That part of the decision pertinent to this discussion follows:

"Par clearance does not mean that the payee of a check who deposits it with his bank for collection will be credited in his account with the face of the check if it is collected. His bank may, despite par clearance, make a charge to him for its service in collecting the check from the drawee bank. It may make such a charge, although both it and the drawee bank are members of the Federal Reserve System; and some third bank which aids in the process of collection may likewise make a charge for the service it renders. Such a collection charge may be made not only to member banks by member banks, National or State, but it may be made to member banks also by the Federal Reserve banks for the services which the latter render. The collection charge is expressly provided for in section 16 of the Federal Reserve Act (38 Stat. 208), which declares that—

""The Federal Reserve Board shall, by rule, fix the charges to be collected by the member banks from its patrons whose checks are cleared through the Federal Reserve bank and the charge which may be imposed for the service of clearing or collection rendered by the Federal Reserve bank.'

"Par clearance refers to a wholly different matter. It deals not with charges for collection but with charges incident to paying. It deals with exchange. Formerly checks, except where paid at the banking house over the counter,were customarily paid either through a clearing house or by remitting, to the bank in which they had been deposited for collection, a draft on the drawee's deposit in some reserve city. For the service rendered by the drawee bank in so remitting funds available for use at the place of the deposit of the check, it was formerly a common practice to make a small charge, called exchange, and to deduct the amount from the remittance. This charge of the drawee bank the Federal Reserve Board planned to eliminate, and in so doing to concentrate in the 12 Federal Reserve banks the clearance of checks and the accumulation of the reserve balances used for that purpose. The Board began by efforts to induce the banks to adopt par clearance voluntarily.' The attempt was not successful. The Board then concluded to apply compulsion. Every national bank is necessarily a member of the Federal Reserve System and every State bank with the requisite qualifications may become such. Over members the Board has large powers as well as influence. The first step in the campaign of compulsion was taken in the summer of 1916, when the Board issued a regulation requiring every drawee bank which is a member of the Federal Reserve System to pay, without deduction, all checks upon it presented through the mail by the Federal Reserve bank of the district. The operation of this requirement was at first limited in scope by the fact that the original act (sec. 13) authorized the Reserve banks to collect only those checks which were drawn on member banks, and which were deposited by a member bank or another Reserve bank or the United States. Few of the many State banks had then elected to become members. In September 1916 section 13 was amended so as to authorize a Reserve bank to receive for collection from any member (including other Reserve banks) also checks drawn upon nonmember banks within its district. Thereby the Federal Reserve Board was enabled to extend par clearance to a large proportion of all checks issued in the Government of the United States. But the regulation J then issued expressly provided that the Federal Reserve banks would receive from member banks at par only checks on those of the nonmember banks whose checks could be collected by the Federal Reserve bank at par. It was recognized that nonmembers were left free to refuse assent to par clearance. By December 15, 1916, only 37 of the State banks within the United States, numbering about 20,000, had become members of the System, and only 8,065 of the State banks had assented to par clearance.

"Reserve banks could not, under the then law, make collections for nonmembers. It was believed that if Congress would grant Federal Reserve banks permission to make collection also for nonmembers, the Board could offer to all banks inducements adequate to secure their consent to par clearance. A further amendment to section 13 was thereupon secured by act of June 21, 1917 (ch. 32, sec. 4, 40 Stat. 232, 234), which provided, among other things, that Federal Reserve banks

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'Solely for the purposes of exchange or of collection, may receive from any nonmember bank * * * * * * checks deposits of * * * payable upon *: Provided, Such nonmember bank maintains with

presentation

* *

* * *

the Federal Reserve bank of its district a balance sufficient to offset the items in transit held for its account by the Federal Reserve bank'

1 See Report, Federal Reserve Board, 1915, pp. 14-17; ibid., 1916, pp. 9–11.

!

