cluded the cost of exchange and permitted its opinion to stand. Nor is any distinction justified by the argument that exchange absorbed is directly attributable to a specific depositor and a specific item while other costs are not, but merely represent a proportionate share of the total overhead. Cost accounting has obscured such a distinction and banks now can, and do state, that it costs so much to transact or furnish a particular service. The most amazing thing in this whole matter, however, is the position which the Federal Reserve takes with respect to the absorption of exchange as distinguished from the absorption of State bank deposit taxes. Some States levy a tax on depositors based upon the amount which they have on deposit in banks. This is a tax on the depositor, not on the bank. Nevertheless, many banks pay this tax and do not charge it back to the depositor. Senator MAYBANK. Let me ask you this: Do you know much about State laws so far as taxation of banks are concerned?

Mr. CLARK. Well, I know something.

Senator MAYBANK. Do you have any laws in Tennessee to tax banks? Mr. CLARK. Tax banks?

Senator MAYBANK. Yes.

Mr. CLARK. Yes, sir.

Senator MAYBANK. What sort of laws are they, capital stock laws?
Mr. CLARK. Excise and franchise.

Senator MAYBANK. Amount of money they have in the bank?
Mr. CLARK. Yes.

Senator MAYBANK. How about licenses? Do you have all those?
Mr. CL RK. Private licenses?

Senator MAYBANK. Yes.

Mr. CLARK. Yes.

་

Senator MAYB NK. I was curious to know. Have you repealed any laws since the depression, or bank holiday?

Mr. CLARK. No; onlv tax laws.

enator MAYBANK. Have not some States repealed laws?

Mr. CLARK. I could not answer that. But our State has not repealed any tax laws.

Senator M YBANK. Would you mind if I asked somebody?

Mr. CLARK. I do not mind; certainly not.

Senator MAYBANK. Have we not repealed some laws in South Carolina?

Mr. R. H. NORRIS (Edgefield, S C.). Changed from tax on capital to an income tax.

Senator MAYBANK. But no capital tax. Did that not help the banks?
Mr. NORRIS. Well, I think it is a fair tax.
Senator MAYBANK. I did not mean that.
Mr. NORRIS. Yes.

It was of some assistance?

Senator MAYBANK. Do you know how many States tax bank capital

and have licenses?

Mr. NORRIS. Well, most all States tax banks.
Senator MAYBANK. How about city licenses?

in Tennessee?

Mr. CLARK. Yes.

Do you have those

Senator MAYBANK. Do they run high? I am just curious.

Mr. CLARK. I cannot say what percentage taxes would be, because I do not have that information before me, but it is high enough. Senator BUCK. State banks do not pay any taxes to cities?

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Senator MAYBANK. Gentlemen, I might say that ends the list of gentlemen that Senator Wagner had listed for this morning. I was asked if I would permit one witness to be heard, who has remained over here and must go back to the Midwest this afternoon. Senator Butler, do you have someone you want to hear this afternoon? Senator BUTLER. Tomorrow.

Senator MAYBANK. I have gotten a note here from Mr. Ransom asking if Mr. Rossetti could make a statement. And if it is agreeable to the committee, I will ask Mr. Gormley if he will suggest that the gentleman testify after our friend from San Francisco gets through, so the testimony will not be broken with pro and con.

Mr. GORMLEY. You want the proponents of the bill to testify now, Senator?

Senator MAYBANK. One gentleman has to go back.

Mr. GORMLEY. Mr. Griffin from Tennessee has to go back.

Senator MAYBANK. If that will be agreeable to the committee, I would be very glad to grant Mr. Ransom's request. Are there any questions you would like to ask Mr. Rowe? If not, we will have the gentleman from Tennessee. Thank you so much, Mr. Rowe. There are no other witnesses scheduled for this afternoon, but there were some witnesses left over from Friday. I do not know how you gentlemen feel about it, but I would like to get away by 5 o'clock to look at my mail.

STATEMENT OF VICTOR H. ROSSETTI, PRESIDENT, THE FARMERS-MERCHANTS NATIONAL BANK, LOS ANGELES, CALIF.

Mr. ROSSETTI. Mr. Chairman and gentlemen, my name is Victor H. Rossetti. I am president of the Farmers-Merchants National Bank of Los Angeles, Calif. I happened to be in Washington today in another matter. Hearing from Mr. Ransom that the hearing before this committee was going on, he invited me to come and make a statement, which I respectfully do, with your kind permisison, Senator. Senator MAYBANK. Go ahead, sir.

