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* They have their standard rates and stick to them, and would rather send their surplus funds to New York to be used for stock-gambling purposes at a wonderful rate of 2 percent, reduced now, I think, to 12 percent, than to loan to their merchants and businessmen at less than their standard rates. So that this payment of interest, particularly on bank-demand deposits, has resulted in drawing the funds from the country banks to the money centers for speculative purposes, to be polite about the matter" (77 Congressional Record, p. 3729). And thus to the House: "* We departed from sound-banking principles. Our great banking system was diverted from its original purposes into investment activities, and its service devoted to speculation and international high finance. * * * Agriculture, commerce, and industry were forgotten. Bank deposits and credit resources were funneled into the speculative centers of the country for investment in stocks operation and in market speculation. Values were lifted to fictitious levels. Call-money rates went soaring, commmunity 'bankers over the Nation were lured away from normal and legitimate channels into a maelstrom of untried and destructive activities" (77 Congressional Record, p. 3835).

It was suggested also that prohibiting the payment of interest on demand deposits would make it easier for banks to pay their deposit-insurance assessments by relieving them of the heavy interest burden-a burden which averaged, for the 5 years prior to 1933, an annual expenditure of approximately $250,000,000. It is significant that nowhere in the Congressional Record of the proceedings on the 1933 act nor in the reports of the congressional committees was there any reference to absorption of exchange, or any intimation that the provision outlawing interest on demand deposits would affect, directly or indirectly, either the charging or the absorption of exchange.

In the hearings before the House Banking and Currency Committee on II. R. 3956 (78th Cong.)-the companion bill to S. 1642 now under consideration in the Senate it was disclosed (p. 497) that the Reserve Board had received numerous inquiries from banks during 1933 and 1934 for rulings on the question whether absorption of exchange was a violation of the interest prohibition. The Reserve Board's 1933 annual report, submitted to Congress on May 28, 1934, contained a copy of its interest regulation Q as well as recommendations for amendments to the law prohibiting payment of interest on demand deposits, including a recommendation that the Board be given power to prescribe rules and regulations to prevent evasions of the law. But neither the interest regulation nor the recommendtaions for legislation contain any reference to absorption of exchange. The annual report of the Board for 1934 contained a recommendation from the Federal Advisory Council regarding regulation Q but again there was no mention of absorption of exchange. And although extensive hearings were held in 1935 before the Banking and Currency Committees of both Houses of Congress on the bill later enacted as the Banking Act of 1935, again no mention was made of absorption.

The 1935 bill contained the provision that the Federal Reserve Board should have the power to determine what should be deemed "interest" for the purposes of the interest statute. It was included in title III of the bill under the heading "Technical amendments." Chairman Eccles of the Federal Reserve Board did not touch upon these provisions in his testimony before the Senate Committee on Banking and Currency but in testifying before the House Committee he referred to the amendments in this title as "in the nature of technical improvements of a noncontroversial nature." (House hearings, Committee on Banking and Currency, Banking Act of 1935, p. 185.) Again he said: "They are largely of a technical nature" (id., p. 346). Comptroller of the Currency O'Connor in testifying upon the bill before the Senate committee filed a statement in explanation of the objects of the proposed amendments contained in title III (Senate hearings, Committee on Banking and Currency, Banking Act of 1935, p. 113). It will be observed that his explanation of section 323 (a) of the bill, which contained the provision authorizing the Federal Reserve Board to define what shall be deemed the payment of interest, reads as follows: "Authorizes Federal Reserve Board to define 'deposit' and related terms for reserve and interest requirements respecting deposits" (id., p. 116). He further explained that section as follows (id., p. 168):

"Mr. O'CONNOR. * * * Section 323 (a) is partly new, and authorizes the Federal Reserve Board to define 'deposit' and related terms for reserve and interest requirements respecting deposits.

"Senator TOWNSEND. Who defines those deposits?

"Mr. O'CONNOR. The Federal Reserve Board.

