are performing service for us on that account, which must cost them a considerable amount of money.

Senator BANKHEAD. That is absorbed, is it?

Mr. THOMPSON. Yes, sir.

Senator MAYBANK. What about State and municipal bonds?

Mr. THOMPSON. The same thing. They can absorb the costs, including postage.

Senator MAYBANK. How about absorbing the charges on the collection of highway licenses by check only?

Mr. THOMPSON. I am assuming that they can absorb that.

Now, if the Federal Reserve Board is absolutely honest in their statement that they are not interested in raising the issue of par clearance or forcing par clearance, but are interested solely in enforcing the law and seeing that banks adopt only sound policies, how can thev justify permitting banks to absorb these tremendously larger amounts of direct cost and disallowing the absorption of a nominal amount of exchange? I am forced to the conclusion that they either intend to force us into the Federal Reserve System, or failing this, at least force us on the par list. If the Federal Reserve Board can, by regulation Q, prohibit the absorption of exchange, what is to stop them by regulation R or X, Y, or Z from prohibiting the absorption of any costs of handling an account?

Senator MAYBANK. Would that work the other way, and could X, Y, or Z say that you should not charge one-quarter but you can charge one-half?

Mr. THOMPSON. If they are permitted to say this, they can say anything they want to by regulation.

Senator MCCLELLAN. Is not the principal issue here whether we are going to do this by law or whether we are going to permit them to make the rules, irrespective of the law? Is not that the real fundamental issue?

Mr. THOMPSON. To my mind it is.

Senator MAYBANK. That is the issue to my mind.

Mr. THOMPSON. I firmly believe that had Congress intended such absorption to be considered as payment of interest, they would have so stated; and Congress knew that such absorption had been going on since the beginning of banking. If the Federal Reserve Board is to be permitted to legislate by regulations, you know that in the long, complicated Federal Reserve Act with its amendments they can find justification for most anything they want to do. It certainly is not the desire of the people of this country to be ruled by needless regulations issued by Federal agencies, but they want to be ruled, as in the past, by laws enacted by their elected Congress. We believe this is your own desire.

It has been suggested by some that if banks would fully invest their funds, they could then afford to forego their exchange. To answer this argument I will cite briefly our own record.

Senator MAYBANK. Let me ask you a question right there. In 1932, when the banks were failing, did you ever have a chance to try to rediscount or get credit for municipal or State bonds, or did you have to put them up as collateral against loans?

Mr. THOMPSON. Since we were not a member of the Federal Reserve System, we could not discount anything.

Senator MAYBANK. Did you put up any collateral in the way of bonds which may have been in default for a week or two because the banks were closed?

Mr. THOMPSON. We did not happen to have anything like that, sir, because at that time very few of the small southern banks had any bonds in any amount; very few of them. But, talking about absorption, you know the Federal Reserve Board absorbs all kinds of costs, itself.

Senator BANKHEAD. Tell us about that.

Mr. THOMPSON. We are not a member of the Federal Reserve System, but I am told by people that I am certain know what they are talking about, that, for instance, if they operated a member bank in Chapel Hill and accumulated excess cash and had to ship it to some point, the Federal Reserve will pay the cost of shipping those funds from the Chapel Hill bank to the Federal Reserve bank, because they are going to have it on deposit. Not only will they pay the cost of shipping it to the Federal Reserve bank for deposit, but if the next day the bank needs some extra funds, they will ship it down to the bank and absorb the cost both ways. They hold securities for all of their members and do all the work necessary to cash those securities themselves. There is no charge for that. They absorb all the cost.

You get a copy of the annual report of the Federal Reserve Board, which is available to anybody, and you will find their costs broken down pretty minutely. It runs into millions of dollars. They are doing what they say we cannot do.

On December 31, 1939, we had deposits of $2,889,000, while our loans and investments amounted to $1,193,000, leaving cash uninvested of $1,892,000. In other words we were 41 percent invested. On December 4, 1944, we had deposits of $5,870,000; and investments of $4,824,000, leaving cash uninvested of $1,221,000. We are now 82 percent invested. Since reserve requirements by law amounted to 15 percent of demand deposits you can see that we are now fully invested. This is typical of our banks.

