United States. Congress. Senate. Committee on Bank.

Banking and currency. Hearings before the Committee on banking and currency, United States Senate, Sixty-third Congress, first session, on H.R. 7837 (S. 2639) ... In three volumes online

. (page 48 of 171)
Online LibraryUnited States. Congress. Senate. Committee on BankBanking and currency. Hearings before the Committee on banking and currency, United States Senate, Sixty-third Congress, first session, on H.R. 7837 (S. 2639) ... In three volumes → online text (page 48 of 171)
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and I charge them $1. That dollar has got to be absorbed by th
Federal reserve bank. I would be better off, I suppose, because I ge
my dollar, but the reserve bank would have to absorb that dollar.
- Suppose the reserve bank should charge the dollar back agains
the depositing bank in Chicago.

The great trouble with that would be that the Chicago depositin
bank would probably not deposit very many items in the FedeK



BANKING AND CUKEENCY. 2299

reserve bank under those conditions, because the banks that come into
the reserve system are going to be the banks that now do not make a
very large charge; they are going to be the larger banks, the national
banks. Consequently, the Chicago bank would probably collect this
for less than a dollar; once in a while they might get down to this
one-third of 94 cents that I suggested. It could beat the price that
the Federal reserve bank would be quoting. But the large charges
are made by little banks in the country, oftentimes private banks,
very seldom national banks, and almost sure not to be in this systern
at all. Consequently, if you charge the dollar back to the Chicago
bank I do not believe this scheme would work at all.

That provides for both those contingencies, and when we get down
to brass tacks, it seems to me the Federal reserve bank has got to do
one of two things : They have to cut this question of individual checks
entirely out^-and remember, they never can handle all the individual
checks; they can only handle those upon member banks. There are
always going to be a lot of little private banks that are not members
of this system ; out in my State we have some 500 or 600 of them.
Those checks that are hard to collect would never go to the Federal
reserve bank, and we are never going to have a complete collecting
bank or clearing house. The items will always have to be divided
anyhow, and the Federal reserve bank, at best, could only take part.

Therefore, the best thing in our minds is for the Federal reserve
bank not to handle personal checks at all, but to facilitate exchange
so that a man can always go to a bank and get it. If a man wants,
for convenience, to float his check, it seems to me best to leave the
facihties as they are, and consequently there will always be a charge
made against that to keep that business down.

Senator Shafegth. How would it do to have these drafts among
banks collected free through the regional banks, as you suggested,
and have the maximum charge apply to the other checks only?

Mr. WooDEUTF. What maximum charge?

Senator Shafeoth. $1 a thousand.

Mr. WooDEtjrr. By whom?

Senator Shafeoth. By the collecting bank.

Mr. WooDEUFF. I have just tried to explain that that would not
work; that no business would come through the Federal reserve
bank if you allow the reserve bank to charge $1 a thousand.

Senator Shafeoth. Now, as I understood, you wanted only the
bank drafts to go through the regional bank ?

Mr. WooDETTFF. Yes, sir.

Senator Shafeoth. Now, why can not there be a law which pro-
vides that in all other transactions a charge of $1 may be made ?

Mr. WooDEUFF. That is, to apply to all transactions outside of the
Federal reserve bank entirely?

Senator Shafeoth. Yes.

Mr. WooDETJFF. If that could be made to hold, there would be no
objection to that.

Senator Shafeoth. Take it as to the national banks.

Senator Nelson. There would be no necessity for that, for they
could in every case go and buy a draft instead of sending a check.

Senator Shafeoth. Yes; but it is a very great inconvenience. A
man often sends a check out after banking hours, or up here in the



2300 BANKING AND CUERENCY.

Senate Chamber. I always add 25 cents to the amount of the check:
if it is a $200 check, I make it for $200.25. ^. . ^ ui

Mr. "WooDRtTFF. The average man does not take that trouble.
Senator.

Senator Nelson. You really pay exchange on that.

Senator Shafroth. I do, in order to avoid a kick.

