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Form F. H. 131
B O A R D DF
GOVERNORS
• F THE
FEDERAL
RESERVE
SYSTEM
Office Correspondence
n
To
Chairman Eccles
From
Mr> Smead
Date.
March„14, 1938
Subject:.
In accordance with the request of Governor Ransom, there is attached
for your information a copy of comments with respect to Section 2 (c) of
the Patman Bill, H.R. 7230, prepared in compliance with his request at
the Board meeting on Friday, March
Attachment•
COMMENTS WITH RESPECT TO SECTION 2(c) OF THE FATM/IN BILL, HR 7^50
Section 2(c) of the Patman Bill provides that "After all
necessary expenses have been paid or provided for, the net earnings of
the Federal Reserve banks shall be covered into the Treasury as miscellaneous
receipts"®
Section 7 of tho present Act requires that all net earnings of
the Federal Reserve banks after the payment of dividends shall be transferred
to surplus*
The reasons for the proposed change in tho Law, it is assumed,
are based on the assumption that
(1) the net earnings of the Federal Reserve banks, after the
payment of dividends, are substantial,
(2) the United States Government will have no claim on such net
earnings if they are not paid to the Government currently
each year, and
(3) the surplus of the Federal Reserve banks is adequate in
relation to their liabilities.
rJo one of the above assumptions is valid.
During the period of the world war and for a few years thereafter member banks were borrowing very large amounts from the Federal Reserve
banks9 and as a consequence the earnings of the Federal Reserve banks were
exceptionally large.
At that time Federal Reserve banks paid a franchise
tax, the franchise tax payments amounting to over §120,000,000 for the calendar
years 1920 and 1921, as compared with total franchise taxes of §1^9,138,300,
for the period from the organization of the Federal Reserve banks to the end
of 1932 after which the requirement for the payment of a franchise tax was
repealed. * It was also during this period that tho Federal Reserve banks
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added substantial amounts to their surplus accounts*
The Federal Reserve
Act, as amended on March 3> 1919* provided that all of the net earnings
of a Federal Reserve bank remaining after the payment of dividends* including
those for the calendar year 1918* should be paid into a surplus fund until
it amounts to 100 percent of subscribed capital and that thereafter 10 percent
of such net earnings should be paid into the surplus and the remainder paid
to the United States as a franchise tax.
This provision of the Law was again
modified by the Banking Act of 1933* to provide that all of the net earnings
of a Federal Reserve bank* after payment of the 6% dividend provided by law*
shall be paid into its surplus fund. At the same time* however* Congress
required the Federal Reserve banks to use one-half of their surplus to
purchase stock in the Federal Deposit Insurance Corporation* on which they
receive no dividends.
In other words* one-half of the surplus of the Federal
Reserve banks was appropriated by Congress for the purpose of furnishing the
Federal Deposit Insurance Corporation with a part of its capital funds.
The net earnings of the Federal Reserve banks available for
transfer to surplus during recent years have been relatively small* amounting
to $2*616*352 in 1937. to $352,5214 in 1936* and to |607,ij22 in 1935*
In
some years the Federal Reserve banks have had deficits in net earnings after
payment of dividends which were charged to surplus.
With respect to the second assumption mentioned above* Congress
has the right at any time to legislate with respect to the surplus funds of
the Federal Reserve banks.
If at any time Congress should consider the
surplus of the Federal Reserve banks more than adequate* in the light of
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their liabilities and responsibilities, it could appropriate a portion
thereof for such purposes as it saw fit*
As stated above* Congress
did in 1933 appropriate one-half of the surplus of the Federal Reserve
banks to be used as a part of the capital funds of the Federal Deposit
Insurance Corporation. While the Federal Reserve banks technically
own stock in the Federal Deposit Insurance Corporation* they are not
permitted under the Lar to receive any dividends on such stock.
Under present law member banks are entitled to a 6 percent
cumulative dividend on their paid-in subscription to capital stock of
the Federal Reserve banks.
No further distribution to member banks
i
of the net earnings of the Federal Reserve banks is possible under
existing law.
In case of liquidation of a Federal Reserve bank the
Law provides that its surplus shall bo paid to and become the property
of the United States»
The acquisition by the Government of the capital stock of
the Federal Reserve banks, as provided in Section 2(a) of the
Patman Bill, would necessitate an initial expenditure of Government
funds in the amount of approximately $133*000,000 for the cost of
such stock, and, in view of the fact that the public indebtedness of
the Government presumably would bo increased by a corresponding
amount, the not income derived by the Government from the ownership
of such stock would bo limited to the difference between the interest
cost to the Government of money borrowed by it and the annual divi-
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dends of the Federal Rosorvo banks.
