the collection item and the correspondent bank. The payee bank receives a check for collection as a trust agent, and the moment the check is charged to a depositor's account the depositor has met the obligation represented by the check. The depositor should have no added expense, and can have none from the payment of the check by his bank. Funds are available and must be transmitted somewhere, with its incident out-of-pocket expense, costly record keeping, and banking obligation to be prepared to furnish information of this transaction in the future. There have been legal decisions which bear witness to this statement. As an example of the recognition of this expense, the public utilities have generally made arrangements for their power and gas bills to be paid at the banks. The banks receive a fee of so much per item for collecting or allowing the public-utility customer to come into the bank and pay his bill, and the bank in turn remits to the company. The same thing happens when a check is handled by mail through that bank and a remittance made back to the bank sending the same for collection. The position of the Federal Reserve Board has been different under different circumstances. I believe that in Indiana, Michigan, and Kentucky a tax per check is charged, so much per check, a State tax. The Federal Reserve Board is permitting member banks to absorb that tax rather than to pass it on to the customer, although it is a bank customer tax. Senator MAYBANK. Let me ask you this: Why don't they allow that in Atlanta? Mr. ARNOLD. There is no State tax in Atlanta. Senator MAYBANK. In other words, they conform with the State law by permitting that? Mr. ARNOLD. That is right. The Federal Reserve Board permits its member banks to absorb the tax, but does not permit it to absorb the exchange. The absorption of the tax is interest. Senator MAYBANK. Is that arrangement mandatory? Mr. ARNOLD. It is a State law that the customer writing the check will pay the tax, not that the bank will pay it. In 1920 there were congressional hearings in which an effort was made to allow members of the Federal Reserve System to charge exchange, and in those hearings it was brought out through proponents of that legislation that these costs could be absorbed through the banking system by use of balances created by the banks in reserve center banks. The bank which I am connected with is 55 years old, among the oldest small-town banks in Georgia, and for these many years we have operated the bank on a nonpar basis, and we believe, on a sound basis. We have never in the history of the bank had occasion to have customer dissatisfaction over exchange charges until the Federal Reserve Board defined regulation Q in the latter part of 1943. Since that time we have had many customers who have received letters from their sellers, people who have sold them goods, stating that they won't sell them any more goods unless they pay them with a check on a member bank, and one even went so far as to say he would not even accept a check on a member bank unless it was a member of the Federal Reserve System. Now, we have a peculiar situation at our point; we accumulate currency there very rapidly. About once a week we ship currency to Atlanta, to our correspondent bank there. The cost of shipping currency is great. It is probably about 75 cents per thousand, from my point. If I were a member of the Federal Reserve System the Federal Reserve System would pay the charge. The Federal Reserve Bank of Atlanta would pay the charge for shipping that currency by reason of my carrying a deposit balance in the Federal Reserve Bank from which they could earn interest on Government bonds. This cost that they absorb for their member banks is an exchange cost, because it is shipping money from one point to another. It is the actual transfer of the cash. We cash war bonds. The Treasury Department through the Federal Reserve System allows a payment of so much per bond. Those bonds are handled just exactly like checks transmitted to the Federal Reserve bank, just exactly like checks, and they recognize that there should be a cost on it. I think the most disturbing factor of the whole thing is the methods which have been used by the Federal Reserve Board to carry their point. The Federal Reserve Board sent out a scurrilous circular to the customers of our bank. It is a reprint from the United States Investor, issue of April 8, 1944. Senator MAYBANK. By the way, on that point, I am wondering if Mr. Gormley has got the letter that accompanied it. Mr. GORMLEY. No, sir; I do not have it. Senator MAYBANK. We would like to have that for the record. Mr. ARNOLD. It is just simply a letter of transmittal stating: "I am enclosing a pamphlet which I think will be of interest to you.' Senator MAYBANK. Well, we want the letter of transmittal; we would like to see the signature in the record. Mr. ARNOLD. It was sent to a mailing list which the Reserve bank got from regulation W. Senator MAYBANK. Who pays for regulation W? Mr. ARNOLD. I imagine the Federal Government. This statement says, referring to exchange charges: It has still existed in the back country, much after the fashion of the gorilla, who has been driven away from the main scene, but keeps on picking off his victims here and