"To this provision, which embodied the legislation proposed by the Federal Reserve Board, there was added, while in the Senate, another proviso, relating to the exchange charge, now known in a modified form as the Hardwick amendment, which declares

""That nothing in this or any other section of this act shall be construed as prohibiting a member or nonmember bank from making reasonable charges, to be determined and regulated by the Federal Reserve Board, but in no case to exceed 10 cents per $100 or fraction thereof, based on the total of checks and drafts presented at any one time, for collection or payment of checks and drafts and remission therefor by exchange or otherwise; but no such charges shall be made against the Federal Reserve banks.'

"Thus a Federal Reserve bank was authorized to receive for collection checks from nonmembers who maintained with it the prescribed balance; and strenuous efforts were then made to induce all State banks to so arrange. But the law did not compel State banks to do this. Many refused, and they continued to insist on making exchange charges. On March 21, 1918, the Attorney General (31 Ops. Atty. Gen. 245, 251) advised the President—

""The Federal Reserve Act, however, does not command or compel these State banks to forego any right they may have under the State laws to make charges in connection with the payment of checks drawn upon them. The act merely offers the clearing and collection facilities of the Federal Reserve banks upon specified conditions. If the State banks refuse to comply with the conditions by insisting upon making charges against the Federal Reserve banks, the result will simply be, so far as the Federal Reserve Act is concerned, that since the Federal Reserve banks cannot pay these charges, they cannot clear or collect checks on banks demanding such payment from them.'

3

"The Federal Reserve Board and the Federal Reserve banks were thus advised that they were prohibited from paying an exchange charge to any bank. But they believed that it was their duty to accept for collection any check on any bank; and that Congress had imposed upon them the duty of making par clearance and collection of checks universal in the United States. So they undertook to bring about acquiescence of the remaining State banks to the system of par clearance. Some of the nonassenting State banks made stubborn resistance. To overcome it the Reserve banks held themselves out as prepared to collect at par also checks on the State banks which did not assent to par clearance. This they did by publishing a list of all banks from whom they undertook to collect at par, regardless of whether such banks had agreed to remit at par or not. This resulted in drawing to the Federal Reserve banks for collection the large volume of checks which theretofore had come to the drawee bank by mail from many sources and which had been paid by remittances drawn on the bank's balance in some reserve city. If a State bank persisted in refusal to remit at par, the Reserve banks caused these checks to be presented at the drawee bank, for payment in cash over the counter. The practice adopted by the Reserve banks would, if pursued, necessarily subject country banks to serious loss of income. It would deprive them of their income from exchange charges; and it would reduce their income-producing assets by compelling them to keep in their vaults in cash a much larger part of their resources than theretofore. That such loss must result was admitted. That it might render the banks insolvent was clear. But the Federal Reserve banks. insisted that no alternative was left open to them, since they had to collect the checks and were forbidden to pay exchange charges. The State banks denied that the Federal Reserve banks were obliged to accept these checks for collection, and insisted that Federal Reserve banks should refrain from accepting for collection checks on banks which did not assent to par clearance. "It was to protect its State banks from this threatened loss, which might disable them, that the legislature of North Carolina enacted the statute here in question. It made no attempt to compel the Federal Reserve bank to pay an

2 North Carolina was placed on the par list on November 15, 1920. There were on January 1, 1921, in the United States, 30,523 banks, State and national. Of these, 1,755 State banks had refused to enter the par list. About 250 of the banks so refusing were in North Carolina. During the year 1921 the number which refused to consent to par clearance increased to 2,353. Annual Report of Federal Reserve Board, 1921, p. 71.

3 See American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, supra; Brookings State Bank v. Federal Reserve Bank of San Francisco (277 Fed. 430; 281 Fed. 222); Farmers' & Merchants' Bank of Catlettsburg, Ky. v. Federal Reserve Bank of Cleveland (286 Fed. 610).

