have caused their source for absorption of such charges to become scarce or to disappear.

Their practice is thus brought into the light as the charge is passed back to the payees of checks so discounted and he informs the drawer that he has not paid in full. The drawer of the check, the customer of the bank, feels that he has been poorly served and protests to his bank, which is unable to offer a satisfactory explanation. The customer would be entirely willing, in most cases, to pay reasonably for services rendered, but he will not continue to allow such charges to be imposed in this troublesome manner.

No one appears to have challenged the wisdom of the act prohibiting the payment of interest on demand deposits. But this bill does challenge the ruling of the Board that compensation by way of exchange absorption by member banks constitutes payment of interest by a device and is designed to invalidate that ruling.

If this bill becomes a law there will be no restraint against banks compensating for bank correspondent balances, or, as I see it, even for balances of individuals, firms, or corporations. In fact, to all intents and purposes it would seem the bill might as well go the rest of the way and repeal the interest prohibition and thereby simplify the process of compensating for demand deposits.

While rates mentioned have usually been at a rate of one-tenth of 1 percent, it is well known that higher charges are frequently exacted and surely there will remain no restraint at all against a return of the very practices the Federal Reserve Act was designed to correct as regards payment of interest for demand deposits.

About 85 percent of the banks of this country now operate on a par basis. Be it remembered that this fact alone makes it possible for the remaining 15 percent of nonpar banks to indulge in this practice at a profit to themselves. I mean to emphasize, if all banks resorted to this exchange charging and absorption, the result would be a tremendous increase in petty book entries and advices, with probably no net gain to any particular bank, certainly loss to all after added accounting expenses incidental thereto.

Resort to the practice of charging only on the part of all banks and absorption by none would pass the toll to the public. To avoid this the Federal Reserve Act has provided for par clearance as far as its authority extended in the dual banking system.

This bill would authorize and encourage a practice profitable to nonmember banks at a rank discrimination against member banks. In our opinion the present system and regulations have proved in the public interest, and nothing should be done to lessen their effectiveness, as passage of bill 1642 appears designed to do.

Senator HAWKES. Anything further? Senator Buck?

Senator BUCK. Has your State passed any legislation on the matter of exchange rates?

Mr. HILLS. No.

Senator HAWKES. Are they contemplating any new legislation? Mr. HILLS. I know of none definitely. It has been intimated that the Association of Credit Men, or their trade association, have talked some of it. Up until this past year I understand there have been about 11 banks in the State who persisted in this charging of exchange. Senator HAWKES. Out of a total of how many?

Mr. HILLS. Somewhere in the neighborhood of 110 banks. the president of the association informed me just before my leaving for Washington that he had been assured by all but three of these banks that they were going to discontinue the practice.

Senator HAWKES. Thank you very much.

Senator BUCK. May I ask you the same question as the other witnesses: Do you know whether your congressional representative has been advised of the association's action in this matter?

Mr. HILLS. I think Senator Wheeler and Senator Murray. I have not seen the Representatives. But I have talked to them.

Senator HAWKES. Thank you, Mr. Hills. Is Mr. Lyons here? He is not here. All right, then we will go ahead with the National Association of Credit Men, and we will hear from Mr. Reader.

STATEMENT OF H. P. READER, ASSISTANT TREASURER, CANNON MILLS, INC., NEW YORK, N. Y., REPRESENTING NATIONAL ASSOCIATION OF CREDIT MEN

Mr. READER. Senator Hawkes, Senator Buck, and gentlemen, I am here, first, as a member of the committee of the National Association of Credit Men. I am personally connected with a cotton manufacturer as assistant treasurer of Cannon Mills, New York.

We are here in opposition to the Maybank bill, because we believe it is contrary to the principles of sound banking and sound business. For a good number of years this association has taken a position in favor of sound currency, and from 1908 until the passage of the Federal Reserve Act, I was a member of the committee that sponsored and formulated that act. I worked for it more than 2 years with the Honorable Carter Glass, who helped us materially in getting the Federal Reserve Act through, and from that time to this this association has taken an active part in the sponsoring of what we believe to be sound financial and banking practice.