"Senator BULKLEY. I think we ought to have a more full explanation of that. I am frank to say that I do not see what that is driving at. "Senator COUZENS. Was that new over last year's act?

"Senator BULKLEY. Yes.

"Mr. O'CONNOR. Yes; part of it is new.

"Senator BULKLEY. It is all new in the sense that it was not contained in our omnibus bill last year.

"Mr. O'CONNOR. I am reading from the report of the House, page 21: 'Section 323 (a) amends section 19 of the Federal Reserve Act so as to repeal the rigid statutory definitions of "demand deposits" and "time deposits" and authorizes the Federal Reserve Board to define for the purposes of the section the terms: "Demand deposits," "gross demand deposits," "deposits payable on demand," "time deposits," "savings deposits," and "trust funds," to determine what is to be deemed a payment of interest and to prescribe regulations to effectuate the purposes of the section.'

"Oh, yes; it comes back to me now: We had a number of discussions in the Federal Reserve Board, gentlemen, after the passage of the 1933 act, when you eliminated the interest on demand deposits, as to what constituted a demand deposit, a time deposit, or a savings deposit. We found great difficulty in applying the definitions that were in the act, and we found some of the banks attempting to circumscribe the prohibitions; and we wanted, when we found those evasions, to keep correcting the definition until they could not evade it."

It will be noted that not one word was said about absorption of exchange; indeed not a word about interest. The explanation was that the provision authorized the Federal Reserve Board to define the term "deposit," in view of the difficulty which had been experienced in determining what were demand deposits. Not only was absorption of exchange not mentioned but that portion of the authorization with respect to the definition of the term "interest" was not even discussed.

Similarly, in the House hearings, the Comptroller of the Currency said (House Hearings, Committee on Banking and Currency, Banking Act of 1935, p. 661) that "practically all of the things I am going to talk about are technical matters * * *" and he described the section which included the power of definition as follows: "Section 323 (a), which is partly new, authorizes the Federal Reserve Board to define 'deposit' and related terms for reserve and interest requirements respecting deposits" (id., p. 665).

In light of this background, how can it fairly be said that Congress intended to eliminate or authorize the elimination of the absorption of exchange as a "device" for the indirect payment of interest on demand deposits? Nothing was said about it at the hearings on the bill; on the contrary, the silence on that subject justifies us in saying that Congress did not intend to authorize this elimination through the regulation of interest payments. If the absorption of exchange was then an acute evil and an obvious device for the indirect payment of interest on demand deposits, as the Federal Reserve Board now asserts it then believed, how can it justify the complete silence of everyone on the subject when the 1935 bill was before Congress? The true interpretation of the statute depends not upon what the Federal Reserve Board claims it intended in proposing the 1935 amendment to Congress, but upon what Congress intended in enacting it into the law. Although the problem may have been acute to the Federal Reserve Board in 1934 and 1935, as it did not communicate its anxiety to Congress, but on the contrary represented the amendment to be "technical" and "noncontroversial," neither of which descriptions fits legislation which would permit it to disturb the practice of exchange absorption, we must conclude that Congress did not intend to authorize its recent ruling.

The provision governing interest payments by nonmember insured banks (initially proposed to be enforced by the Federal Reserve Board but changed before passage to the Federal Deposit Insurance Corporation) was also discussed fully by represntatives of the several banking agencies but no mention was made there of any intention to prohibit absorption of exchange.

It cannot be said that Congress, in enacting the Banking Act of 1935 and continuing therein the prohibition against the payment of interest upon demand deposits, adopted the administrative interpretation laid down by the Federal Reserve Board in 1934. We do not contest that the courts have held that the existence of an administrative regulation during several reenactments of a statute is persuasive evidence of the congressional approval of such administrative action (McCaughn v. Hershey Chocolate Co. (1931) 283 U. S. 488, 492, 75 L.