Allow me to go back now to a justification of exchange charges. Suppose the chairman of this committee owes John Smith of Albany, N. Y., $100. While passing the post office here in Washington he decides to send Smith a post office money order which he purchases, paying a fee to the post office of 22 cents. He mails the money order to Smith in Albany, who, in the meantime has moved to Buffalo, N. Y., but the letter is forwarded and eventually reaches Smith, who takes the money order to the post office in Buffalo and, much to his surprise, finds that since the money order is payable at the post office in Albany that the Buffalo office will charge him 22 cents exchange for cashing it. Well, gentlemen, if exchange is wrong, the United States Government is wrong, since the United States post office is a nonpar affair. But instead of charging exchange at the rate of one-eighth of 1 percent it charges almost one-half of 1 percent. That is 22 cents for issuing the money order and 22 cents for paying it. Our charges would be 12 cents at one end only.

Senator MCCLELLAN. You mean, you only charge 12 cents for all of the items?

Mr. THOMPSON. Yes; 12 cents on the hundred dollars, whether it be 1 or 20 checks.

Suppose, instead of one money order, Smith of Albany was selling some small article that cost $2.50. Suppose his customer sent him forty $2.50 money orders. He takes them down to the Buffalo post office, 40 money orders totaling $100. Do they charge him 22 cents? No; they charge him 6 cents for each money order, or $2.12.

Have any of you gentlemen ever borrowed money at a bank on a note?

Senator MCCLELLAN. Why bring that up?

Mr. THOMPSON. If so, you found that the bank charged you interest. It can exist in no other way. You borrowed the money, you paid the interest, and in time you paid the note. The bank made its profit and is satisfied. We hope you made a profit and that you are pleased. Now, after a lapse of time you accumulated funds which you take to the same bank where you had secured the loan and open a demand deposit account. In time you accumulate a sizeable, even a very large, balance which, by any basis of analysis, is a very profitable account for the bank. The bank lends a part of this balance profitably, and invests a much larger part in Government securities. That is the bank's business; that is what it must do to justify its existence. But one day you take in a check for deposit drawn on a nonpar bank. Now the banker with horror in his voice tells you that he will have to charge you 12 cents for collecting this $100 check. Regulation Q, you know. How would you feel? We maintain that this is unfair. We maintain that the customer, by depositing his funds in what proves to be a profitable account, is rendering the bank a service. Since money is a commodity, and the only commodity in which the bank deals, the bank must receive this commodity from its customers, if it continues to exist. Surely the customer is entitled to some free service in return for his service to the bank. To put it on any other basis is to put the bank in the position of always receiving, always demanding, but never, never giving anything in return. Is this reasonable? We do not think so. We do not believe you think it is. The success with which we handle our customer relations is going to determine our existence. Can we make a success of it if we continually have streams of letters like these coming in calling us clip banks, gyp joints, and advising our customers to move their accounts elsewhere, when the Federal Reserve System is guilty of the same thing we are doing? Is that fair?

Senator MCCLELLAN. It appears to me, in that connection, that this is more or less a coercion to compel you folks to join the Federal Reserve System.

Mr. THOMPSON. That is what we have maintained-either join the System or get on the par list. That is what we maintain and believe. Senator MAYBANK. If you are on the par list, you might as well be in the System.

Mr. THOMPSON. Of course, a great many would go into the System and a great many would not, even though they were forced on the par list. Senator MAYBANK. Why?

Mr. THOMPSON. It is expensive for small banks to be members of the Federal Reserve System, because in normal times small banks, especially our bank, have no paper available for rediscount with the Federal Reserve. It brings no benefits. I am not against the Federal Reserve System.

Senator MAYBANK. Neither is any of us.

Mr. THOMPSON. It takes different kinds of institutions to satisfy the people; and I believe we ought to have two separate and distinct banking systems in this country, and I think a great mass of the people believe it. I think members of the Federal Reserve System will tell you that. If, for no other reason, I would be opposed to seeing all banks forced into the System.

