ÆäÀÌÁö À̹ÌÁö
PDF
ePub

296

ABSORPTION OF EXCHANGE OR COLLECTION CHARGES

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 At lanta, 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 existene 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 Ne braska knows the need to help these little banks and every one of them is f 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 Midde West and South which are now threatened with extinction because of a sudde reversal of posiiton by an administrative agency. The Federal Reserve Boar. has recently ruled that a certain type of service charge which these banks mak against other banks in connection with the transfer of funds can no longer te absorbed as an operating expense by member banks of the Federal Reserve System. To outlaw the practice of absorbing exchange, the Federal Reserv Board has suddenly decided to use a law passed more than 10 years ago, in sp of the fact that for 10 years the Board has concurred in an interpretation whil permitted this age-old practice.

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

To illustrate what I mean I refer you to page 483 of the hearings, where! will find an analysis of an account carried with a city correspondent bank bank in my district, the Georgia Railroad Bank of August, the oldest and of the best banks in the State of Georgia, and a member of the Federal Res System. This form of analysis is now almost universally kept by banks to s whether they are making or losing money on handling the deposits of : customers. In this case the customer or depositor is another banking instit which uses the Georgia Railroad Bank to handle the collection of checks is by depositors of other banks in its area. In the box at the foot of page you will see that the Georgia Railroad Bank credits its customer wit estimated earnings on the loanable balance in the customer's account. earning's credit, 1 percent of the loanable balance, amounts to $376.45 for month of December 1943. On the opposite side it charges $260 for the ev» of handling the account during that month, leaving an estimated net prot the Georgia Railroad Bank on this particular account of $116.45. As the nof this computation the city correspondent bank does not wish to charz country bank customer any service charge for handling the account d this month for the simple reason that it made a business profit out of the k which the depositor carried more than sufficient to offset the expense. On ining this analysis slip you will observe that part of the expense is d as "cost of collecting nonpar checks, $231.24." This means that the C. Railroad Bank paid our service charges of this amount to other Georgia ! Now, the Federal Reserve ruling requires the Georgia Railroad B: charge its little country bank customer the $231.24, merely because the e is for service charges of other banks by way of exchange. Prior to the in the ruling, banks using the account-analysis form charged a customer where they would otherwise sustain a loss in handling the accounts. 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 account is increased from $116.45 to $347.69-more than doubled—: little country bank with its customers take it on the chin for the differe am not worried about the Georgia Railroad Bank and it is not worries: am worried about the little country bank-and there are hundreds c: in my own State. Since the small banks cannot afford to stand this 、1 they will find it necessary to charge it back to their own customers. T:

farmers and merchants of Georgia will be forced to bear an added expense which they should not have to bear because the Georgia Railroad Bank is ready and able to pay this expense and, in fact, wants to pay it, as it has been doing for its country-bank customers for a century or longer.

The Federal Reserve Board holds that unless its member banks compel their depositors to pay these service charges, they are violating the law which was passed in 1933 prohibiting banks from paying interest on demand deposits. Their theory is that a city bank should not pay these charges as part of its operating expenses, but should charge the cost to its depositors. They say it is all right for banks to stand the expenses of all other costs connected with handling their depositors' business, but they cannot stand the expense of these little service charges. The Federal Reserve says that these service charges for exchange are out-of-pocket expenses and this is the reason they cannot be paid. Personally, I do not know of any expense which is not out of pocket. But certainly if exchange service charges are out-of-pocket expenses, so are the personal property taxes which are levied by some States, such as Michigan, Indiana, Kentucky, and California, against bank depositors on their bank accounts, and yet this same Board has ruled that banks can pay these taxes against their depositors and absorb the expense without violating the law. Now, I ask what the difference is between a dollar paid out to a little country bank for transferring money to a distant point to collect a check for a depositor and a dollar paid out in settlement of the depositor's intangible personal property tax. It is a dollar paid out in connection with a depositor's account in each case and the only difference is in who gets it-the country banker or the tax collector. If it is not interest for the bank to pay the depositor's own tax liability, it certainly cannot be interest to pay the bank's own operating expense merely because it happens to be identified with a depositor's account.

