ham, Memphis, and St. Louis to absorb this exchange. I meant to say, we did not start the practice of the so-called middleman; that is, the correspondent bank absorbing that exchange. Back in the old days a correspondent bank felt it was good business; they felt that the balances of the country banks were worth that much to them, that they could afford to absorb the exchange.

And I might add, that it did not have any direct relation to the amount of the balance. All of you know that an operating bank measures its service, to some extent at least, by the amount of the balance kept. Necessarily a man who keeps a $5,000 balance with a bank is entitled to more credit than a man who keeps $1,000 or $250.

Even so, there has never been any specific relation between the amount of cost absorbed and any specific rate of interest. The Federal Reserve Board undertakes to enforce this regulation for no other purpose, in my opinion, than to break down the system of charging exchange to these country banks.

Senator BUCK. Will it do that?

Mr. GORMLEY. Yes; and I will explain how it will do that.

Senator BUCK. How have you managed the matter in the last 6 or 8 months?

Mr. GORMLEY. Our banks are being harassed now continually. As an illustration of that I might say

Senator BUCK. Was not this put into effect about the 1st of January, I mean as to the regulation?

Mr. GORMLEY. The regulation was adopted in 1937, but for 6 long years the Federal Reserve banks never made any attempt to enforce it. I think that demonstrates a lack of confidence in the legality of regulation Q.

Senator MAYBANK. As I understand the situation, that action followed the death of Chairman Steagall of the House Committee on Banking and Currency.

Mr. GORMLEY. At least there is the amazing coincidence that it followed the death of Congressman Steagall, who had been the champion of country banks for the last 15 years.

It is a rather intricate thing to explain to you gentlemen just what has happened to these country banks and how we are being embarrassed. That was the reason I undertook to bring out the fact that in the beginning the country banks did not encourage or insist on correspondent banks absorbing this exchange. As a matter of fact, it was no concern of ours.

Senator BUCK. What is the justification for this charge? There is no service rendered, is there?

Mr. GORMLEY. That depends. I was going to explain that to you. Senator BUCK. I wish you would do so.

Mr. GORMLEY. This grew out of the old custom in effect before banking and clearing became as efficient as it is today. In the old days it was the usual practice for the man who wanted to buy a bill of goods in New York to go to his bank and buy New York exchange and send it up there; just like if you want to buy goods in a foreign country you have to buy a bill of exchange payable in that country, arranging with one of the banks doing business in that country. Out of that grew the charging of exchange on incoming remittances.

Senator BUCK. You do not render any service here, do you?

Mr. GORMLEY. That depends on whether or not the goods are sold in my local town, or the sale is made where the seller is located. We contend that the sale was made in our local town. Let us say that we have a check to the R. J. Reynolds tobacco people on Griffin, Ga. The sale was there, and our practice of making a charge is for transmitting that fund, when Reynolds sends that check in to us we charge them for transferring the balance into funds they can use, say in New York or Atlanta.

I disagree with you as to whom the service is rendered. However, admitting for the sake of the argument that you are right, that the service is not to the payee of the check. This practice was developed 50 or 100 years ago. It grew out of the old practice of buying and selling bills of exchange, when depositors of banks would not have the privilege of issuing checks as they do now. It has been accepted for 50 years.

When the Federal Reserve System was first inaugurated it met a rather cold reception from the banks. I do not think the original Federal Reserve Act ever contemplated that Federal Reserve banks would act as a clearing agency, certainly not to the extent which they have practically developed. Now, other than acting as fiscal agents for the Government they do not perform any other worthwhile function. But to encourage membership in the Federal Reserve System they offered par clearance as a body.

Of course, the larger banks took advantage of that, but the smaller banks have never seen any advantage in Federal Reserve System membership. They notified our banks as to what they would do unless we agreed to clear at par. They said they would accumulate our checks and send them down to the express agent in our town and have them presented over the counter and make demand for payment in currency.

Senator MAYBANK. When was that?