Mr. WooDEOTF. Now, gentlemen, if you will allow me to make
just one or two more remarks, I think I am through. I suggested
that perhaps the best thing to do, in our minds, would be for the
Federal reserve bank not to touch individual checks at all. If the
Federal reserve bank must go into the collection of individual
checks— and the country bankers, of course, are opposed to the
reserve banks going into the business at all ; but if they must go in-
then the best thing they can do is to go in on the same lines as the
present reserve city banks handle the business. They should put in
a separate department to handle out-of-town business and take all
checks at par, and handle the business just as it is handled now by
the big banks, charging exchange, handling all business, member or
nonmember; having an analysis department so they will know how
much it costs them, and charge it back to their customers. That
could be handled on the lines of the Boston clearing-house out-of-
town department. They clear as cheaply as they can, and when they
get the returns back they credit the member banks.

If these banks must go into this business, the only way it could be
worked successfully would be to do that.

Now, as to the bill itself, we have suggested in our resolution that
the bill should be amended on page 33.

Then I want to call your attention to one thing we have left in;
that is on page 24, and it seems to me this clears the situation. You
will find on page 24, under the head of " rediscounts : "

■ Sec. 14. That any Federal reserve bank may receive from any member bank
deposits of current funds in lawful money, national bank notes, Federal reserve
notes, or checks and drafts upon solvent banks, payable upon presentation ; or,
solely for exchange purposes, may receive from other Federal reserve banks
deposits of current funds in lawful ' money, national bank notes, or checks and
drafts upon solvent banks, payable upon presentation.

Now, suppose you leave that in, in case there should ever be anj
question. It would not do any harm to leave that in and after youi
Federal reserve bank is organized and after its officers and directors
have taken this thing up, if they ever want to create a coUectior
agency or clearing house they can always do it under this section
They may accept checks and drafts; they can take whatever thej
please when the time comes.

But over here on page 33, where it says it shall be the duty of everj
Federal reserve bank to take these checks, that, we think, is a greal
error.

Senator Nelson. If you strike out the word " checks " on page St-
and leave it in on page 24, it would still leave it with the regiona
banks to do this business and charge for it.

Mr. WooDEUFF. They could do what they found it necessary to d<
when the time came. It is very hard for us to sit here and be sun
we are all right. Maybe we are wrong, maybe I am wrong, maybi
the framers of the bill are wrong on that. It is easy for us to si
here and theorize on how we can nandle this business, but, after all



BANKING AND CUEBENOY. 2301

the men that have to do that are the men who are running the banks
after the banks are created. Leave it there, and when the banks are
started if the officers feel it necessary to do that they can do it

Senator Nelson (interposing). And strike out the word "check"
on page 33.

Mr. "WooDRtnFF. On page 33, line 15, strike out the word " upon,"
the last word. And in line 16, strike out the first five words ; also
the balance of the section after line 19.

Senator Nelson. How would it read then ?

Mr. WooDRirFF (reading) :

It shall be the duty of every Federal reserve bank to receive on deposit, at par
and without charge for exchange and collection, checks and drafts drawn by
any of its depositors upon any other depositor and checks and drafts drawn by
any depositor in any other Federal reserve bank upon funds to the credit of
said depositor in said reserve bank last mentioned.

Senator Pomeeene. You used the words " checks " and " drafts "
interchangeably there, do you?

Mr. Woodruff. No, sir. I tell you, I am not authorized by our
resolution to cut out that word " checks."

Senator Pomerene. But you have clearly defined checks and drafts
as we understand them, and now you leave the word " checks " in.
As I understand your statement here, you object to the collection of
checks ?

Mr. Woodruff. Yes, sir.

Senator Pomerene. Why do you leave that word in ?

Mr. Woodruff. The only reason that word " checks " is left in is
the fact that we say " bank drafts." That is merely banking par-
lance. We do that for convenience among ourselves. It was thought
that in some places in the country what we consider bank drafts
might be referred to as bank checks. There is no difference if it is
drawn by the bank.

Senator Nelson. You see, this is a check of one bank upon an-
other, and it would be technically a draft, but this word is used
here

Mr. Woodruff (interposing). So that it would prevent any ques-
tion.

Senator Hitchcock. But you do have what are known as cashier's
checks, payable to an individual in a town ?

Mr. Woodruff. Yes, sir.

Senator Hitchcock. And such a check should be received at par.

Mr. Woodruff. Yes, sir; but a cashier's check does not come under
this in any way. A cashier's check would not be drawn upon some
other depositor. A cashier's check is used largely for little remit-
tances within a town • , i i

Senator Hitchcock (interposing). Should not a cashiers check

be received at par?
Mr. Woodruff. Well, it would probably lead to some abuse. _
Senator Hitchcock. No; suppose a man in your town is given a

cashier's check for $100 on your bank, and he sends it to Chicago and

deposits it, and the Chicago bank deposits it in the reserve bank.