I ask you, Why does the Federal Reserve Board defy the will of Congress to hold that absorption of exchange is interest-only exchange-while at the same time holding that all other expenses connected with collecting a depositor's money, cashing his checks, and keeping his accounts are not interest? The insured banks of this country paid out total operating expenses-exclusive of interest on deposits-of about $1,000,000,000 in 1942, according to the annual report of the Federal Deposit Insurance Corporation for that year, page 92, and the hearings on this bill show that the total exchange charges made by these 2,500 small country banks does not exceed eight or nine million dollars annually. Nine million out of a billion-the nine million is interest, says the Federal Reserve, but the rest of the billion can be paid out without violating the law. This $9,000,000 is not much in a banking system that today has deposits of over $100,000,000,000 and grosses almost $2,000,000,000 from its operations. It is not much to the banking system, but it is two-thirds of the operating profits of 2,500 small bank businesses-2,500 independent, locally owned banks serving our country communities, run by men who make their livelihood by providing banking service to people who are the backbone of our Nation, men who make their living by harvesting the fruits of the soil and of God's eternal sunshine. These are the people who make our cities thrive because they supply the food and raw materials the cities use, and if you take away their financial institutions you weaken our foundation. Even our mighty city institutions realizing this have come to their succor against this outrageous "blow below the belt" which the Federal Reserve has struck while our Nation is waging the greatest war in history. The real reason the Federal Reserve Board has made this preposterous distinction-without a difference is because the Board still pretends that it is charged with the duty of eliminating the practice of charging exchange and instituting the so-called par clearance system, notwithstanding the fact that the Supreme Court of the United States more than 20 years ago, speaking through its great Justice Brandeis, in the case of Farmers & Merchants Bank of Monroe v. Federal Reserve Bank of Richmond, reported in 262 United States 649, held that: "The contention that Congress has imposed upon the Federal Reserve Board the duty of establishing universal par clearance and collection of checks through Federal Reserve banks is irreconcilable with the specific provision of the Hardwick amendment to section 13 of the Federal Reserve Act" and that "The right to make a charge for payment of checks, thus regained by member and preserved to affiliated nonmember banks, shows that it was not intended, or expected, 'that the Federal Reserve banks would become the universal agency for clearance of checks."

But the Federal Reserve Board apparently is no more willing to abide by the interpretations of the law by the Supreme Court relating to par clearance, than

that he believes that the practice of absorbing exchange is interest as a matter of law.

We have heard a great deal of discussion on this floor about doing something for the small businessman. Here, my friends, is an opportunity to do something which costs the Government nothing and which costs the public nothing. Give the little man a break-give the public a break. Let the banking sytsem continue to absorb these expenses for the independent banker just as the Federal Reserve banks absorb these expenses for their members. I think there can be but one answer and that is to vote in favor of this bill.

The CHAIRMAN. The time of the gentleman from Georgia has expired.

EXTRACT OF REMARKS OF REPRESENTATIVE DOUGHTON OF NORTH CAROLINA FROM CONGRESSIONAL RECORD OF MARCH 2, 1944

Mr. DOUGHTON. Mr. Chairman and members of the committee, I am supporting H. R. 3956 for the reason that I think it is necessary to make clear the intent of Congress under the Banking Act of 1933, with respect to the absorption of exchange or service charge by member banks of the Federal Reserve System.

The recent ruling made in August 1943, in my judgment, makes this legislation necessary in order to clarify and carry out the intent of the original act of 1933. In a ruling of the Federal Reserve Board, August 1943, the Board rules that the absorption of exchange or collection charges by member banks is a device for the payment of interest, which in my judgment is contrary to the intent of the law, as at the time the 1933 Banking Act was under consideration no one ever suggested so far as I know that a collection charge or absorption of exchange would be the payment of interest.

Interest in the legal and accepted term of the word so far as banking is concerned, or as relates to money matters, is a price or premium per annum that is paid by a borrower for the use of borrowed money and charges for sevices rendered by a bank has no relation whatever to interest charged for the use of money.

Now, what relation does a service charge or the absorption of exchange have to the payment for the use of borrowed money? It takes the wildest stretch of the imagination to bring about any connection between paying for the use of money and charges for services rendered.

