charge; you cannot do
this; you cannot do that."
Mr. PATMAN. But that is not answering my question. Suppose
we confine it to just that one case, if you please. That is a reasonable
illustration, one that is likely to occur any place in this country. Do
not you think the correspondent bank would expect to make a profit
out of that account, or it would not carry it?
Mr. CROWLEY. I assume that any man in business, in any of his
operations, wants it to be profitable.
Mr. PATMAN. Yes, sir: and if you were a correspondent bank, you
would not take an account unless you could make a little money out
of it, would you?
Mr. CROWLEY. I think in every business there are certain things
which are done and where you cannot say every move is profitable.
Mr. PATMAN. That is not the question, though, Mr. Crowley; you
have not answered my question. With all due respect to you, you
have not answered my question. I ask you this question: Will the
correspondent bank handle the account for this local bank unless the
correspondent bank normally expects to make a profit?
Mr. CROWLEY. I think that all depends on how keen the competition is. I have seen many times when business was willing to do a
lot of things for good will and things like that.
Mr. PATMAN. But that is an exceptional case. I am talking about
normally. Will a correspondent bank take an account of a local
bank and handle it in the way that has been described here, unless
the correspondent bank can make a profit out of it? You would
not do it, would you, as a normal, general, rule; as a normal procedure
and a general rule, you would not do it, would you?
Mr. CROWLEY. I presume a man in business would naturally try to
operate all of his departments at a profit.
Mr, PATMAN. Wall, am I assuming correctly JJ^SAJING your answer
to it is "yeg.^" that they would normally .expert to^maSFa" PIP®^
Mr. CROWLEY. YesjpiutXwant to add this to my answer I do not
think that is involved in this question; whether a correspondent bank
is operating at a profit or a loss, I do not think, has anything to do
with this bill before us.
Mr. PATMAN. Well, I am all haywire on this bill before us. Now,
then, if that bank in Texarkana sends an account to St. Louis and lets
the correspondent bank make a profit—and naturally they are going
to make a profit, or they would not take the account—why w^ould it
not be better to keep that money right there in Texarkana and invest
it in Government securities which, if the money was needed, they
could get back on a moment's notice, almost, and just as easy as they
could get it from St. Louis, and make as much or more profit? Now
you tell me why that would not help the Texarkana bank, and that
will help me in passing on this thing.
Mr. CROWLEY. I do not set myself up as an authority to tell the
fellow in Texarkana, or wherever he may be, what he ought to do
with his funds. If he wants to put them in a correspondent bank,
508
ABSORPTION" OF E X C H A N G E
CHARGES
in place of buying Government securities, or wants to invest them
any other way, that is the responsibility, in my opinion, of managenient.„
Mr. PATMAN. But you are in favor of local management and local
control?
Mr. CROWLEY. I am in favor of local management and local control.
Mr. PATMAN. That being true, you are in favor of keeping local
funds at home.
M r . CROWLEY. Yes.
Mr. PATMAN. N O W ,
do not you know, if this money is sent to St.
Louis, there will be less incentive for the Texarkana bank to make
loans in Texarkana?
Mr. C R O W L E Y . N O ; I do not agree with that. That money, even
if it is sent to St. Louis, to the correspondent bank, still would be
available if they could get any loans in their own district.
Mr. PATMAN. But if they are required to keep a certain balance in
St. Louis, that would stop them from making loans in Texarkana.
Mr. CROWLEY. With the liquidity of those banks, by investing in
Goverment securities and things like that, it would be a long, long
time before they would draw their balances down so that they could
not loan money in the local communities.
Mr. PATMAN. But is it not a fact, Mr. Crowley, that the local bank,
as a general rule, can get more profit by investing its own funds, as
now provided by law, than it would if it were to send those funds to a
correspondent bank?
Mr. CROWLEY. I am going on the theory that all local banks have a
very definite responsibility to take care of the needs in their local
communities and the more funds they can employ in their local
communities the more profitable it is and the more the contribution
they are making to their local community.
Mr. PATMAN. That being true, would it not be better to keep those
funds right there in that locality?
Mr. CROWLEY. I do not know what you mean by "that locality."
They have to have some correspondent accounts.
Mr. PATMAN. Evidently they must have them, unquestionably; but
I am talking about generally having the major part of their reserves in
those accounts. I am not convinced; in fact, the way it looks from
here, from the testimony I have heard, the correspondent bank would
be better off if it invested the money itself. .JUldJdlis^uestioiiof
interference does not appeal to me at all, because the banks have
asked for too much interference from the Government^ to complain
aJMOiiJthat. -
"
Mr. CROWLEY. Wait a minute. What kind of interference have
they asked for? I have not seen any interference which the little
fellow comes for here that helped him very much.
Mr. PATMAN. Well, you take those demand deposits: The little bank
asked for that, and the American Bankers Association. And, by the
way, how do the American Bankers Association stand on this bill;
do you know?
Mr. DILWEG. Right at that point, a number of bankers testified
here that they did not ask that interest be removed on demand deposits, but subsequently thought that Congress showed proper statesmanship when they put that law into effect.
Mr. PATMAN. Well, they did not protest.
ABSORPTION OF E X C H A N G E
CHARGES
509
M r . DILWEG. That is the testimony.
M r . PATMAN. Let me ask this: Do they plan coming here—the
American Bankers Association? I have not heard from them in this
hearing at all. I presume they will come forward and express themselves. This involves all banks, and naturally they ought to have
something to say, and I look forward to hearing what recommendations they have to make.
Mr. CROWLEY, ket me say right therfi I won't .have a friend -left
around Washington at all, wkeall^fiJLJibLrough testifying on this.bill.
It is a strange situation for a bureaucrat to come up here before this
committee and be arguing about "regulation." As a rule, we are up
here arguing for more power, and I am tryijig to preserve for the small
banks of this nation the right to determine their own destiny, that
they may have some elbow room to run their own institutions. We
are the fellows who insure these banks; if something happens to the
banks, we are the ones who are going to pay their losses. And let
me say this to you: Deposit Insurance will never suffer enough loss
in dollars and cents in these banks to be particularly hazardous to the
financial position of Federal Deposit Insurance. I n my judgment,
Congressman Patman, the very backbone of your whole small business structure in this country is your small bank. Now you aske me
where the A. B. A. stands on this thing here. I have a statement
that the present president made at the time deposit insurance was
: being talked of, where I think he said it would create socialism if
/ deposit insurance was put into law. Now the A. B. A. are all good
I friends of mine, but they use the little fellow to contact you Congressmen every time there is any legislation up, and the big fellow stands
J back and lets the little fellow become the front.
M r . PATMAN. I am asking if that is the reason the A. B. A. won't
be here?
I
Mr. CROWLEY. The big banks are all silent at this time; but, in
I reality, they are giving this bill the "foot" all the time. It is unfair.
I The only thing I have ever seen that they openly stood for is a late
I fall and an early spring. That is the only thing I think they will
I positively stand for.
Mr. PATMAN. And you do not think they will be up here to testify
before the bill is brought out?
M r . CROWLEY. I do not care where they stand on it, because I think
it would be a vacillating thing no matter what they stood for.
M r . PATMAN. There is another thing I hope you will help me out on.
M r . CROWLEY. First, may I read his statement?
M r . BROWN. I want to call attention to the fact that Mr. Drawdy,
of the Georgia Railroad Bank & Trust Co., testified they were the
correspondents for about 80 banks, and began probably back in 1835,
and it is a matter of fact if they did not absorb exchange and collection
charges that they could probably make more money, but they had the
good will of these people and the interest of these localities at heart
for 75 or 100 years. He wrote me a letter later and also testified to
that fact, that probably they would make more money if they did not
absorb exchange and collection, on account of dealing wTith those
people interested in the community and have been there for 75 or 100
years.
510
ABSORPTION OF E X C H A N G E
CHARGES
M r . CROWLEY. This is the statement M r . Wiggins made on the
Banking Act of 1932.
said:
The question was asked Mr. Wiggins and he
If you are willing to precipitate another
The CHAIRMAN. Oh, no; do not say another one. Do not talk about precipitating a panic when cotton is 5 cents & pound.
Mr. WIGGINS. I am not talking about a panic; I am talking about something
else. If you are willing to precipitate another series of failures, pass the law.
That was the statement of the present chairman of the A. B. A.
against Federal Deposit Insurance.
Mr. PATMAN. While we were considering Federal Deposit Insurance?
Mr. CROWLEY. That is right.
Mr. PATMAN. Of course, I am opposed to their views on that;
I am in favor of your views on that. Now, you are in favor of investing reserves locally, are you not?
Mr. CROWLEY. May I just answer you in this way?
M r . PATMAN.
Yes.
Mr. CROWLEY. We had an old fellow back home when Judge
Kaiser was running for the United States Senate and he said to James
McCormack, who was his coachman, he said, "James, are you going
to vote for me tomorrow?" James said, " M r . Kaiser, I cannot vote
for you tomorrow, but I will do all I can for you." You are doing
that for me, too.
Mr. PATMAN. Well, I fail to see the light and you do not help me
when you fail to give a satisfactory answer as to why the local bank
has to send its money away from home, when it would do better if it
kept it at home.
Mr. CROWLEY. I did not say they would do better by sending it
away from home. I want them to employ as much of their funds as
they can at home, and I want them all to do that, too.
Mr. PATMAN. N O W here is the point: Why is it that these banks
will be in such a desperate situation in the event par clearance is
required of them, or we pass this law, or not pass it, while a number
of other banks of the same size, some of them operating in the same
communities, across the street, are faring all right? Why is that?
Mr. CROWLEY. Let me answer that in this way: Wh.en I first came
up here in December, my understanding was par clearance never was
thought about in connection with this at all. That was furthest from
the thought of the Federal Reserve Board. We were talking about
this regulation.
Mr. PATMAN. Please do not accept anything I say as representing
the Federal Reserve Board, because of all people I do not represent,
I do not represent the Federal Reserve Board.
Mr. CROWLEY. There was no statement at all that par clearance
was tied into this thing here, and that was the indirect reason for all
of this maneuvering. Now the thing I said in December, and say
now is if you are going to talk about "par clearance," put a bill in
and let us have it right out, and not do it in some indirect method.
Mr. PATMAN. Would you favor such a bill?
M r . CROWLEY. Put the bill in and see.
Mr. PATMAN. Would you favor it, or oppose it?
Mr. CROWLEY. I would like to look into it first.
Mr. PATMAN. Well, you ought to have a very definite conviction
.on that, Mr. Crowley—a man with your experience and knowledge.
511ABSORPTION"OF EXCHANGE
CHARGES
You would not like to say now, whether you would favor such a bill?
M r . CROWLEY. I have always been a very strong State rights man
and have always been very strong for State systems.
M r . PATMAN. But you really have not answered my question.
M r . CROWLEY. That bill is not before us.
M r . PATMAN. But this question is before us.
M r . CROW^LEY. Where do you think I would be?
Mr. PATMAN. But you have not answered my question; that is,
why these banks that you are talking for now will be in such a desperately serious situation in the event this bill does not pass, when other
banks of the same size, of the same capital, the same deposits, operating in the same town, across on the other side of the same street, are
faring all right. Now you just tell me that, and that will help me a lot.
Mr. CROWLEY. Let me say this to you first, as far as that is concerned: You might be able to get along pretty well on $12 a week;
I might not be able to get along quite so well. But the thing I object
to is why do we have to have a regulation at all, why not leave this to
the banking system that they might police themselves, and why are
we going way down to the bottom of the barrel to find some little bit
of a reason for passing this stricture on the banking system? Let us
assume they could live without it; do we want to cut them down to
just a mere existence, because we have a right to do it?
Mr. PATMAN. But, Mr. Crowley, the principal argument made for
this bill is that, unless it passes, these banks, most of them, will have
i to close, forcing a change in the branch-banking system; that they
| just cannot make money. And I cannot understand why they cannot
i, operate, when their competitors across the street, with the same
5 capital, with the same deposits, with the same of everything else,
can go ahead and make money. I just cannot understand it, Mr.
1 Crowley.
Mr. CROWLEY. That is true in life, all the way through. You and
I have the same heart and the same lungs, and everything else; but
one might not be as strong as the other.
Mr. PATMAN. But here are 2,500 cases.
Mr. BARRY. If they are both getting along all right, the par and
the nonpar, why disturb that situation?
Mr. PATMAN. I will leave that, because I assume no fair answer
can be given; but I will ask you another question, Mr. Crowley.
Why does it happen, as in the State of Iowa, that they passed a
State law out there against this? They have par clearance out there,
and your little banks get along all right out there; do they not? And,
even if they were to pass this law, it would not apply to Iowa.
Mr. CROWLEY. Let me say there was an awful lot of banking legis- i
lation passed in the days when we were all sweating and worrying I
about the banking system of this country. I have been active in *
State legislation and I don't think the little banks of Iowa ever went
up to their legislators and begged for the enactment of that law. That
is just another one of those things which happen in our form of government. But if you leave a group of State congressmen and State
senators alone, they will review it in time and straighten it out; and
I think Iowa will straighten itself out eventually, too.
