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1 FEDERAL RESERVE BOARD WASHINGTON July 5, I93U. B-995. address official correspondence t o t h e federal reserve board SUBJECT: ^ Working Capital f o r Industry! Dear S i r : Section IJb, added to the Federal Reserve Act by the Act approved on June 19 t 193^i provides i n subsection (e) that i n order to enable the Federal Reserve banks to make the loans, discounts, advances, and purchases provided f o r i n such s e c t i o n , tho Secretary of the Treasury i s authorized to pay to each Federal Reserve bank not to exceed such p o r t i o n of the sum of $139,299,557 as may be represented by the par value of the holdings of each Federal Reserve bank of Federal Deposit Insurance Corporation stock, and i t i s understood that the Secretary of the Treasury w i l l make such payments to the Federal Reserve banks from time to time as they make the loans, d i s c o u n t s , advances and purchases authorized by Section 13b. I t i s a l s o provided that, within the meaning of such s e c t i o n , the sum so paid to each bank by the Secretary of the Treasury s h a l l become a part of the surplus fund of the Federal Reserve bank, In the weekly condition statement, however, the amount of surplus derived from net earnings of the Federal Reserve banks w i l l be shown a g a i n s t the capt i o n "Surplus ( S e c t i o n 7)". and the amount of surplus r e s u l t i n g from payments by the Secretary of the Treasury against the caption "Surplus ( S e c t i o n 13b)". The amount of l o o n s , discounts, advances and purchases under S e c t i o n 13b of the Federal Reserve Act w i l l be shown in the weekly condition statements of - 48G 2 - the Federal Reserve "banks a g a i n s t the c a p i t i o n "Industrial advances", immediately f o l l o w i n g the item " B i l l s bought in. open market". Inasmuch as S e c t i o n 12B of the Federal Reserve Act provides that Class B stock i n the Federal Deposit Insurance Corporation h e l d "by the Federal Reserve "banks s h a l l not be e n t i t l e d to payment of dividends, and a s payments r e c e i v e d from the Secretary of the Treasury to enable the Federal Reserve banks to make i n d u s t r i a l advances w i l l be included i n the Federal Reserve banks' surplus accounts, the Board f e e l s t h a t , beginning with July 1, 193^. the r e s e r v e s s e t up at the time the Federal Reserve banks made t h e i r f i n a l payment on the s u b s c r i p t i o n to the stock of the Federal Deposit Insurance Corporation should be considered as v a l u a t i o n r e s e r v e s and deducted from the book value of the stock i n s e l f . Accordingly, the item "Fed.Dep.Ins. Corp. stock" w i l l be eliminated from the weekly condition statement of the Federal Reserve banks, the amount of reserves s e t up on such stock w i l l be eliminated from the item "Reserves (F. D. I . C. stock, s e l f insurance, e t c . ) " , and the l a t t e r caption w i l l be changed to read "Reserves f o r contingencies"• You w i l l note from subsection ( e ) of S e c t i o n 13b that b e f o r e payments are made to the Federal Reserve banks they must execute agreements to hold the stock of the Federal Deposit Insurance Corporation unencumbered and to pay to the United S t a t e s a l l dividends, a l l payments on l i q u i d a t i o n , and a l l other proceeds of such s t o c k , f o r which dividends, payments and proceeds the United S t a t e s s h a l l be secured by sti.ch stock i t s e l f up to the t o t a l amount p aid to each Federal Reserve bank by the Secretary of the Treasury under such s e c t i o n , and, that each Federal Reserve bank, i n a d d i t i o n , s h a l l agree that i n the event such dividends, payments and other proceeds i n any calendar year do not aggregate two per centum of the t o t a l payments made by the Secretary of the Treasury under such s e c t i o n , i t w i l l pay to the United S t a t e s i n such year such further amount, i f any, up to two per centum of the said t o t a l payment as s h a l l be covered by the net earnings of the bank f o r that year derived from the use of the sum so paid by the Secretary of the Treasury. I t w i l l be necessary, therefore, for the Federal Reserve banks to keep a l l income received from the use of the sum so paid by the Secretary of the Treasury, and a l l expenses and l o s s e s incurred i n connection therewith, under S e c t i o n 13b of the Federal Reserve Act, separate and d i s t i n c t from the other earnings, expenses and l o s s e s of the bank, i n order to determine what, i f any, payments s h a l l be made to the Secretary of the Treasury i n the event the dividends, payments and other proceeds of the Federal Deposit Insurance Corporation stock do not aggregate i n any calendar year two per centum of the t o t a l payments made by the Secretary of the Treasury under Section 13b. You w i l l be advised a t a l a t e r date in regard to the manner i n which the net earnings of the Federal Reserve banks, derived from operations under Section 13b, are to be compiled and reported to the Federal Reserve Board and to the Secretary of the Treasury. On Form 3^ p l e a s e report "Industrial advances", code TURK, f o l l o w i n g item Federal Land Bank bonds; item "Surplus ( S e c t i o n 13b)", code TALC, f o l l o w ing the item Surplus ( S e c t i o n 7)? and "Industrial commitments11, code MEKTT, on the reverse s i d e of the form. Very t r u l y yours Chester M o r r i l l , Secretary. TO ALL FEDERAL RESERVE CHAIRMEN*