This ruling by the Federal Reserve Board is clearly reading into the law something that never was intended. If it had been intened or proposed I am sure the law could never have been passed. No one ever dreamed such a thing. The suggestion was never made, and it was not until 1937 after the law had been in force for 4 long years that the Federal Reserve Board ever discovered that it had not been able up to that time correctly to interpret the law.

I heard no suggestion, no intimation, that the absorption of collection and exchange charges could by any stretch of the imagination be considered the payment of interest. I say if there had been anything of that kind in mind it would have been definitely expressed, and if it had been expressed it certainly would not have been adopted. It was not, as I say, until 1937 that the Federal Reserve Board promulgated such order. When they did, the late lamented Henry Steagall, then chairman of the Committee on Banking and Currency, Senator Wagner, chairman of the Senate Committee on Banking and Currency at that time, and about 50 of us took the matter up with the Federal Reserve Board and asked them why they were placing such a construction on this act which was never intended, or never dreamed of. I believe the President himself intervened. The Federal Reserve Board backed away and we heard nothing more about the matter until 1943, when Congress was not in session, when we were all away home in recess trying to rest from our arduous labors. Then they began to agitate the matter, a matter that for 11 long years they have allowed to sleep or during which time they had not known what the real intent of the law was or if they had known were derelict in the discharge of their duties.

The banks of the country as a whole are functioning smoothly, safely, and satisfactorily, and under the management of the Federal Deposit Insurance Corporation, which is definitely opposed to the rule of the Federal Reserve Board and favors the enactment of the bill now under consideration.

The people of the country have absolute confidence in the banks and their security. Bank failures are almost a thing of the past, or at least too negligible to create the slightest alarm. And now, when the banks are so busily engaged in

war work and rendering so much necessary service in the sale of bonds and other work incident to the war, I think it is most unfortunate that this monkey wrench the order of the Federal Reserve Board, in my opinion without legal sanction, should have been thrown into the banking machinery of the Government.

The small banks throughout the country, as everyone knows, serve a useful and necessary purpose and if deprived of this source of income will be forced to close their doors.

It appears to be the policy of the Federal Reserve Board to choke out and destroy small banks and substitute therefore a system of branch banking by the large banks of the country.

My friends, this bill clarifies the situation and should be overwhelmingly passed, thereby saving the lives of the small banks of the country and teaching the Federal Reserve Board that it is not a policy-making body.

I cannot think of a worse thing that could be done to small towns and the communities which do business in small towns, than to permit the rule of the Federal Reserve Board to stand.

The small banks are having a hard time anyway, although fewer of them are failing than large banks in proportion to number, and I understand the Federal Insurance Corporation has sustained greater losses by the failure of large banks than small banks.

My friends, let us not give a monopoly on banking business to the large banks of the country but preserve our present system which gives the small banks an opportunity to survive and continue their usefulness to the communities they

serve.

From whence cometh this demand anyway for this change in our banking policy? Certainly not from the people; not from those banks which are absorbing the exchange; not from any serious results that have resulted from the policy, but from some imaginary evil in the minds of the Federal Reserve Board.

Let us let well enough alone and teach the Federal Reserve Board to attend to its own business.

By its own ruling it admitted, if its contention is correct which I am sure it is not, it has been permitting and tolerating a violation of the law for 11 years. So its own inconsistency, if nothing else, should be enough to justify the enactment of this legislation which I think is not only important but most necessary to the financial economic well-being of communities served especially by the small banks.

The CHAIRMAN. The time of the gentleman from North Carolina has expired. (Mr. Doughton asked and was given permission to revise and extend his own remarks.)

STATEMENT OF HON. R. L. DOUGHTON, A REPRESENTATIVE IN CONGRESS FROM NORTH CAROLINA, CHAIRMAN OF THE COMMITTEE ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES

Mr. DOUGHTON. Mr. Chairman and members of the Committee on Banking and Currency, I appreciate very much the privilege of appearing before this great committee this morning in behalf of a bill in which the people whom I represent, the people of the State from which I come, and I believe many of the people of the country, are greatly interested.