Should not the reserve bank have the right to charge it against you

at par ?



2302 BANKING AND CTJEBENOY.

Mr. "Woodruff. You might put it in, but it would encourage me
to issue nothing but cashier's checks instead of drafts against the
Federal reserve banks, because as long as I keep the cashier s checks
floating around I would have the use of the money.

Senator Hitchcock. I do not see that that would be kept floating
around any longer than the draft would.

Mr. Woodruff. It might never be sent to the Federal reserve bank;
probably it would not. There is no reason, Senator, why a bank
should use both of these things, for they have the same effect. In
other words, if a bank wants to pay a bill there is no reason why it
should draw a cashier's check if it is going to have the same effect
as a check upon the Federal reserve bank.

Senator Hitchcock. I may go into a bank and say, " Give me a
cashier's check to the order of John Smith." That is often done.

Mr. Woodruff. I can see no objection to putting that in

Senator Hitchcock (interposing). If you leave the word in, that
would include a cashier's check.

Senator Nelson. They have left it in.

Senator Hitchcock, they have? I did not understand so.

Mr. Woodruff. One of the members of the committee suggests
that I reiterate the fact that most of the banks that make large
exchange charges are small State and country banks that would
not come into the system. I have already made that point. His point
is that this rule, even if it were a good rule, would not affect the
worst troubles.

That is all I have to say. I appreciate your kindness.

Senator Bristow. Just a minute. There is one part, Mr. Wood-
ruff, of your statement that I wanted to inquire a little further about.
I understand you object to having checks drawn against your bank
that may be deposited with your reserve bank in Chicago, for in-
stance, charged to your account. You want it to come there and be
collected. One of your objections is it depletes your reserve which
your books show you have there and causes confusion. Now, does
not that require your reserve banker in Chicago, where your account
is, to carry you for that amount of money for the time that is re-
quired by that check after it is presented to be sent down for
collection ?

Mr. Woodruff. In case it is charged against us and overdraws our
account it would.

Senator Bristow. Suppose it did not? Now, when a business man
in Chicago receives a check in payment of a bill of a party in Joliet
he takes that check on your bank and deposits it with his banker,
who happens to be your reserve agent there, and that reserve-agent
bank credits this customer of its with the amount, but it can not
charge the amount to you until it sends it down to your bank, and
you authorize it to make such a charge ?

Mr. Woodruff. Yes.

Senator Bristow. Now that bank is out of the use of that money
until it gets your authority to charge you with it ?

Mr. Woodruff. That bank is always foxy enough to take care of
itself on that.

Senator Bristow. We are not talking about being foxy; we are
talking about the facts.

Mr. Woodruff. Yes.



BANKING AND CUEEENCY. 2303

Senator Bkistow. What difference is there between that and the
man who follows exactly the same principle and sends his check to
Chicago, the dealer there deposits it, and it is sent back to the local
bank— we will say to Joliet — and there it is charged up to the mer-
chant's account? Are you not objecting to doing for the merchant
exactly what you are demanding that the reserve agent do for you ?

Mr. WooDEOTT. In the first place, the Chicago Bank— I did not
mean that word _" foxy " disrespectfully. Senator— the Chicago bank,
when it credits its customer with that check that it sends down for
collection to us, usually, if it is an interest account, does not pay the
customer any interest on that check while outstanding. They very
properly deduct from the interest account at the end of the month the
items in transit. Now, in the analysis department, where they an-
alyze practically every large account, wherever there are any of those
outstanding checks, the analyzing department at the end of the
month will tell them just what they lost by items being outstanding
in the mailj what they lost by checks going from Chicago down to
Joliet, and if the balance that the man kept in the bank would not be
enough to make up that loss that the bank suffered and give a profit,
then they will certainly make some new arrangement. "Usually items
of that kind may be credited three days after their receipt, or some-
thing of that sort. That is how they protect themselves.

I do not quite understand the last part of your suggestion.

Senator Beistow. They protect themselves in that way, as you say ?
Now, if your account with your reserve agent was sufficient so that
it cared to carry that account, and not credit your checks until it had
authority from you, it would take your account just as it does now ?

Mr. WooDETnFF. Yes.