there. It says here: 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. If it actually were true, that without exchange charges, some bank 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. That is a circular sent out by the President of the Federal Reserve Bank at Atlanta to customers of the Commercial Bank & Trust Co. at Griffin, Ga., and those customers brought several to me. I just cannot understand any man holding that type of position and stooping to that point to carry a legislative problem through Congress. I objected to the Federal Reserve Board of Atlanta by letter at the time, and I received in reply a six- or eight-page single space very closely written letter which was technical from its very beginning to end, terms which no layman could understand. I am sure that the man who signed the letter did not understand it. I feel sure it was prepared by very high-grade legal counsel, probably in Washington. The distribution of this circular by the National Association of Credit Men placed the small country banks in a very bad position. Now, the National Association of Credit Men is what we call in this day and time "big business." It is composed of the big shippers all over the country. Now I want to say just a word about the position of the American Bankers Association. The American Bankers Association has a membership of bankers all over the United States, and frankly, while our bank is a member, I really see no real use of it. The American Bankers Association has never been of any use to the small country bank. It is a tool of the large giant city Reserve center banks. I don't know of any position that the American Bankers Association has ever taken on banking reforms that has later been determined as being right. I am informed that in 1912 these large banks controlling the American Bankers Association fought the establishment of the Federal Reserve System. I know that in 1933-because that was during my day-it fought the formation of the Federal Deposit Insurance Corporation. I don't think anyone today would question whether those organizations should continue to exist or not. They should. We must have them. Now, I know the American Bankers Association is against the Maybank bill because the Maybank bill does not cater to the large city banks. Their executive council is selected from all over the country, but after all, it is controlled by city banks. We are handicapped. Our group has no money. We have no facilities for having thousands of telegrams sent to Washington to the various Senators asking them to support this bill. The National Association of Credit Men, with the powerful organization of the Federal Reserve Banking System, with their powerful organization, are having thousands of wires sent in here every day to Senators, urging them to vote against this bill, and I feel sure that the American Bankers Association is doing the same thing. But the small country bank needs this legislation, needs it badly. I have a resolution here-a copy of a resolution, which I have certified to, which was adopted unanimously by the Georgia Bankers Association in convention assembled, approving the legislation. I have heard that some of the Atlanta banks object to it, but they have not had the courage to say so. I have been to a representative officer of the four major banks in Atlanta and have asked them personally if they objected to this bill. They said they had no choice in the matter, it made no difference to them, but it does. I would like to file that resolution for the record. Senator MAYBANK. Very well. (The resolution is as follows:) RESOLUTION Whereas Congressman Paul E. Brown has introduced a bill in the Congress, the effect of which is to clarify regulation Q and the interpretation as placed thereon by the Board of Governors of the Federal Reserve System; and Whereas it is the opinion of the Georgia Bankers Association in convention assembled, that the ruling of the Board of Governors is calculated to force out of existence the dual banking system, to force all State banks into the Federal Reserve System, and to force par clearance, is unjust, unfair, and is calculated to vest too much power and authority in an appointive board which tends toward injury to the small man and the small bank of our Nation, and is an attempt by the Board toward the complete centralization of control of the entire banking system of the country: Therefore be it Resolved, That this association condemns the attempted action of the Board of Governors of the Federal Reserve System in the enforcement of regulation Q as it applies to the absorption of exchange, and unqualifiedly commends most highly Congressman Brown for the leadership that he has given in attempting to prevent the travesty of justice and the resultant damage that would be done to the small banks and their depositors: Further be it Resolved, That this association go on record as commending Congressman Brown's bill to the other Members of Congress of our State, in the enlistment of their support of the bill, to the end that it be enacted: Further be it Resolved, That the secretary of this association be instructed to have this resolution transcribed and a copy thereof sent to both of our Senators and each Member of the Congress from Georgia. This is to