The gentlemen who have preceded me have stated our case in a very fine way, and have made it unnecessary for me to say all I would have said. We heartily endorse our banker friends' statements, who preceded us. I will read you just a small part of what I had intended to say, because the ground has been covered, and I see no need of duplicating it.

Senator HAWKES. That is very considerate, because we are very short of time.

Mr. READER. The passage of the bill, we believe, would encourage competing banks to pay exchange charges to those customers, either correspondent banks or business houses, which maintain large balances with the banks. This would almost certainly have a tendency to draw funds from local areas into areas where they might be used for various purposes, possibly speculative.

In case of any country-wide stringency which might occur, this evil would become a very serious one, and when demands were being made on banks in largely populated areas and in the lesser populated areas at the same time.

Prior to the passage of the Federal Reserve Act, you gentlemen no doubt can remember the difficulties that we experienced each year in the transfer of funds to the West for movement of crops and things of

that sort, resulting in the advanced and unreasonable cost of money. Call money usually advanced in the fall to 20 or 25 percent. And since the passage of the Federal Reserve Act that has not been the case.

We believe that this Maybank bill is contrary in principle to the Federal Reserve Act, which we are heartily supporting.

Senator HAWKES. Thank you, Mr. Reader. Mr. Felio, we will hear from you. Will you state your name and connection?

STATEMENT OF EARL N. FELIO, ASSISTANT TREASURER, COLGATEPALMOLIVE-PEET CO., JERSEY CITY, N. J.; AND CHAIRMAN, LEGISLATIVE COMMITTEE, NATIONAL ASSOCIATION OF CREDIT

MEN

Mr. FELIO. Senator Hawkes, Senator Buck, and gentlemen: My name is Earl N. Felio. I am assistant treasurer of ColgatePalmolive-Peet Co., of Jersey City. As a manufacturer, we sell some 200,000 accounts around the country. But primarily I am here not from that angle, but from the angle of being the chairman of the legislative committee of the National Association of Credit Men.

We were talking from an industry standpoint, not from a banker's viewpoint. We represent some 22,000 manufacturers, wholesalers, and producers throughout the country, and because I am from big business I do not want you to think those 22,000 manufacturers all represent big business. In fact, our association is composed very, very largely of small business people.

Now there seems to be a popular conception, and of course it is a misconception, that the passage of this Brown-Maybank bill would inure to the benefit of the small businessman and the small banker. I differ with that completely, because, frankly, the only one that can afford to carry compensating balances and do not let anybody tell you we have not been asked to put up such balances-is the big businessman.

And so the passage of this bill in my estimation would be class legislation to the extent of helping one group as against another, and although from a selfish attitude big business might think of staying with this Brown-Maybank legislation, we are very much opposed to it. We think it would hurt credit, that it would weaken the Federal Reserve System, and so we are here in opposition to it. And I am here as representing this large body of small business houses.

When the thing first came up, we polled the whole Nation, and letters and wires came back from every section of the country. The opposition was extremely substantial. And those letters I believe you will find in the record of the previous meetings.

I would like to pose this question to you: There is more to it than just this question of compensating balances, which big business probably can handle. Bank checks have come to the point where they are really the Nation's currency, or certainly are to us, about ten to one currency in our clearings. And we feel if a bank check more or less takes the place of currency, then it should have all the attributes of currency.

I find this situation happening in our form, and I have had it reiterated in many other firms. You sell two accounts on Feachtree Street in Atlanta, Ga., a block from each other. Peachtree Street is

the principal street. You do not know in advance what bank they are going to use. The bill is $25 in each case. The first fellow sends his $25 check in payment of his bill. The next fellow sends it in on a nonpar bank, and it is $24.60 or $24.70. In that case you develop a drain on business. You make it impossible for us to regulate our costs, and if for no other reason, we are opposed to this bill, because we do not want to see more banks leave the System and get into this charging of exchange system, that is now the case in some sections of the country.

Senator HAWKES. May I interrupt you, and ask you this question

Mr. FELIO. Yes; Senator.

Senator HAWKES. When one customer sends you a check from which you only get $24.90 or $24.85, and the other one sends you a check from which you get $25, what do you do about it?

Mr. FELIO. Well, we are now writing that customer. Our next witness has some very factual data on that.

Senator HAWKES. The reason I am asking that question is this: You are really cutting the price.