Senator Beistow. And if your account there was not sufficient to
justify them they would not take it any longer — they would refuse?

Mr. WooDEUiT. Yes.

Senator Beistow. That would be the same principle applying to
you you say the bank would apply to the merchant ?

Mr. WooDEuiT. Yes.

Senator Beistow. My suggestion was that while you object to the
merchant taking advantage of this time of transit, you still demand
that the bank give you the same advantage that you feel you ought
not to give the merchant ?

Mr. WooDETJFF. I understand. That is, you mean if a local depos-
itor in our bank should have $1,000 in the bank and sent a check, and
that check goes around the circle, we would get the use of the $1,000
while that check is going around the circle; but if it was charged
immediately, we would not get the use of it. Your point is well
taken ; there is no doubt we make a little additional profit there. The
use of bank drafts as we advocate would be fair to everybody for the
Federal reserve bank would get the use of the money while items were
in transit. Then let us call attention to the other' side. Many times
the money is not on deposit with our bank.

Senator Bristow. Is not that a question for the bank to settle with
the depositors, and not to be settled by law ? . r^^.■

Mr. Woodruff. It could hardly be done, just exactly as the Chicago
bank does with the merchant. , i •

Senator Reed. Senator Bristow, are you not overlooking this sit-
uation? I can only get at it by an illustration. I am addressing



2304 BANKING AND CURRENCY.

myself to you and Mr. Woodruff. Assuming that the merchant in
San Francisco owes a merchant in New York City $10,000. As I un-
derstand, Mr. Woodruff, under this plan the merchant could draw a
check upon his bank in San Francisco and send it to the New York
merchant. The New York merchant would thereupon deposit that
check in his bank, and it would that day go into the regional bank,
and out of this Government bank there would be paid to that mer-
chant in New York $10,000. Then the check would be sent back to
the regional bank in which San Francisco deposited, and there it
would be charged against the account of the San Francisco bank. All
that would take some 7 or 8 days ; maybe 9 or 10 days. The Govern-
ment banks (we will call them that) would advance that money for
all that period of time. In the meantime the merchant either did or
did not have the money in his bank in San Francisco. If he did have
it there, that local bank would have had the use of that money, but
this Government bank would have had to have advanced the money
for the use of the merchant in New York City. If he did not have it
there, then his local bank would not have had the use of the money,
but the merchant in New York would have had the use of the money^
and this Government bank would have been advancing the money for
several days on the transaction. Now, it seems to me that that is a
questionable scheme.

Senator Beistow. I agree with Senator Reedj that I do not think
these Government banks ought to have anything to do with that
Irind of business. I think that is the business of the banks that are
organized to handle the business of the country, and that they ought
to do just as they do now.

Senator Reed. On the other hand, Senator, if you will pardon me,
if this merchant desires to use the $10,000 and had $10,000 in New
York of his own money, in some bank, he could check against it
properly, because once the check went there that banker can pay it.
Or, if he had the $10,000 in his own bank in San Francisco, he could
buy a draft and send it on. Now he, in that case, of course, would be
out the interest on his money during the time he Avas transmitting
it, but as he owed the bill in New York, and as it was his duty to
pay it in New York, there is no hardship imposed upon him when
he has to pay the bill where he has contracted to pay it.

Senator Bristow. But, Senator Reed, Mr. Woodruff's proposition
is this, that the man could buy the draft just as you suggest and pay
it just as you suggest, and not by check as I suggested. But if the
merchant gave a check to his New York house in payment of this
$10,000 account, and that New York house took the check and depos-
ited it with the regional reserve bank, the regional reserve bank,
under the bill, is authorized to charge the account of the San Fran-
cisco bank with the $10,000. But Mr. Woodruff is objecting to that,
and says that must not be permitted until the San Francisco bank has
authorized its account to be charged with that $10,000. Now, he is
asking that his bank be permitted to have the use of that $10,000
while it is in transit through the mail back to San Francisco, but that
the merchant be deprived of the privilege now given him.

Senator Reed. The difference is that in the first instance the mer-
chant bears the loss incident to the payment of the bill 3.000 miles
from his home, but where he has contracted to pay it. In' the other
case the loss falls upon the regional bank. The regional bank, that



BANKING AND CUKKENOY. 2306

lias no interest in the transaction, is compelled to stand that loss,
it seems to me. I may be wrong about it.