certify that the foregoing is a true copy of the resolution adopted by the Georgia Bankers Association in convention assembled in Atlanta, February 22, 1944. D. J. ARNOLD, President, Georgia Bankers Association. Mr. ARNOLD. I don't know what our position is going to be under this flood of pressure from the outside coming into the Senators asking them to defeat this bill. We know it is the salvation of the country bank for it to pass. We know that without it we will drift into centralized credit control, with the elimination of State banks, and the establishment of branch banks all over the country, controlled in the large financial centers, with correspondent relations probably eventually eliminated, and all deposits going into a federalized system of banks. I don't think this country can afford to lose the small country bank. Thank you, sir. Senator MAYBANK. Thank you. How many more witnesses have you, Mr. Gormley? Mr. GORMLEY. I only planned to put one more on this morning, Senator, but I don't believe we will be able to finish with him before it is necessary for you to leave. Then for this afternoon I planned to put on three more, none of whom will take very long. Senator MAYBANK. I have arranged to use the District room in the Capitol this afternoon. It is right outside of the Senate Chamber. I hoped we could have more Senators in attendance. I do know that Senator Buck and Senator McClellan will be there this afternoon. I think if we adjourned now until 2 o'clock and then meet over in the District room, it probably would be better. Mr. GORMLEY. Please understand this: We are here at your convenience and the only thing I have tried to impress on the other Senators, I am sure you all realize we have waited for this hearing since March, and through circumstances, certainly beyond our control, we have not been successful in getting a hearing before this. It would be satisfactory to me, in view of the fact that the next witness I had planned to introduce to the committee will take considerably more than the remaining 10 minutes before you have to answer roll call, it would be satisfactory to me to recess now and meet at 2 o'clock. Senator MAYBANK. If that meets with the wishes of the gentlemen that are here, we will meet at the District of Columbia Committee room right outside of the Senate at 2 o'clock. 65785-45- -4 I will be there and I am hopeful that many other Senators will be there. (Thereupon, at 11:55 a. m., a recess was taken until 2 o'clock of the same day.) AFTERNOON SESSION The committee reconvened at 2 p. m., in the District of Columbia Committee hearing room in the Capitol, upon the expiration of the recess. Senator MAYBANK. The committee will come to order. Mr. GORMLEY. Mr. Chairman and gentlemen of the committee, I would like to present Mr. Willis Johnson. Senator MAYBANK. Mr. Johnson, will you come up, sir, and have a seat opposite the committee reporter? STATEMENT OF WILLIS JOHNSON, PRESIDENT, CITIZENS BANK & TRUST CO., WEST POINT, GA. Mr. JOHNSON. Mr. Chairman and gentlemen, my name is Willis Johnson. I am from Georgia, where we have Democrats and boll weevils. I am president of the Citizens' Bank & Trust Co., at West Point, Ga., a town of 3,500 people, serving a trade area of about 30,000 people, one-fourth in Georgia and three-fourths in Alabama. I am the only bank president that I know who voted for Roosevelt for the fourth term. I appreciate this opportunity of speaking to you gentlemen about a matter which has vital importance to my institution. My bank has a capital of $100,000, surplus and undivided profits of $120,000, over 6,000 depositors, about 1,000 borrowers, and total resources of $5,750,000. In 1943 the net profits in my bank were $20,000, out of which we paid $6,500 Federal taxes and paid our shareholders $8,000, leaving $5,500 to our undivided-profits account. My bank is 95 percent cash and Government securities. Exchange collected by us in 1943 for the transfer of funds to a very large extent to Atlanta, Ga., amounted to $10,000, or, roughly, half of our profits. The enforcement of regulation Q, which is admitted by its proponents to be a backhanded effort designed to force all State banks into the Federal Reserve System, whereby it would be necessary to remit checks at par, would cause my institution to lose half of its net profits. I started in the banking business August 1, 1908, in a national bank where I worked in various capacities until March 1926. I very well remember when the Federal Reserve Act was passed that all of the reserve city banks, the large bankers, if you please, opposed the enactment of that law. When they found that the Federal Reserve Act was going to be passed they tacked onto that act a par check clearance provision intended then to stop the practice of outlying banks charging exchange to remit to reserve cities for the payment of their checks. Georgia banks resisted that effort and finally brought a case to the Supreme Court that aflirmed their contention that the Federal Reserve Act did not require a par system of clearing checks to be established. My bank is not a member of the Federal Reserve System for the sole purpose of charging the exchange for the payment of checks drawn on West Point in Atlanta or other Reserve cities. The State of Georgia |