meant to pay him that sum. He drew his check for that amount. But Smith's bank took the matter right out of Smith's hands. What Jones actually received was only $999, or a little less than that. That is, unless-mark this unless for a reason that we shall presently tell-unless somebody ele took Jones' loss on his own back for some good and sufficient compensation. That happened, sometimes.

A relic of Dark Ages.-Now, even in those days the exchange charge was a relic of the Dark Ages. There was no logic about it. In the first place, the $1 and $1.25 was being collected from the wrong party. Smith s bank got the money for helping Smith to pay his own bills. Nobody else was helped, because everybody else in the picture, Jones and the other bank, got no more than the exact money which was due to them. Then why didn't the Laketown bank get its pay from Smith, if it really was entitled to compensation? Because the bank at Laketown had no heart for charging one of its own customers. The customer lived near the bank and could put up a mighty protest against being nipped in this fashion. Poor Jones, on the other hand, or the banks in between, would get nowhere if they complained. They lived too far away and they had to collect the check in some fashion.

Then, in the second place, whatever service the Laketown bank rendered cost it no more than a trifle, certainly a great deal less than the $1 or the $1.25 which it exacted. Nearly every bit of this income was sheer profit to the bank. So that bank and thousands just like it fattened substantial.y on the gains which they got from sources just like this. No wonder that exchange charges became something of a scandal, and no wonder that when the Federal Reserve System came, with a clear mandate from Congress to put check collection on a better basis, this nipping of exchange charges was soon taken in hand for a reform. Businessmen all over the country and the vast majority of bankers, as well, hailed the coming of a better arrangement. Exchange charges had been taking a huge and unearned toll away from industry.

Where are these nonpar banks?-Strangely enough, however, after all the years which have come and gone under the Federal Reserve System, this whole problem of exchange charges has come up once more and has been thrown into the lap of Congress in the pending Brown and Maybank bills. Federal Reserve banks, even with a good deal of cooperation from businessmen generally, have never suceeded in driving the exchange charge completely out of existence. It has still existed in the back country, much after the fashion of the guerrilla, who has been driven away from the main scene but keeps on picking off his victims here and there. At last accounts, 2,529 banks were clinging grimly to this antique practice and were tucking away profits for themselves, whereas 11,501 other banks were operating in up-to-date fashion, paying in full for checks drawn on themselves. The 11,501 are "par banks" in very reality. The location of the nonpar banks, the 2,529 who still nip their toll from the checks of remote holders that cannot strike back, is interesting. You cannot find so much as one nonpar bark in all the area of Sates from Passamaquoddy Bay to the Potomac, and you find only 16 of them in all of the area comprising Michigan, Ohio, Indiana, and Illinois. The bulk of the nonpar banks are in the Carolinas and Georgia and along the Gulf or in the States of the M ssissippi Valley. Twenty of our States are quite without any nonpar banks whatever, and one of the 20, Iowa, has forbidden exchange charges by a specific law. Nine other States besides the 20 have no more than a handful each of nonpar banks. To tell the truth, while the nonpar banks represent 18 percent of the banks of this country, they hold only 2 percent of the bank deposits. Exchange charges no longer have the dignity of a general use by the banking business or of a general approval in banking circles.

What are they?-How have the 2,529 banks been able to continue along their archaic course? By keeping as far away from any dealings with the Federal Reserve System as possible. They are not members of the system, of course. None of them are national banks. Let them tell it, or rather let their voluble spokesmen inside and outside of Congress do the talking, and they are poor little institutions, grubbing out a forlorn existence and therefore to be pitied and cossetted for all their errant ways. As a matter of fact, 204 of the nonpar banks are parts of chain banking systems, a condition more suggestive of opulence than of poverty, to say the least. Furthermore, 195 of these 2,529 banks are reported to be operating branch banks of their own, which again smells rather of prosperity than of the reverse. The one quality common to all of them in reality is not poverty, but a determination to hold grimly to an old-time practice which fattens their income at the expense of others. To this end they have taken a

mighty oath not to become part of that par clearance system of this country which includes all of the other 11,501 banks.