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ed. 1183, 1187; Jones v. Magruder (D. C. Md., 1941) 42 F. Supp. 193, 199; Railroad Federal Savings and Loan Association v. United States, 135 F. (2d) 290, 293 (C. C. A. 2, 1943)). But in almost all cases it will be found that the administrative regulation was in existence a considerable length of time and usually through several statutory reenactments. Where the regulation is only of short life, the rule is not applied (Commissioner of Internal Revenue v. Sun Pipe Line Co., 126 F. (2d) 888 (C. C. A. 3, 1942)). The theory upon which the rule is based is that there is a presumption that the legislature is aware of the administrative ruling and impliedly adopts it by failing to legislate against it. This presumption, however, is thoroughly overcome as far as the 1935 act is concerned, since Congress actually was kept in complete ignorance of any ruling on this subject. As an eminent authority has said: "While the acquiescence of the legislature seems to be of small matter where there is no evidence to the effect that the statute or contemporaneous interpretation was called to the legislature's attention, it is believed that when action has been taken upon a statute by the legislature, and where a practical and contemporaneous interpretation was called to its attention, the failure of the legislature to change the interpretation should be regarded as presumptive evidence of its correctness" (2 Sutherland, Statutory Construction (3d ed.), 525). Even had the legislative record been such as to warrant the conclusion that Congress did intend to adopt the Reserve Board's views, its rulings on the subject were so confusing and contradictatory that no clarification of the issues could have resulted. Thus, the Board had held that absorption of exchange charges by a bank for depositors who maintained balances of $1,000 or more was not a violation of the law; this, notwithstanding the interest statute prohibits the payment of any interest on demand deposits. Yet in another case it held that absorption of exchange charges by a bank "up to an amount equivalent to a certain specified percentage of the amount of the collected balance" of its correspondent bank customers was a violation of the law (Federal Reserve Bulletin (1934), p. 395). Furthermore, these rulings appear to have been entirely precatory to the extent that they declared exchange absorption to be illegal, as the practice continued to be indulged in by member banks throughout the system without interference by the Board until 1944.

We think it cannot reasonably be said that Congress, in passing this legislation, could have had any intention of prohibiting the long-established banking practice which was so completely wrapped up in the explosive par clearance issue without some mention having been made of the problem in the debates, the reports on the bills or the testimony upon which the congressional committees acted.

There are certain well-established rules for determining legislative intent. One of these is that penal statutes must be strictly construed and the statutes in this case are plainly penal. The one governing insured nonmember banks carries with it the specific penalty of $100 for each violation as well as the general penalty of the forfeiture-of-deposit insurance. The one governing member banks carries the general penalty of forfeiture of charter, in the case of national banks, and forfeiture of membership in the Federal Reserve System, in the case of State member banks, as well as the loss of Federal deposit insurance, or the removal from office of the bank officers responsible for the violations. Statutes which provide for forfeitures upon their violation are penal (State of Maryland v. The B. & O. R. Co. (1845) 3 How. (U. S.) 534, 11 L. ed. 714; Chase v. Curtis, et al. (1885) 113 U. S. 452, 28 L. ed. 1038; Hall v. Norfolk & W. R. Co. 44 W. Va. 36, 28 S. E. 754 (1897); Vestal Co. v. Robertson, 277 Ill. 425, 115 N. E. 629 (1917); Manhattan Trust Co. v. Davis, 23 Mont. 273, 58 P. 718 (1899)).

Another of these rules is that words having a precise and well-settled meaning in common usage are to be understood in the same sense when used in statutes. This rule has been applied to the use of the word "interest" in statutes in two decisions of the United States Supreme Court involving provisions of the Internal Revenue Code (Deputy v. DuPont (1940) 308 U. S. 488, 84 L. ed. 416; Old Coloncy R. Co. v. Commissioner of Internal Revenue (1932) 284 U. S. 552, 75 L. ed. 484). In Deputy v. DuPont, the Court, speaking through Mr. Justice Douglas, said: **** In the business world 'interest on indebtedness' means compensation for the use or forbearance of money. In absence of clear evidence to the contrary, we assume that Congress has used these words in that sense. In sum, we cannot sacrifice the 'plain, obvious and rational meaning' of the statute even for 'the exigency of a hard case.'"