M r . PATMAN. YOU think they will repeal this law?
M r . CROWLEY. I would not be surprised.
Mr. BROWN. But this bill would not affect Iowa.
(
512
ABSORPTION" OF E X C H A N G E
CHARGES
Mr. PATMAN. N O ; it would remain just as it is.
Now, Mr. Crowley, I would like to vote for a bill here, if it would
freeze the situation as it is, where it could expand and there be no
competition between the banks. I would be inclined to vote for that.
I would like to see the bill first, like you would like to see the bill
about par clearance.
Mr. CROWLEY. This is not a freezing thing, and that would not be
a satisfactory solution of this problem. You don't have any right to
freeze my rights on a thing like this.
Mr. PATMAN. Mr. Crowley, of all the people who cannot complain
with good grace about interference in the banking system, there is one
bureau all the bankers favor, the Bureau of Engraving and Printing,
and nobody hears them say anything bad about that.
M r . CROWLEY.
O h , no.
Mr. PATMAN. And they have gotten very good legislation from the
Congress.
I
Mr. CROWLEY. Very favorable.
I
Mr. PATMAN. And it would come with poor grace for them to
I complain about a little legislation, or a small amount of interference,
I to prevent the expansion of a bad policy in the banking fraternity.
Mr. CROWLEY. What I mean is that I don't think a freezing,
Congressman, meets this thing head on. I really think this practice
is not something growing by leaps and bounds. As a matter of fact,
I think it has diminished more than it has grown. It has not grown
to any great extent. So why should we want to go to the expense of
putting a freeze on, when there is no great growth in the practice?
Mr. PATMAN. Suppose a case would come to you, as Chairman of
the Federal Deposit Insurance Corporation's Board, exactly like
the case which came to the Federal Reserve Board, how would you
have passed on that?
Mr. CROWLEY. In the first place, I don't think I would have made
the interpretation they made in the first instance. In Federal Deposit
Insurance, we have never come up here since 1935 and asked for any
amendment to our law, have we?
Mr. PATMAN. I don't recall any, but you had a pretty good law
to start off with, did you not?
Mr. CROWLEY. Yes; but, like all these fellows downtown, we
could have been running up here if we wanted more power.
Mr. PATMAN. YOU are not lacking in power, are you, Mr. Crowley?
Mr. CROWLEY. Oh, we could use some more.
Mr. PATMAN. But you have ample power, have you not?
Mr. CROWLEY. I think the success of Deposit Insurance has been
in the cooperation with the State commissioners and in working with
the Federal agencies, plus the fact that where we had a problem, in
most instances we have been able to work it out with the individual
bank.
Mr. PATMAN. Another thing that bothers me on this thing, Mr.
Crowley, is the argument made that it is invalid, illegal, this order.
I cannot understand why a bank did not go into court and contest it.
I have been in little towns and I know the smaller the town the smaller
the lawyer's fee; and in every town and with every bank you can
always get a case brought into court, and at a price that is not prohibitive. I just cannot understand why somebody did not contest
513ABSORPTION"OF E X C H A N G E
CHARGES
this thing in the courts, where an interpretation could be made by the
courts.
Mr. CROWLEY. I think you pretty well know the fear the average
citizen has about coming to Washington or getting into the Federal
courts. I was 30 years old before I knew they gave us anything but
an income tax.
Mr. PATMAN. YOU don't insist that they would have to come to
Washington, do you?
Mr. CROWLEY\ Congressman, you don't want legislation that is
going to force a lot of little fellows into the courts to try out the.
legality.
Mr. PATMAN. All right; let us start on another approach. What ,
about declaratory judgments? Why haven't you gone into court and
gotten a declaratory judgment?
Mr. CROWLEY. Wait a minute. You have gotten me on the other
side. I am a part of the Government here.
Mr. PATMAN. All right.
Mr. CROWLEY. YOU have me up here in the position of one of the
little bankers.
Mr. PATMAN. Well, there are about 5,000 of the banks not members
of the Federal Reserve System, are there not? Just between 4,500
a n d 5,000?
Mr. CROWLEY^. Somewhere around that.
Mr. PATMAN. And about half of them are affected by this bill?
M r . CROWLEY.
Yes.
Mr. PATMAN. And the other half are not.
Mr. CROWLEY. We want the other half on something we can find
a regulation on.
Mr. PATMAN. Why doesn't your counsel join the counsel of the
Federal Reserve Board in asking the Attorney General to get a declaratory judgment? That would not involve, the prestige or the standing
or the public relations of any bank in the country. That would be
right here in Washington and you could just go in the court here and
ask the court to give you a declaratory judgment. Would you be
willing to do that?
Mr. CROWLEY. NO ; I think this committee either ought to vote this
bill out or vote it down. As far as I am concerned, Congressman, I
think I have fulfilled my public responsibility when I have made my
views known on this thing here. You have had a notice of this thingy
and if the committee feels they want to turn this bill down, then they
have to take the responsibility for it; and, as far as I am concerned, I
am not going to the Attorney General or play around with the thing
any more. I am going to make my position publicly known, and that
is all there is to it.
Mr. PATMAN. I have asked for information in two instances, which
has not up until now been furnished. As to one of those, I just made
the request yesterday and, of course, I have not had an opportunity
to get it, even if it has been prepared. One is as to the banks involved
in this, about 2,600, I believe. I wanted a statement about the size
of the banks, and a break-down as to each bank. I wonder if that is
available.
Mr. CROWLEY. We will get it for you.
Mr. PATMAN. IS it available now?
94473—44
4
514
ABSORPTION" OF E X C H A N G E
CHARGES
Mr. THOMPSON. We have been preparing that. I have some of the
material now, and we hope to get it to the committee this week.
Mr. PATMAN. This week?
M r . THOMPSON. Yes, sir.
Mr. PATMAN. This is now Wednesday.
M r . THOMPSON. Y e s , sir.
M r . PATMAN. A n d the other?
Mr. C R O W L E Y (to Mr. Thompson). Wait a minute. You want to
get it so that if they are going to vote on this bill, they won't hold
up on account of this.
Mr. THOMPSON. I have two tables here now, showing the earnings
and the distribution of assets.
Mr. PATMAN. Have you broken it down as to each bank, or just
in classes and groups?
Mr. THOMPSON. N O , sir. By arrangement with the Federal Reserve, it was decided we would answer both sides of your request.
Mr. PATMAN. That is fair.
Mr. THOMPSON. That is, prepare the data for the par and the
nonpar banks, grouping them by size.
Mr. PATMAN. And are you working with them on this?
Mr. THOMPSON. The Federal Reserve has left it to us to get up
the data, because we have it in our files, and we have not had time
to turn it over to the Federal Reserve.
Mr. PATMAN. Then it will be a joint preparation agreed upon by
both of you?
Mr. THOMPSON. N O , sir. We will submit the tables and the data
to the committee, and the Federal Reserve will also have an opportunity to look at it.
You know, the uses of statistics are rather strange, and you can
pick people of the utmost probity and good will and technical skill
and give them the same data, and they will come out with different
conclusions.
Mr. PATMAN. I think everyone on this committee realizes that.
Mr. THOMPSON. SO we would not think of introducing this material
as coming jointly from the Federal Reserve and ourselves, until the
Federal Reserve has had an opportunity thoroughly to go over it.
Mr. PATMAN. I certainly don't want you to understand me as
saying I want you -to do it without their approval. Of course, if
they approve it that is all right.
(The tables referred to follow:)
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519ABSORPTION"OF E X C H A N G E
CHARGES
Mr. PATMAN. Then the other request was about the chain banks
in this group, and the holding-company banks. One thing that
appealed to me at the very beginning, Mr. Crowley, was that if we
did pass this bill, it would render unnecessary the establishing of
branch banks and holding-company banks in a lot of these communities where these banks would be squeezed out. That appealed to me
very much. But I was very much disturbed when the first witness
coming on here was a holding-company man, who owned a lot of
banks down in North Carolina; and it was the same thing as to other
witnesses.
Do you have that information?
Mr. THOMPSON. The Federal Reserve has prepared information on
the holding-company banks, and we have prepared information on
the branch banks, of which there are about 195.
Mr. PATMAN. In this group?
Mr. THOMPSON. Out of this group of 2,100 to 2,400 nonpar banks.
Mr. PATMAN. There are about 195 of them which are branch banks.
M r . THOMPSON. Yes, sir.
Mr. PATMAN. And how many of them will be holding-company
banks?
Mr. THOMPSON. The Federal Reserve is preparing that.
Mr. PATMAN. YOU have no estimate on that?
M r . THOMPSON. NO, sir.
(The statement on branch banks referred to follows:)
Insured
Arkansas
Georgia
Iowa
Kentucky
Louisiana
Mississippi
North Carolina
North Dakota
State
nonpar
banks
;
operating
8
2
17
1
18
21
35
15
branches,
June
30,
South Carolina
South Dakota
Tennessee
Virginia
Wisconsin
Total
1942
3
20
11
7
37
195
Source: Division of Research and Statistics, Federal Deposit Insurance Corporation.
Mr. ROLPH. Did I understand the gentleman to say he is making
this analysis according to each individual bank?
Mr. THOMPSON. NO, sir; we took them and grouped them by size,
because a difference in size affects the figures quite materially.
Mr. BARRY. Mr. Crowley, referring to Mr. Patman's question
about going into court, this ruling was not actually in force until just
recently, December, was it?
Mr. CROWLEY. That is right.
Mr. BARRY. And it is obvious to you, and I think to most members
of this committee, that when the act was passed to prohibit the payment of interest on demand deposits, Congress never intended that
exchange would be interest?
Mr. CROWLEY. I think that is correct.
Mr. BARRY. SO why should we sit back and compel the small bankers
to go into court to have the courts decide what Congress was thinking
of at the time, when we know ourselves we never considered the
problem?
Mr. CROWLEY. I agree with you.
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Mr. BARRY. We are faced with the issue for the first time, directly,
now.
Mr. CROWLEY. That is right.
Mr. DILWEG. Not only that, but there is the question of the burden
of proof; when the small banker goes before the Board, he assumes
the burden of proof.
M r . BARRY. The examiner, in effect, tells the banker that he is
guilty, and then the Board puts the burden of proof upon the banker
to prove that he is innocent.
Mr. CROWLEY. That is right.
M r . BARRY. So that the banker still must be the moving party.
Mr. PATMAN. M y contention is that if the local bank should go into
the local court, that would place the burden upon the Federal Reserve
Board to sustain their action. Don't you agree to that, Mr. Crowley?
Mr. CROWLEY. But it would not work out in that way, in a practical sense, as far as the little fellow is concerned. The reason he is
little is because he does not have the initiative and drive, or the money
or anything else, to protect himself.
Mr. PATMAN. I am suggesting a way whereby there is no law violation and no prestige involved and no public relations involved. Mr.
Crowley and Mr. Ransom can agree that their attorneys will go into
court right here and ask the Attorney General to get a declaratory
judgment.
Mr. CROWLEY. Congressman, I don't think on this thing here,
Ronald Ransom and I could agree where to have lunch. [Laughter.]
Mr. PATMAN. Well, your lawyers would not have any personal
feeling like that, and they could agree as to that declaratory judgment;
they could ask the Attorney General to go into court and ask for a
declaratory judgment. You can take it.from me as being correct.
M r . BARRY. M r . Crowley, I know you are not a lawyer, but this
language is rather clear. In June of 1934 there was a ruling of the
Federal Reserve Board reading as follows:
I n conclusion it should be noted that, in any case in which a member bank pays
or absorbs exchange or collection charges or other expenses in connection with
any deposit payable on demand, the burden will be upon it to show that such
payment or absorption of charges is not a device to evade the provisions of section
19 of the Federal Reserve Act forbidding the payment of interest on deposits
payable on demand.
Mr. DILWEG. That is exactly my point when I say that the little
banker, when he goes before the Federal Reserve Board, has to
assume the burden of proof.
Mr. PATMAN. You are not talking about the same thing I am. I
am talking about going before the court.
Mr. BARRY. First there must be a hearing, to start with.
The CHAIRMAN. Mr. Crowley, these regulations don't rule against
the little bank at all, do they? But they rule against the bank that
absorbs the exchange, do they not?
Mr. CROWLEY. But it affects the little bank.
The CHAIRMAN. And the real party at interest is not a party to the
litigation at all. Is that not true? The little bank, whose exchange
and collection charges are absorbed, would not be a party. It goes
against the bank absorbing the exchange. It is still legal to make
charges for exchange and collection charges, and it seems to me the
real party at interest would not be before the court.
521ABSORPTION"OF E X C H A N G E
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M r . BARRY. That is right.
M r . PATMAN. And that is why a declaratory judgment would be
the most effective approach.
M r . MONRONEY. I don't think you can get a declaratory judgment.
M r . PATMAN. Let us ask the Attorney General.
The CHAIRMAN. Mr. Crowley, have you completed your statement?
M r . CROWLEY. Yes, sure.
Mr. CRAWFORD. Mr. Chairman, I would like to ask M r . Crowley
a few questions.