Why Reserve Board acted.-Now to tell the influence which has brought them storming into Washington once more for help from Congress, after many years of guerrilla fighting in their own areas. It appears that the adioit solicitors of new accounts at certain interior city banks, bankers who ought to be engaged in better business than this, thought up a way of turning the archaic doings of these 2,529 banks to their own advantage. They offered to absorb the exchange charges made by the nonpar banks for all people who would keep adequate balances with them. You may well believe that many a concern or bank, harassed by the exchange charges of the 2,529 nonpar banks, were quite ready in these days of abundant and uninvested deposits to buy immunity by placing balances with these aggressive institutions. As a consequence, one of the aggressive banks ran its deposits up from $800,000 to $8,000,000 in less than a year, another increased its balances in 3 years from less than $1,300,000 to more than $10,000,000, and still another ran its balance up in 3 years from less than $3,000,000 to more than $19,000,000.

Even a tyro at banking will realize that this was an unhealthy development. It is not well for the banking structure of any country that huge deposits, belonging to outside people, should be built up in suburban institutions or in quite unseasoned banks, as most of these aggressive institutions were. Similar accumulations in institutions not equipped by experience to serve as reserve agents, and not justified by their employment outlets for money to be big holders of other banks' funds, had a good deal to do with bringing on our recent great depression. Congress sensed the evil in such developments back in 1933 when it forbade banks to pay any interest whatever on demand deposits. The Federal Reserve Board sensed the evil, now present, in the doings of these aggressive banks, and as guardian of our economic structure it felt that it had to take steps to cure the evil. So it declared that is could see no difference between paying interest under that precise name on a demand account or offering a pecuniary reward for demand deposits by absorbing exchange charges against them. And, pray tell, what is the difference? Can anybody, except one who has an axe of his own to grind, argue that Congress meant to leave the door open in 1933 for ambitious banks to start buying demand deposits once more when the spirit moved them?

A howl and a pious declaration.—What a howl has gone up from the nonpar banks over this action of the Federal Reserve Board! You might think, at first blush, except as you heard this howl, that the ruling of the Federal Reserve Board does not affect the 2,529, that it put a crimp only in the doings of the city banks that had agreed to absorb exchange charges. The truth is that the nonpar banks are feeling the pinch because they have been flourishing greatly under the conditions which the absorbing banks have created. For, in reality, the activity of the absorbing banks sent a good deal of remittance business to the nonpar banks that they would not otherwise have had. Hence the vigor with which they have begged their Congressmen to throw the Federal Reserve Board back on its haunches, and hence their pious declaration, over and over again, that there is no similarity whatever between buying demard deposits with promises of interest and buying demand deposits with promises of some other financial consideration.

We won't waste the time of our readers in arguing whether the buying of demand deposits can be unrighteous when you call the payment interest and altogether righteous when you call it by another name. Instead, let's briefly survey the arguments which the nonpar banks are advancing, and then the arguments which force us to vigorously dissent from them.

Are they sentenced to starvation? The outstanding argument of the nonpar banks is emotional. They declare that this ruling of the Federal Reserve Board condemns many of them to death by starvation. Without income from exchange charges, they cannot continue to operate. One might suggest, without being so very hard-boiled either, that these banks could retain every penney of their present income by collecting it from the people who really benefit from the service. Why shouldn't their own customers pay for the convenience of having a checking account and for being able to use it in paying bills due at distant points? The people at the distant points would have no objection to being paid by money order. Why then should they be put out of pocket because somebody along the bayous of Mississippi or on the lone reaches of Missouri or of Minnesota chooses to pay them by check instead? We might be so hard-hearted as to ask why any man's creditors should have to supply him with checking service at 65785-452

their expense.

These banks could stay prosperous by collecting their charges from the proper sources.

Instead, we are going to challenge the argument that exchange charges really do spell the difference between prosperity and starvation for the nonpar banks. In the same States, sometimes in the same towns, where nonpar banks operate, are equally small other banks that do not charge exchange and yet continue to carry on a decent existence. And it can hardly be alleged, we should say, that small banks cannot exist in Iowa, where exchange charges are forbidden by statute, or in Vermont or Utah or Pennsylvania, where every bank is remitting par for checks drawn upon it. As a matter of fact, the four States just named are very much the homes of small banks and always have been.