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In the Old Colony case the Court, speaking through Mr. Justice Roberts, said: * as respects interest,' the usual import of the term is the amount which

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We cannot

one has contracted to pay for the use of borrowed money. believe that Congress used the word having in mind any concept other than the usual, ordinary, and everyday meaning of the term, or that it was acquainted with the accountants' phrase 'effective rate' of interest and intended that as the measure of the permitted deduction."

Furthermore, judicial precedents concerning interest for the purpose of determining whether usury has been practiced, establish that the question whether a particular payment by a borrower to a lender is interest or reimbursement of an expense, involves intent. There is no presumption of an illegal or usurious intent, but on the contrary the burden rests upon the party seeking to impeach the transaction for usury to prove the illegal intent (Brown v. Robinson (1918), 224 N. Y. 301, 314, 120 N. E. 694, 698). Here, however, for purposes of administrative disposition, it appears that the Reserve Board has reversed the presumption and burden of proof by ruling (Federal Reserve Bulletin (1934), p. 396)

that, in any case in which a member bank pays or absorbs exchange or collection charges or other expenses in connection with any deposit payable on demand, the burden will be upon it to show that such payment or absorption of charges is not a device to evade the provisions of section 19 of the Federal Reserve Act forbidding the payment of interest on deposits payable on demand."

The extensive hearings which were had before the House Banking and Currency Committee on the present measure have clearly demonstrated the importance of absorption to many bankers and the intensity of their opposition to any restriction of this practice, which was a well-known banking custom and was separate and distinct from the payment of interest. That the two practices are different both in origin and economic effect is borne out also by numerous witnesses who testified at those hearings.

It is significant that' just as bankers have long differentiated between the payment of interest which they consider compensation and the absorption of exchange which they consider expense, so have courts in usury cases similarly differentiated between the payment of interest and exchange (Cayuga County Bank v. Hunt, 2 Hill (N. Y.) 635; Holford v. Blatchford, 2 Sandf. Ch. (N, Y.) 149).

In Buckingham v. McLean ((1851) 13 How. (U. S.) 151, 14 L. ed. 91), the Supreme Court said: "The reason why the addition of the current rate of exchange to the legal rate of interest does not constitute usury is, that the former is a just and lawful compensation for receiving payment at a place where the money is expected to be less valuable than at the place where it is advanced and lent."

ABSORPTION OF EXCHANGE ADMINISTRATIVE INTERPRETATIONS

Let us now consider the historical development of the administrative concept that absorption of exchange constitutes payment of interest in violation of section 19 of the Federal Reserve Act.

In 1935 the Reserve Board revised its regulation Q (effective January 1, 1936) to include the following definition of interest:

Section I (f): “The term ‘interest' means a payment, credit, şervice, or other think of value which is made or furnished by a bank as consideration for the use of the funds constituting a deposit and which involves the payment or absorption by the bank of out-of-pocket expenses (i. e., expenses arising out of specific transactions for specific customers and definitely attributable to such transactions as distinguished from overhead and general operating expenses), regardless of whether such payment, credit, service, or other thing of value varies with or bears a substantially direct relation to the amount of the depositor's balance.

"The term 'interest' includes the payment or absorption of exchange and collection charges which involve out-of-pocket expenses, but does not include the payment or absorption of taxes upon deposits whether levied against the bank or the depositor nor the payment or absorption of premiums on bonds securing deposits where such bonds are required by or under authority of law.

