Mr. NEEDHAM. Mr. Clarence A. Whelchel, who is a brother of Congressman Whelchel, from Tennessee, came up here to testify, and if you could take just a minute. Senator HAWKES. Well, he certainly can present his views, but I have an appointment in a few moments. Representative WHELCHEL. I am Congressman Whelchel, and my brother is from Mount Pleasant, Tenn., and I will ask that he make his statement brief. Senator HAWKES. Thank you so much. STATEMENT OF CLARENCE A. WHELCHEL, PRESIDENT, FARMERS & MERCHANTS BANK, MOUNT PLEASANT, TENN. Mr. WHELCHEL. My name is Clarence A. Whelchel. I am president of the Farmers & Merchants Bank, of Mount Pleasant, Tenn., a little bank with less than a million dollars in deposits. We are making money without charging exchange. And that is just as briefly as I know how to speak to you. Senator HAWKES. Let me ask you this question. Have you acquainted your representatives in Congress, particularly your Senators, with your viewpoint? Mr. WHELCHEL. I have. Representative WHELCHEL. We will see them. Mr. RANSOM. Mr. F. M. Reeves, a witness from Georgia, was here yesterday, at great inconvenience. He is president of a very small bank. He wants to make the point that even Georgia was not unanimous on this bill. He left a statement here, and I would like to have it incorporated as part of the record. Senator HAWKES. It will be incorporated in the record of the hearings. The above-mentioned statement is as follows:) STATEMENT OF F. M. REEVES, EXECUTIVE VICE PRESIDENT, FIRST NATIONAL BANK OF CORNELIA, CORNELIA, GA. Mr. REEVES. Mr. Chairman and members of the committee, my name is F. M. Reeves. I am executive vice president of the First National Bank of Cornelia, Cornelia, Ga., a small country bank with only $30,000 capital and about $18,000 surplus and undivided profits. The deposits of the bank were $225,000 when I became connected with it. They are now a little more than $800,000. I have been connected with this bank 18 years, and during that entire time it has paid its checks at par, as required by the Federal Reserve Act, and has had no income or benefit from exchange charges against its own checks drawn on it by its own customers. The bank has undergone no reorganization and has sold no preferred stock. We have averaged a net earning before charge-offs and depreciation of a little above $5,000 a year. It has been called to my attention that the statement has been made to your committee that Georgia banks are unanimous in support of the Brown-Maybank bills. I enlisted in this fight immediately upon the introduction of these bills into the Congress, and I have made it a point to find out whether that statement is correct or not. I find that Georgia banks are not unanimous in support of these bills. However, the larger banks in the cities have taken no part in the controversy, due to the fact that they feared they might offend their country correspondents and lose business thereby. The soundest banking thought in the State of Georgia, in my opinion, is opposed to the Brown-Maybank bills, although some of the banks may not be in a position to voice their opposition publicly. I am opposed to these bills for the following reasons: 1. They open the field wide for the initiation of banking practices that were considered unsound at the time of the enactment of the Banking Acts of 1933–35. These bills would go a long way toward breaking down all the barriers which have protected safe and sound banking in the Nation since 1933. 2. The United States has a dual banking system comprised, first, of national banks, members of the Federal Reserve System, and, second, State banks chartered by the various States. I am in favor of these two groups of banks being kept distinctly separate and neither group permitted to invade the field of the other group in the matter of securing legislation that would hamper each other. I think the sponsoring of the Brown-Maybank bills by nonmember banks is an attempted invasion of the field of operations of the Federal Reserve System and its member banks. If the State banks desire to continue to deduct exchange charges for paying their checks, I favor their retaining this right. Since the Federal Reserve Board has promised regulation Q, I am likewise opposed to these nonmember banks undertaking to interfere with the regulation and the authority of the Federal Reserve Board by having a bill passed by the Congress that would outlaw regulation Q. 3. It is unsafe and unsound for any bank to be put in a position with keen competition for business that would force it to resort to practices in its business which entail a loss upon it. The Federal Government, through the Federal Deposit Insurance Corporation, has undertaken to insure bank deposits, and if bank deposits are really insured, it is necessary that sound banking practices be followed in all the banks of the Nation and that all earnings above legitimate dividends be set aside for the protection of the Government and the depositors in the banks. 4. It has been urged that many country banks would have to go out of business if regulation Q is not outlawed and the absorption of exchange charges be permitted by member banks of the Federal Reserve System for their correspondent banks. As stated in the beginning, our bank has made money in the face of a most ruthless competition from nonpar banks. I have serious doubt that this argument is correct, and it has been made without any specific proof to sustain the` same. If my bank could live without deducting exchange charges for paying off its checks, it is my opinion that any bank in the Nation with reasonable support could live. Furthermore, to say that correspondent banks must absorb the exchange losses of small country banks is tantamount to saying that strong banks should be compelled to subsidize small and weak banks, many of which have been established without proper investigation to determine whether there was business enough in a given community to support the bank. 5. In my opinion, there is no question but that banks have used the device of absorbing exchange charges as an indirect means of paying interest on deposits. I do not believe they should be permitted to resume this practice. I trust that the committee will take the above views into consideration in reaching a conclusion with respect to this matter, and I also earnestly hope that the committee will see fit to decline to report the bill out. Senator HAWKES. Is there anyone else who desires to be heard? Mr. GORMLEY. I just want this information: Do I understand this is the final session? Because we have some more witnesses coming in on Monday and Tuesday, from Florida and Alabama. Senator HAWKES. You will have to see the chairman of the committee. Senators Buck and Butler and I did this today as a matter of courtesy to these people who had come from far away to testify before the committee. Mr. GORMLEY. You are not terminating the hearings? Senator HAWKES. I am not terminating the hearings, because I have no authority to do that. Senator Wagner, the chairman, will have to decide the matter. We will stand adjourned at this time. (The following statements were later received for the record:) Hon. ROBERT F. WAGNER, THE SECRETARY OF THE TREASURY, Chairman, Banking and Currency Committee, United States Senate, Washington, D. C. DEAR SENATOR WAGNER: Your committee has asked for a report from the Treasury Department on S. 1642. 