Full text of Papers of Benjamin Strong, Jr. : Correspondence with the Federal Reserve Bank of Philadelphia : Officers of the Federal Reserve Bank of Philadelphia, 1915-1927

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9/7

CHARLES J. RHOAD S.

RICHARD L. AUSTIN.

GOVERNOR.

CHAIRMAN.

EDWIN S. STUART.

GEORGE M. LA MONTE.

DEPUTY- GOVERNOR

FR^

DEPUTY CHAIRMAN

HARDT,

CASHIER.

FEDERAL RESERVE BANK OF PHILADELPHLt
408 CHESTNUT STREET

PHILADELPHIA,
February 1,

13L-N 3 '

sos

Ar..

Ps-L-

My dear Governor Strong:

I beg to acknowled e receipt and
thank you fgr your favor of/the 30th ultimo,
enclosing circular
and forms issued

letterg

by the Ga1Ump449mptggi4,connection
with ttnrisgoldtiong-tiind and the
distribution of the

balances in their hands.

I imagine'that most of the contributors to the Fund will avail themselves of
either the first or second method of repayment, which will result in creating New York
exchange, although it may not result in the
Federal Reserve Bank of Philadelphia getting
the benefit of all the repayments due to the
Philadelphia subscribers.

Governor
HON. BENJAMIN STRONG, Jr.,
Governor, Federal Reserve Bank
of New York.

CJR-D

4
_

4*a(3,

'RICHARD L.AusTIN.

.wwwo,

GEolzon M. ',MONTE.
DEPUTY CILURNIAN:

.11ERAL RESERVE BANK OF PHILADELPHIA

FILING

Iltin7"7 s4""

DEC

PIEULADELPIHA,

1915

December 7,915.

FEDERAL RESERVE BANK

Dear Yr. Strong:

I have your
tter of yesterday, stating that it w uld be convenient to you to have Go ernor Aiken and
me meet you on Wedne day to discuss the
matter of acting as fiscal agent for the
Government, and wr te to state that I
will come over on the 9 o'clock train
Wednesday mornin
which will bring me
to your office about 11:15.
If this
hour conflicts ith other engagements
of yours, Aiker and I can talk over
matters until ou are free.
;

WI
you also make a mental
note to disc ss with us briefly the
new circular', received this morning,
dated Decem6er 4, 1915, issued by the
Federal Re erve Board, with reference
to genera open market operations.

Very27
Governor.

BENJAMIN STRONG, Jr., Esq.,
Governor,
Federal "eserve Bank of New York.

E
1)EC'0 1915

a !!,

FEDERALRES
OF NEW ERVESAlig
YORK

COPY OF LETTER SENT TO ALL THE GOVERNORS
BY MR. RHOADS

January 11, 1917.

Enclosed is a copy of a letter prepared by the governors'

bond committee asking for proposals to purchase United States 3%
Conversion Bonds which has been sent to the principal dealers in
government bonds in the city of New York.

Will you not prepare identical letters and send them to
dealers and investors in your district who, in your judgment, might
be interested in bidding on a block of not less than 4500,000. of
these bonds.

Yours very truly,

Chairman.

_. S.

Please advise me at Philadelphia the names and addresses
of all parties to whom you send letters identical with
the enclosed.

COPY OF LETTER SENT TO BOND DEALERS
BY MR. RHOADS.

January 11, 1917.

Dear Sirs:

A committee acting in behalf of several of the Federal reserve banks will shortly have for sale approximately 45,000,000. to
47,000,000.. par value of U. S. 3% conversion coupon bonds, series of

January 1, 1917, payable thirty years after that date.

On January 24, 1917, at 11 o'clock a. m., the committee
will consider sealed proposals which have been received by it prior
to that time for the purchase of said bonds on a cash basis for New
York or Chicago delivery.

The committee will not consider any proposal for less than
4500,000. par value of bonds and reserves the right to reject any or
all proposals.

You are invited to submit proposals which should be addressed to Charles J. Rhoads, chairman, bond committee, care of the Federal
Reserve Bank of New York.
4

Respectfully,

Chairman.