Statutes similar in purpose were enacted in Alabama, Florida, Georgia, Louisiana, Mississippi, South Dakota, and Tennessee. See Annual Report of Federal Reserve Board, 1921, p. 70; Alabama, General and Local Acts, 1920, No. 35; Florida Laws, 1921, ch. 8532; Georgia Laws, 1920, p. 107; Louisiana Acts, 1920, No. 23; Mississippi Laws, 1920, ch. 183; South Dakota Laws, 1921, ch. 31; Tennessee, Public Acts, 1921, ch. 37.

exchange charge. It made no attempt to compel a depositor to accept something other than cash in payment of a check drawn by him. It merely provided that, unless the drawer indicated by a notation on the face of the check that he required payment in cash, the drawee bank was at liberty to pay the check by exchange drawn on its reserve deposits. Thus, the statute merely sought to remove (when the drawer acquiesced) the absolute requirement of the common law that a check presented at the bank's counter must be paid in cash. It gave the drawee bank the option to pay by exchange only in certain cases; namely, when the check was 'presented by or through any Federal Reserve bank, post office, or express company, or any respective agents thereof.' The option was so limited, because the only purpose of the statute was to relieve State banks from the pressure which, by reason of the common-law requirement, Federal Reserve banks were in a position to exert and thus compel submission to par clearance. It was expected that depositors would cooperate with their banks and refrain from making the prescribed notation; and that when the Reserve banks were no longer in a position to exert pressure by demanding payment in cash, they would cease to solicit, or to receive, for collection, checks on nonassenting State banks. Thus, these would be enabled to earn exchange charges as theretofore. Such was the occasion for the statute and its purpose."

As stated, the court found against the Federal Reserve bank.

This latest move by the Federal Reserve is but another of its efforts to force par clearance but this time it takes on the guise of interest regulation. In 1936 the Board in its efforts to accomplish by regulation what it is now seeking to accomplish by a campaign of publicity and intimidation was defeated and nullified by the protests of the banks throughout the country and the representatives in Congress from their districts. From my own congressional district I have received many telegrams of protest and I know that the other Congressmen, particularly from the States of North Carolina, South Carolina, Mississippi, Alabama, and the Middle Western States, have received similar protests. You are going home now for the holidays and will have an opportunity to investigate this matter first hand. I urge you to look into it carefully. Talk to your home-town banker and hear from him first-hand what this ruling means. When you talk to him do not forget the address which Mariner S. Eccles, Chairman of the Board of Governors of the Federal Reserve System made on September 17, 1943, before the National Association of Supervisors of State Banks at their annual convention meeting in Cincinnati, Ohio. Mr. Eccles is himself a branch banker and comes from Utah where in the Twelfth Federal Reserve District branch banking has enjoyed widespread development. Mr. Eccles favors allowing banks to branch across State lines and in his speech to the State bank supervisors he said that he believed that "The dual banking system, as Low constituted, is outmoded."

He referred to the large mergers and consolidations in the industrial world and the development of modern transportation and distribution systems stating "Attempts to halt this march of progress by antitrust, antichain-store legislation or other statutory pairs and penalties have largely been in vain. It requires no gift of prophesy to foresee that the same economic forces will in time compel the banking system to follow a parallel pattern."

He then says: "I have long felt that limited branch banking is the practical solution of the banking problems confronting those areas where unit banks canrot succeed."

My colleagues, I ask you to mark those words well for it is my opinion that this is exactly what will happen if this regulation forces the independent unit country banks on the par list. They will not be able to succeed without the revenues which the exchange charges have brough them in the past and branch banking will follow in their funeral procession.

(Mr. Brown of Georgia, by unanimous consent, was granted permission to revise and extend his remarks.)