"Notwithstanding the foregoing, the payment or absorption of isolated items of out-of-pocket expense in trivial amounts and not of a regularly recurrent na

3 The provision permitting banks to pav and absorb the taxes for their depositors is supported by later specific rulings of the Board to the same effect. Why the Board permits taxes to be paid and absorbed but prohibits banks from absorbing exchange can be explained only by the fact that the former has no bearing upon the issue of par clearance. The provision relative to bond premiums constituted a reversal of an earlier ruling by the Board (Federal Reserve Bulletin (1933), p. 500).

ture, where the charging of such items to customers would cause undue friction or misunderstanding, will not be deemed to be a payment of interest, provided that the bank acts in good faith and does not utilize the absorption of such items as a basis for soliciting accounts or obtaining an advantage over competitors and provided further that the bank maintains and makes available to the examiners authorized to examine the bank a record showing the amounts of such items paid or absorbed by it, the dates of such payment or absorption, and the names of the customers for whom such items were paid or absorbed."

At about the same time the Federal Deposit Insurance Corporation issued a revision of its interest regulation IV, also to become effective January 1, 1936, containing the following definition of interest:

Section 1 (f): "The term 'interest' means a payment or credit which is made or furnished by a bank as consideration for the use of the funds constituting a deposit.

"The term 'interest' includes any direct or indirect payment by the bank of the purchase price of premiums given to depositors or prospective depositors in connection with obtaining deposits.

"The term 'interest' does not include the payment or absorption of taxes upon deposits, whether levied against the bank or the depositor, nor payment or absorption of premiums on surety bonds securing deposits where such bonds are required by or under authority of law."

The Reserve Board requested the Federal Deposit Insurance Corporation to hold its definition of interest in abeyance and deferred until further notice the effective date of its own definition pending discussions between the two agencies with a view to having the Federal Deposit Insurance Corporation issue its interest regulation in language paralleling the Reserve Board's regulation Q. These discussions centered on the question whether the payment or absorption of exchange or collection charges constituted interest and this appears to have been the first time the issue was raised between the two agencies. Their viewpoints were irreconcilable in this respect. On January 20, 1936, the Federal Deposit Insurance Corporation advised the Reserve Board by letter that "both the practice of paying interest on demand deposits and the practice of charging for exchange and collection and absorbing such charges where the advantage lay existed long prior to the Banking Act of 1933 and thus far Congress has expressly prohibited only the former", and that "in the present state of the law and the practices we are not prepared to say that the practice which would be proscribed by regulation Q is unsupported by principles of banking specially applicable to the business of exchange."

The Reserve Board announced in its January 1937 Bulletin (p. 11) that during the preceding year it had given exhaustive consideration to the subject and "as a result of this consideration, has taken action fixing February 1, 1937" as the date on which the definition of interest in its regulation Q would become effective. In its March 1937 Bulletin (p. 186) it announced that the effective date had been postponed from February 1, 1937, to May 1, 1937, at the request of the chairmen of the Banking and Currency Committees of both Houses of Congress. In the same Bulletin (p. 187) there was printed the February 12, 1937, press release of the Reserve Board and the Federal Deposit Insurance Corporation jointly announcing the amendment of the Reserve Board's regulation Q and of the Federal Deposit Insurance Corporation's regulation IV, and the addition to each regulation of the sentence: "Within this regulation, any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit shall be considered interest."

This joint press release included the following statement:

"The Board of Governors, in its original definition of the term 'interest' (sec. 1 (f)), specified that such term should include the payment or absorption of exchange or collection charges which involve out-of-pocket expenses. The present action of the Board of Governors removes this finding or specification from its regulation.

"Henceforth under both regulations the question of what in a particular case is a payment of interest upon a demand deposit or a device to evade the prohibition against the payment of such interest, becomes, for both agencies, a matter of administrative determination under the general law in the light of experience and as specific cases may develop." [Emphasis supplied.]

This release was widely interpreted to constitute an abandonment by the Board of its previous theory that absorption of exchange could be interest.

Absorption of exchange was a dead issue from 1937 until 1943. The Reserve Board's Bulletins contain no rulings on the subject during this long period.

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