/f7

1.1131RARi
1,11 P\(

1 5 191

February 24,
--arYEDER 11,1,

Ti.R\IE

E. P. Passmore, Esq.,
Governor, Federal Reserve Bank of Philadelphia,
Philadelphia, Pa.
Dear Mr. Passmore:

Referring to the Conference of Governors called by the
Board for March 20th, Governor Strong feels that

might be worth

while to take advantage of the opportunity to discuss matters of
mutual interest which may
Board.

not

be on the progranre prepared by the

I am consequently writing to all the governors with the

suggestion that they be prepared to stay in

'"ashington for

several

days to take up a variety of ratters.
If this meets with general approval, I shall be very
glad to prepare a programme.
convenience

such topics as you

'ill you send me at your earliest
would like to have discussed at the

meeting.

Very truly yours,

Deputy Governor.

JFC/CEP

BOK

Verch 6, 1919.

PERSONAL Arn flOPFIDENTTAL.

Ny dear Governor raseeore:

For some time

I have been interested with some friends in a otudy of some

of the problemc of our national financial syetem and particularly to the possibilities of a reform moveeemt which might result in the
plan for a Federal budget.
past two years and an a

eetabliehment

of a scientific

The need for this has been made apparent to me during the

result of contact with the financial machinery

Some of ny friends believe the time is now opportune for

in Washington.

a general attempt to

inter-

est the people of the country in national financial reform.
The campaign for saving, thrift and sensible spending, incident to

the flo-

tation of Government loans leae put many of our people in a receptive nood for fur-

ther suggestions in
be reduced if both

these matters.

The

individuals and the

national debt must be reduced and can only
Government practice

sensible spending.

is particularly true with the Government but cannot be made possible until scientific machinery is

installed to accomplish it.

Students of this subject seem to be in
budget system is the only solution.

general agreement that a scientific

To persuade our people

that such a

system should

be installed, a nonpartisan organization uhould be built up and a wise and sane cam-

paign of publicity

inaugurated.

a plan of that sort in which some of my friends

are interested with E. view to activity after the next loan is placed. In the meantime,
steps must be taken to prepare the publicity, and the pereonnel of the organization

must be

developed in

advance.

It is, of course, out of the eueeticm to utilize the Liberty Loan organizetione as such for an enterprise of this character.

It does not, however, iieem

proper for me to ask you if in your experience with the Liberty Loan, War 'Savings, or

other organizt!tions in connecticn with the war, you have come in cortact with individuals
in your district who would

be likely to be

interested in this movement

and who would

Parch 6, 1919.

be qualified for service in such an organization and who would do so as a matter of
public duty. That is first needed is a representative in every State, competent to

take charge of the movement and direct it in the State. He should have qualifications
to enable his to become a leader of the Ftote moverent, some ability as an organizer,

should be public spirited, able to grasp the subject and willing to study it, and
should be regarded locally as without

noliticel prejudice or purpose, and have the

confidence in general of the people of the f-tate.

In addition to trte directors, eimilar organizers nunt be appointed in
the various counties and

principal cities.

I shall be greatly indebted to you if you ean let me have suggestions and
nnmes of men in your district for this work without, hovever, mentioning the matter
to them. You may know

them well enough to make definite recommendations not only

because you came in contact with them in Liberty roan matters, but other public

spirited activities with which you are
Thin is n natter in which
grateful for

acquaint or connected.

have e etrong personal

interest and will be

your ascietance. At our reeting in Washington on the 20th I hope to

have an opnortunity to refer to this matter more specifically.
Fincerely yours,

Governor.

E. P. Passmore, Fog.,
Governor, Federal Reserve Bank of Philadelphia,
Philedelphia, Pa.
BS/EK

September 14, 1921.
Dear Governor Aorris:

You will recall that about two years ago we had some correspondence in
regard to the work of the National PudRet Committee.

In part, at least, passage

of the budget legislation by the Congress was due to the work conducted by that
Mow that the bssis of the budget systeii, has teen adopted by Congress,

committee.

our orgenizetion io endeavoring to crystalli.ze public sentiment for ths support
of the prograaL of governent economy and thereby to insure permanent success for
the new national budget system.