EXTRACT OF REMARKS OF REPRESENTATIVE BROWN ON FLOOR OF HOUSE FROM CONGRESSIONAL RECORD OF MARCH 2, 1944

Mr. BROWN of Georgia. Mr. Chairman, this bill seeks to amend the Federal Reserve Act of 1933. One paragraph of one section of that act made it unlawful for banks to pay interest on demand deposits directly or indirectly. That law has been on the statute books since 1933. It was amended in 1935 to authorize the Federal Reserve Board to define interest. Define interest how? Define it within the statutes.

This bill of mine amends paragraph 12 of section 19 in this way:

"This paragraph shall not be deemed to prohibit the absorption of exchange or collection charges by member banks."

That is all there is in the bill.

For 10 long years the Federal Reserve System has not put into operation their construction of this law. The banks have been going on all these 10 years absorbing exchange where they wanted to until recently. Last fall the Federal Reserve Board announced that they were going to put into operation on the 1st day of January 1944 an order prohibiting the absorption of exchange and collection charges; that if after January 1 of this year they absorbed such charges they would be guilty of a crime. We are now forced to amend this act to carry out the original intention of Congress.

Let me call the roll on those who opposed this bill. First, let me state again that the Federal Reserve Board has now construed the law to mean that it is a crime to absorb exchange charges. Who else says so? They called out the Federal Advisory Council. Who are they? They are bankers, one from each Federal Reserve district, selected by the directors of the Federal Reserve banks; they are a part of the Federal Reserve System. They opposed the bill. The record shows that the Federal Reserve Board is relying upon a man by the name of Spahr who wrote a book some years ago. They claim that Spahr said that to absorb exchange charges was to pay interest. Then five minority members wrote the minority report and inserted practically everything that the general attorney for the Federal Reserve Board had testified to and contended for and rested their case upon the claim that Spahr had said that absorption of exchange was interest. Here is what they say:

"W. E. Spahr, in a book published in 1926, devotes many pages to a discussion of the absorption of exchange charges clearly indicating that the practice was just another name for paying interest."

I received a letter from Mr. Spahr the 11th of February 1944 stating to me that my interpretation of the law was correct. I replied to his letter, and received another in return in which he said: "I agree entirely with the last paragraph of your letter."

The last paragraph of my letter reads as follows:

"My understanding of your letter is that you do not believe that the absorption of exchange is interest, even though the exchange may be charged for remittance to a distant point in settlement of clearance. This is the issue in these hearings, and the testimony has been overwhelming that inasmuch as absorption of exchange was a practice separate and distinct from payment of interest, Congress never intended to regulate absorption under the guise of interest regulations, even though a bank agreed to absorb exchange for a correspondent on its forwarding to a nonpar bank, provided the correspondent kept a balance sufficient to justify its doing so."

This is the issue in these hearings. I have these letters here and can show them to anyone who wants to see them. I am quoting from the main witness they rely upon to build their case; he repudiates the Federal Reserve Board's position, and says that the interpretation of the Federal Reserve Board is wrong— wrong when he wrote the book, and wrong today.

Furthermore, this afternoon the gentleman from Kentucky [Mr Spence] received a letter, 5 minutes ago, from Mr. Spahr, quite a lengthy letter, in which he says that the Federal Reserve Board is entirely wrong and got off on the wrong foot. I cannot understand why they still consider this practice to be prohibited under the law of 1933 as amended in 1935 as the payment of interest. What more evidence do you want? Ninety percent of the lawyers of this land who understand this bill say that the absorption of exchange charges is not the payment of interest. I call upon the gentleman from Pernsy'varia [Mr. Graham], who sits on the left here, a man whom every Member of this House regards as one of the most able lawyers in Congress. He states that absorption of exchange is not the payment of interest on demand deposits.