Mr. Crowley, in the January 1931 issue of the American Banker,
which you have probably seen, they show a very interesting statement
of deposits and certain other figures of the 300 largest banks in the
country. Then on page 2 of that issue they show an estimate of deposits of all banks as of December 31, 1943, $120,000,000,000.
I was wondering if your December 31, 1943, figures have gone far
enough to permit you to give us an estimate, as rough as you want to
make it, of the total deposits of all banks as of December 31, 1943, as
to demand and time deposits, and the amount of deposits in the nonmember banks which you insure.
Have you any figures on that?
Mr. THOMPSON. We are not able to do that. We just have some
very rough estimates of all commercial banks.
Mr. CRAWFORD. SO, then, as of June 30, 1943, would be the latest
figures we could get from you?
M r . THOMPSON.
Yes, sir.
M r . THOMPSON.
Yes, sir.
Mr. CRAWFORD. Showing the break-down on those deposits?
Mr. CRAWFORD. In your 1941 annual report, on page 70, you show
table 34, number of accounts and average size, in insured commercial
banks, special call dates, 1936 to 1941. And as of September 24, 1941,
3^our report shows a total of 66,918,000 accounts. That is the latest
published figure on that item, is it not?
M r . THOMPSON. Yes, sir.
Mr. CRAWFORD. Would it be reasonable to assume that that figure,
in the aggregate, is considerably greater today than it was at that date?
Mr. CROWLEY. I would think it wrould be fair to assume it has
increased.
Mr. CRAWFORD. Would you mind explaining to the committee, as
briefly as you like, the rough make-up of that figure? I n other
words, that does not mean 66,918,000 individual depositors, does it?
Mr. THOMPSON. NO, sir. , T h a t is supposed to be a count of the
individual accounts as they exist; so that if you have an account in
your own name, if you had a joint account in your wife's name, and
your wife had an individual account —that is, checking accounts—•
and you each had savings accounts in those same three names, that
would be six accounts.
If you were a business concern and had accounts in one hundred
banks r that would be 100 accounts. If you were dealing with a
branch bank and are a widespread concern and had an account in
every branch, say, of the Bank of America, that would be four hundredand-some-odd accounts.
Mr. CRAWFORD. YOU have not made any studies at all showing
the number of individual accounts, have you?
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Mr. THOMPSON. We have made some estimates. We have gone
into individual banks and studied that. I believe the figure is that
this overstates the individual accounts by about 10 percent, in each
individual bank, on the average. But that does not take into account
the multiplication through the system by national accounts.
M r . CRAWFORD. Then we probably would not have more than
65,000,000 depositors?
M r . THOMPSON. Oh, I would say you have less than 50,000,000.
M r . CRAWFORD. Less than 50,000,000?
M r . THOMPSON. Yes; for the country as a whole, eliminating all
duplications through the banking system.
M r . CRAWFORD. In your 1941 annual report, Mr. Crowley, you
show the board of directors of the Federal Deposit Insurance Corporation, yourself as Chairman, Phillips L. Goldsborough as Director,
and Preston Delano, Comptroller of the Currency, as Director.
M r . CROWLEY. That is correct.
M r . CRAWFORD. That constitutes the present board of directors of
the F. D . I. C . ?
M r . CROWLEY. That is right.
M r . CRAWFORD. I would like to know personally if you are in a
position to say whether or not your views, as expressed here this
morning, are agreed to by the other directors, or are these strictly
your personal views?
M r . CROWLEY. I presume, Congressman, being the kind of an individual I am, that a large part of it is my own view. Insofar as
Senator Goldsborough is concerned, Senator Goldsborough is a former
Governor of Maryland, who served in the United States Senate, and
he has been associated with me full time. Senator Goldsborough, I
am sure, subscribes to my theory.
Insofar as Mr. Delano is concerned, I think that the letter of the
Treasury indicates Mr. Delano's feelings in the matter.
M r . CRAWFORD. And when we refer to the letter of the Treasury,
I assume it is the one dated January 29, 1944, which reads, in part:
DEAR MR. SPENCE: This will acknowledge receipt of the letter of January 17
from your committee asking for the views of the Comptroller of the Currency
and the Treasury Department on H. R. 3956.
The statutory prohibition against payment of interest on demand deposits is
a wise provision. To exempt from that prohibition the payment of interest
when in the form of absorption of exchange charges, as proposed in this bill,
would intensify the abuses which have developed in overcompetition for correspondent bank balances. It would, moreover, further discriminate against small
national banks which, under the law, as compulsory members of the Federal
Reserve System are prohibited from making s\ich charges on the great majority
of their checks which are cleared through the Federal Reserve banks. Legislative approval of exchange absorption, such is contained in this measure, is
not, therefore, in the interest of sound banking.
I t is our opinion that the bill should not be enacted.
M r . BROWN. Who signed that letter?
M r . CRAWFORD. I t is signed by D. W. Bell, Acting Secretary of
the Treasury.
From your statement this morning, I assume you do personally
disagree with that general approach I have just read?
M r . CROWLEY. Let me say this to you, that the Comptroller of
the Currency is the policeman for the national-banking system. He
represents his own national system. The State bank supervisors
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523
represent the State system. This does not affect the nationalbanking system, because, under law, very definitely they have certain
practices they cannot do, that some of the State banks do enjoy.
[ have always been opposed to the national-banking system writing
the code and then saying to the State banking system " I f you fellows
ire going to survive, you have to take our code."
Mr. MONRONEY. They are all members of the Federal Reserve
System, are they not, so that their viewpoint would be the viewpoint
>f the Federal Reserve System?
M r . CROWLEY.
Yes.
Mr. CRAWFORD. There is quite a bit said in the discussions on this
general subject, from December 10 to 20, inclusive; and there has been
more or less said during the last few days about this squeeze play.
[ want to ask you this question: In view of the documented record
which shows the great amount of attention given this question, presented by H. R. 3956, and from December 22, 1933, when this question was first raised, up to January 1944, do you feel that the contention can be supported that there was a squeeze play on the part of
the Board of Governors of the Federal Reserve System, following the
passing of our late, loved, and distinguished chairman, Mr. Steagall?
In other words, it seems to me that it is a part of this record that
perhaps should not have been brought in here at all, and I want to
have ycu express your views on it.
Mr. CROWLEY. Let me say this to you, that you cannot stop a fellow
Prom thinking. If you go back to your record, the first letter was
written some time in August, and I think Henry Steagall was away a
^ood part of the fall sick; and I think you will find the day after
Steagall died was the date of one of the letters to one of these banks
absorbing exchange. I think it is a fair conclusion that Steagall,
had he lived, would have continued to do as he had always done,
Ehat is to fight any encroachment upon the State banking system.
Certainly, whoever was handling the affiars did some pretty good
timing—and, if you want to, you can call it a squeeze play. And I
won't change my statement on that, because after this thing lay
dormant for 10 years, more or less, it has now been brought out at
this time, when the amount involved did not warrant bringing it
out; it has caused undue hardship and it has taken your time and it
has taken my time and the time of a lot of people, in the midst of a
war. And I think we have a lot of evidence that we will be glad to
show this committee sometime, when you are studying the banking
system, that a lot of men in this Government, in the banking business,
are trying to nationalize this branch banking system and are trying
to extend branch banking and aretrving to control interbank balances.
I just think this whole thing is a liTaXIer oftimirigT
~
Mr. CRAWFORD. Did the F. D. I. C. and the Federal Reserve
Board hold a meeting on or about November 11, 1942?
Mr. CROWLEY. I wouldn't know, Congressman. That is a meeting
of the Federal Reserve Board, you say?
Mr. CRAWFORD. With the F. D. I. C.
M r . CROWLEY. M r . T h o m p s o n SAJ^S we d i d .
Mr. CRAWFORD. Was it at that meeting that the matter of bad
banking practices, as related to this type of operation, was discussed,
do you recall?
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M r . CROWLEY. If they say it was, then it was, Congressman.
M r . CRAWFORD. I beg your pardon?
Mr. CROWLEY. If the Federal Reserve Board say we had a meeting
at that time, I would be willing to accept that.
Mr. CRAWFORD. What I wanted to find out was whether or not
you would hold that the practices engaged in by, let us say, this bank
down here in St. Louis, which has been cited in the record at considerable length, was participating in bad practices
Mr. CROWLEY (interposing). Let me say this to you, on that bank
in Nebraska—and I don't know whether there was one in St. Louis
or not. But there were one or two banks that I agreed were engaged
in an unsound practice, and we did talk, I think, about trying to get
them in for a conference and to see if we could not reason with them.
I have always felt that it was wrong to legislate against the whole
banking system or a whole industry, because you could not control
one individual.
M r . CRAWFORD. What I was trying to do was to tie up some particular practice which came within the scope of the concept of that
discussion held at the joint meeting.
M r . CROWLEY. I think we talked about one or two banks there at
that time. Anyhow, that had been discussed at different times with
the Federal Reserve.
M r . CRAWFORD. And the F. D . I. C. joined with the Board of
Governors in a published statement of Friday, February 12, 1937, in
which, among other thoughts expressed in that statement, we find
this language.
M r . SMITH. What are you reading from?
M r . CRAWFORD. A joint statement issued by the Federal Deposit
Insurance Corporation and the Board of Governors of the Federal
Reserve System, printed in the December hearings. It says:
I n view of the widespread differences of opinion in the law-making and administrative branches of the Government as to the intent of the law, and as a result of
further consultations between the Federal Deposit Insurance Corporation and
the Board of Governors of the Federal Reserve System, their respective regulations relating to the payment of interest on demand deposits having been brought
into uniformity by agreements adopted by the Board and by the Corporation,
the definition of interest has been eliminated from regulation Q of the Board and
from regulation 4 of the Federal Deposit Insurance Corporation, and paragraph
(a) of section 2 of each regulation has been amended by inserting after the first
sentence the following:
Within this regulation, any payment to or for the account of any depositor as
compensation for the use of funds constituting a deposit shall be considered interest.
The effect of this amendment is to declare the existing law, rather than to interpret and apply the law to particular practices. This will permit the general application by each agency of a uniform right to determine specific cases based upon
the facts involved; it will also permit each agency to determine, with respect to
cases coming before it, whether or not any practice involved in any such case is a
device within the meaning of the statute employed by the bank to evade the
prohibition of the law.
The Board of Governors in its original definition of the term "interest" specified
that such term should include the payment or absorption of exchange or collection
charges which involved out-of-pocket expense. The present action of the Board
of Governors removes this finding or specification from its regulation.
Henceforth, under both regulations, the question of what in a particular case
is the payment of interest upon a demand deposit, or device to evade the prohibition against the payment of such interest, becomes for both agencies a matter
of administrative determination under the general law in the light of experience,
and as specific cases may develop.
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Now, having in mind the joint statement which I have just read,
and the full statement that follows, of February 12, 1937, and then
going directly to the case cited in the September 1943, Federal Reserve
Bulletin, page 817, would you mind stating to the committee whether
or not it is your contention that the case cited was not a violation of
, the law.
1
Mr. CROWLEY. Congressman, I want to answer that indirectly for
you, if I can. It has been so long ago and I have been involved in
so many things that I would like, if you don't mind, to let M r . Brown
i or Mr. Thompson answer that for you.
M r . FRANCIS C. BROWN. Mr. Crawford, we took the position that
was not a violation of law, in conferences and in correspondence as
well as in our opinion. I think Mr. Dreibelbis testified to that
yesterday.
Mr. CRAWFORD. That it was not a violation?
Mr. FRANCIS C. BROWN. We took the position that, in our opinion,
absorption of exchange was not interest; and also, on the facts of the
Lincoln case as outlined to us, substantially as set forth in their ruling,
that in our opinion that was not a violation of the law.
Mr. CRAWFORD. YOU see, what confuses me, if it is confusion, is
when I take that joint statement
Mr. BARRY (interposing). Will M r . Crawford yield for one question?
M r . CRAWFORD. Wait just a minute, please.
When I take that joint statement, and then go to the statement
issued by the F. D . I. C.
M r . FRANCIS C. BROWN (interposing). I can give you a copy of that,
M r . Crawford [handing paper].
M r . CRAWFORD. And then going to the F. D . I. C. statement of
December 6, 1943, in which it says:
The Board is of the view that the absorption of exchange by an insured nonmember bank in connection with its routine collection for its depositors of checks
drawn on other banks cannot be considered a payment of interest, within the
terms of the interest regulations of the Federal Deposit Insurance Corporation,
in the absence—
and here is the important language—•
in the absence of facts or circumstances establishing that the practice is resorted to
as a device for the payment of interest.
As I say, when you take the language in the joint statement, and
the language in this statement which I have just read, and then apply
to the September specific case what I have been attempting to ascertain from your attorney, M r . Brown—and I would like to get your
reaction on it—the question is whether or not you are in a position,
speaking for the F. D. I. C., to enlighten this committee on what
would be required in the way of questionable practices to make a case
which would support, through the F. D . I. C., the facts or circumstances establishing a violation of the law.
M r . FRANCIS C. BROWN. M r . Crawford, I don't think you can have
a violation arising out of a routine collection transaction. You might
frame up a situation where you control two banks and you went to
a correspondent bank and said "We will put a balance of each of our
banks with your bank, and then we will run through some just perfectly abnormal transactions for the purpose of creating exchange"—
and that might be a violation.