Mr. GORMLEY. In the 1920's. They said they would demand payment in currency over the counter. And they did that. We got an injunction, and the case went to the United States Supreme Court, and we beat them. I believe that decision was handed down in 1923. After that the Federal Reserve System pursued its course, thinking to offer sufficient inducement to the smaller banks to become members, but without avail. When the act of 1933 was written there was a provision providing for deposit insurance, and that provision for deposit insurance was again made a means of forcing country banks into the Federal Reserve System. There was written into that act a provision that all banks would have to become members of the Federal Reserve System in order to obtain deposit insurance after 1935. The bill was amended in 1935, providing that banks of over $1,000,000 of deposits could after 1937 retain their deposit insurance by becoming members of the Federal Reserve System. But with the help of Congressman Steagall that provision was stricken. We contend that was the hand of the Federal Reserve System undertaking to force all banks into the System.

Incidentally, gentlemen of the committee, in that same bill was written the original prohibition against payment of interest on demand deposits. In the House hearing it was contended that this was a very, very vicious practice, and that payment of interest on demand deposits

had been responsible for some very unsound and unwise concentration of bank balances in the large centers.

I am just a country banker, but I have never been able to agree with that. I do not think payment of a nominal sum of interest on demand balances, which was the practice in the day and time before 1933, had anything to do with concentration of bank balances in New York.

And that was, of course, the thing that was held out; that the money of the United States deposited in banks, was being drawn into New York, and used there for speculative purposes.

As a matter of fact, the thing that brought bank balances and money from all over the country into New York in the day and time of 1929, when we had our Wall Street crash, was not the fact that New York was paying one-half, three-quarters, or 1 percent on daily balances, but that call money in New York brought as high as 12 to 15 percent. Demand for funds was that acute, for speculative transactions, that price of call money reached an ungodly high point. This brought those bank balances in there.

The prohibition against interest on demand deposits was written into the act of 1933 for no other purpose but to sell the larger banks of the country on deposit insurance.

Perhaps some of you gentlemen connected with banks remember that the big banks opposed deposit insurance. First, they were against it as being unsound in principle, and, next, because they were being assessed on 100 percent of their deposits while they only had protection up to $5,000 on each account, and they argued that the premium should be on the actual coverage.

Now, after we repealed the clause in that Banking Act of 1933, and the amended act of 1935, requiring banks, first of all, to become members of the Federal Reserve System to obtain deposit insurance; and after 1935 banks of over $1,000,000; after that the provision was stricken, the Federal Reserve System issued regulation Q, which is a far-fetched interpretation of what constitutes payment of interest.

Under regulation Q they define as payment of interest absorption of any out-of-pocket cost. It seems to me to be absurd when considered in connection with what we have always considered interest. That is, a specific rate, And when we speak in terms of interest, I think legally and by reason of custom we have in mind a specific rate of interest.

For instance, if you borrow $100,000 it will cost you 1 percent or 2 percent or 3 percent, depending on the amount, up to 5 or 6 percent. There is no uniformity or any specific rate whatsoever in the amount of exchange which any correspondent bank would absorb for its customer. And that for the reason that one month a customer might have a balance of $10,000, and the next month only $5,000. One month they may absorb $250 of exchange for that customer, and the next month they might only absorb $125 exchange.

There is nothing in the world in that practice that ties in with what we have always regarded as interest. It is purely a service charge. And as an example of that, the Federal Reserve itself continues to furnish service which represents out-of-pocket cost to their own members, and which, if they are right on regulation Q is a violation of the law against payment of interest on demand deposits.

After regulation Q was passed in 1937, the Federal Reserve System did notify banks that after that time they could not absorb exchange or it would be regarded as payment of interest.

A few banks, and we will take Atlanta as an instance, the four clearing house banks there immediately notified country bank accounts that they could no longer absorb exchange. But the Federal Reserve receded from its position, and as a result members and other correspondent banks have continued to absorb this exchange. And there has been no attempt by the Federal Reserve to enforce this thing from 1937 up to last fall, when they called on two or three banks, and I think issued an order to banks in general, that they were going to then rigidly enforce regulation Q.

Gentlemen of the committee, if this were such a serious violation, which was followed all those years, it did not start just in the last year; in fact, it has been practiced every year since regulation Q was passed-I say, that in itself is a weakness of the Federal Reserve position when they undertake now to enforce same to make an attack on these country banks.

Now, Senator, I will get around to an answer to your question. How is this affecting us and our right to charge an exchange on our remittances?

Senator BUCK. I asked you how you got along for years.

