munity and I could have collected or had him arrested, rather. But the country banks tried to escape a little charge. If this bill is passed there will be such items as that. The banker will not know when his checks will be paid or returned.

Senator HAWKES. Mr. Chairman, may I for my own information and possibly some of the rest, ask this question: Can any bank become a member of the Federal Reserve System? What are the restrictions in connection with that, if any?

Mr. NEWSOM. Well, I think you had probably better ask some official of the Federal Reserve Board. My present impression is, if they can meet the requirements and the conditions, if the internal conditions of the bank are such that they will pass the examination, they will be admitted.

Senator HAWKES. Are the requirements such as to work any hardships on these small banks, or are most of them in a position to answer those requirements?

Mr. NEWSOM. Most of them are in a position, I think, to answer them. And I am glad you asked that question, because I would not operate a bank that did not belong to the Federal Reserve System.

Senator HAWKES. Well, the point I want to bring out, listening to the testimony, is that it seems to me that if this bill passes it puts the members of the Federal Reserve System, the bank members, in a hole, as compared with the ones who don't choose to go in, whereas if the bill is not passed those banks not in the System have a right to go in there. It is natural if you cannot make a living without going into the System, to go into the System. That is the point I have. I do not know whether it makes sense to you. That is the way I look at it.

Mr. NEWSOM. I think they would be privileged to go into the System if they passed the examination and requirements.

Senator HAWKES. Well, you would know, as a banker, whether those requirements are such that almost any bank that is in good condition could answer the requirements.

Mr. NEWSOM. I am not in position to answer that.

Senator HAWKES. You cannot. Does anyone here know?

Senator MAYBANK. I might say this, Senator: From what I understand, that is one of the issues. A lot of these State banks, speaking for the ones in South Carolina that do not desire to go into the Federal Reserve System, they desire to continue under the State banking laws of South Carolina. To the best of my knowledge since the moratorium there have been no failures, no trouble. To the best of my knowledge the condition is good. But that is only a limited knowledge. Senator HAWKES. That is all right so far as it goes, Senator, but it does not cover my question, as to whether those banks, if they found they were being hurt by this ruling, could become members and protect themselves.

Senator MAYBANK. My answer to that would be that I think they could. I don't know that they could protect themselves, because so many of them depend upon the absorption of exchange by the larger banks. They could, of course, charge that back to the individual.

Senator HAWKES. Mr. Chairman, if your bill goes through, it is clear to me that if I were in one of the larger member banks and these nonmember banks began absorbing this exchange, that I would immediately meet that thing to protect myself. Therefore, their position would not be changed.

Senator MAYBANK. Of course, some did and some did not before the ruling.

Senator HAWKES. You see what I have in mind?

Senator MAYBANK. Yes, I see. And I would like to ask the question of those on the other side. I think they would know much better, from what I know, as the witness suggested he does not know, and he does not want to state about banks, the balance sheets of which he is not familiar with.

Mr. NEWSOM. The question that was asked the gentleman from Wilmington, just how the absorption of the exchange might affect his bank, he told you that there were two State institutions, one national and one Morris Plan, two other than the Morris Plan and the national bank; that the national bank would also be a member of the Federal Reserve System.

My opinion in a situation of that kind is this: The Wilmington Bank, if they continue as a member of the Federal Reserve, and the banks not so far from Wilmington in other cities continue as nonpar institutions and absorb exchange, the towns and cities so close together in a trade area like this-of course, gasoline rationing might affect them now, but it is a mighty short distance from one town to the other and I have no doubt that the smaller banks would not maintain an account with member banks if they can go to a nonmember bank in a nearby city and have all the exchange absorbed, that they would no doubt do it, because it would be money in their pockets.

Senator HAWKES. That is the point I had in mind. In other words, the fellows in the Federal Reserve System, the members of the Federal Reserve System would either have to get out of it to compete with that thing, or the other men would have to get into it to compete with them. That is the issue as I see it. It seems clear to me.

Senator BUTLER. Mr. Chairman, may I have a word?

Senator MAYBANK. Senator Butler.

Senator BUTLER. I think that was rather approaching the question I wanted to ask this gentleman. The act as it is proposed here simply denies a member bank the privilege of absorbing exchange in lieu of interest. That is what it amounts to.