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But I did not have any abstract, hypothetical case in mind, at the
time we put that in my opinion. And that same reservation was put
in the Board's memorandum at my suggestion, simply because we
did not want to say that people could not devise a method of paying
interest through the exchange rule. But I don't think you can have
interest simply arising out of the absorption of exchange on a perfectly normal, commercial transaction; that is, where somebody buys
something and issues a check on a nonpar bank, which is cleared and
exchange is charged.
M r . CRAWFORD. M r . Chairman, I have one or two other questions,
but I will yield for that one point.
M r . BARRY. M r . Brown, if the Federal Reserve Board and the
F. D . I. C. got together and decided the absorption of exchange was
interest, and vice versa, and the Congress had granted the power in
the basic law and never contemplated exchange being interest, your
ruling would still be unsound?
M r . CROWLEY. That is correct.
M r . BARRY. I n other words, no bureau would have the right to
construe the action of Congress.
M r . FRANCIS C. BROWN. I think that is right, and if you will read
the opinion in full which I submitted at the time, you will find we
point out in my opinion you cannot differentiate exchange charges,
or the absorption of exchange, from free service. If a man has a
$1,000 balance and gets more free service through a bank than if he
had a $500 balance, we cannot differentiate the absorption of this
fixed cost from the absorption of exchange charges. They are both
out-of-pocket expenses.
And I would like to point out also, Mr. Crawford, while on this
point
M r . PATMAN. (interposing) You say they are both out-of-pocket
expense?
M r . FRANCIS C .
BROWN.
Yes.
M r . PATMAN. IS that correct?
M r . FRANCIS C. BROWN. Why not? Any expense is out-of-pocket.
M r . PATMAN. Well, why is it distinguished by being called out-ofpocket?
M r . FRANCIS C. BROWN. I have not been able to define an out-ofpocket expense.
M r . PATMAN. I thought that was something aside from normal,
operating expense.
M r . FRANCIS C. BROWN. This is a normal, operating expense.
The bank has to pay postage, and the bank has to pay express charges.
They have to pay telephone charges. Why should they not have to
pay service charges which the other bank assesses on that collection?
In other words, your correspondent bank sets itself up as the institution which undertakes to collect the checks. Your individual goes
to his bank and his bank sends the check to the correspondent bank.
The correspondent bank says "We will collect the check and make
that good for you."
When they collect the check and the other bank charges exchange,
it seems to me that is their expense, part of their business expense.
I would like to point out that in the 1936 definition of interest which
was stricken out of regulation Q, there was an express provision that
you could absorb taxes assessed on your deposits, and the Board has
527
ABSORPTION"
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ruled that in the case of Michigan the taxes assessed on deposits
could be absorbed by the bank, and that is not a violation of the
interest regulation, or the interest law. I certainly cannot differentiate between the absorption of a tax, which is paid and which is
levied upon the depositor, from a service charge which is levied as a
result of that depositor's check going through a commercial transaction.
Mr. PATMAN. I agree with you, if both banks are in the same State.
But suppose one bank is in Ohio and sends its deposits over to Michigan; then the Michigan bank would not be expected to pay the taxes,
would it?
Mr. FRANCIS C. BROWN. Well, 'it is a personal property tax, is it
not, Mr. Patman? It is levied on that property and it is levied on
the person who owns that property, regardless of where it may be.
If you have securities in California, they will tax those securities if
they find out about them, regardless of where you may live.
Mr. DILWEG. Are you familiar with a ruling of the Board in 1934,
Mr. Brown, when this statement was made? [Reading:]
I n another case there was also presented to the Board a question as to the
legality of a practice under which member banks charged to their depositors the
amount of exchange charges on checks received on deposit, except that, if the
average daily balance of the depositor was $1,000 or more, the banks absorbed
the amount of such exchange charges.
Then here is a significant part of the ruling of the Board:
The Board stated it was of the opinion that the absorption of charges in such
circumstances was not an indirect payment of interest, since the amount of charges
absorbed did not vary with or bear a substantially direct relation to the amount
of the depositor's balance'; and that accordingly, the member banks were not
prohibited from absorbing charges on such a basis in connection with balances
payable on demand.
In other words, if I say, "You must keep $100,000 in my bank, and
I will absorb the charges," that is perfectly all right under that ruling.
But if I say, " I will absorb charges if you will keep a varying amount
in my bank," that is illegal.
Mr. PATMAN. NO; it is just the opposite, I think.
Mr. DILWEG. NO; I don't think so.
Mr. PATMAN. The way I interpret that—and I would be in favor of
voting for a bill carrying that provision in it—is that if there is no
relationship whatsoever between the allowance of out-of-pocket
expense and the balance normally carried, I don't think that would
be a violation of law. But where there is a direct relation
Mr. DILWEG (interposing). The bank says that you must carry at
least $100,00.
Mr. PATMAN. That is a violation of the law.
Mr. DILWEG. NO, not under that ruling.
Mr. PATMAN. Yes; I think you have it backwards, because where
you must carry $100,000 to get so much exchange charges absorbed,
it occurs to me there is no escape from it; that it is just an evasion.
M r . DILWEG (reading):
If the average daily balance of the depositor was $1,000 or more, the banks
absorbed the amount of such exchange charges—
and that was determined to be a legal operation, by the Board.
They say—
you must have on deposit so much money, and we will absorb charges.
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Then it goes on to make this statement—and I repeat the Board's
statement:
The Board stated it was of the opinion that the absorption of charges in such
circumstances was not an indirect payment of interest, since the amount of
charges absorbed did not vary with or bear a substantially direct relation to the
amount of the depositor's balance * * *.
So I was not giving it backward.
M r . PATMAN. It would go up and down, and they would absorb
all charges. That is different from a case where if you keep $100,000
on deposit in this bank, this bank will absorb a definite amount of
exchange charges for you. But if you keep half of that amount on
deposit, they say "we will absorb half of the exchange charges for
you."
M r . DILWEG. That is exactly what I said.
M r . CRAWFORD. M r . Chairman, I have two or three other questions, and I am through.
M r . Crowley, do you have late figures showing the number of
insured banks not members of the Federal Reserve System? The
latest figures you have will be satisfactory.
M r . THOMPSON. I am sorry. I did not bring the December 31
figures with me. The November 30 show 13,465 insured banks,
including mutual savings banks.
M r . CROWLEY. He wants the nonmember banks.
M r . CRAWFORD. Have you the number of nonmember banks included in that.
M r . THOMPSON. Yes, sir; 6,554 in the continental United States.
M r . CRAWFORD. That is nonmember banks?
M r . THOMPSON.
Commercial.
M r . CRAWFORD. Commercial, nonmember banks?
M r . THOMPSON. Yes, sir. We have 180 mutual savings banks.
M r . CRAWFORD. How many States have enacted laws calling for
par clearance?
M r . CROWLEY. DO you know, Frank?
M r . FRANCIS C. BROWN. Mr. Crawford, I cannot answer that
question offhand. I know Iowa did last year.
M r . PATMAN. Was it last year? I thought Mr. Crowley said that
was during the depression.
M r . DREIBELBIS. I t was effective July 1, last year.
M r . CRAWFORD. First I think I voice the opinion of this whole
committee, and certainly my own, when I congratulate you for your
extraordinary management in protecting the earnings and capital
structures of the insured banks. I have been in agreement with it
100 percent, as I have understood it.
Have you seen any evidence under the Iowa law or under any other
State law which has thus far been enacted, of interference to any
material degree whatsoever with the earnings of the insured banks
which you have in Iowa and these other States where such laws might
have been enacted?
M r . CROWLEY. NO; I don't know that we have had any evidence
of that, Congressman. That, again gets back to my theory, that if
the State of Iowa wants to change their banking laws, they have to
assume the responsibility for doing so. I don't think the fact that
Iowa changed those banking laws and went to par clearance indicates
that all of the little banks in the State of Iowa were in full accord.
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You have been around the State legislatures a long time and you
know how State legislation is put in the hopper and bankers wake up
some morning and find it is all signed and sealed and delivered. But,
in a period of time, it will be repealed if it is not all right.
Mr. CRAWFORD. In order that the record may be perfectly clear, I
want to say I have never been a member of a State legislative body,
and I am sure I have never spent as many as 20 days at a capital of
any State or all of the States put together, during a session of the
legislature. So I don't know anything about that, at all.
Mr. CROWLEY. All right.
Mr. CRAWFORD. If the Iowa law is the only one, and it became
effective only last July, I should not think that would give you time
to draw any reasonable conclusions on it, anyway.
Mr. CROWLEY. And they could be wrong, Congressman being only
one of the 48 States.
Mr. CRAWFORD. That is all I have.
The CHAIRMAN. If there is nothing more, Mr. Crowley, we are
very glad to have had you. I want to say the way you have administered the affairs of the Federal Deposit Insurance Corporation has
reflected some glory upon this committee, from which that law came.
I think you have rendered great service to the Nation.
Mr. CROWLEY. Thank you.
Mr. PATMAN. Mr. Chairman, may I join you in your statement
in the record on what Mr. Crowley has done through the Federal
Deposit Insurance Corporation? But I would like to ask if the State
Supervisors have expressed themselves on this. Do you know?
Mr. CROWLEY. Some of them have. A great many of them have,
Congressman. I don't know from what particular States.
Mr. PATMAN. I wonder if any member of the committee knows
how many have and how many have not.
Mr. BROWN. Every one in the South, and several in the midwest.
That is all in the record.
Mr. CROWLEY. For instance, Mr. Nelson, of Michigan, sent a
letter which I saw; he sent it voluntarily on this, and I think many
of the other States have joined in that.
The CHAIRMAN. This will conclude the hearings on the bill, then.
Mr. PATMAN. Suppose the American Bankers Association wants to
come in?
The CHAIRMAN. We cannot hold it open for anybody who might
want to come in later.
I understand Secretary Jones will be in on Monday to discuss Mr.
Patman's bill on the disposition of surplus property.
Mr. FOLGER. Mr. Chairman, I would like to have permission to
put in the record a few letters.
(The letters follow:)
AMERICAN TRUST CO.,
Charlotte,
N. C., January
1, 1944'
H o n . JOHN H . FOLGER,
Mount
Airy,
N.
C.
DEAR CONGRESSMAN: After talking with you last night over the telephone, I
gave the subject further thought and have decided to make this suggestion for
you and your committee's consideration—that is regulation Q which was passed in
1935, which states that "no bank shall directly or indirectly or by any device
whatsoever pay any interest on demand deposits."
That has been the law ever
since 1935 but it has never been enforced all these years by anyone and the banks
have all absorbed some exchange in small or large amounts in violation of this law.
530
ABSORPTION" OF EXCHANGE
CHARGES
It should be repealed, in my opinion, entirely rather than try to pass legislation
that would put a limit on the amount of exchange that a bank can absorb. For
instance, now with money so plentiful and cheap, a sound, well-managed bank
cannot afford to absorb as much exchange as it would be perhaps sometime
later when money rates are higher. The nonmember Federal Deposit Insurance
Corporation banks, as you know, will be allowed to continue to absorb exchange
just as they please and yet member banks of the Federal Reserve System will be
prohibited from doing so from now on by the Federal Reserve Board. I believe
you and all the members of your committee in the House will agree that whatever
law we do have, if any, should apply to banks alike.
I do not know, of course, for certain, but it seems to me that the enforcement of
regulation Q at this late day, particularly by the Federal Reserve Board would
cause them to lose a good many members. I am frank to say that if we could
afford to get out of the Federal Reserve System now we would do so but we
cannot afford to do it on account of the nature and character of our bank and its
size
You asked me to tell you how we operate it now. Under the Charlotte clearing
house rules, which apply to all the banks in Charlotte, including the Wachovia
Bank & Trust Co. and all of their branches, as well as their home office, we charge
back to banks one-half of the actual exchange cost for collecting nonpar checks
and drafts and allow 1 percent per annum on net loanable balances for the absorption of the other one-half exchange and overhead expense. All of this,
however, will be changed under ruling of the Federal Reserve Board, which is
most unfortunate and will cause us to lose many millions of dollars of balances.
I think it is a tragedy that the Board seems to feel forced to enforce this ruling
at a time when Congress is in recess. They are working on the banks everywhere
urging them to comply with regulation Q at once, taking the position that they
cannot name a date on which a bank must comply because they are already
violating the law.
This seems to be about all I can say and I appreciate very much your courtesy
and consideration of the matter, and wish you good health and happiness for
many years to come.
Sincerely yours,
W . H . WOOD,
Chairman
of the
Board.
P. S . — W e realize that your committee may not think it wise to repeal the law
prohibiting the payment of interest on demand deposits. Maybe you could
repeal that part of the law placing the burden on the Federal Reserve Board to
interpret the law as to what constitutes the payment of interest.
