greater service relatively. The balance is used only so far as it offsets those costs.

Senator BUTLER. One witness mentioned that there could not be a uniform service charge the country over. It has to be individual, almost, in each case. Do you think that is true?

Mr. GREGORY. There are two reasons why that is true. There is a feeling among the banks that if they set up a standard service charge they might be in violation of some of the antitrust laws. It is true each bank has a different cost situation. Our costs are definitely different from a bank farther away from the business center of the city, or one that does a savings business. Our bank is almost a hundred percent commercial. Because of that fact our costs are relatively high in some departments.

Senator BUCK. Is it not generally regulated by committees-clearing-house committees ?

Mr. GREGORY. Not any more. Originally, in the N. R. A. days, that was true. I served on city and State committees for bankers N. R. A. codes. We set up standard methods of analysis. Since that time we have each had our costs analyzed, and we have decided on the basis of each bank's problems what we shall and shall not charge. There is no standard analysis or charge for the city of St. Louis or the State of Missouri today.

Senator BUTLER. Your 20 banks, are they about uniform, or are there great variations?

Mr. GREGORY. They vary from about 4 million up in total resources. I think the largest one now is 30 millions, but the average is 10.

Senator BUTLER. Would it be a fair question to put to you or any other witness here representing the bankers, to make a guess as to what percentage of your income the service charge is?

Mr. GREGORY. I can tell you exactly in our case. I am glad to do it. Our service-charge income is 26 percent of our gross income. That is made possible by an unusual factor. About 12 percent of our gross income comes from what we would regularly call service charges. We pioneered the so-called nickel charge west of the Mississippi River, in the form of Checkmaster checks. The income from that source represents about 14 percent of our gross earnings. And that is significant because the Checkmaster account is the poor man's account. Wage earners and salaried people come voluntarily and gladly pay those charges, because they get the service they want.

Senator HAWKES. What do you mean by the nickel charge?

Mr. GREGORY. We make a charge of 5 cents per check drawn on us by the customer.

Senator HAWKES. Regardless of the size?

Mr. GREGORY. Regardless of the size. And 5 cents for each check he deposits. In the last 2 or 3 years we have added a small 15-cent monthly maintenance charge to that. It is fairly profitable on a small scale.

I said 26 percent of our gross. Actually of the 26 percent we get about 4-percent net profit, I suppose-4 percent on the gross income. Now, I want to distinguish definitely between the service charge and exchange charge. In the first place, I contend the exchange charge is not taken from the person who causes the expense. The exchange charge is assessed back against another city bank which

absorbs it out of its own profit. There is nothing new in the way of income that comes into the banking system at all. It is an actual reduction in one bank's earnings, to be applied to another bank's earnings, on a basis almost as effective as a revolver held at the head of the banker who has to pay. They cannot get out of it, they cannot escape it. But nevertheless, no new money comes into the banking system. The bank that gets the money avoids the direct charge against its customer, who in the first instance sent the check out of his town and caused the expense to the local bank.

Now, I think that is definitely different from a service charge, where in each case the cost involved is assessed back against the man who caused that cost or expense to the bank.

It seems to me anything which is as evil as an exchange charge, that takes from one bank to give to another, simply because the first bank has the money, is ultimately going to lead us into trouble. An idea of the potential difficulties can be gotten if we consider the cost of absorbing exchange on even half of the country's clearings in a given

year.

I think it is noticeable, too, that the nonpar banks rarely make service charges, and that they are almost invariably ready to quit making exchange charges when they adopt a proper schedule of service charges.

Senator BUCK. I have been trying to develop that very thing.
Senator BUTLER. Will you answer that?

Mr. GREGORY. The banks that are charging exchange in MissouriI will make a positive statement-generally the banks that are now charging exchange in the State of Missouri are the banks who are not charging service charges.

Senator BUCK. They go from one to the other.

Mr. GREGORY. Their income would be an offset in practically every case I know of. A great many banks as the result of their excessive earnings from exchange are not investing their funds. That is true in Missouri. We discovered that to be a fact. The actual figures of the F. D. I. C. or the earnings figures published by the American Bankers Association will demonstrate that those two points are true.

I think what we are up against is that the small banks all over the country are using exchange as an "open sesame" to easy earnings. They will say, "We will walk through this easy door, where we do not have to risk investing our funds, where we do not offend our customers by assessing the charges against them that are reasonable in the form of service charges. We will make our city correspondent pay for it." And the city correspondent ultimately makes all the rest of us pay for it. It must in order to live. It seems perfectly reasonable to the small bank that has not taken the trouble to evaluate the possible dangers of such banking practices.

I think what we are doing is we are forming a pressure against right banking, good banking. And we are very much opposed to anything leading to bank management that is bad.