Mr. NEWSOM. That is what the regulation is. It is the regulation issued by the Federal Reserve.

Senator BUTLER. That is the purpose of this proposed act. Now, it is easy enough for me to see, although I have never been a banker, why some might want to charge exchange and some might not want to charge exchange. But I would like to have you as an expert banker tell me why we find two Federal agencies here on the opposite sides of this question.

Mr. NEWSOM. Well, that, I don't know.

Senator HAWKES. Is that unusual, Senator?
Mr. NEWSOM. It may be, so far as I know.

Senator MAYBANK. Is there anything further?

Mr. NEWSOM. Gentlemen, as I said in my opening remarks, I never did favor the practice of charging exchange on a customer's check, and I always attributed the charging of exchange to two types of bankers, the lazy banker and the smart banker. It being a profit easy to grab without any work and this suits the lazy banker.

On the other hand, we have the smart banker. He has his regular schedule of service charges and he gets his exchange, too. He is getting

it both ways. This hearing I think started out as a question of whether or not banks should absorb exchange, but developed into a contention between nonpar banks and par banks. If the bill is passed the par banks are going to be effected a great deal.

Senator MAYBANK. Are there any further questions, gentlemen? Unfortunately, I overlooked Mr. Rowe, of the First National Bank of Ayden, N. C., who is listed here as the first witness. I will ask him to excuse me, and if he is here, to come up, unless you have some questions.

Mr. NEWSOM. Thank you, Mr. Chairman. That is all.
Senator MAYBANK. Thank you, Mr. Newsom.

STATEMENT OF A. F. ROWE, CASHIER, FIRST NATIONAL BANK,
AYDEN, N. C.

Mr. Rowe. My name is A. F. Rowe. I am cashier of the First National Bank of Ayden, N. C. I thank you gentlemen for the opportunity of appearing before you and stating the needs of a small bank with less than $2,000,000 on deposit in a small town of about 1,800 population.

We are operating a national bank which is required by law to be a member of the Federal Reserve System and remit at par, in a State where the great majority of the banks are nonpar; within a radius of 20 miles of our town there are 12 banks and branches located in 8 towns. Only 1 of these banks is a par bank. I believe at least 80 percent of the items from out-of-town banks deposited with us are on nonpar banks.

Now the question of the absorption of exchange with relation to interest on the main deposits, I do not know so much about the theory, but I do know how we worked it. About 20 years ago our correspondent bank located in Richmond handled all of our nonpar items without any relation to the amount of deposit we carried with them. I do not know that they analyzed our accounts.

In 1933 this bank stopped absorbing exchange and began charging it back to us. I began inquiring around among my fellow bankers and found that there was a member bank in our State which was more or less soliciting correspondent bank relations. And so I went up to the bank and asked about opening an account. I was told that if we would open an account with them that they would absorb our exchange to the amount of 2 percent of our average daily collected balance. In October 1934 I opened an account with them, carrying from then on the majority of our balance with correspondent banks with this particular bank. In 2 or 3 years they wrote us that due to reduced earnings on investments, that they were compelled to reduce this allowance and immediately reduced it to 1 percent. From then on for 2 or 3 years they absorbed our exchange charges to the amount of 1 percent of our average daily collected balance.

In 1941 they wrote us another letter stating that earnings had still been reduced on investments and that they could not continue the plan with us and from then on they would charge us one-half of the exchange they paid out and absorb the other half. This was the relation we had with them when the Federal Reserve made its statement on this act last fall, and from then on they have not absorbed any exchange for us.

Now we considered that absorption of exchange as an earning on a balance with that bank. I asked them to submit to me monthly their analysis of our account and I figured as to how much balance I would have to carry with them to get them to absorb a definite amount of exchange. And I think the correspondent bank-it appeared that way from the correspondence-took the same view.

Now, if this bill passes, the principal thing about it, it will permit a few banks, somewhere in the neighborhood of 2,500, to collect interest or exchange on their balances from their correspondent banks, but this will be denied to the great majority of the banks. Now if the correspondent banks are earning a sufficient amount of money on their deposits to pay out an amount of money, I think it should be paid out to all banks. If they are not earning it, if it is contrary to sound policy, then it should not be permitted any bank.