Another thought is that the Federal Reserve Board and the Federal Deposit
Insurance Corporation be authorized by the Congress to limit by joint regulation
from time to time the rate of interest that member banks may allow on net
balances (after deducting float and reserve requirements) for the absorption of
exchange charges on nonpar checks, drafts and other items deposited by correspondent banks and other customers—the maximum rate to be allowed not to
exceed one-half of the rate of interest which may be paid on time deposits that
are payable in less than 90 days (which would at the present time be one-half of
1 percent). The rate so fixed should be applicable to all members of the Federal
Deposit Insurance Corporation. The Board now has authority to fix interest
rates on time deposits and could, if authorized to do so, fix the rate to be allowed
for the absorption of exchange charges.
W. H. W .
Laurel
H o n . JOHN H . FOLGER,
House
Office Building,
Washington,
D.
C.
COMMERCIAL STATE B A N K ,
Hill,
N. C., January
27, 1944.
DEAR MR. FOLGER: I wish to thank you for the cooperation you gave me and
the other members of the North Carolina delegation while in Washington this
week. I regret that I could not stay in Washington longer and thereby testify
before your committee.
I would have been able to have shown that the Commercial State Bank of Laurel
Hill is receiving in exchange an amount that was equal to 110 percent of its net
profits for the year 1943. I would also have shown that the Bank of Gibson, this
county, received in exchange in 1943 an amount equal to 120 percent of its net
531ABSORPTION"OFE X C H A N G E
CHARGES
profits. Both of these banks are now charging their customers what they consider
to be reasonable service charges. However, these charges would have to be increased 300 percent in order to produce sufficient revenue to replace exchange
charges. I realize, of course, that the Federal Reserve people claim that they are
not attempting to prevent nonpar banks from charging exchange. However, every
banker in America knows that they are now attempting this entering wedge, and
they have been trying to do this for a number of years.
Some of the members of your committee seem to think that the banks we represented could invest a larger percentage of their funds. However, a bank that has
65 to 70 percent of its funds invested is not attempting to carry an excessive
amount of its funds uninvested. One member of the committee suggested that
the banks put their excess reserves in seven-eighths percent certificates of indebtedness and that income from this source would probably equal amount now being
received by banks as exchange. To show you how absurd this suggestion is, the
income that my bank would have received from the amount it could have invested
on December 31, 1943, after retaining required reserves would have amounted to
$1,750 for a 12 months period, while the exchange we collected for the past 12
months was $14,451. It is very evident that had all of our money been invested
even at 2 percent, the income would have been only a small percentage of our
exchange collections. I hope that Mr. Crawford of Michigan can be convinced
that he is not on solid ground in suggesting that income from exchange can be
replaced with income from Government bonds.
With best wishes, I am
Sincerely,
EDWIN
STATE
Greenville,
H o n . JOHN H . FOLGER,
Member
of Congress,
Washington,
D.
PATE.
B A N K & TRUST CO.,
N. C., January
10, 1944-
C.
DEAR JOHN: Despite the lack of intimate personal contacts for the past several
years, the friendship which began with the several trials of Mr. George in Surry,
makes me want to still address you in this friendly, informal way.
With the
reassembling of Congress, may I wish you the best of health and strength sufficient
to successfully grapple with the great responsibilities which lie ahead of you and
the other Members.
First of all I want to say that I have never been identified with any pressure
group and, probably all together, have never written half a dozen letters to all
of our Congressmen and Senators combined. For this reason one from me at this
time may not be abusing a citizen's privilege. The subject of my immediate
concern is the recent ruling of the Federal Reserve Board in which it is held that
the absorption of exchange by a member bank constitutes the payment of interest
in violation of the Banking Act of 1935.
Since our bank is not a member of the Federal Reserve System, you wonder
why I am interested in or concerned with this ruling of the Fedeial Reserve Board.
The answer is obvious and simple. This action on the part of the Board is a
disguised and camouflaged attack on the small nonmember banks through a
distorted and unwarranted interpretation of an act of Congress—a distortion
which it now appears the Congress alone can correct.
The history of the Federal Reserve Board reveals many distorted interpretations of law and abuses of power. The original act provided for voluntary membership in the System by State banks and among other things provided that Federal Reserve banks could not pay exchange on checks. As a method of forcing
State banks to join the System, the Federal Reserve banks adopted the practice
of having their messengers and agents present for payment in cash checks drawn
on State nonmember banks. This abuse of power became so intolerable that our
State legislature (session of 1923, I think) outlawed the practice and at the same
time legalized the charging of exchange by State banks. I do not recall, but you
may have been a member of the legislature at this time. Thus we saw a law
which prohibited Federal Reserve banks from paying exchange distorted by an
interpretation which sought to deprive State banks of rights given and guaranteed
by the State which created them.
Again after nearly 8 years delay we find the Federal Reserve Board, by interpretation, writing into an act of Congress, something which I do not believe
represents the intention and purpose of Congress when the Banking Act of 1935
was passed. Congress provided in this act that interest should not be paid on
532
ABSORPTION" OF EXCHANGE
CHARGES
demand deposits. Interest has always had a definite meaning, and in many years
of banking experience I have never (until this ruling of the Federal Reserve
Board was promulgated) heard that the absorption of exchange or other out-ofpocket expenses constituted a payment of interest by a bank on its customers'
balances. If the mandate was clear, which the banking law of 1935 gave the
Federal Reserve Board, wThy did the Board fail and refuse to enforce it for nearly
9 years?
In the interpretation and enforcement of laws, the word "intent" is perhaps
the most pregnant with meaning.
Many infractions of the law are softened and
even overlooked if intent is not there. What then is and was the intent of the
Federal Reserve Board in its two interpretations regarding exchange? Judged by
their effect, their purpose was certainly not the promotion and protection of the
welfare and well-being of nonmember State banks. On the other hand, I believe
a most casual examination of them will show that the purpose of the Board was:
(1) Force all nonmember State banks to join the Federal Reserve System, (2)
force them out of business if they fail and refuse to join. I am going to take the
liberty of speaking for you and say that you do not believe that the Congress
ever intended to pass legislation that would force the small State banks out of
business, nor did it intend to delegate this power of life and death over nonmember
State banks to the Federal Reserve Board.
Various Government-sponsored and subsidized lending agencies have already
taken away a substantial part of our agricultural and crop-production loans
which we were always glad to make to satisfactory borrowers at a rate never in
excess of 6 percent per annum. However, we are meeting and will continue to
meet this Government competition without undue complaint. I do, however,
seriously, and I believe justly, complain when a Federal agency, through either an
abuse of power or a distorted interpretation of an act of Congress, undertakes to
put our bank, along with thousands of other nonmember State banks out of business. I believe you join me in this complaint.
I sincerely hope you will sponsor legislation which will clarify the intention of
Congress, and invalidate the distorted interpretation which the Federal Reserve
Board has recently placed upon the language used in the act of 1935. I suggest
that an amendment be added reading something like this: "The absorption of
exchange shall not be construed to be the payment of interest."
As a member of the House Banking and Currency Committee you no doubt have
frequent contacts with Mr. Crowley, Chairman of the Federal Deposit Insurance
Corporation. I want to say that the work of Mr. Crowley is outstanding, jl
know of no instance in which he has attempted to defeat the will of Congress
through a misinterpretation of its laws. He had to overcome an overwhelming
prejudice against the insuring of bank deposits. He has done this, and at the
same time earned and now possesses the respect and confidence of practically all
bankers—big and little. He is a real friend and big brother to us little bankers.
On the other hand, and by way of contrast, Mr. Eccles, Chairman of the Federal
Reserve Board, is admittedly and openly hostile to little banks.
This letter is long, but I trust you will not tire in its reading. I believe the
statements I have made are correct and feel that they should be brought to your
attention in the interest of thousands of small banks now under attack by the
Federal Reserve Board. I am sending Mr. Doughton a copy of this letter and
enclose herewith a copy of my letter to him.
W i t h my very kindest regards and best wishes, I am,
Most sincerely yours,
JOHN
Roxboro,
H o n . JOHN H . FOLGER,
Washington,
D.
THE
N.
MITCHELL.
PEOPLES B A N K ,
C., February
3, 1944.
C.
DEAR MR. FOLGER: I am sorry that it was not possible for me to stay over
longer in Washington on the regulation Q hearing. The Fourth War Loan
drive had just started. I have 11 counties in my group and it was absolutely
necessary that I return.
It was brought out in the hearing by Mr. Crawford that the salary schedule in
some nonpar banks was larger than in the State of Kentucky and certain other
States. Our salary schedule in the Peoples Bank last year averaged 66 cents
on the hundred. This was lower than any of the national banks in any of the
States. If our deposits hold at the present figure it will average about 44 cents
533ABSORPTION"OF E X C H A N G E
CHARGES
this year. The average of national bank earnings from securities total 86 cents.
Our average earning last year totaled $1.24 per $100. These figures are taken
from earnings and expense account prepared by the American Bankers Association. Our figures of course are taken from our income and expense account
last year. The amount of exchange we collected represented 25 percent of our
total net earnings last year. A few years ago it represented 100 percent.
In
1934, our salary schedule was $2 on the hundred compared with the average
last year of 66 cents.
From my experience in the bank I have come to the conclusion that all small
banks are dependent on exchange in proportion to their deposits. In other
words, in 1934 our deposits were $500,000, exchange representing 100 percent
of our net earnings. In 1943 our deposits were $4,000,000, exchange representing only 25 percent. In other words, it cost just as much to service a bank account
with an average balance of $50 as it does one of $5,000. We average a bank
account for every family in. the county and our increase in deposits has been due
to an educational program of "live at home" we have sponsored with our farmers.
No other bank carries an account with us as we are not in position to clear checks.
We do not have any war industry.
The correspondent banks have not been suffering in the past by absorbing
exchange charges. It has long been a custom with a number of these banks to
double the amount of exchange charged by the country bank unless the bank
endorsing the check has a reciprocal bank account with the collecting bank.
I
am enclosing a letter as a proof of this statement. We have had many more of
this type in the past few years, but since this one is dated February 1, 1944,
I would like to enclose it in this letter. Same shows that J. Klotz & Co. was
charged 44 cents in collecting a check for $220. Our exchange on this check was
22 cents. The collecting bank simply added 22 cents on our charge and then
told the customer that we charged 44 cents.
One of the largest banks in North Carolina admitted to me that they usually
doubled the exchange charges in collecting checks. The unfairness in this puts
all the burden in charges on the small country banks.
Most of them are getting
as much out of this exchange as the country bank itself.
The Penny Furniture Co., with their head office in Durham, drew out $10,000
in cash and carried it to Durham. They were told by a member bank in Durham
the exchange would be $12.50. We have never charged over one-tenth of 1 percent. In other words, the member bank was making a charge of $2.50 exchange
to clear the check. This happened today, February 3, 1944.
If I can be of any assistance or if you want me to come back, please let me
know.
Yours truly,
G. C. HUNTER,
Executive
Vice
President.
BRUCE'S
5 CENTS TO $1 STORES,
Roxboro,
AL
P A W L I N G , N . Y . , February
1,
1944.
C.
GENTLEMEN: Our bank, Irving Trust Co., New York City, has charged us 44
cents to collect the $220 check you gave us in December.
Presumably this is
because your bank is not a Federal Reserve member.
Will you please send us 44 cents in stamps to balance the account.
Thanking you, we are,
Very truly yours,
J. K L O T Z & C o .
W . H . RICE.
THE
Madison,
H o n . JOHN H . FOLGER,
Member
of Congress,
Washington,
D.
C.
B A N K OF M A D I S O N ,
N. C., January
29, 1944-
DEAR MR. FOLGER: I understand that there is now before the Committee on
Banking and Currency a bill to amend the Federal Reserve Act, as amended, to
provide that the absorption of exchange and collection charges shall not be deemed
the payment of interest on deposits.
I want to express to you my hearty approval of this bill. The country banks to
a large extent and particularly the smaller banks such as ours, are dependent on
534
ABSORPTION" OF E X C H A N G E
CHARGES
this so-called exchange charge for a large part of our profits, and while this bill
does not directly mean (in case it should fail of passage) that the country banks
will have to remit at par, it would be another step in that direction. The Federal
Reserve Bank has been trying for years to force par clearing on us country banks,
and we resent the Federal Reserve banks meddling in our affairs. We are not a
member of the Reserve System, though we are insured by the Federal Deposit
Insurance Corporation, and I understand the Federal Deposit Insurance Corporation is sympathetic toward the country banks, and does not approve of the
influence the Federal system is bringing to bear to force this par clearance.
We country banks cannot wTell charge back to our depositors this "exchange"
cost, even if we were of a mind to do so. They would not understand it. If
these accounts maintain a balance with us of sufficient size to warrant our handling
the account, then they can well expect that we collect the items they leave with
us on deposit. The same is true with the correspondent bank accounts. The
banks with which we carry accounts have been very well satisfied with the manner
in which this account has been maintained for the 40 years of our existence, and
they are willing and ready to carry on the account just as they have in the past.
Now the Federal Reserve Board has ruled that they must change their cusom of
many years. One of my correspondent bankers told me that they had made
money on our account in the past, after absorbing this exchange and that they
could continue to do so in the future.
I sincerely hope that you will support this amendment and use your efforts to
help save the country banks of our Nation.