I at one time had the honor and privilege of serving as a member of this committee. During my first term in Congress I was a member of the Committee on Banking and Currency. Subsequently, I was transferred or elected to membership on the Committee on Roads and gave up reluctantly my assignment to this committee. So, I repeat, I appreciate very much the opportunity and the time you have given me to present briefly some views I have on the bill under consideration.

I have come here to urge your committee to report favorably on Congressman Brown's bill. H. R. 3956.

In 1933 when I voted for the Banking Act, which contained the provision prohibiting banks from paying interest on demand deposits, I had no idea that 10 years later this law would be used to disrupt the charging of exchange by the many hundreds of small banks in this country which have engaged in this practice for years and are dependent upon it as a chief source of income. Had there been any indication that this provision would be so misconstrued, I would have insisted upon an amendment such as that proposed in the pending bill. I did not do

so simply because there was nothing in the language of the provision or the legislative record to suggest to me that the power to regulate interest charges could be stretched to include regulation in the field of exchange charges. So far as I know, that interpretation was never discussed or considered.

Banks have charged exchange for over a century and, ever since checks have been used so extensively as the common man's currency, there have been a great many banks which have charged exchange where they were required to settle by bank drafts on other cities where they maintained balances. Every depositor who keeps his funds in city banks or in banks in the larger towns has been taught by the banks to accept a system of service charges. Exchange charges are the original form of service charges and many banks in the country towns prefer to stick by the old-fashioned service charge, which they call exchange, instead of adopting the complicated systems which the city banks employ.

I do not profess to know a great deal about banking, but I see no difference between the city banks' service charge and the country banks' exchange charge, except that the one is collected from the bank's depositors and the other is collected from the persons who present the checks which the depositors have given. I see no difference.

There are many banks in my State which pay their operating expenses out of the proceeds of their exchange charges. I have asked them to explain to me just how the system works and they tell me that when, as frequently happens, their depositors give checks to persons in other cities, these checks are accumulated and sent in through the larger banks to be paid. The banks which do this work of collecting frequently send in a number of these checks on the same day. This is particularly true in seasonal periods when the local people are buying merchandise or commodities out of town and most of them settle with their personal checks. The banks which collect these checks have to be paid and the common method of settling is for the country bank to send its draft for the proper amount of the checks being paid. These drafts frequently cover settlements of a number of different checks and the banks are accustomed to deduct either a small flat sum or a small percentage from the amount to be paid by draft in order to reimburse themselves for the expense of issuing the draft and for the income which they are forced to forego in order to have funds available in the city locations for this purpose.

If the banks' customers had come in and bought out-of-town drafts and used these to settle for their purchases, the banks would probably have collected a small fee for issuing these drafts and I am unable to see that it makes any difference whether the banks collect this charge when they issue these drafts to their depositors or to their depositors' customers.

The bankers from my State have told me that all of this trouble has arisen because of a ruling which the Governors of the Federal Reserve Board made last fall, which held that banks which have been handling the collection of exchange charge items could no longer absorb these charges as part of their expenses, but had to pass them on to the individual payees of the checks. They tell me that this will require an enormous amount of bookkeeping which will, in many instances, be far more costly to the banks than absorbing the charges.

At a time like this when businessmen everywhere are beset by labor shortages and regulation necessary to deal with wartime conditions, I deem it exceedingly unfortunate that banks should be forced to keep track of these small charges with the great amount of detail which, I understand, will be required.

Bankers in institutions which have been charging exchange from various parts of the country have expressed grave apprehension that the restriction against absorption of exchange charges will deal a mortal blow to the practice itself. In view of the many efforts in the past of the Federal Reserve banks and Federal Reserve Board to bring about universal clearance of checks at par, it seems that there are good grounds for the fears which these men have expressed. The quickest way of breaking down any practice is to impose burdensome details upon the continuation of the practice. Men frequently are forced to change their practices in order to escape the burdens which they must carry to continue them.

There is one other general aspect of this matter that I want to talk about. It concerns me very much because of the great problems which are confronting the Ways and Means Committee in financing the war. As you gentlemen know, the task of our committee in getting tax bills through requires not only much time, but great labor as well. Mr. Eccles, Chairman of the Federal Reserve Board, testified before this committee last spring regarding the bill to encourage

« ÀÌÀü°è¼Ó »