4e are oeskini, to extend thie or by selecting, tic far es possible,

bankers to accept active chairlanstips in various of the more important cities,
simply to carry on work which ;All be laid out for tnem by the national committee.
The scope of the work is described in the enclosed memorandum.

Can you suet representative Elan, preferably bankers, who might be

willing to accept such appointments ih the cities of Pti adelphia, Carden, Trenton,
Wilmington, Reading, Frie von Scranton.

At the present time I shall only ask you to suggest nanes, but later on
possibly you would be willing to communicate with them directly and further our'
object of having them Accept these appointvents.

If for any reason you think it unwise to make these suggestions, will you

not rrite s quite frankly and, if you are willing to do so, give me your reasons.
With best regards, and thanking you very cordially, I am,
Yours very truly,
George W. Norrie, Esq.,
t':overnor, Federal Reserve Bank of Philadelpi)i$,

Philadelphia, Pa.
BE:MM

enc.

rEDERAL RESERVE BANK OF PHILADELPHIA
925 CHESTNUT STREET
GEORGE W. NORRIS. GOVERNOR
WILLIAM H. HUTT, DEPUTY GOVERNOR
WILLIAM A. DYER, CASHIER

ASSISTANT CASHIERS
C.A. M9 ILHENNY
W.J. DAVIS
R. M. M IL LER.JR.
JAMES M.TOY
FRANK W. LA BOLD S. R. EARL

RICHARD L.AUSTIN
CHAIRMAN OF THE BOARD AND
FEDERAL RESERVE AGENT

HENRY B. THOMPSON
DEPUTY CHAIRMAN OF THE BOARD

ARTHUR E. POST
ASSISTANT FEDERAL RESERVE AGENT

June 22nd, 1922. Pq-,
'141/42

1, itv24.
My dear Governor Strong:I have read with interest and care your letter of the
21st instant, in reference to reimbursement of fiscal agency exI had supposed that Under Secretary Gilbert had clear and
penses.
undoubted warrant for his voluntary offer to reimburse these expenses after June 30th, and must confess some surprise at what
appears to be a substantial doubt as to the existence of such a
right, or - at least - the propriety of exercising it. If the reimbursement is made, and the fact comes to the attention of Congress as it inevitably would - there would be criticism not only of the
Treasury Department for making the reimbursement, but also of the
Federal Reserve Banks for asking and receiving it. It must be borne
in mind also that the question would be raised at a time when Members
of Congress would still be generally under the impression that the
earnings of Federal Reserve Banks were large, and that the effect of
the reimbursement had been simply to swell their surplus.
It would seem to me that in view of the doubt as to the
propriety of the reimbursement, it would be better not to ask it
until the Reserve Banks generally reached the point where they could
not bear these expenses and earn their dividends, and that if this
condition should arise, it would be better to lay the facts before
Congress and get specific and unquestionable authority for the reimbursement.
On the other hand, I do not like to admit the principle
that the Treasury Department may call upon Reserve Banks for any
amount of service of any kind, and compel them to perform these services as part of their routine business, at the expense of their
stockholders.
It occurs to me that perhaps the best solution would be. for
the Reserve Banks to make no claim for reimbursement, vzoadasi_the_
Federal Reserve_Board_is willing_to let us report our net earnings
aYfiii. deducting from ouropera_AllaaAltenses the coetbi',AtOjailInif
frieTir-igencz functions, and then charge saa-EarTU-Profit & Loss
under the general heading "Fiscal Agency Expenses", subdividing that
item to a sufficient extent to show clearly the character and cost
This would have the advantage of
of the various services rendered.
showing in a striking way the portion of our total expenses represented

-2by fiscal agency services, and would also serve to show to Congress
that in addition to the cash payment of the franchise tax we were contributing services of very great actual money value.
As we are now getting close to June 30th,
have your views on these suggestions, and also know
is in the other banks. I presume that you wrote to
the other ten banks a letter similar to the one you
I am,

truly y

re,

iVery

Governor.