I have noticed that a lot of the country-bank witnesses have said that absorption of exchange helps the local merchant, and does not favor the merchant outside their home town. In other words, they say they are charging exchange because they want the Sears, Roebuck, Montgomery Ward type of house to pay for the expense of that money going out of their town into "foreign" business.

Well, as a matter of fact, absorption helps the mail-order houses. Absorption takes from the local merchant one competitive advantage, because a part of the cost of doing business by Sears, Roebuck or any other mail-order house is absorbed by the city bank that clears a purchaser's check and absorbs the exchange under the sort of system we are talking about. If the exchange was not absorbed by the city bank, the mail order house would have to add the exchange to its price thereby giving the local merchant that much advantage in the price competition. So the local merchant gains nothing particularly by the banker's failure to assess the charge against his customer. His customer does gain an advantage. And he is the one man who should pay. The local businessman loses, and also the city correspondent must lose.

I think we have made a great deal of progress since the Federal Reserve came into being. One of the things we have done better is. to improve our system for the collection of items, and we have gotten away from circuitous routing almost entirely. I can say positively that the 20 banks in our association would have to change correspondent relationships tomorrow morning if this bill were passed, and get new connections where they can route check operations to the best advantage. to us, exchange absorption will inevitably result in circuitous routing. There is no other thing banks can do.

We are not going to nonpar, certainly not until the last ditch. And we do not want to be in the position of having to fight circuitous routing again. We want to keep away from it.

Senator BUTLER. You do not object to a $64 question now?

Mr. GREGORY. No, sir. I will be glad to answer it if I can. Senator BUTLER. I made a statement a while back on Government corporations, on that general subject.

Mr. GREGORY. Yes, sir.

Senator BUTLER. There are in the neighborhood of a hundred of them now. I do not know whether the F. D. I. C. and the Federal Reserve are technically corporations or not. But we have about a hundred corporations. And the general move coming in the next session will be an effort to at least simplify the situation by combining a number of them.

Now, my $64 question is this: Here are your Federal Reserve and F. D. Í. Č., each having something to do with banking. Why not have one Federal organization that would look after all of those functions? Then you would not have a quarrel between two Federal organizations.

Mr. GREGORY. I may be facetious, but I will stick my neck into that noose, and say we should have one instead of three.

Senator BUTLER. There may be more.

Mr. GREGORY. The Comptroller's Office, the Federal Reserve and the F. D. I. C. in my humble opinion, for what it is worth, should be combined under Federal Reserve. But that is a personal opinion. definitely.

Senator BUTLER. That may be irrelevant to this situation.

Mr. GREGORY. I think that it is.

Senator BUTLER. But I would like to get your opinion.

Mr. GREGORY. You will get an honest one, sir, if I can give it to you. Senator HAWKES. I was not here when you took the witness chair. Are you from Missouri?

Mr. GREGORY. I am from St. Louis; yes, sir; from the Associate Bankers of St. Louis.

Senator BUTLER. Twenty suburban banks, you call them?

Mr. GREGORY. That is right. Ours is the closest to the downtown area, of all of them.

Senator BUTLER. Are there any questions, gentleman? Thank you very much, Mr. Gregory.

We will hear from Mr. Romines, of Houston, Mo. Mr. Romines, will you take a seat opposite the committee reporter?

STATEMENT OF E. E. ROMINES, CASHIER, BANK OF HOUSTON, HOUSTON, MO.

Mr. ROMINES. My name is E. E. Romines, of Houston, Mo. I am cashier of the Bank of Houston. I am a small banker, not in the sense of $10,000,000, but in the sense of $1,300,000, which is the total resources of our bank.

There has been a great deal said about the regulation as issued by the Federal Reserve Board, which in my opinion is very clear, in that it states no bank shall pay interest directly or indirectly by any device whatsoever. Apparently, this hearing would not have been necessary if it had been clear to everyone that absorption of exchange would be a device, is a device, and has been used as a device to pay interest. I am assuming that we are all in agreement in that the payment of interest is against the law.

The bank which I want to comment on, and which Mr. Gregory touched on a minute ago, are good friends of mine. They have almost without exception all the correspondent business in our territory. I do not want to make any charge against them. I just want to present to you the facts as I see them and have them.

To do that I am going to have to read a little speech here that was delivered by Hon. Calvin D. Johnson, of Illinois, in the House of Representatives on Thursday, March 2, 1944. If this is permissible, I will go ahead.

Senator BUTLER. You may read it, Mr. Romines.

Mr. ROMINES. The speech is as follows [reading]:

Mr. Chairman, inasmuch as the case of the Federal Reserve System is based more or less on a bank in my district, I desire to offer an explanation.