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The annual 6 percent dividend
payable to member banks in accordance with Section 7 of the Federal
Reserve Act amounts to about ^7*800,000, and if the cost to the
Government of borrowed money bo considered to bo say 2-l/2 percent
per annum on the basis of long torn bonds the not profit which would
accrue to the Government from its investment of v133j000,000 in the
capital stock of the Federal Reserve banks would bo less than
$>5*000,000 per annum
With respect to the adequacy of the surplus, the Federal
Rosorvo bonks now have deposit and note liabilities of about
$11,960,000*000 and surplus accounts aggregating $1148,739*000, the
surplus accounts amounting to about 1*2 percent of deposit and note
liabilities*
If the operations of the Federal Rosorvo banks are to
be governed with a view to accommodating corjnerce and business and
with regard to their bearing upon the general credit situation of the
country as required by statute, the Federal Reserve banks cannot
function with a profit motive in view.
Moreover, if they are to dis-
charge effectively their statutory responsibilities, they must
have adoqtiate surplus funds to permit them to operate at a loss, if
necessary, over substantial periods.
Present surplus funds,
amounting to 1#2 percent of liabilities are certainly not excessive
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and could easily provo inadequate particularly as there are no present
prospects for substantial increases therein.
Since the Federal Reserve banks vere organized in I91I4 their
total earnings have amounted totfl,2i4l,000,000.Of this amount
$610,000,000 has been utilized to cover costs of operation, 133,000,000
has been sot aside as reserves for contingencies and the balance of
#598,000,000 has been used as follows:
Payment of 6 percent dividend on
capital stock, as required by
Section 7 of the Act
|l62,000,000
Payment of franchise tax to the
United States Government
1^9,000,000
Contribution to the capital stock of
the Federal Deposit Insurance Corp.
139,000,000
Balance in surplus accounts
lij.8,000,000
It will be noted from the above that of the net earnings of
$598,000,000 of the Federal Reserve banks since their organization, I48
percent has gene to the Treasury as franchise taxes and to the Federal
Deposit Insurance Corporation as a contribution to its capital funds, 27
percent has gone to member banks in payment of the 6 percent dividend
required by statute, and 25 perccnt remains as surplus.
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The oxponscs of tho Fodoral Reserve banks wore incurred
in rendering the services and performing tho functions required by the
Federal Reserve Act.
One of the purposes of tho Federal Reserve System,
as stated in the preamble of the Act, is to furnish an elastic currency,
and in order to do so Section 16 of tho Act authorizes the Federal Reserve
banJ.cs to issue Fodoral Reserve notos#
In accordance with tho provisions
of the Act the Federal Reserve banks furnish member banks and through
them the public with tho currency needed for carrying on the country's
business; they collect large volumos of checks and other items payable
upon presentation for member banks; they provide rediscount facilities
for member banks; and perform fiscal agency, depositary and custodianship
services for tho Treasury and a large number of Government agencies*
In
carrying out these and other important functions the Federal Reserve banks
have endeavored to be of as much service to their member banks, and through
them to commerce, industry, agriculture, and tho public in general, and to
the United States Government, as is consistent with the efficient and
economical operation of the System.
All compensation provided by the boards of directors of the
Federal Reserve banks for directors, officers or employees is subject to
the approval of the Board of Governors.
In discharging this responsibility
the Board gives individual consideration to the salary of each officer in
every Federal Reserve bank, and has provided a classification plan whereby
all of the non-official positions in each Federal Reserve bank are classified
and a maximum salary provided for each#
The Board of Governors also requires
each Federal Reserve bank to submit periodically detailed reports of its
expenses and of salaries paid each Officer and employee.
The reports of
expenses are tabulated by the Board*s staff and summaries thereof are
furnished each Federal Reserve bank in order that it may compare its costs
with similar costs at other Federal Reserve banks.
Shortly after the present Board took office on February 1, 1936,
it instituted a survey of the organization at each Federal Reserve bank and
as a result thereof many economies were effected, among which were the
placing of the chairmanships at the Federal Reserve banks on an honorary
basis and the fixing of their compensation on the same basis as that of any
other director in lieu of annual salaries of from $20,000 to $50,000, as
had been the previous practice. Wherever it is found that certain operations
can be handled more economically without sacrificing efficiency prompt steps
are taken to effect the economies.
There has been a gradual reduction in the unit costs reported
for the principal operating units of the Federal Reserve banks.
For
example, in the Country Checks-Outgoing unit, which is the largest single
operating unit in the Federal Reserve banks, the average cost of handling
a thousand items was $3.65 ten years ago as compared with $2.59
in
1936 and
in 1937. With a few exceptions, the unit cost in the Country ChecksOutgoing unit for each of the past ten years has been lower than that
reported in the immediately preceding year as may be noted from the following
tabulation:
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Cost per thousand items in the Country Chocks-Outgoing unit
1928
1929
1930
1931
1932
$3.65
3*35
3-35
3.23
1933
193k
1935
1936
1937
3.30
3*05
2.88
2,59
2.6k
The reductions in operating costs reported for tho Country Checks-Outgoing
unit are due to improved methods of procedure.