Mr. Benjamin Strong, Governor.
Federal Reserve Bank,
New York City.

I would like to
what the sentiment
the Governors of
wrote me.

I.I

C;
6.

*144:

9,5

FSIXeRA.1,

aai

BANK OF PHILA.D.eLFHIA

925 Chestnut dtreet

June 8th, 1923.

Mr. J. H. Case, Chairman,
Open Market Investment Committee
of the Federal Reserve system,
Federal Reserve Bank,
New York City.

My dear Mr. Case:-

Governor Crissinger's letter to you under date of
May 31st, which,' in accordance with his expressed desire, you
have brought to the attention of the Federal Reserve Bank of
Philadelphia, was carefully considered at the semiwmonthly meeting of our Board of Directors on Wednesday, the 6th instant,
and I um directed to reply as follows:
Governor Crissinger's letter may properly be considered

in two aspects - first, as it affects the Federal leeerve Bank
of Philadelphia directly and exclusively, and secondly, in its
broader or national as

To take up the former aspect first. About a year ago
the disoounts of this Bank had fallen to a point which left us
with very considerable funds

temporarily unemployed. The volume

of di mounts was constant ly shrinking. It was the judgment of the
Board that this shrinkage was likely to continue for some time,

and that the

65.1

of our deposits which we are at liberty to use

would enable us, from that source alone, to meet any demands which
our member banks might make upon us within a period of two or
three years. This judgment, I may add, has thus fur been Ve rif led.
The low point in discounts was not reached until August, le22, and
there has never dude been a time when our at ecounts amounted to
65/. of our deposits.

This judgment having been reacted, the next question for
decision was Whether all the rest of our resources ddould eamain
idle and unproduot I ve, or whet he r we were charged wi th a duty to

employ them-

It would unduly prolong this letter to recite the

consi de reti one Which lad us to t he latter concl usi on.

flee it

to say that we did reach it, and that we have never regretted it,
nor seen any reason to think that we made any mistake.

IPBIEBAL 3,15ERVE

POO NO

1IANI

4PPHILADaLatiA

.1%, J, 110 Case

The third question was the aeoent of funds which
s* decided that we might properly purchase
government securities to an amount not exceesing our free capital
and eurplus, At the preeent time this investment represents only
should be employed,

about 84 of our capital and surplus not already invested in
building,

The last question was the msener of emplayment, sank
ore' acceptances were than selling at 41, and believing that this
rate was unjustifiably Lee we wore more disposed to curtail our
purchases than to increase them, This left us only government se
amities, sie deemed it better Reserve eanking policy to buy short

term notes than longe-torm bends, As between Ovrttorm Treasury
Certificates and longer term Treasury Notes, we chose the latter

for three realize

(1) because they pale a better rate, (2) became

their surchsse did not involve competition with member banks, sad (3)
because we thus avoided the necessity of reinvesting the prooeees
of frequently maturing Certificates. Our purchases were masa slowly,
without edvssming the price of the Notes, se only bought part of
whst less offered to us by member banks or aealers, At no tire did
we MAO any bid, or else° any Opexemerket order,
Having exercises our best judgment in =Sting those purchases; having Ewen our judgment thus far verified; and observing no

injury that has resulted either to the Treasury epartment or to the

business ana cossnerce of the Nation, wesere reluctant to dispose of
these uecurities, or any of them, particularly at a heuvy loss, which
loss can be avoides by simply holding them to maturity, I may add
that our Board coesentes to the sale of our proportion of C60,000,000

only out of a. desire to meat, as far as possible, the desires of the

Treasury Department, and respect for the unanimoea roccevaenoation of

the Coanittes I vas directed to advise you that the Waru reserves
fall liborty end discretion to dissent from am future roccessenaation

which the Oemmittee may make,

As to the broader aspect of the question, The Board noted
with some surprise the references in Governor Irissingerte letter to
"the policy of the (Reser-ve) Besrd," "the Board's determination,; and
the desire that you nhould call the matter to the attention of the
Banks "In order Cat the policy of the Board may be carried out in its

entirety," Mile the Federal Reserve sot does provide that 2sos.