Now, who appeared in support of this bill? In effect, every State in the Southland, the 13 Southern States, and 5 or 6 Western States appeared. Not only did they appear, but from 25 to 30 men from each State came to Washington to represent their associations in support of the bill. We did not have time to hear them all. Some of them left statements, but they were represented and I have right here in my files statements from bankers in the State of Georgia, a State having nearly 400 banks. At the meeting of their State association, composed of big banks and little banks and members of the Federal Reserve

System, too, a resolution was adopted supporting this bill. A pitifully small number, only 3, of the bankers in the States of Georgia were against the Brown bill. I challenged Mr. Ransom, the clever member of the Board of Governors of the Federal Reserve System, who started all this fight. Mr. Ransom came from Atlanta, Ga., and I come from Georgia. I am told that out of the 348 banks, both national and State, big and small, only 3 opposed the resolution endorsing the bill and they said that many of the banks in the State would go out of existence if the interpretation of the Federal Reserve Board was correct and its ruling was allowed to stand.

What else? Every Member of this House from Georgia is for the bill.

Let us go to Omaha. Omaha, Nebr., is the headquarters of a member of the Federal Reserve advisory council. Every Congressman from the State of Nebraska knows the need to help these little banks and every one of them is for the Brown bill.

The importance of this measure cannot be stressed too greatly, since it preserves the independence of some 2,500 small locally owned banks in the Middle West and South which are now threatened with extinction because of a sudden reversal of posiiton by an administrative agency. The Federal Reserve Board has recently ruled that a certain type of service charge which these banks make against other banks in connection with the transfer of funds can no longer be absorbed as an operating expense by member banks of the Federal Reserve System. To outlaw the practice of absorbing exchange, the Federal Reserve Board has suddenly decided to use a law passed more than 10 years ago, in spite of the fact that for 10 years the Board has concurred in an interpretation which permitted this age-old practice.

This ruling requires member banks of the Federal Reserve System to pass these expenses back to their customers. Thus, these expenses become compulsory service charges which the public must pay. Solely as the result of the Federal Reserve Board's ruling, these service charges must be paid by the depositing public, regardless of the profits which the Federal Reserve member banks derive from the balances which their depositors maintain.

To illustrate what I mean I refer you to page 483 of the hearings, where you will find an analysis of an account carried with a city correspondent bank, a bank in my district, the Georgia Railroad Bank of August, the oldest and one of the best banks in the State of Georgia, and a member of the Federal Reserve System. This form of analysis is now almost universally kept by banks to show whether they are making or losing money on handling the deposits of their customers. In this case the customer or depositor is another banking institution which uses the Georgia Railroad Bank to handle the collection of checks issued by depositors of other banks in its area. In the box at the foot of page 483 you will see that the Georgia Railroad Bank credits its customer with the estimated earnings on the loanable balance in the customer's account. This earning's credit, 1 percent of the loanable balance, amounts to $376.45 for the month of December 1943. On the opposite side it charges $260 for the expense of handling the account during that month, leaving an estimated net profit to the Georgia Railroad Bank on this particular account of $116.45. As the result of this computation the city correspondent bank does not wish to charge its country bank customer any service charge for handling the account during this month for the simple reason that it made a business profit out of the balance which the depositor carried more than sufficient to offset the expense. On examining this analysis slip you will observe that part of the expense is described as "cost of collecting nonpar checks, $231.24." This means that the Georgia Railroad Bank paid our service charges of this amount to other Georgia banks. Now, the Federal Reserve ruling requires the Georgia Railroad Bank to charge its little country bank customer the $231.24, merely because the expense is for service charges of other banks by way of exchange. Prior to the change in the ruling, banks using the account-analysis form charged a customer only where they would otherwise sustain a loss in handling the accounts. Where the bank makes a profit it does not want to make a service charge.

The result of this ruling is that the Georgia Railroad Bank's profit on this account is increased from $116.45 to $347.69-more than doubled-and the little country bank with its customers take it on the chin for the difference. I am not worried about the Georgia Railroad Bank and it is not worried, but I am worried about the little country bank-and there are hundreds of them in my own State. Since the small banks cannot afford to stand this expense, they will find it necessary to charge it back to their own customers. Thus the

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