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 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. MY DEAR SENATOR: As requested, we are pleased to submit herein the report of this Corporation on S. 1642 entitled "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." We recommend enactment of H. R. 3956, an identical measure, which already has been passed by the House of Representatives. While this legislation is in the form of an amendment of the existing law, the primary issue before the House in its consideration of the bill was what Congress meant to include in the term "interest" in the 19331 and 19352 statutes prohibiting payment of interest on demand deposits. As is obvious from the debates on the bill, the House concluded that in its opinion Congress never intended that absorption of exchange be included in the term "interest." We share this view and in our administration of the 1935 act, in its application to nonmember insured banks, which substantially restates the provisions of the 1933 act applicable to memper banks, we have so construed the law. Historically the two practices are separate and distinct and the legislative history of both acts clearly shows that Congress intended to regulate payment of interest only. The evils which these statutes were designed to correct, as the hearings and the debates in Congress show, were attributed to actual interest payments and not to absorption of exchange or other expenses for customers. At no place in the legislative record of the present statutory provisions is there any mention of absorption of exchange. It is a fact, however, that as respects member banks, an administrative ruling has been made which prohibits them from absorbing exchange and ruling is based solely upon the interest statute. If, therefore, the interest statute does not extend to absorption of exchange, as we believe is clear as a matter of law, the ruling is invalid for lack of legislative authorization. But while its invalidity seems clear, it is nevertheless being actively and continuously enforced so that it will continue to have the force of law unless Congress enacts the pending bill which specifically states that absorption of exchange is not interest. As the adverse impact of the ruling is borne principally by nonmember banks, judicial relief to test the correctness of the ruling is not available, since these 1 Sec. 19 of the Federal Reserve Act, act of June 16, 1933, ch. 89, sec. 11 (b), 48 Stat. 181, supplemented by act of August 23, 1935, ch. 614, sec. 324 (a), 49 Stat. 714. 2 Act of August 23, 1935, ch. 614, sec. 101, 49 Stat. 702. institutions have no standing to question a ruling which does not by its terms apply to them, even though its full impact falls upon them indirectly. Although enactment of the bill merely declares and reaffirms the intent of the present law, failure of passage means submitting to continued enforcement of a ruling which lacks congressional sanction. Opposition to the bill has been solicited upon the ground that its passage means a blow to par clearance of checks. But par clearance of checks was not deterred by the practice of paying interest on demand deposits and the interest statute was not designed to further par clearance, but was intended only to prevent attraction of funds to money centers for use in stock-market speculation. Desire to achieve more widespread par clearance is not a sufficient reason for sustaining a ruling which misapplies the interest statute. Opposition to enactment of the bill on this ground is a confession that the present law is not only being misconstrued but is being misapplied to a field in which Congress has pointedly refrained from legislating since in 1917 it expressly authorized member and nonmember banks to charge exchange on clearings through private commercial banking channels (sec. 13 of the Federal Reserve Act, act of June 21, 1917, ch. 32, sec. 4, 40 Stat. 234). Par clearance is pertinent to this legislation only because the prohibition against absorption operates to force banks which charge exchange to clear at par. This circumstance demonstrates that, in enacting the interest statutes, Congress did not intend to affect absorption of exchange because the historic bitterness engendered by the par clearance controversy is such that some mention of the problem would have been made in the 1933 or 1935 congressional considerations of the interest laws. But no mention was made. Thus, while the effect of absorption on par clearance may be pertinent to a discussion favoring the enactment of the bill, it is not a reason which may be advanced in opposition to its passage, unless the opposition is prepared to sacrifice the constitutional supremacy of Congress in legislative matters in order to strike a blow at nonpar banking. Furthermore, while the defeat of the bill would be a direct blow at banks which charge exchange, the passage of the bill will not spread the practice of charging exchange to any greater degree than has been marked the past 10 years. During this period, exchange has been absorbed by banks desiring to do so, and the interest statute was not enforced against exchange absorption, unless covertly, until the recent ruling (September 1943) defining absorption of exchange as interest. This was the first revival of the issue after it had been laid to rest in 1937 following its brief and uncertain career in that year. During this 10-year period, the number of banks charging exchange has diminished until today only slightly more than 2,500 institutions impose these charges. How, then, can the mere return to a practice so briefly interrupted tend to increase the number of banks which charge exchange? If par clearance is jeopardized by exchange absorption, we believe