of govormftat securities mete by the Banks shall be subject to suoh
rules or regulations as the !teserve Board nay prescribe, we are not
aware of any rules or regulations which the Board has ever peescribed
on thin subject, nor do we find in the at any power given to the Board

to proeorie ales rules as to the sales of such securities, or ang,poser
to impose upon the Siroctors of the severe' eseks a. policy on thii subject which is at variance with their own judgment, sucha power, on
the contrary, would seem to us to be utterly inconsistent with all the

RFSERVE SAW or 11HILADFLPHIA

Jo. 3 To Mr. J. H. Case

other provisions of the Act, and would create an impoesitle eitoa,
tion4 inasmuch as it would vest responsibility in one groue and power
in another group. There can be no doubt that the Federal Reserve
System is a Regional and not a Central banking system, and the Act
expressly provides that each Bank shall be conducted under the
"control" of a Board of Directors, which shall "perform the duties
usually appertaining to the office of directors of banking associa-

tions.

It has been end it the wish and policy of the Board of this
Bank to do everything eeeenle to eet the ViErAS of the Treasury De-

partment and a the Federal Reserve Board or all matters, but it is
felt that attention should be called to the fact that this willingness
must not be construed as a willingness to surrender the powers expressly
conferred by the Aet anel nate:pall:7 attachiu to the deeree OA responsibility which Directors of Reserve Banks accept for the management of
their severe.' inatitutionm.
I am,

Velei truly yaara,
(Signed)

Geo. 'W. horns
Sovernor.

DEM RF3FRVE BABX
_ No. 3

VHILADFLAIIA

To Mr. J. H. Case

other provisions of the Act, and would create ar Implesitle altos,
tion, inasmuch as it would vest responsibility in one grout) and power
in another group. There can be no doubt that the Federal Reserve
System is a Regional and not a Central banking system, and the Act
expressly provides that each Bank Wall be conducted under the
"control" of a Board of Directors, which shall "perform the duties
usually appertaining to the office of directors of beetling associa-

tions.
It has been end is the wish and policy of the Beard of this

Bank to do everything eesenle to zeet the views of the Treasury Department and of the rederal Reserve Board on all matters, but it is

folt that attention should be called to the fact that this willingness

must not be construed as a willingness to surrender the powers expressly
conferred by the Art, are neterally ettechtu to the ee'ree o: responsibility which Directors of Reserve Banks accept for the management of

their severe]. lueitutions.

I am,

Vere truly yeurs,
(Signed.)

Co.e Ile Scarls
Sovernor.

6OPY

FEDERAL RESERVE BANK OF PHIr,ADEDPHIA.
925 uhestnut St.

September 14, 1923.

Dear Mr. Case:

I enclose herewith a draft of a letter to
This

Secretary Gilbert, and supporting memorandum.

is nothing but a draft - dictated and not revised.

Please

feel entirely free, therefore, to suggest most radical
alterations.

After you have had time to consider it,

and to draft the additions and amendments, let me know,
and I will come over for a conference with you.
I am,

Very truly yours,
iSigned)

Ur. J. H. Case, Deputy Governor,
Federal Reserve Bank,
New York City.

Geo. W. Norris,
Governor.

60PY

FEDERAL. RESERVE BANK OF FHP,ADEL.PHIA.

925 6hestnut St.

September 14, 1923.

Dear Mr. Case:

I enclose herewith a draft of a letter to
Secretary Gilbert, and supporting memorandum.

This

is nothing but a draft - dictated and not revised.

Please

feel entirely free, therefore, to suggest most radical
alterations.

After you have had time to consider it,

and to draft the additions and amendments, let me know,
and I will come over for a conference with you.
I am,

Very truly yours,
(Signed)

Mr. J. H. Case, Deputy Governor,
Federal Reserve Bank,
New York City.

Geo. W. Norris,
Governor.