I have taken up considerable of your time. You can bank on this, that banks are not purely philanthropists. If your account is unprofitable to the bank or should become unprofitable, the bank is going to be the first one to know it. The bank might carry you along a month or two and say, "He will come back, because he always has." But the bank cannot continue to do it; and if your account is unprofitable, you are going to be charged eventually with the out-of-pocket expense that the bank is spending on your account.

There is simply, in this day and time, no such thing as a purely par bank. All the banks that I know about have some kind of service charge. You may carry your account with a member bank. When you go in and make a deposit, if you analyze your account you will find the bank charges you 4 cents for that deposit. Every time you draw a check it charges you 4 cents. If your balance is profitable to carry, you do not pay anything, but if it is not, you pay it. There is no such thing as purely par clearance, because we are forced to charge, and the Federal Reserve Board upholds that.

After all, I think bankers should be left a little discretion as to what is just and fair and profitable. Who, before, ever heard of anybody telling a banker that he must raise his charges? It is usually the other way 'round.

What is back of all this? We believe we know. We think you know and the Supreme Court of the United States has said that it cannot be done.

All we ask of you is this, that you give us a chance to continue a fundamental American tradition-to give our customers a chance to give us a chance to exist and continue to serve, to give us the right of small banks, the right of small businesses, the right of small men to exist, and eventually even to grow great, if they can, by their own frugality and labor.

Senator BANKHEAD. We thank you for your interesting and informative statement.

Who is your next witness, Mr. Gormley?

Mr. GORMLEY. I am going to deviate slightly from our planned order of the hearing this morning, due to the fact the next gentleman I am going to call on will be necessarily forced to go back to his office by tomorrow.

I am going to introduce Mr. David J. Arnold, vice president of the Commercial Bank & Trust Co., of Griffin, Ga., and also president of the Georgia Bankers Association.

STATEMENT OF DAVID J. ARNOLD, VICE PRESIDENT OF COMMERCIAL BANK & TRUST CO., GRIFFIN, GA., AND PRESIDENT OF THE GEORGIA BANKERS ASSOCIATION

Mr. ARNOLD. Gentlemen, my name is David J. Arnold. My home is Griffin, Ga., which is a small city in middle Georgia, and I am employed as vice president of the Commercial Bank & Trust Co. of that city, which is a nonpar bank, and at this time I am president of the Georgia Bankers Association.

At the recent end of the association's fiscal year we were favored with a 100 percent membership of all Georgia banks, including both State banks and national banks.

I am appearing before you in behalf of most of the Georgia banks, and as secretary of the National Association of Nonpar Banks. Both of these groups are earnestly anxious for the passage of the bill known as the Maybank-Brown bill, and I wish to make a few remarks to you, presenting frankly some of the problems of our banks, and a general outline of my views, concerning the application of regulation Q, as interpreted by the Federal Reserve Board, with its destructive effects on country banks and their future operations.

First, this move on the part of the Federal Reserve Board appears to be an organized effort on the part of this board, cooperating with the giant city banks in the reserve centers, to bring about a condition which will eliminate the dual banking system and will encourage branch or chain banking.

The Chairman of the Reserve Board has stated that in his opinion the dual system of banking is outmoded and that he favors branch banking. His statement to this effect may be found in the Congressional Record.

Small country banks of this Nation, with their control in the hands of those directly interested in the welfare and development of the communities served, are vital to the national welfare, and without them the country communities may become direct problems for Government financing. Even with Government facilities for borrowing, many other useful functions of the country banks would be unavailable.

There is no such thing as clearance of checks on a currency basis. Checks are not currency, as has been stated, and no check is worth par in the ordinary course of business. There is usually a charge somewhere along the line and it is just a question of who pays this charge. I am speaking now of the check that is cashed or negotiated by a person who is not the payee bank's customer, and certainly a check presented by mail from a distant point cannot be handled as an item at the teller's window can be handled.

A check which comes into the bank for collection must be handled several more times than a check over the window. The cost of handling is greater and the payee bank should not be expected to bear the cost of collections by transit from the fellow who finally gets the money and the profit from the transaction. This is a just charge and it is not nicking the currency.

There is no arrangement between the payee banks and their correspondents for their correspondent to bear the expense of collecting checks drawn on the payee bank. The arrangement for the absorption of exchange or other collection cost is between the bank originating