Mr. GORMLEY. We are continuing to charge it, but under embarrassing circumstances. It is that much of a coincidence that nobody connected with a bank would be so naive as to say that that is not a combined and planned attack. Since the Federal Reserve announced in November of last year that they were going to enforce regulation Q, banks in my State have been subjected to this kind of attack. Wholesalers and manufacturers of the United States are bombarding country banks with letters, billing them with small exchange cost. If one of my banks sends a check to Palmolive for $125, in 10 days the customer gets a bill for 14 cents exchange and suggesting they do business with at-par banks. Thousands of these letters have come into customers of Georgia banks.

Of course, the Federal Reserve very smugly says, "We have no control over the wholesale and the manufacturing trade of the United States." That is true. And that they have no control over the National Association of Creditmen. But the forces which encourage the Federal Reserve to crack down and enforce this regulation, have allied themselves with the wholesale and manufacturing trade of this country, for no other purpose than to embarrass the little banks of the country by trying to bring down on their heads the wrath of their own customers. And they have done that by writing letters to those customers.

A lot of people say you have not been frank with your customers; that if you had, your customers would have understood this thing. But this custom has been in existence for so long a time there has been no occasion to explain it.

Senator BUCK. And that is really the only justification for it?

Mr. GORMLEY. Yes; and I think a good one. It has been in existence for all those years, and it never occurred to any bank to go out to a customer and say: "When you send out a $1 000 check to Baltimore, when it comes back we will charge $1 on it. It has been the accepted custom from time immemorial."

Senator MAYBANK. It is not only accepted as the custom, but is provided for in the laws of some of the States.

Mr. GORMLEY. Yes, sir. It is not only accepted in Georgia, but the State of Georgia legalizes it.

Senator BUCK. This act does not prevent you from charging it, does it?

Mr. GORMLEY. Not literally. But we are being harassed by incidents referred to above. Here is an article that was printed in the United States Investor. If it is not actually and absolutely scurrilous, it borders very closely on the scurrilous. Reprints of this article have been sent out over the signature of the president of the Federal Reserve Bank of Atlanta to over 18,000 mercantile firms in the 6 Federal Reserve districts. I understand he used the list of licensees under regulation W, and he mailed a copy of this article to every one of the licensees under regulation W, indicating that he thought the article was worth while and is being sent accordingly for their consideration. Whoever prepared this article refers to this practice of charging exchange on remittances as outmoded, and that it is only engaged in, in a cowardly sort of fashion, by "backwoods" types of banks.

Now, gentlemen of the committee, I know you can appreciate this thing, what it is doing to the relationship between the bank and its customers; that it is a very sensitive thing. Anything that creates a question in the minds of your depositors in regard to your bank, is very dangerous. It certainly seems to me most unbecoming in the Federal Reserve banks, or the president of a Federal Reserve bank, to engage in a practice of this kind.

It has been my opinion all the time that the Federal Reserve System was created as a stabilizing influence, a stabilizing factor in banking. As a matter of fact, it seems to me that now they are doing anything in the world they can to create a feeling of dissatisfaction between the country bank and its customers. This article is as good evidence of that as anybody would want.

Senator MAYBANK. Mr. Chairman, I would like to ask unanimous consent to have that article printed as a part of the record. The CHAIRMAN. Very well. That may be done.

(The document referred to and headed "What about the Maybank bill?" is as follows:)

[Reprinted from United States Investor, issue of April 8, 1944]

WHAT ABOUT THE MAYBANK BILL?

TO ENCOURAGE EXCHANGE CHARGES IS TO TAKE A BACKWARD STEP

What are exchange charges?—Before the Federal Reserve System came to throw light into many dark corners and to improve the quality of American banking generally, a curious practice existed among banks in many parts of the United States known as "exchange charges." Here is how they worked. Mr. Smith, of Laketown, owed money to Mr. Jones, of Hillcroft, and sent him a check drawn on his own Laketown bank. Jones naturally deposited the check at his own Hillcroft bark. The latter sent it in the usual course to its correspondent bank in New York or some other city, and from there the check went on its way to Laketown for payment. Lo and behold, when the Laketown bank received the check for payment, it nipped a little profit for itself by sending a slightly reduced payment to the New York or other institution, and it called the difference its “excharge charge."

The nip usually amounted to one-tenth or one-eighth of 1 percent, that is to say $1 or $1.25 per $1,000 of check. Smith really owed Jones $1,000 and really