If it actually were true, that without exchange charges some banks here or there might be obliged to quit business, which we are inclined to challenge, the question then would be altogether in order whether such bank had ever really deserved to live. Getting down to brass tacks, so to speak, is any community entitled to banking service if that service has to be kept alive by levying unearned tribute on the people of other communities?

A dangerous bill.—Our reason for dissenting vigorously from the argument that the Federal Reserve Board should be thrown back on its haunches and made to retract its decision that buying demand deposits with the coin of absorbed exchange charges is no different in principle from buying the same deposits with interest payments, is that the Maybank bill of the nonpar banks is unfair to other banks, many of them distinctly small and deserving institutions, that it threatens the very existence of the par clearance system in this country and that it even threatens to sap the strength of the Federal Reserve System. All three of these statements of ours are easily susceptible of proof. We require every National bank and every State bank that joints the Federal Reserve System to remit for the full 100 percent on all checks drawn against themselves and several thousand other banks also do so because they regard this as good banking practice. Surely there is unfairness in giving to 2,529 other banks the right to nip off exchange charges when these 11,501 do not enjoy that right.

Why do we say that the par clearance system, under which 8 percent of the demand deposits of our country circulate widely in the form of checks payable at 100 cents on the dollar, is threatened, if the Federal Reserve Board is rebuked and made to retract? Because there will be a distinct incentive for other banks to quit the par list and to give themselves over to the delight of nipping profits off checks in the same unseemly fashion. If other banks see that Congress has deliberately espoused the cause of the 2,529 banks, and has punished the Federal Reserve Board for daring to take steps to preserve the par clearance system, why should the 11,501 forego the privilege of doing some profit nipping on their own account? The little national bank in the State of Mississippi which threw up its national charter in 1942, became a State nonmember bank in order to collect exchange, and then gathered in $25,488 89 of income in the very next year from this source, is a specific example of what can easily happen.

Why do we say that the Federal Reserve System itself may suffer in vitality if Congress bows to the will of the nonpar banks? Because Congress will have indicated that it cares less for the good will of the 11,501 banks than for the happiness of a group of banks which have not only flouted every invitation of the Federal Reserve Board that they become members of the system, but have fought the par clearance system of the Federal Reserve, in season and out, and have now linked hands with some ambitious city banks, in an effort to restore the baneful practice of heaping up demand deposits in banks quite unprepared to serve as worthy reserve agents.

Many banks are protesting.-Those who are championing the cause of the nonpar banks in Congress have declared (see p. 3, Report of Committee on Banking and Currency) that "bankers generally support the bill" which the 2,529 banks have sponsored. The accuracy of that statement is gravely in question. The Minnesota Bankers Association, which includes a good many nonpar banks in its membership. has come out strongly against the bill. So, too, have the bankers' associations of Colorado, Connecticut, Kansas, Indiana, Illinois, Massachusetts, New Mexico, New York, New Jersey, and so likewise has the National Association of Credit Men. Much more keenly than Members of Congress realize, these bankers and credit men recall what a deal of mischief was done in the days before the depression by the payment of interest on demand

deposits. They dread the return of such interest and its effects, even though the interest be paid now in another guise and under another name. They think the effect will be to lay part of the train of powder which can ultimately bring on another catastrophe such as we had in the 1930's.

Mr. GORMLEY. That document can be verified. I have not a copy of letter accompanying same, but doubtless could furnish it.

Senator MAYBANK. I would like to have the letter, too.

Mr. GORMLEY. I am representing these two-hundred-odd banks in Georgia; and, more, I am representing between 1,300 and 1,400 banks that have been listed in this association that we call the Nonpar Association of America.