Senator Beistow. I can see the force of your suggestion so far
as the regional bank is concerned, and the bank that deposits with
the regional bank ought, then, to pay that bill.

Mr. "WooDErrFP. I want to suggest, in connection with your last
statementj that there would be one serious objection to charging those
items against the reserve balance. The bill, as I understand, provides
that we must keep not less than a certain per cent of our reserve in
the regional bank, and then I believe the bill also provides if we dis-
obey any of the provisions of the bill we may be fined or sent to the
penitentiary. Now, entirely unbeknown to us, a lot of those items
may be charged to our account in the Federal reserve bank. Our
reserve in the bank may therefore fall, without any action on our
part, to a point below the point provided in the bill, and we may go
to prison.

Senator O'Goeman. Do you not think, right there, that the reserve
board will make necessary rules and regulations and, among other
things, provide that the regional bank will advise member banks
daUy, by wire, of the checks that have been charged up to their ac-
counts ?

Mr. WooDEtirr. Senator, in that case we would be compelled to
deposit by wire also in order to keep our account from being over-
drawn. Another thing, the Federal reserve bank could not advise
us until the close of business, because they would not know what
checks might be presented, and then it would be too late for us to
remit.

Senator Weeks. You all agree that the methods of remitting are
crude, cumbersome, and unscientific, do you not?

Mr. WooDEUFF. Yes.

Senator Weeks. And we ought to take advantage of this legisla-
tion to improve it?

Mr. WooDEUTT. Yes.

Senator Weeks. And that the consensus of opinion is that if the
reserve bank collects bank drafts and drafts on other reserve banks
and lets individual checks alone that would be a reasonable solution
of the question as far as this bill is concerned?

Mr. Woodeuff. We feel, Senator, that the business of the country
would eventually be transacted as it should be and the payments
made with drafts on the regional banks.

Senator Weeks. That is, if charges were made on individual checks
the custom would grow, and grow rapidly, to use cashiers' checks
or some form of bank draft or check to pay bills ?

Mr. Woodeuff. Cashiers' checks would not be used very much, in
my opinion, but I do believe drafts against regional reserve banks
would come to be the standard exchange in this country, a thing I
feel should take place.

Senator Beistow. Mr. Woodruff, before you close, I do not want
to be understood to be advocating that your accounts should be
charged with the checks without, first being submitted to you ; but
I do maintain if that rule is good for you it is good for the merchant.
That is what I objected to. You change the system by law and put a
burden on the merchant that the banks voluntarily have relieved



2306 BANKING AND CUKBENCY.

them from, and still, by law, you preserve to yourself an advantage
which you think you ought to have, and an advantage I do not deny
you ought to have.

Senator Nelson. There is where you are mistaken, Senator; they
have never relieved the reserve banks of that duty.

Senator Bristow. I mean the merchants.

Senator Nelson. They have always insisted, most of the banks,
that they should not charge them with those checks until they notified
them.

Senator Bristow. I am not objecting to that; but I do object to
devising a plan here by which a merchant has got to buy a draft
instead of using a check.

Senator Hitchcock. Mr. Chairman (Senator Eeed), I move that
we take a recess to-day until 2 o'clock.

Senator Eeed. Mr. Woodruff, Senator Shafroth desires to ask you
a question.

Senator Shafroth. I have been requested to ask you this question,
Mr. Woodruff: If the reserve banks must handle individual checks,
should not they be confined to checks originating in member banks,
thereby eliminating all checks bearing the indorsement of nonmember
banks ?

Mr. Woodruff. In case you leave the law as it is that would un-
questionably be a very great improvement.

Senator Shafroth. That would have a tendency to have the non-
member banks come into the system, would it not, and be an induce-
ment for them, if their checks were included ?

Mr. Woodruff. I think it would be a very small inducement for
country banks. Senator. For city banks it would be an inducement.

Senator Shafroth. It would ?

Mr. Woodruff. Yes.

Senator Eeed. It has been suggested that we have an executive ses-
sion for a few minutes and then take a recess until 2 o'clock.

(Thereupon, at 12.50 o'clock p. m., the committee went into execu-



Online LibraryUnited States. Congress. Senate. Committee on BankBanking and currency. Hearings before the Committee on banking and currency, United States Senate, Sixty-third Congress, first session, on H.R. 7837 (S. 2639) ... In three volumes → online text (page 48 of 171)