A survey of the Country
Checks unit at all Federal Reserve banks has recently been completed by
members of the Board's staff.
Since the new Board took office members
of its staff have also made field surveys of the Bank Examination, Auditing
and Legal Departments at tho Federal Reserve banks.
On occasions when the
unit costs of some particular bank appear to be out of line special field
surveys are made.
For example, last month a special survey was mo.de of a
certain operating unit at two banks where there was a substantial variation
in unit costs and suggestions were made to the bank reporting tho higher cost.
The costs of performing tho various services rendered by the
Federal Reserve banks during 1937 are sot forth below in summary form.
EXPENSES OF FEDERAL RESERVE SYSTEM, YEAR 1937
Currency and Coin
The cost of receiving and handling
2,257,889,000 pieces of currency and
2,730,387*000 pieces of coin, including
shipping charges to and from member
banks was
11)9*671
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Assessment by the Treasury Dept. to cover
the cost of printing new Federal Reserve currency, the cost of issuing such currency at the
Reserve banks, and the cost of redeeming Federal Reserve currency unfit for circulation,
including shipping charges, amounted to
Total
§1,787,036
05,936,707
Check Clearing and Collection
Handling and collecting 926,792,000 checks
and 6,705,1+13 maturing notes, drafts,
coupons, etc. cost
.••..««••••
$3,802,889
Loans, Rediscounts and Investments
The cost of making 13,571 discounts and
advances to member banks; of handling 388
applications for advances to industry for working capital under Section 13b of the Federal
Reserve Act; of maintaining credit information,
of holding in safekeeping and servicing about
000,000,000 of securities for member banks
and purchasing and selling Government
securities for member banks cost «...
§1,366,258
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Fiscal Agency, Custodianship and Depositary
Receiving, proving, and paying 127,823,063
Government checks and coupons, including
work relief checks; maintaining the general
account of the Treasury of the United
States, etc. cost
$1,125,1*02
Fiscal Agency work for the U. S# Treasury
Dept. comprising principally the issue,
redemption, and exchange of 3,982,751
pieces of securities cost
Total
Reimbursed by Treasury Dept
§1,380,352
§2, 505,751+
01,6314,363
Net cost
0871,391
Services performed for various Government
agencies such as the Reconstruction Finance
Corporation, Federal Farm Mortgage Corporation, Federal Land Banks, Federal Intermediate Credit Banks, Federal Emergency
Administration of Public Works, and the
Federal Home Loan Banks and Home Owners*
Loan Corporation amounted to
Reimbursed by Government Agencies
Net cost
$2,231,1142
2,20l|,l426
026,716
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Accounting
This function, which includes the maintenance of the general books, member and
Federal Reserve bank accounts, etc., and
the making of transfers of funds for the
account of member banks, cost
$1*579*520
Banking House and Furniture and Equipment
Cost of operation of banking houses,
including payment of taxes, the salaries
of janitors, elevator operators, etc.,
less deductions for income received from
rented space, etc., was
02,612,685
Reserves set aside for depreciation
on banking houses
1*297*859
Furniture and equipment, net cost
233*290
Total
Bank examination
The cost of examining state member banks
and incidental work in connection therewith
was
01,101,800
Expenses of the Board of Governors
Assessments for expenses of the Board of
Governors of the Federal Reserve System
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01,7148,379
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Statistical and Analytical
Preparing and publishing monthly reviews of
credit, business and agricultural conditions;
and obtaining and assembling various statistical
data, etc. cost
Bank
..
$1+80,028
Relations
Bank relations work; visiting member and nonmember banks, conferences, etc. cost .
$195,001+
Personnel and Service
The maintenance of personnel records, the
purchasing of supplies and equipment, telephone service, filing, mailing, etc., cost
......
§2,29l+,23U
Protection
The salaries of special officers and watchmen, and the cost of other protective
services amounted to
09614*932
Postage and Insurance
The cost of postage on ordinary mail*
insurance on equipment and supplies, etc.;
the cost of employees' fidelity bonds*
bankers blanket bond, etc., amounted to
yl,32l{-,298
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Auditing
Maintaining general audits of the Federal
Reserve banks and branches cost
0552*623
Legal
The employment of counsel and other legal
expenses cost
4)190,086
General Overhead
General overhead and supervisory expenses,
including directors1 fees and expenses
amounted to
$1,685*101
Total Net Expenses
§28,263*800
@FedFRASER