COPY
Draft)

Hon. S. P. Gilbert, Jr.,
Under Secretary of the Treasury,
Aashington, 0- "

My dear Mr. Gilbert:
At the last Conference of Governors of the Federal Reserve
'Banks held in Washington in March last, there was a discussion as to
the substitution of the "interest cherge" on the uncovered portion of
Federal Reserve notes, authorized in the 16th Section of the Federal
Reserve Act, for the present payment to the United States as a franchise
tax of the balance of earnings remaining after the payment of dividends
on stock and appropriation to surplus.
It was the unanimous opinion of the Governors that such a
change would be desirable, and the undersigned were appointed a committee to discuss the mgtter with you, and learn whether the Treasury
You may
Department would interpose any objection to such a change.
recall that we had a moment's conversatioa with you on the subject immediately after the adjournment of the Gonference, at which you raised
the question as to the disposition of the surplus earnings remaining
after the payment of the interest charge, 6% dividend on stock,and
We were not prepared at the moment to answer
appropriation to surplus.
this question definitely, and beg leave to submit herewith for your
consideration a memorandum in which the entire subject is quite fully
discussed.
After you have had an opportunity to read this memorandum, and
give the subject some cOnsideration, we would like to have the opportunity to discuss it with you, in order that we may be able to make a report
to the next Conference, which has been called for November 12th.

We qre,

Very truly yours,

COPY

Draft)

The lath Section of the Federal Reserve Act, dealing with
the subject of Note Issues, provides that when the application of a
Federal Reserve Bank for Federal Reserve notes has been granted and
the notes supplied, such bank shall be charged with the amount of notes
issued to it, " and shall pay such rate of interest as may be established

by the Federal Reserve Board on only that amount of such notes which
equals the total amount of its outstanding Federal Reserve notes, less
the amount of gold or gold certificates held by the Federal Reserve
Agent as collateral security."
I*-haw-been-suggeRted-tAat-tlie-puppeee-ef-this-previeleR-IR

the-Ast-4e-sapt-ef-a-ugenepal-dispee4tien-te-plase-pesttListieRs upeR
tphe-mami§aetupe-ef-epedit".

The opening sentence of the . ect ion reads

"Federal Reserve notes, to be issued at the discretion of the Federal
Reserve Board, for the purpose of making advances to Federal Reserve

Banks through the Federal Reserve Agents as heretofore set forth, and
for no other purpose, are hereby

authorizedt/.

It is popularly believed

that the provisions in regard to note issues, and particularly the provision that Federal Reserve notes, instead of being issued directly by
the Federal Reserve banks, should be issued by and bear the name of the

United States, were concessions in form rather than in substance to that
school of political economy which holds the view that note-issuing power
is primarily a function of government.

It has been suggested that the

framers of the Act were concerned with fixing proper limitations on the
issuance of undue amounts of credit by the Federal

Reserve banks, and that

this provision in regard to the interest charge on or the taxation of the
note issues is a part of that general disposition to place' restrictions

upon the manufacture of credit.

It is altogether probable that this

was the thought underlying the provision.

The same thought was in the

minds of the members of the Federal Reserve Board in June 1920, when.

they advised the banks that they were giving serious consideration to
the advisability of imposing this interest charge, with a view to preventing the then continuing increase in the volume of Federal Reserve
:

notes in circulation, unless there was actual and unescapable need for
more currency.

They also called attention to the criticisms which were

being made of the large earnings of the Federal Reserve banks, and to

the fact that it was " generally overlooked that the large earnings of
the banks are due to a great extent to their use of Federal Reserve

notes".

Insofar as Federal Reserve notes are fully covered by gold,

they are practically gold certificates, but it is manifest that an interest charge, accruing to the government, it a logical and natural charge

for the right to issue notes not covered by gold

which are the obliga-

tions of the Government of the United States, and from the use of which
the Federal Reserve banks derive a profit.,

Mien Covernor Harding dis-

cussed this subject before the House Committee on Banking and Currency
in 1921, he pointed out that the imposition of such an interest charge
would be absolutely sure to yield a good return to the government, because
whenever the earnings of the Federal Reserve banks were abnormally large,
, they would have outstanding an abnormally large uncovered note issue, and

the tax or interest charge would be

correspondingly large.

to admit, however, that the Federal Reserve Board

was divided in opinion

on the subject, and no action was taken on the matter.