Yours most sincerely,
V.
H . IDOL,
President.
(Upon request of M r . Brown of Georgia, the following statements
and letters were incorporated in the record:)
STATEMENT
OF H O N .
HENRY
D . LARCADE, JR., A R E P R E S E N T A T I V E
STATE OP LOUISIANA
FROM
THE
Mr. Chairman and gentlemen of the committee, I thank you for the opportunity
to appear before your honorable committee in support of H. R. 3956, by Mr. Brown
of Georgia.
From my experience as a country banker over a period of more than 20 years,
I feel qualified to appear before you in favor of this proposed legislation. I do not
propose to make any lengthy argument in favor of this bill but wish to say that
unless some consideration is given to the small country banks of this Nation that
it is only a question of time before these banks will cease to exist.
I say this advisedly, because I was in the banking business before the creation
of the Federal Reserve System, and I have watched with great interest all of the
changes which have occurred which affect the small country banks.
I may further say that with the advent of the Federal Reserve System I had
expected great benefits and protection to the banking system in general, and
especially the smaller banks in the country, but Mr. Chairman, I am frank to say
that it is my opinion that the small country banks have received very little benefit
from the Federal Reserve System. Having been engaged in the banking business
in Louisiana in 1907, 1920, and 1932-33, during these years of financial disturbances and panic, I had an opportunity to observe conditions, and also the help
which was extended to the small country banks by the Federal Reserve System.
We all expected that when the Federal Reserve System was in operation that we
were safe. We all expected that if conditions were such that we needed help that
here, at last, was an agency that would help a small bank if it should get in
difficulties, and if a bank was sound and solvent, certainly this governmental
agency would come to our rescue and tide us over any emergency.
But lo and behold, instead of working as we thought it would, it seemed to me
that instead of the Federal Reserve System expanding credit and extending credit
to the small country banks at a time when needed, that the system worked just the
opposite—the Federal Reserve instead of expanding credits during the periods
when it was most needed by the country banks, contracted credits, and the result
was just the opposite to the purpose for which I thought the Federal Reserve
Banking System had been created.
As an example, all, or nearly all, State banks did not become members of the
Federal Reserve System, and most of them had correspondents in the financial
centers of their States and as a result all borrowing was made by these country
banks from their correspondents in the financial centers. Some of the banks which
535ABSORPTION"OF E X C H A N G E
CHARGES
were correspondents for the small country banks were members of the Feeeral
Reserve. Some were not. But as recently as 1920 when some of the country banks
in certain sections of the country needed assistance, they were not only unable to
obtain this assistance from their correspondent banks but were also unable to
obtain assistance from correspondent banks which were members of the Federal
Reserve System. The reason for this was that the collateral and security which
they offered would not be accepted by the Federal Reserve banks. This was particularly true in my section of the country, as well as other sections of the country,
where the small country banks were located in agricultural regions. The Federal
Reserve would not accept the notes of the farmers and planters as collaterial and
security. They advised that if we had commercial papers at 60 and 90 days, it
would be acceptable.
Of course, we in the agricultural sections just did not have that kind of paper.
Mr. Chairman, believe it or not, but as a result, of this, do you know that my
bank, a State bank, had to take over and absorb a national bank, a bank in my
town that was a member of the Federal Reserve System. The national bank was
in difficulties and had borrowed from their correspondent all that they could, and
neither their correspondent nor the Federal Reserve bank would loan them a
dollar, notwithstanding that that bank was absolutely solvent and sound. This
national bank had some $300,000, in Louisiana ad valorem tax secured bonds,
but they were not acceptable as collateral by the Federal Reserve System, and as
a result our bank, which happened to be in excellent condition, was forced to take
them over to save the national bank.
Since that time conditions in the operation of the small country banks have
changed further, and the opportunities for income have been continually reduced,
until now one of the main sources of revenue to a small country bank is exchange.
The Government has encroached on the banking business to such an extent by the
establishment of so many governmental loan agencies (many of which I approve)
that the opportunity for revenue has been greatly reduced in obtaining channels
for the loaning of their funds.
State, county, city, and Federal taxes have been greatly increased; salaries and
other expenses have been increased for the small country banks. The Federal
Reserve pays no taxes.
Unless it is planned to turn the banking business over to the Government by the
establishment of branches of the Federal Reserve all over the country, it is my
opinion that full consideration and protection should be given to the country banks.
When I was in the banking business, not only did our correspondents absorb
all exchange charges on our checks and items sent them for deposit but in addition
paid us 2 percent interest on daily balances.
As a matter of fact, all of the larger banks always absorbed exchange charges
of their correspondent banks, and I believe are fully able so to do. Until to
creation of the Federal Deposit Insurance Corporation, many country banks
refused to become members of the Federal Reserve System as they would have
been forced to "par" all checks on them and their clearing house member banks
in the same town or city, and since exchange is an important source of income of
the country banks, and now almost essential to their survival, as without this
revenue, their income would be so reduced that it would be the difference between
a small profit or a loss on their operations. The banks in my State and in my
district are in favor of amending the Federal Reserve Act as proposed by M r .
Brown in his H. R. 3956 in order that the matter may be legally settled, and I
personally join them in asking your favorable consideration of this amendment,
for, as I have stated, it is my opinion that this provision is fair, reasonable, one
that has been in existence since time immemorial, and is necessary for the existence of the small country banks, who after all are the ones who are rendering the
services to the populations and citizens of the country, especially in the country
districts of our Nation, and unless these small banks are given an opportunity to
exist, it will not be long before many of them will cease to exist.
ARKANSAS
Hon.
PAUL
Member
BROWN,
of Congress,
Washington,
D.
C.
STATE B A N K
Little
Rock,
DEPARTMEXT,
February,
4, 1944.
DEAR MR. BROWN: I am enclosing copy of a letter addressed to Senator
Robert F. Wagner which is in answer to a letter put out by the Federal Reserve
536
ABSORPTION" OF EXCHANGE
CHARGES
Board under date of January 24 which appears to have been mailed out to t he
banks over the country.
Sincerely yours,
State
H o n . ROBERT
Chairman,
F. WAGNER,
Committee
on Banking
and
Currency,
bnited
States Senate, Washington,
D.
T. W .
Bank
LEGGETT,
Commissioner.
FEBRUARY
4, 1944.
C.
DEAR SENATOR WAGNER: I have before me a copy of a letter addressed to you
under date of January 24, 1944, signed by Chester Morrill, Secretary of the
Federal Reserve Board, Washington, D. C. The letter is to convey the views
of the Federal Reserve Board to the Congress in its consideration of Senate bill
1642 and a companion House bill 3956, which bills, if enacted, will nullify that
part of regulation Q of the Federal Reserve Act, as amended, which prohibits
the absorption of exchange and collection charges on checks by member banks
as recently interpreted by the Federal Reserve Board.
It appears to me several of Mr. Morrill's statements are inconsistent. He
would have you to believe the Federal Reserve Board had no intention of using
methods to break down the practice of charging exchange by nonpar banks.
However, he goes into detail to point out and explain the practice of nonpar
banks in charging exchange on cash letters and cites what he thinks have been
abuses brought about by this practice by a few, and only a few member banks,
that are over zealous to get new business. Apparently he does not admit a
bank's right to charge for the services of transferring funds from one section
to another on circulating checks to be a large part of banking services.
Mr.
Morrill fails to cite the fact that this practice was never questioned before the
inception of the Federal Reserve Act in 1913. As a matter of principle I believe
it could be admitted that the adoption of the Federal Reserve Act was the result
of a compromise in thoughts pertaining to the proper banking practices and that
big business was interested in pursuing the course that would make checks circulate at par as a medium of paying accounts, and they seem to have gotten the
ear of the Federal Reserve Board, thereby benefitting mostly the industrial
centers in the collection of funds and the transfer thereof to desired available
points at no cost.
The springing up of small banks has been a great factor in the development of
the country.
Man)- banks exist that would not have existed if it had not been
for the recognized rights of these banks to charge for the very service that is
now questioned; that is, the right to charge exchange on the transfer of funds.
It cannot be said that checks should circulate without cost as does currency.
There are certain risks in the handling and payment of checks. The payee,
whether or not he is an individual, corporation, or an industrialist, accepts a
check with the knowledge there are certain costs in sending the checks through
certain central channels in order to make the funds available to them in their
particular city or community.
The Federal Reserve Board at the hearing in Congress during December,
1943, disclaimed any prejudice toward nonpar banks. They fail to cite the
fact that they have consistently worked to force banks to par checks and to make
transfers of funds without compensation to the respective bank performing such
service. It is to be remembered that in 1922 the Federal Reserve System attempted to coerce the State banks of the nation to go on the par list. They
took every conceivable advantage. In some instances they would hold checks on
some particular bank for several days, sending the accumulation by a personal
representative to the bank demanding cash over the counter in order to try to
embarrass the bank by reason of the fact they might not be expected to have
available cash on hand to meet the situation. In their continued warfare on
the banks there developed a case from the State of Georgia that got into the
courts (my records do not show the title of the case). This particular case
went to the Supreme Court of the United States and a decision was handed down
on July 11, 1923. I n that case, the court said, in part, as follows:
"Congress did not in terms confer upon the Federal Reserve Board, or the
Federal Reserve Banks, a right to establish universal par clearance and collection
of checks."
537ABSORPTION"OF E X C H A N G E
CHARGES
During the turmoil the Legislature of North Carolina passed a law authorizing
the State banks of that State to charge exchange at a rate not to exceed oneeighth of 1 percent for such services. This statute was challenged and likewise
went to the higher courts and was upheld. I n this case the court said, in part,
as follows:
"We do not need aid from the debates upon the statute under which the* Federal
Reserve Act exists, to assume that the United States did not intend by the statute
to sanction this sort of warfare upon the legitimate creation of the States".
I am mentioning these things in order that the records may be clear.
Mr. Morrill minimizes the importance of the question of banks to charge
exchange on their cash letters by sighting the fact there are only 2,500 nonpar
banks. Following this line of thought, I am unable to reconcile his argument,
that the result of this practice is such a factor in the centralizing of bank balances,
and pyramiding of deposits that are dangerous to the banking system.
Nowhere
does the Federal Reserve Board admit that many of these banks could not exist
and perform the service to their community and the country as a whole without
this charge.
I would like to call attention to the fact that banks perform many services
other than the absorption of exchange. The cost of check books, stationery and
other services furnished are all a part of the cost of doing business. Is it logical
to rule out exchange as a legitimate charge to be absorbed by a member bank,
yet admit the virtue of every other cost which is absorbed by the banks and not
challenged by the Federal Reserve Board. The Federal Reserve Board attacks
the right of banks to absorb exchange for their customers, but admits the right
of member banks to charge other costs in handling accounts, including per item
cost of checks and drafts drawn on themselves. They did not attack, but rather
admitted the virtue of banks demanding compensating balances to cover these
other charges. If you eliminate exchange charges on checks, you still have the
system of banks charging back service charges to their customers where their
balances do not compensate the bank in handling the account.
Following this,
then it is an admitted fact that banks agree to perform certain banking services
for their customers contingent upon the size balance maintained.
Could not
this be interpreted as a device for the payment of interest on demand deposits?
In the hearing before Congress during December 1943 Mr. Ransom, of the
Federal Reserve Board, is quoted as raising no objection to these practices,
either of service charges or exchange as a matter of principle. But he contended
that under the strict interpretation of the law as outlined, the Federal Reserve
Board had no other course than to rule that the absorption of exchange charges
was an indirect method of paying interest on demand balances. If this be true,
then why does the Federal Reserve Board oppose the passage of Senate bill
1642 and House bill 3956. The bill is simple in the fact that it only attempts
to leave the question as it was before the Board felt disposed to make a revolutionary interpretation of a law that had been on the statutes for 10 long years.
Yours very truly,
State
T. W .
Bank
LEGGETT,
Commissioner.
STATE OF A L A B A M A , D E P A R T M E N T OF C O M M E R C E ,
Montgomery,
Ala.,
February
2, 19J/4.
Hon.
P A U L BROWN,
House of
Representatives,
Washington,
D.
C.
DEAR CONGRESSMAN BROWN: There is enclosed statement which I hope can
be included in the record of proceedings of the hearings on House bill 3956.
If I can be of further assistance, please advise.
Yours very truly,
ADDIE L E E FARISH,
Superintendent
of
Banks
STATEMENT BY A D D I E L E E FARISH, S U P E R I N T E N D E N T
ALABAMA
OF B A N K S ,
STATE OF
A large majority of Alabama banks are not only very resentful and bitter about
the Federal Reserve Board's attempt to prohibit the absorption of exchange by
member banks through the means of an arbitrary ruling or interpretation of the
law, but they are extremely apprehensive concerning the motive that prompted
538
ABSORPTION" OF EXCHANGE
CHARGES
such action, particulauly in view of the fact that a large number of member banks
have already discontinued the practice of absorbing exchange. They are convinced that the alleged abuses by certain banks could have been regulated for
violations as to unsafe and unsound practices.
Many banks firmly believe this is only a feeler to determine how soon the
campaign to force all banks into one system can get under way.