Now, as to exchange and service charges: A service charge as we practice it in our State is based on a contract between the depositor and the bank, and it is controlled by competition and by your general relations with your customers. If you charge a customer too much exchange, he will go somewhere else, and if you don't charge him any in a par bank, as has been stated here, your stockholders are liable to get onto it.

The service charge is controlled by this relation with the bank. Therefore it would not be subject to, I should think, the other regulations, because the public will regulate that part as to the amount you charge them.

But the exchange charges are charges made from one bank against another bank, and they are not based on contract. We have for our neighbors in a town just 4 miles from our bank, a small nonpar bank. We were getting quite a few checks on them, and I went to the bank, took off my hat and walked in and asked the cashier if he would let me open an account with his bank, since the correspondent banks had all stopped absorbing any exchange. And he said well he would try it. So I opened an account, and explained to him the balance I could carry with him, being restricted by law; he said he would try it. And just a few weeks ago I got a letter from him stating that after 1 month's trial of our account that his committee felt that the arrangement was unfair to his bank, that I had sent him a number of nonpar items which if we had sent them through the usual channels he would have collected the exchange on, and that he could not continue the arrangement and asked me to close the account.

Well, now, I have no recourse at all. Our State law permits him to charge me exchange. Our State law prohibits me from taking checks to his bank and asking for the cash over the counter, even though he is only 4 miles from our bank. Now, when he gets a check on our bank, and I presume he gets as many on us as we do on him, although he is only 4 miles from us he sends that check to his correspondent bank in Richmond, 165 miles away, in another State. That correspondent bank deposits it in the bank in Richmond, which sends. it back to us and of course we remit at par. That is giving him a decided advantage over us. But still we as a small bank san operate at a profit without this exchange charge.

Now, I have some figures which I have gotten from a report of the American Bankers Association for the year ending December 31, 1942,

which is the last year these figures are available on the earnings of the banks of our size in our State in 1942.

There were 43 banks in our State in our deposit classification, that is, from $500,000 to $1,000,000 on deposit. There were 43 State banks which were charging exchange. These banks earned on the basis of average deposits $4.16 for each $100 on deposit. For that year we earned $2.69, which you see is quite much less. But their expenses were $3.35 per $100 as compared with ours of $1.97. Their recoveries on previous charge-offs and losses was 24 cents against our 14. Their losses for that year were 19 cents on the $100 against ours of nothing. The net result before dividends was that the 43 North Carolina banks earned 86 cents on the $100 of deposits and we earned 88 cents. They paid out 40 cents on the $100 as dividends on common stock and we paid out 24. They carried 44 cents on the hundred in their undivided profit account and we carried 64.

Now we were able to do this by the use of a service charge schedule based largely on recommendations of the American Bankers Association.

We have what we call a metered service charge on the small accounts. On the larger accounts we analyze them, adding up their average daily balance and allowing them a charge for earnings and if the earnings are not sufficient we make a charge. In addition we charge back to our depositors this exchange which we are paying on the nonpar banks.

The result is that our community is supporting our bank and at the same time it is paying tribute to our surrounding bankers.

Now when the Federal Reserve bank stopped our correspondentor at the suggestion of the Federal Reserve bank our correspondent stopped absorbing exchange, I thought it would hurt us this year. But last year we carried a large balance with our correspondent bank, because they were absorbing exchange even larger than the amount absorbed because we appreciated what they were doing for

us.

This year we carried a reasonable balance with them and invested the remainder in Treasury certificates. Now they were allowing us 1 percent on our average daily collected balance. All we have to do now is to so invest our money that we can earn the same amount to come out equal, which we are doing.

Now as to the statement as to our fellow bankers and the small banker, we have a good many small nonpar banks. They can either adopt the service charge, which most of them have already done-by the way, back during the depression or when we had the N. R. A. or something similar to it, the bankers in our State adopted a State-wide limit of service charges, which was recommended by the State bankers association, which is controlled completely by the nonpar banks, and in most instances it was adopted.

Since that time they have been having a service charge. But we have in our State a large number of large nonpar banks, some of them sixty and seventy-five million dollar banks, nonpar. These nonpar banks are still absorbing exchange. Those small banks that would have any difficulty can continue to carry their accounts, which they are already doing, with these nonpar banks. They can still charge their exchange, and I do not see where it would affect them but very little.