Mr. FELIO. That is right.

Senator HAWKES. If you let one fellow pay you something less than the other man pays you with a check.

Mr. FELIO. Well, along that same line, it may be correlated to it, at least, if a bank accepted from us a compensating balance, they naturally would favor us, and to that extent it would be discriminatory toward the other customer who is not big enough to give them a compensating balance, and therefore they insist that he pay that exchange. There is that angle. The two things-it works both ways. We are anxious to have our bank checks operate as our currency, and we like to know that when we sell merchandise, we will be paid a hundred cents on the dollar. A surprising thing that will be brought out in the next witness' testimony is this: Many of the customers, when you write to them and call their attention to the fact exchange has been deducted, that is their first information that their checks have been clipped, that there has been a levy taken from their checks. Senator BUCK. What are they likely to do?

Mr. FELIO. There have been several things. Some of the banks have gone on the par list. In fact, since this thing has been given so much attention in the last several months, I believe your Federal Reserve records will show that some 40 to 60 banks have gone from nonpar to par for that very reason, that is, pressure from the trade.

We have taken it up also with the farmers granges and the merchants' associations, and they are all of the same opinion, that we should not let this exchange charge grow, more banks start to charge exchange.

We have a very homely incident. There has not been any humor in this so far, so I would like to give you an incident that occurred in one of the Midwestern States. A man went in a drug store and bought a 5-cent Coca-Cola. The druggist cashed his check for $2. This check was drawn on the bank in the very next town. The $2 check was mailed to the bank for collection. The bank sent back $1.90, taking out 10 cents and calling it exchange. Of course, the druggist was out the Coca-Cola and he was out the 5 cents. That is, of course, a very homely incident.

.

We talk about banking, and we talk about industry. It goes farther. It goes all the way down the line to the little retailer, more than to the manufacturer. That is one point I should like to make. And our next man will give you some factual data.

Senator HAWKES. Mr. Felio, did you say how many members there are in your national association?

Mr. FELIO. Twenty-two thousand.

Senator HAWKES. Twenty-two thousand.

Mr. FELIO. In every type of industry, not all food manufacturers. Senator HAWKES. And located in every State in the Union? Mr. FELIO. And in every State in the Union; yes, sir.

Senator HAWKES. Thank you very much. The next witness is Mr. Harold Warrick. Will you please state your name and connection, Mr. Warrick?

STATEMENT OF HAROLD D. WARRICK, GENERAL CREDIT MANAGER AND ASSISTANT TREASURER, GENERAL FOODS CORPORATION

Mr. WARRICK. My name is Harold D. Warrick. I am general credit manager and assistant treasurer of General Foods Corporation. Mr. Chairman, I would like to present a concrete example of what a collection charge represents.

I have before me a bill rendered by our bank. It is a monthly bill. I will use it as an example. It totals $560. This represents collection charges on around 1,900 checks. Of these checks there are 1,581 which are under $500. The collection cost on the 1,581 checks amounts to one-sixth of 1 percent, or $327.

There is another class of checks which are over $500, amounting in number to around 215. The cost on these checks is one-ninth of 1 percent, or $233.

This bill might be considered as favoring our company because the bank could absorb the charges. But if this were allowed over the country, what a tremendous thing it would be! That is, if all banks were allowed to charge exchange, it would run into the hundreds of thousands of dollars just on our business alone, as to cost. Senator HAWKES. You mean as a cost to the banks?

Mr. WARRICK. Cost to the bank. The bank charges it back to us as it is now.

Senator HAWKES. As it is now, but if the bill went through, they would not charge it?

Mr. WARRICK. They would not charge it back necessarily. They could absorb it. But they would surely receive compensation in some way if they did absorb it, naturally they would. It lends itself to poor banking practice, poor business, the way I see it, because it is a question-well, it is something like an unseen or hidden tax the way it would work out. Provided the banks are allowed to absorb the charges.

And another thing: There does not seem to be any uniformity, or apparent uniformity in the charges, because here are some checks, the amounts run, $2.82 on a check for $2,800; another check for $500, 10 cents. Does it cost any more to collect a check for $2,000 than it does for a check for $500? There are checks in another group, under $500, on which charges are in smaller amounts. They might go down

to 10 cents.