Exchange charges constitute a vital source of income to our small banking
institutions. The net earnings of 12 banks operating in Alabama with resources
of less than $500,000 for the calendar year 1942, were $32,046.12, of which
$15,675.88, or 48.9 percent, was income from exchange—calendar year 1943, net
earnings of these banks were $37,494.02, of which $21,227.26, or 56.6 percent, was
income from exchange.
The net earnings of 12 banks for the calendar vear 1942, with resources of
$500,000 to $1,000,000 were $76,144.80, of which $46,444.65, or 61 percent was
income from exchange—calendar year 1943, net earnings of these banks were
$80,056.48, of which $57,235.34, or 71 percent was income from exchange.
The net earnings of 12 banks with resources of $1,000,000 to $3,000,000 for the
calendar year 1942 were $193,880.59, of which $108,652.57, or 56 percent, was
income from exchange—calendar year 1943, net earnings of these banks were
$219,429.02, of which $123,591.21, or 56.3 percent, was income from exchange.
STATE OF OREGON, B A N K I N G D E P A R T M E N T ,
Salem, Oreg., January
25, 1944•
Mr.
D O N A L D S. THOMPSON,
Chief,
Division
of Research
and
Statistic,
Federal
Deposit
Insurance
Corporation,
Washington,
D.
C.
DEAR MR. THOMPSON: I was very much pleased to receive copy of the formal
statement of your corporation regarding the absorption of exchange charges.
This has been read with interest by myself and examiners and we feel that the
Federal Reserve Board's ruling was not well founded.
Very truly yours,
A . A . ROGERS,
Superintendent
of
Banks.
DEPARTMENT
Mr.
STATE OF W A S H I N G T O N ,
OF F I N A N C E , BUDGET, AND BUSINESS,
Olympia,
Wash., January
27, 1944•
D O N A L D S. THOMPSON,
Chief,
Division
of Research
and
Statistics,
Federal
Deposit
Insurance
Corporation,
Washington,
D.
C.
DEAR MR. THOMPSON: I have appreciated receiving your letter of January
15, with enclosures, all of which relate to the position taken by Chairman Crowley
in respect to the absorption of exchange charges as payment of interest. I have
been very much interested in reading all the matter you have submitted. I am
sure the insured banks of the Nation will appreciate the interest Mr. Crowley
has taken in this matter.
Yours very truly,
J. C . M I N S H U L L ,
Supervisor
of
Banking
Paint
H o n . O. C. FISHER,
Washington,
D.
Rock,
FIRST STATE
Tex., January
BANK,
25, 1944.
C.
DEAR CONGRESSMAN: I am not much on writing to our Representative unless
I have something that seems like is right to bring before him, and at this time
would like to call your attention to a bill now being considered to change the
ruling of the Federal Reserve Act so that banks might absorb the exchange charges
for their customers.
Notice that Federal Deposit Insurance Corporation is in favor of this amendment and that the opposition to same is mostly from the Governors of the Federal
Reserve System.
539ABSORPTION"OF E X C H A N G E
CHARGES
I n this part of the country we do the most of our business with checks, a fact
with which you are familiar, and under this ruling we can no longer give a man
credit for his items when he sells livestock until the check has been cleared, so this
legislation seems to be mainly for the purpose of putting the little local bank out
of business if possible. Without calling your attention to the matter, you know
that they serve a very useful place in our business world, especially in the livestock
country.
We devote free of charge a large part of our time to the sale of War Savings
bonds, and try to help in the winning of the war in any way we can, but the powers
that be seem to want to put us out if possible.
Your careful consideration to this bill will be greatly appreciated.
Yours very truly,
J. M . PATTON,
President.
T H E F I R S T STATE B A N K ,
Hordville,
Nebr., January
31, 1944PAUL BROWN,
Representative,
Washington,
D.
C.
DEAR MR. BROWN: Thank you for introducing House Bill 3956 and we hope
it will become a law.
Our little bank is doing all it can to help our local agricultural community produce the maximum amount of food. We have the money to loan and our biggest
problem is enough demand for funds to give us sufficient income to warrant us
staying in business. The loss of exchange under the recent interpretation of section F of regulation Q is serious for us.
We need this added income to augment our interest income so that we may find
it worth while to stay in business. I am sure this is true for many small country
banks throughout the Nation.
We are in a town of 160 people and our bank has sold nearly $24,000 in War
bonds during the last 2 weeks. We do this at our own expense and are glad to
be of this service. Our little community has led our county during each drive
because we are close to our customers and can work with and advise them and
they are responding wonderfully. This is true with the banks in general and
especially the small-town banks throughout the Nation.
We hope your bill will
become a law and thank you for your interest in behalf of the small-town banks.
Very truly yours,
,
B O A R D OF GOVERNORS,
Federal
Reserve Board,
E D I S O N , N E B R . , February
Washington,
D.
President.
3,
1944-
C.
GENTLEMEN: I have this morning received a rather extensive statement of your
position in regard to the absorption of exchange by city banks. It was sent to
me try the Federal Reserve Bank, Kansas City, Mo. I have read it with much
interest, as your position has been set forth very well.
While there are several other points that might be refuted, I will not go into the
matter except to state that it is quite clear that the Federal Reserve Board is not
made up of men from small communities and small banks. This being the case
they simply cannot understand the point of view of these smaller communities
which make up so large a part of our Nation.
By small banks I mean banks with
deposits of less than $1,000,000. These are the banks that often are not even
considered by the governing authorities but they are also the banks which reach
out in the country districts and do the job that the larger banks simply cannot do.
Your letter states that the Federal Deposit Insurance Corporation has based
its decision partly upon the effect of this regulation rather than upon the exact
wording of the law or regulation. It seems to me this is the logical method to
follow, as the laws and rulings should be made for those governed and not those
governed for the laws and regulations. The effect is what counts and not the
technical interpretation of laws and regulations.
It is stated that many small banks which do not charge exchange get along
all right, which may be true, as I am not acquainted with the situation over the
entire United States. Conditions vary much from one place to another and there
540
ABSORPTION" OF EXCHANGE
CHARGES
may be other things involved. However, I understand that there are many
small communities that are now without banking facilities. Lack of adequate
exchange charges may be partially explanatory for this. It has been my observation locally that the members of the Federal Reserve System are located in the
larger towns and not in the smaller ones.
It has been hinted that banks should not make a charge for cashing their own
checks. The charge is not for cashing the checks. The charge is for the draft.
If one of our local customers comes in and buys a draft he pays for the service. Is
there any reason why a bank located in some city should not pay for this service?
We feel they should be placed on the same basis as our local customers.
Most of
the banks which send us checks to be paid do not even enclose envelopes and
postage for the return of the draft. Considerable time is consumed by our
employees in checking the items which we received and issuing drafts for them.
Are we to carry on this service to the city banks at a loss?
You mentioned a few cases which appeared to be out of line with good banking
practice. The reasonable thing to do is to correct those few cases rather than to
place a penalty or burden upon the thousands of small banks which have operated
in accordance with good banking practices. This letter is sent with the hope that
it will present briefly the point of view the really small banks which, after all, are
of greater importance than their size indicates.
Yours respectfully,
MERLIN
Copy to Congressman Brown.
R.
GAREY,
Cashier.
T H E A D R I A N STATE B A N K ,
Adrian,
Minn.,
February
1, 1944Congressman PAUL BROWN,
House
of Representatives,
Washington,
D.
C.
DEAR SIR: W i t h reference to regulation Q, about absorption of exchange:
Gradually rules, regulations, laws, and conditions relating to the small business
of country banks are being hung on them 'till it will not be long 'till the small
town will have no bank at all and then, and not 'till then, will the Government
and people find out they have killed one of their best and most useful friends.
If there is any institution that serves its community more, or half as much, as
a small country bank, I have not yet found them. Because they do not fully
realize their value, the public is quick to think anything relating to banking regulations is O. K. because it finds the man who has money.
We have several small
towns around here that had banks prior to 1933 and now have no banks—they
are just plain dead. Their people would do anything within their ability to have
their little bank back. Regulations such as above are just another step to eliminate the small country bank.
Yours very truly,
EDWIN
BRICKSON.
FARMERS STATE B A N K ,
Douglas,
Nebr.,
February
2,
1944.
Representative
PAUL BROWN,
Washington,
D.
C.
DEAR SIR: I have just noticed that you have introduced H. R. 3956 pertaining ^
to exchange charges between banks.
It is highly gratifying to this bank to know that the small country banker has
at least a few "friends in court."
Most of the rulings and regulations coming out of Washington of late, in fact,
for some time back, have worked a hardship on country banks and it is indeed
pleasing to know that someone outside of the banking business can see our position.
We are going to ask our Representative Mr. Howard Buffett. to support your bill.
Thank you.
Yours very truly,
M. W.
DUNLAP.
ABSORPTION OF E X C H A N G E
Comparative
statement
of deposits
of Georgia
Ga., at close
541
CHARGES
Railroad
of year
Bank
&
Trust
Co.,
Augusta
[In thousands]
1935
1936
1937
1938
1939
1940
1941
1942
Deposits:
Savings
$3, 796
Bank
1, 538
Demand other
than banks... 2,685
$4, 022
2, 895
$3, 749
3,403
$3, 617
2, 273
$3, 648
1,936
$3,617
2. 274
$3, 695
3, 741
$3, 930
4, 913
$4, 104
6,829
2,826
3, 421
3,413
3, 945
3, 412
3,982
5. 963
9,182
12, 067
8,019
9, 743
10, 573
9, 303
9, 529
9, 303
11,418
14, 806
20, 115
24, 360
1934
Total
Total
Deposits:
Savings
Bank
Demand other than banks
increase
in
10
1943
$4, 216
8, 077
tjears
$420, 000
6,539,000
9, 382, 000
Total increase
16, 341, 000
The reason for only a small increase in savings deposits is the fact that during
l
this 10-year period interest rates have been reduced from 2 / 2 to 1 percent; and,
further, that we now only pay interest on any account of $2,500 or less, limiting
savings to strictly thrift accounts, whereas, previously there was no restriction;
furthermore, we have urged our depositors to use their savings to buy War bonds.
The increase in bank deposits, as will be noted, is not nearly as great as the increase in demand deposits other than bank deposits. The growth in both is as a
result of greatly improved conditions, the general increase in bank deposits
throughout the country, particularly in locations where there are military installations such as here, and further to an aggressive policy of what is believed to be a
good bank.
The break-down of deposits is shown in this form, so that it may offset any unfair attempt to show that the increase in deposits in this bank is as a result of
absorption of exchange.
[Map accompanying this statement is on file with the committee.]
Schedule
of correspondent
bank accounts
maintained
Trust Co., Augusta,
Ga., showing
the balance
and
reserves carried
with said bank on Sept. 80, 1948
Total cash
reserve
Bank located in—
Georgia
. ..
Do
North Carolina
South Carolina
Georgia
South Carolina
Georgia...
Do
.
Do
. .
South Carolina. . . . ..
Georgia.
South Carolina
Georgia
..
Do
Do
Do
Do
Do
Do
Do
Do..
Do
South Carolina
Do
Georgia
Do
.
.
.
..
..
.
with Georgia
the percentage
..
.
..
....
. ...
_
. . .
$1, 211,000
418,000
9, 760, 000
927, 000
558, 000
2, 734, 000
461, 000
606, 000
1, 433, 000
361, 000
241,000
40, 347, 000
179, 000
185, 000
628,000
1,017,000
87, 000
278, 000
503, 000
237, 000
125, 000
379,000
99, 000
347, 000
1,147, 000
1,961,000
Railroad
of their
Bank
&
total
cash
Balance with
Georgia Railroad Bank & Percentage
Trust Co.
$303,000
74,000
218, 000
10,000
71,000
451, 000
25,000
444, 000
13, 000
22, 000
5,000
255, 000
41, 000
15,000
305, 000
140, 000
57,000
59, 000
174, 000
42, 000
22, 000
83,000
16, 000
379, 000
25, 000
12, 000
25
18
2
1
13
17
6
73
1
6
2
1
23
8
48
14
65
21
35
18
18
22
1
40
2
1
542
ABSORPTION OF E X C H A N G E CHARGES
Schedule
of correspondent
bank accounts
maintained
with Georgia
Trust
Co., Augusta,
Ga., showing
the balance and the percentage
reserves carried
with said bank on Sept. 30,
1943—Continued
Total cash
reserve
Bank located in—
Georgia
Do
_ _
Do
South Carolina
Georgia
Do
Do
Do
Do
South Carolina
Georgia
Do
Do
Do
Do.
Do.
Do.
Do
Do
Do
Do
South Carolina
Do
Georgia
Do
Do
..
Do
Do
Do._
Do
Do
Do__
Do..
Do
South Carolina
Georgia.
South Carolina
Georgia
Do
Do
Do
South Carolina.
Georgia __
. .
Do
Do..
South Carolina.. .
Georgia. __
Do..
Do
_
_
.
.
...
..
.
. . . .
. . . . . .
. . . . .
Railroad
of their
Bank
&
total cash
Balance with
Georgia Railroad Bank & Percentage
Trust Co.