the facts should be fairly assembled and the issue squarely and openly presented for congressional consideration and not resolved indirectly in the disguise of an interest ruling. But it must be said that evidence thus far produced has consisted only of fearful apparitions of the consequences of general departure from par clearance instead of facts indicating that absorption of exchange threatens par clearance. Opposition to the bill is also being drummed up on the false premise that absorption of exchange has led to diversion of funds from normal banking channels and to unsound banking conditions. The facts submitted in the cases cited during the hearings on the bill to the House Committee on Banking and Currency where these charges were made do not support these conclusions. In five of the seven cases we have received information from the banks involved showing affirmatively that banking funds have not been diverted from normal banking channels and unsound banking conditions have not arisen as the result of exchange absorption. If such conditions do occur, ordinary supervisory methods can easily effect timely corrections. Here again the fact that unsound practices have not resulted from actual experience in absorption of exchange charges during the past 10 years is submerged in the dreadful descriptions of possible consequences, which are wholly imaginary. Care must be exercised that the opprobrious connotations of the terms “unsound” banking and “unnatural” balances are not accepted as substitutes for facts to show that absorption of exchange has produced either consequence. It should be observed that exchange charges have been singled out as the one expense which banks may not absorb for depositors without violating the interest law, while other expenses may be absorbed with approval. The distinction is The term rested on the theory that exchange charges are out-of-pocket expenses. out-of-pocket expenses has no precise significance by legal definition or common usage. It suggests expenses of the type which one may pay for incidentals as distinguished from more important expenses. Treating the term to mean expenses identifiable only with a particular transaction as distinguished from those which are not, we find that exchange charges are the only out-of-pocket expenses which are administratively prohibited from being absorbed. Thus all banks are permitted to absorb their own service charges by service charge allowances in consideration of balances maintained. Banks today generally have established service charge schedules which allow the theoretical earning value of their customers' accounts to be offset against their charges for the services which they render to customers in collecting checks deposited, paying checks, and otherwise furnishing them depositary service. These charges are frequently called activity charges. If the allowances to the customers for the earning value of their accounts are less than the activity charges for the services they require, the excess is billed to the customers as service charges. However, where the earning allowances exceed the activity charges, the customers are neither paid nor credited with the difference. These servicecharge credit allowances to customers are granted in direct proportion to the size of the balances which they maintain. This is accomplished either through scheduels under which activity allowances increase proportionately with the minimum balances maintained by depositors or through individual analysis of costs of handling depositors' accounts, the latter system being generally employed by banks in handling the accounts of their bank customers and other large depositors. The effect of these allowances is that the banks absorb their own service charges in direct proportion to the size of the balances which their depositors maintain. This has been held not to be a violation of section 19 of the Federal Reserve Act prohibiting payment of interest on demand deposits. (January 1944 Federal Reserve Bulletin, p. 13.) As banks may absorb their own service charges without violating the regulations of either the Federal Deposit Insurance Corporation or the Board of Governors of the Federal Reserve System, why should member banks be prohibited from absorbing the exchange charges which they pay to other banks? We must bear in mind that exchange charges are service charges of the banks making the charges. When paid out by collecting banks in connection with their depositors' business, they are merely one of the expenses of collecting checks and historically have been treated as part of the expenses of bank operation. The Federal Reserve Board has expressly ruled that member banks may pay and absorb the intangible property taxes levied by States such as Michigan, Indiana, and Kentucky computed on their depositors' bank balances, without violating the interest statute. These taxes are laid on the depositors and not on the banks. They are in every sense out-of-pocket expenses as the term is used in relation to absorption of exchange. Rulings on this question follow the exception contained in the Board's revision of regulation Q, effective January 1, 1936, which provided that: "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." (1935 Federal Reserve Bulletin, p. 864.) [Italics supplied.] We think, therefore, that apart from the question whether the interest statute was designed to prevent absorption of out-of-pocket expenses, it would be entirely inconsistent to permit the prohibition against absorption of exchange to be continued since all other types of out-of-pocket expenses may be absorbed. This circumstance, as well as the fact that the Corporation has from the beginning interpreted the interest statute governing nonmember banks which it administers as not prohibiting absorption of exchange, prompted the Federal Deposit Insurance 、 Corporation to caution the Federal Reserve Board on August 20. 1913, before its controverted ruling was issued that "the theory of the Board of Governors would appear to require it to outlaw as well the absorption of service charges and other expenses for depositors which all banks now incur to some degree," that its prorosed ruling was "simply another attempt to force par clearance upon nonmember banks" and that "it hopes that the Board of Governors will not give rise to a situation where two Federal agencies make conflicting decisions to the consternation of the public"; and to suggest that "in such a situation we consider it singularly approprate to await precise directions from Congress" (House hearings, p. 599). |