Mr. ROSSETTI. In the first place, I am opposed to the proposed Brown-Maybank bill. I favor the prohibition of the absorption of exchange. I know it to be a fact that it is used as a device for compensating balances and attracting business, and that the practice, if given full sway without the prohibition, would be inimical to sound economic national practice.

To illustrate, I believe that the prohibition places the burden of the payment of charges, characterized as exchange or otherwise, where it rightfully belongs, on the maker of the check, or the drawer. To illustrate, a railroad in the West draws a draft on a southeastern railroad in payment of its balance arising from freight and passenger traffic, and that charge rightfully should be placed on the southeastern railroad, or the western railroad, as the case might be, and the absorption of that exchange would controvert that application.

The prohibition will tend to throw the burden of exchange on the drawer of the check, where it rightfully belongs. The banks imposing exchange to my mind do so in the face of the balances that they receive that are profitably employed, and they have the benefit of those

balances while the item itself is in transit. Exchange charges to my mind are passe. They are an imposition. They grew out of early day practice, when it cost money to move funds. Today funds throughout the country are much more mobile, no involvement of expense, and the payer bank certainly enjoys the benefit of the deposit, and is not justified in imposing exchange.

To my mind the removal of the prohibition as contemplated in this Brown-Maybank bill will result in very uneconomic, unsound, vicious practice, and I would just like to register my opposition.

Senator MAYBANK. Any questions, gentlemen?

Senator HAWKES. Why, yes, Mr. Chairman. I know Mr. Rossetti, and I know he is one of the soundest, best bankers in the United States, a man who is very highly respected throughout the Nation. Therefore, his opinion is weighty with me. I would like to ask him this question: Can you tell us in your opinion, if this prohibition remains as it is now, will it put these small banks out of business?

Mr. ROSSETTI. In my judgment, it will not. Any bank that depends on exchange charges for its living, should not be in existence.

Senator HAWKES. Well, now, the truth of the matter is that a great many small banks-I am looking for information-a great many small banks do not join the Federal Reserve System because of the advantages they have by remaining out; is that correct?

Mr. ROSSETTI. Well, I think possibly the exchange item is a factor. But reverting to your question, the little bank today that cannot make money in view of the prohibition of interest payment on commercial deposits and the modification of the interest on savings deposits, the limitation, as you know, having been fixed by the Federal Reserve Act at 212 percent maximum, and the banks of the country are even paying less than that due to the low money interest rates prevailing, have no reason to be in business.

As a matter of fact, if you take even the rate of Government bonds, at 22 percent, and then add the interest saving through the modification of the rate of interest on savings deposits, and the elimination of interest on commercial deposits, they have a very fair rate on their investments.

Senator HAWKES. Well, of course, that question that you are answering is a different question than the one I had in mind. I might agree with you on that, but that was not the thing I had in mind. The point I have in mind is, from your knowledge of the banking system in the country and the banking opportunities, can these small banks that are required to service certain local communities, stay in business without this right to absorb exchange?

Mr. ROSSETTI. I say they can. I say frankly they can, in my judg

ment.

Senator MAYBANK. Are there any further questions? Senator Buck?

Senator BUCK. No; I have no questions, Senator.

Senator HAWKES. No, Senator. That is all I wanted to get—that opinion.

Senator MAYBANK. Thank you so much, Mr. Rossetti. I will ask the last witness to come up here. Mr. Clark, will you come up here. Mr. Clark, will you state for the record your connections in Tennessee?

Mr. CLARK. Well, they pay a State and county tax. They do have to pay a city tax.

Senator BUCK. Real-estate tax?

Mr. CLARK. Yes.

Senator BUCK. But not on capital?
Mr. CLARK. No.

Senator MAYBANK. You may proceed with your statement, Mr. Clark.

Mr. CLARK. This the Board has ruled is proper and is not a payment of interest. Can anything be more out-of-pocket, more attributable to a specific depositor, more a benefit to the depositor than this payment of his tax? Yet the Board says it is not interest. What difference is there between such a situation and the absorption of exchange? Can it be that exchange absorption is prohibited because exchange does not fit well with the Board's desire for universal par clearance while the tax absorption does not step on the par clearance toes? The Tennessee Legislature, during its session of 1921, authorized banks within the State to charge exchange. I quote from section 5917 of the Code of Tennessee:

Banks, both State and National, shall have the right to make an exchange charge for the handling of cash items, and when such cash items are presented to the payer bank for payment through or by any bank, banker, trust company, Federal Reserve bank, post office, express company, collection agency, or by any other agency whatever, the amount of such charge shall not exceed one-tenth of 1 per centum of the total amount of such "cash item," so presented and paid at one time, and the minimum charge shall be 10 cents: Provided, however, That no such charge shall be made on checks or drafts given or drawn in settlement of obligations due the State of Tennessee or any subdivision thereof, or of the United States, and that no such charge may be made by banks for the collection of checks deposited with said banks, when the check is drawn on any other bank in the same municipality, city, town, or village: And, provided, That nothing in this statute shall be deemed mandatory upon the banks to charge exchange on checks or drafts payable to a person in this State, and drawn on a bank, trust company, or persons within or without this State, but it shall be optional with such banks whether they shall so charge exchange (1921, ch. 37, sec 1).

Tennessee has 222 State-chartered banking institutions, 161 of which charge exchange under the authority granted them by the foregoing code section. These institutions are known as nonpar nonmember banks. They are located in the small towns, and these banks share the community interest along with their churches and their schools. Approximately 95 percent of these banks afford the only banking services available in their respective towns and villages.

Senator HAWKES. Might I ask you a question on these 161 banks? Mr. CLARK. Yes, sir.

Senator HAWKES. They charge exchange under the right given them in the Tennessee law. Do you know, or have you any way of knowing, how many of those, if any, have a service charge in addition to that? Is it customary, or not?

Mr. CLARK. Most all of them have service charges.

Senator HAWKES. Most all of them have service charges?

Mr. CLARK. I couldn't just single them out-I could if I had the record before me- -as to which one of these 161 are charging a service charge. But all of these 161 are charging exchange, and most of them have some sort of form of service charge.

Senator HAWKES. Yes, sir. Thank you very much.

Mr. CLARK. It is a well-known fact that the demand for loans has decreased in rural communities in proportion to the decrease ex

perienced in the cities. The country bankers are at a disadvantage in that they have few opportunities to participate in loans growing out of the war effort. It will be well to note that, at the close of the year 1943 the percentage of loans carried by banks in Tennessee in relation to total assets amounted to 17.89 percent, an all-time low, whereas, only 6 years ago, loans and discounts carried amounted to more than 45 percent of total assets. This is conclusive proof that banks have lost a substantial part of their income from this source as most of these loans yielded 6 percent. The banks have attempted to augment this income by purchasing United States Government and other highgrade securities, and today, well over 50 percent of the total resources of our banks are so invested. However, high-grade securities available for bank investment yield a much lower interest rate than the 6 percent loan on the local loan, and profits decrease accordingly.. Therefore, we must consider income from other sources. An analysis on the earning reports of banks show that 84 percent of the net income of the Tennessee nonpar country banks for the year 1943 was represented by exchange and service charges. Without this source of income, 33 of these institutions would have had an operating deficit or a loss for the year, and a greater number would have shown earnings. of as little as $1,000 or less.

Senator MAYBANK. You have not the figures there?

Mr. CLARK. I am sorry. I do not have the break-down.
Senator MAYBANK. Could you guess?

Mr. CLARK. I would say about 60-40.

Senator MAYBANK. Exchange 60 percent?

Mr. CLARK. Well, I would say it was; yes.

Senator MAYBANK. Did you say 81 percent?

Mr. CLARK. Eighty-four percent of the net income.

Senator MAYBANK. Well, then, that would be half of the net in-come, if you left out the service charge?

Mr. CLARK. Something like that. I could not say exactly.
Senator MAYBANK. I understand.

Mr. CLARK. Our country bankers have never considered as interest the exchange absorbed for them by their city correspondents, and I do not believe it is the intention of the United States Senate, our highest lawmaking body, to permit a governmental agency, in the absence of a specific authorization enacted by Congress, to make and enforce a regulation which would have the effect of nullifying the accepted practice of charging exchange, as granted by the regularly enacted. laws of Tennessee and other States.

Small business is having a hard time surviving. Small banks are also experiencing great difficulty. This ruling of the Federal Reserve Board strikes down the custom long existing to absorb these charges by banks. This ruling, if enforced, will particularly hurt every nonpar bank in the United States, both large and small, as it may deprive them of one of their very important sources of income.

The State bank section of the Tennessee Bankers Association in convention assembled in Nashville, Tenn., in the month of May 1944 went on record as unanimously opposing the Federal Reserve recent. intepretation of regulation Q favoring the passage of the BrownMaybank bills.

Senator MAYBANK. Now, there were some of those banks there that were in the Federal Reserve?