On February 8 and 9, 1944, before the House Committee on Banking and Currency, an official of the Board of Governors, of the Federal Reserve System, made public charges against the National Stock Yards National Bank of National City, National Stock Yards, Ill. Mr. Dreibelbis, of the Board of Governors charged that this bank accumulated large interbank balances by agreeing to absorb exchange and that this was leading to unsound results. He stated that this bank was in a little town across from St. Louis with a population of 244; that it had interbank balances of $73,754,000 in June of 1943, an increase of 124 percent over 1940, while other deposits amounted to only $19,000,000, an increase over 1940 of 87 rercent.

The public charge of the Board of Governors are not in accord with the facts. National City, Ill., is in my district. It is a separately incorporated city immediately contiguous to and a part of the metropolitan area of East St. Louis, a city of more than 75,000 population. It is served by the same utilities as East St. Louis. The same water lines, the same gas lines, the same electric power lines, the same sewers, the same telephone lines, and the same bus lines serve East St. Louis and National City, Ill. A stranger cannot tell when he is in East St. Louis and when he is in National City. The only differentiating characteristic of National City is that the St. Louis National

Stock Yards are there. These are one of the largest stockyards in the United States. A tremendous volume of livestock passes through these yards. This livestock comes chiefly from the States of Missouri, Illinois, Arkansas, Kentucky, Tennessee, and Mississippi. The money value of receipts has increased tremendously in recent years increasing the volume of business handled by the bank.

The Federal Reserve ought to know that every important stockyard is served by a stockyard bank. Banks are established at the more important stockyards in order to facilitate the transfer of title to incoming stock shipments, to collect the proceeds of the sale of such stock from the commission brokers, and to remit or credit the proceeds to the country bank serving the shipper.

Speed in handling shipping documents is essential, for any unnecessary or unusual delay results in loss of weight and thereby loss in dollars to the shipper. Consequently, direct relationships between country banks located in stockproducing or feeding areas and stockyards banks are necessary in order that bills of lading covering stock shipments may arrive at the yards' banks not later than the arrival of the stock. The conventional transit facilities of the Federal Reserve System would not meet the needs of either the shippers or the yards because speed and expertness of handling are the essence of this specialized business.

A stockyard bank performs many valuable and expert services for the distant shipper who is seldom personally known. For instance, a shipment may have been delayed in transit due to some fault of the railroad with consequent shrinkage in weight, the stock may have developed disease or suffered injury by accident, or otherwise; in such event the stockyard bank will take such steps as are advisable to protect the shippers' rights and interest under the circumstances. It also will interest itself in the grading of shipments should such action be warranted.

Stockyard banks, also facilitate the sale and shipment of rough stock to the finish-feeding areas which in effect is the reverse order of handling the business. Its services are drawn upon extensively for the purpose of placing finishfeeders in touch with brokers who can supply rough-fed stock and vice versa. These banks, in furnishing a highly specialized service, have seldom exploited the other phases of commercial banking and it is perfectly natural that they should have a large country bank business in relation to their local deposit business. Also, the disproportion in such relationship will vary in direct proportion to the yards' activity.

The National Stock Yards National Bank of National City had deposits of other banks, who have to keep balances there in order. to serve their local customers, amounting to $33,000,000 on June 30, 1940, and to $74,000,000 on June 30, 1943. These deposits were in 622 accounts in 1940 and 643 accounts in 1943, an increase of only 21 accounts. The total amount of exchange absorbed by this bank in 1943 was $22,000, equivalent to one thirty-sixth of 1 percent on its interbank deposits. This was less than the amount of exchange charged back to customer banks and was only $7,000 more than the exchange absorbed in 1910. It is ridiculous to charge that a return of one thirty-sixth of 1 percent has led to an unsound accumulation of bank deposits. It is equally ridiculous to charge that an increase of $7,000 in exchange persuaded more than 600 bankers to increase their balances by more than $10,000 030. That is a rate of return of less than one five-thousandth of 1 percent. The bank has written that

"The country banks have maintained accounts with this institution for years, and, of course, this was brought about by the fact that the shipper in the country who ships to this market has the proceeds of the livestock shipments deposited in our bank for the credit to the country bank on date of sale

It has never been our practice to solicit bank accounts on a basis whereby we would absorb all of the exchange. We have never solicited any dumping accounts from any banks in the large centers in order to increase our deposits." A well-managed and well-run institution in my district operated by distinguished constituents of mine has been subjected to public attack by a supervisory agency without one shred of evidence to support that attack. I cannot understand the meaning of this attack. But if it means that any stockyards bank, upon which is imposed increased business by reason of unprecedented wartime runs of livestock to the yards, is to be similarly attacked, the livestock yards in Missouri, Kansas, Illinois, Nebraska, Indiana, and elsewhere will be affected. The Federal Reserve System has been repeatedly charged with having pursued such a restrictive credit policy in 1920 as to drive many farmers