I will first explain to you why we created that association. A number of State associations, especially in the Southeast, went on record as opposing enforcement of regulation Q. That was in States where we operate nonpar banks. And in Georgia a resolution to that effect was passed by our annual convention last year, by a unanimous vote. Of course, do not get the idea that we do not have some dissenters. Because of that division of sentiment, and to save the officials of the association of any embarrassment, we decided to organize a group in Georgia, and we did. We had a meeting of the nonpar banks there and organized a group for the specific purpose of pressing our side of this case.

The thing was thought that well of that it was taken up in a number of States, and as a consequence we have between 1,300 and 1,400 members.

This is not a money-gathering organization. Georgia has carried whatever publicity expense has been involved. We have carried the entire expense. We have not accepted a dollar of contribution from any bank outside of Georgia. We have had voluntary offers from outside banks, but the publicity we have gotten out we have paid for.

Neither in the State organizations nor in the American Bankers Association can this question be properly presented, because we have a division of sentiment in each association. As a matter of fact, the sentiment in the American Bankers Association, as evidenced by their action at the spring council meeting, was overwhelmingly against us. I presented an amendment to a resolution that was offered, and I think I got only 2 votes.

We have here representatives of the American Bankers Association. What I say now I say in all due respect for the efforts and the accomplishments of the American Bankers Association in behalf of the banks of this country, that the American Bankers Association does not represent the interest of the little banks of the United States when the interest of the big banks conflict. And you will find the association conventions of the A. B. A. are largely made up of banks the resources of which are over $5,000,000.

I am not concerned with that type of bank at all. I am speaking here in behalf of the little bank, with resources from $150,000 up to $1,000 000; the bank that operates in a town of, let us say, 500 or 750 or 1,000 people.

I would like to make this statement to you gentlemen of the committee. I served as superintendent of banks in the State of Georgia. for a period of some 8 or 9 years. I was appointed in 1931. I went through the bank holiday. We had 50 banks in the State of Georgia that could not have paid their operating expenses in those trying

years if it had not been for the revenue received from this one source, exchange.

There is nothing in regulation Q other than an attempt to force all banks of the United States on a par-clearance basis, or into the Federal Reserve System.

I would like to say this one further thing to you gentlemen of the committee

Senator HAWKES. Mr. Chairman, may I ask a question right here, as I have to leave shortly?

The CHAIRMAN. Certainly, Senator Hawkes.

Senator HAWKES. I want to see if you will explain what I interpreted your remarks to mean, that the Federal Reserve was trying to stir up friction between the small country banks and their merchant customers.

Mr. GORMLEY. That is right.

Senator HAWKES. Will you explain that? What is their purpose in that?

Mr. GORMLEY. They are attacking us through our customers. They resorted to legislation, and we defeated them. They resorted to force by intimidation; that is, threatening to send our checks to the express office and have them accumulate in an amount which would embarrass our banks. We defeated them in court on that, and now they are undertaking to accomplish by indirection what they have failed to accomplish by direct methods. They are attacking us now through our customers.

Senator HAWKES. You made that statement, but what I would like to know is, what is their objective? What is their purpose in trying to destroy your relationship to your customers?

Mr. GORMLEY. To force all the banks to yield to the Federal Reserve System or enter into an agreement to clear for them at par. They want all the banks in the Reserve System or to agree to a par clearance operation.

It may or may not be desirable. For a long, long time I thought that probably if we could get the entire banking resources of this country in one central system, the Federal Reserve System, it would be possible for one central agency to control or influence the economic conditions of this country and have the banking system operate smoothly. I had an idea at one time that if the Federal Reserve Board had control of all banking resources they would be enabled by their power to increase or lower reserve requirements, and to tighten or loosen the reins of credit, to control economic conditions in this country. But I have abandoned that idea, gentlemen, and I have reached the conclusion definitely that the men who comprise the Federal Reserve Board are very, very human. While, of course, they have a much broader vision than a little man like myself, based on their attempts to control economic conditions in the past, I would say it would be most dangerous to the economy of this country for any one central board to have control of banking resources or to a considerable extent influence the control of banking resources in this country.

I can cite you specific cases whereby the Federal Reserve Board. attempts to either control or to modify economic conditions by raising reserve requirements have gone badly awry. You need not go back any further than 1937, when they raised the rese. ve requirements up to the limit.