$138,000
422,000
342, 000
310,000
251,000
463, 000
197,000
231, 000
262, 000
328,000
410,000
349,000
342,000
1,116, 000
533, 000
252,000
47,000
1,035,000
1, 360,000
297,000
161,000
342,000
2, 231,000
92,000
744,000
53,000
186,000
612,000
120,000
1,021,000
1,308,000
576,000
596,000
148,000
247,000
206,000
328, 000
385,000
151,000
555,000
520, 000
1, 851,000
606,000
748,000
216,000
224,000
191,000
387, 000
45, 000
$31,000
160,000
64,000
22
38
18
81,000
104,000
124,000
70,000
77,000
55,000
168,000
125,000
202,000
269,000
97,000
47,000
42,000
165,000
243,000
176,000
16,000
45,000
5,000
18,000
144,000
50,000
86,000
302,000
150,000
76,000
5,000
119,000
14,000
20, 000
77,000
120,000
86,000
266,000
73,000
6,000
241,000
30,000
204, 000
165,000
19, 000
114,000
62, 000
3, 000
27, 000
33
23
63
30
30
17
41
36
59
24
18
18
90
16
18
60
10
13
2
20
20
95
46
49
80
7
21
2
13
31
58
26
69
48
1
46
2
34
22
9
51
32
1
60
H O U S E OF R E P R E S E N T A T I V E S ,
C O M M I T T E E ON E L E C T I O N S N o . 1,
W ashington,
D. C., February
4, 1944•
H o n . PAUL BROWN,
Member
of Congress,
House
of
Representatives,
Washington,
D.
C.
M Y DEAR MR. BROWN: AS requested on the floor yesterday I am enclosing to
you a letter of the Credential Insurance Co. of America, which explains the position non-Federal Reserve member banks are in today, and from a competitive
standpoint you can well see that it would be impossible for them to continue their
business as independent nonmember banks. Unless some early action is taken, I
am convinced that we are headed for complete Federal domination of our banking
system.
^
Y o u may use this letter as you see fit.
W i t h all good wishes and best regards, I am
Sincerely yours,
JAMES
DOMENGEAUX.
543
ABSORPTION"
OF E X C H A N G E
THE
M r . JAMES P . W I L M O T ,
Lafayette,
PRUDENTIAL
CHARGES
I N S U R A N C E C O . OP A M E R I C A ,
Memphis,
Tenn.,
January
26, 1944-
La.
DEAR SIR: We are herewith returning your remittance which was tendered as a
payment in connection with the aboye loan, as the check is drawn on a nonpar
point bank and will not clear through the Memphis clearing house at par, as their
rules pertaining to collection of such checks are very strict.
In the past, as an accommodation to our borrowers and to eliminate the collection charge, we have routed these checks through our home office in New Jersey,
who, through their banking facilities, could collect same at par. However, we
are now advised that under a new ruling they also are required to pay a collection
charge.
You can accordingly understand why it is necessary to return your check so
you can forward exchange that will clear at par. The following cities are par
points: Birmingham, Little Rock, Louisville, Nashville, New Orleans, Memphis,
St. Louis, and New York.
Very truly yours,
M . G . TIRMENSTEIN,
FEDERAL
DEPOSIT
T h e H o n o r a b l e PAUL BROWN,
House of Representatives,
Washington
25, D.
INSURANCE
Washington,
Cashier.
CORPORATION,
February
8, 1944'
C.
MY DEAR MR. BROWN: I am very happy to give you my own personal views
on your questions, " W h y do country banks carry balances with city correspondents?" and " W h y do they carry them in the present volume?"
Country banks keep balances with other banks for the following reasons:
(1) The operations of banking law compel them to do so.
(2) Prudence dictates that they should do so.
(3) They do not necessarily deprive their local communities of credit when
they carry balances with their city correspondents.
(4) They find it convenient and worth while.
(5) Taking the country banks as a whole, there is nothing else they can
do with the money now.
(1) The operations of banking law compel country banks to carry balances
with other banks.
(a) Member banks of the Federal Reserve System are required by law to carry
their reserves on deposit with the Federal Reserve banks or their branches, all of
which are located in the important financial cities of their respective districts.
The member banks are not even allowed to count their vault cash as reserve.
(b) Banks not members of the Federal Reserve System are required in most of
the jurisdictions under which they operate to carry their reserves either in the
form of cash in their own vaults or on deposit with city correspondents.
While
they could carry more in their own vaults if they chose to do so, John Dillinger
and his associates increased the risk and the cost of doing so to the point that the
banks have formed the habit of keeping in their own vaults only enough cash to
meet the current requirements of their customers and communities for pocket and
till money. I n some jurisdictions the banks are permitted to keep their reserves
also in the form of securities. These cases are relatively unimportant in the
national picture.
(c) On June 30, 1943, the country member banks of the Federal Reserve System
and the nonmember insured banks reported total cash and due from banks of
$11,300,000,000. On the basis of 20 percent of demand deposits and 10 percent
of time deposits, we estimate the required minimum working reserves of these
banks—by which we mean not only required reserves but vault cash requirements
and working balances with correspondents—at about $6,400,000,000, leaving
excess reserves of about $4,900,000,000., of which about $800,000,000 were on
deposit with the Federal Reserve banks, while $600,000,000 were kept at home in
the form of valut cash by the country banks members of the Federal Reserve
System. Because of the presence of these excess balances on deposit with city
banks, including the Federal Reserve banks, these country banks have been
accused of depriving their local communities of needed credit. I propose to deal
with that point later.
544
ABSORPTION" OF EXCHANGE
CHARGES
(2) Prudence dictates that country banks should carry balances with other
banks.
Country banks keep balances on deposit with their city correspondents in excess
of minimum requirements because they consider it the prudent thing to do
under existing conditions.
We must remember that deposits in many of these
country banks have increased tremendously in recent years. A doubling or trebling of deposits in 2 years is not unusual. This rapid increase in deposits reflects
war conditions. The individual banker knows how uncertain war prosperity can
be. He sees the temporary nature of much of the activity around him. Even in
farming areas he is not sure how long this farm prosperity will last. He remembers
the last war and its aftermath. He remembers 1932 and 1933. He does not
know how much of his present deposit volume will stay with him when this is all
over. He fears that he is handling hot money. He is therefore, impelled to keep
a higher cash ratio than he otherwise might.
(3) Country bankers do not deprive their local communities of credit when they
carry balances with their city correspondents.
Country bankers know that they do not deprive their communities and customers of needed credit when they carry balances with their city banks in
excess of their minimum reserve requirements. Our continuous contacts with
these banks convinces us that if the carrying of these balances with city correspondents did deprive the local communities of needed credit, the balances would
not be placed in the city banks. These country bankers keep a higher proportion
of their assets in loans than do the city bankers. They are close to their communities and serve them. That is the kind of business they know best how to do.
Ignoring for the moment the question of demand for credit, let us assume that
the country banks could invest or lend localty every penny they had. They could
do so without withdrawing a single penny from their city correspondents. Tn
fact, if they withdrew the funds from the city correspondents their ability to serve
their communities would be lessened, Here is the way it works.
(a) The banker lends money to his local customers; (b) They pay local salaries and buy local produce and local goods with the
money;
(f) To the extent that the money changes hands locally among customers of
the bank nothing really happens insofar as the condition of the bank itself is concerned, except that both loans and deposits show an increase.
(d) To the extent, that customers use their credit to buy things elsewhere or
pay bills elsewhere the following happens:
(A) Assuming the checks are deposited in other country banks:
(1) Those country banks deposit them with their city correspondents
for collection and credit to their account;
(2) The checks are forwarded to the country bank upon which the
checks are drawn (the drawee bank);
(3) The drawee country bank remits to the city banks with drafts
on the drawee bank's city correspondent;
(4) The drawee bank has reduced its balance with a city bank while
other country banks have increased their balances with city banks;
(5) What has happened to the banks is as follows: Taking all country
banks combined, total loans have increased; total deposits have increased correspondingly; and the balances on deposit with. city correspondents have remained unchanged in total amount.
(B) Assuming the proceeds of the loans are dispersed in the city:
(1) The checks drawn on the country bank (the drawee bank) are
deposited in the city banks by customers of the city banks:
(2) The checks are ultimately forwarded to the drawee country bank
for payment ;
(3) The drawee country bank pays with drafts on its city correspondent ;
(4) The country bank shows an increase in loans and a reduction in
balances with city banks:
(5) The city banks show increased deposits and increased cash
reserves or balances with other banks;
(6) The money did not go out to the local community at all: it never
left the city. In fact, if the monev bad not been deposited in the city
bank by the country bank in the first place the transactions described
above could not have been consummated so readily; and that brings;
me to my fourth point.
545ABSORPTION"OF E X C H A N G E
CHARGES
(4) Country banks carry balances with their city correspondents because they
find it convenient and worth while.
For the country banks which do not choose to clear through the Federal Reserve
banks, and for many country banks which also clear through the Federal Reserve
banks, the city correspondents perform this clearing function which I have just
described. The country banks, therefore, find it convenient and worth while
to keep balances with their city correspondents in order to facilitate the transfer
of funds and to compensate the city banks for this service, just as I try to carry
a large enough balance with my bank to compensate the bank for performing
services for me without charge. Without this service the country banks would
be put to a very great expense unless they were doing all of their clearing through
the Federal Reserve banks—at par, as the Federal Reserve requires.
They
would have to keep their funds in their own vaults, greatly increasing the risk of
robbery and necessitating the payment of much heavier premiums on their surety
bonds and on insurance against theft. Whenever checks were presented to them
for payment from out-of-town sources, they would have to ship currency by express
or mail at considerable expense for shipping and insurance charges. The country
banks, therefore, save money by carrying balances with the city banks in amounts
sufficient to make it worth while for the city banks to perform these functions for
the country banks. Traditionally, for generations, most of these services have
been performed without charge to the country banks, provided the country banks
Tradicarried sufficient balances for the income thereon to offset the expense.
tionally and for generations, interest had also been paid on these interbank
deposits and the two had never before been confused one with the other.
This service is and always has been a competitive device indulged in by all
banks wrhich wish to do a correspondent business for the purpose of inducing
country banks to carry the balances with city banks and to induce them to carry
as large balances as possible. Similarly, the city banks perform similar services
for us, as individuals or businesses, without cost or without imposing service
charges, provided we carry large enough balances to compensate the banks for the
cost. The free services are a competitive device aimed at persuading us to place
our accounts with particular banks. The remissions of service charges are inducements held out to us to carry larger balances than we would otherwise need.
(5) Taking the country banks as a whole, there is nothing else they can do with
the money.
Having explained why country banks carry balances with their city correspondents we come to the fifth point which deals with the mystery of the existence
of so-called excessive balances.
Taking the country banks as a whole, there is nothing else they can do with
the money. The high levels of income have enabled people to pay off their debts
and loans at banks have been declining. The only avenue of investment left to
the banks, therefore, under existing conditions is in the United States Government securities. The banks, as a whole, are unable to increase their holdings of
Government securities because the securities are not avialable.
The Treasury
Department has announced its policy of attempting to finance the war by financing through individuals and nonbanking corporations to as great an extent as
possible, thus restricting the amount of securities available for purchase by the
banks. The only way the banks could get these securities would be to bid them
away from other holders, such as insurance companies and trusts. Such bidding
would result in price fluctuations in Government securities which would make it
difficult for the Treasury to maintain its announced pattern of interest rates.
It was pointed out earlier that the excess of cash and due from country banks
over their working requirements amounted to about $1,900,000,000 on June 30,
1943. Full employment of these funds, assuming maintenance of 20 percent
reserves against the resulting deposits, would necessitate purchase by these banks
of $25,000,000,000 of United States Government securities. This expansion would
come about because of the fact that while a single bank can only invest to the limit
of its excess reserves, the banking system as a whole can invest to five times the
excess reserves of the banking system as a whole, if required reserves are 20 percent
of deposits. When one bank invests its excess reserves those reserves are deposited
by the recipient or seller of securities in another bank,and the major part of those
funds become excess reserves of the next bank. The next bank in turn can invest
its excess reserves and so on, from bank to bank, until all excess reserves are
invested. In the present illustration, until this occurred and investments were
increased by $25,000,000,000 the banks' funds would not be fully employed.
The $25,000,000,000 of United States Government securities are not available
and the Treasury apparently has no intention of making them available if it can
ABSORPTION"
546
OF E X C H A N G E
CHARGES
avoid doing so. It might be observed at this point that if it were possible to
employ these funds fully in this manner and it were done, such employment would
have a profound effect upon the reserves of the city banks and upon their investment position. This is an involved question, however, which goes beyond the
scope of your request and would serve only to confuse the primary issue, which is
the ability of the country banks to employ their funds more fully at the present
time.
If you should care to discuss these questions with me further, I should be most
happy to place myself at your disposal.
Respectfully yours,
Chief,
D O N A L D S. THOMPSON^
Division
of Research
and
Statistics.
The CHAIRMAN. We will meet tomorrow in executive session.
(Thereupon, at 12:20 p. m., the hearings on H. R. 3596 were concluded.)
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@FedFRASER