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Reasoning Behind Law Pertaining to NOW Accounts

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Question: 
What is the reasoning behind the law stating that a corporation cannot have a NOW account?
Answer: 

NOW accounts originated in the Consumer Savings Bank in Massachusetts in the mid 1970s. At that time savings banks didn't offer checking accounts, and businesses didn't do business with them for checking accounts.

Through a series of court cases and other decisions, NOW accounts spread throughout New England and just beyond, by the time the Monetary Control Act of 1980 authorized all depository institutions to offer them. But the Monetary Control Act still restricted the ownership.

I'm told that the history of no interest on checking accounts harkens back to the 1930s, when hundreds of banks folded during the Depression. A lot of people blamed the banks' practice of paying interest on their checking accounts, which (they felt) caused the banks to make riskier investment and lending decisions in order to earn higher yields (to pay the interest). In 1933 Congress banned the practice of paying interest on demand deposits (that's basically all that's left of Reg. Q now). From 1933 until NOW accounts were created, no one paid interest on a checking account.

There have been a number of attempts to revoke the law preventing interest on business checking accounts. But Congress has not yet seen fit to pass them on for the president's signature.

First published on BankersOnline.com 1/16/06

First published on 01/16/2006

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