He was obliged

The matter may be discussed from several points of view.

For the present purpose, the most important point is - How would the
substitution of a 2% interest charge on uncovered currency outstanding,
for the present government participation in profits, affect the income
derived by the government from the operations of the Federal Reeerve
banks?

One of the banks reports - "We paid to the government as a

franchise tax for the year 1922 ( exclusive of adjustments applicable
to previous Years) $855,363.90.

A 2%

tax or interest charge on uncover-

ed currency outstandine would have amounted to $1,128,000. showing that
the proposed change would have amounted last year to an increased payment
of $272,636,10

This was. due, however, to the fact that, having no in-

ducement to keep down our uncovered currency, we retained a large amount
4

of gold available for deposit with the Federal Reserve Agent.

Had we

deposited with the Agent all the available gold our uncovered currency
would have been so far reduced that an interest charge of 2% thereon -would

have amounted to only $501,200. which would have been a saving of $354,163
from the franchise tax actually paid.

If the interest charge had been 2 1/4% -

half of the discount rate prevailing during the year- it would have

amounted to $563,850, or a saving of $291,513 from the amount actually paid.
It is only fair to assume that if the tax or interest charge were

to be substituted, the banks would deposit and maintain as collateral with
the Federal Reserve Agents their entire reserves, except their 35% against
deposits.

The results for the last five years, celculeted on this assump-

tion, are shown in the following table:

- 4-

COMPUTATION OF NOTES SUBJECT TO TAX
ALL FEDERAL RESERVE BANKS
(Under present wording of Federal Reserve Act)
(Figures in thousands)
1922
1921
1918
1919_
1920
$1,560,212

$1,735,179

$1,721,815

$1,713,589

$1,864,241

1,978,000

2,190,000

2,120,000

2.652,000

3,145,000

546,074

607,313

602,635

599,756

652,484

4. Reserves available
against Notes(2-3)

1,431,926

1,582,687

1,517,365

2,052,244

2,492,516

5. Average Notes in
Circulation

1,869,000

2,606,000

3,148,000

2,691,000

2,219,000

6. Excess of 5 over 4

437,074

1,023,313

1,630,635

638,756

Tax computed at 4%

17,483

40,933

65,225

25,550

Tax computed at 2'.%

8,741

20,466

32,613

12,755

2,704

60,725

59,974

taT--10,851

70,652

82,916

15,993

2,740

1. Average Net Deposits

2. Average Total Reserves

3.35% of Item 1

Franchise tax paid

(b)

Carried to Surplus

48,334

(c)

Includes $3,400 deducted from surplur account and paid to U. S. Government
as franchise tax for 1921 and 1920. (1921 - $3,130;
1920 -$270 )
;a)

Includes $26,728 reserved for government franchise tax which was transferred
to surplus fund in accordance with March 3, 1919, amendment to Federal Reserve Act.
Includes $1,000 deducted from supersurplus account and credited to general,
reserve account of the Federal Reserve Bank of New York after closing books Dec. 31,
1920.

L'omputed from combined weekly condition reports of all Federal Reserve banks.'"
Materially different results vould be obtained by computing the tax for each
bank separately. For example, it appears by the statement fbr September 12, 1923
(the last available at this writing) that while the ratio of gold reserves to Federal
Reserve notes in aotual circulation, after setting aside 35% against deposits, was
110.9 on that date for the System as a whole, that result was due largely to the fact
As a matter of fact, the ratio
that this ratio was over 150 in the New York bank.

was less than 100 in seven of the twelve banks.

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It should be borne in mind, in the first place, that it is
more logical and more equitable that the government should get a direct
return on notes on which it puts its name, issued by it to a corporation

which uses these notes for profit, and that this return should be proportioned to the amount of the notes, than that it should forego any such
direct return and then absorb all the surplus profits of such corporations,

when in point of fact (taking figures for the year 1922) the funds used in
making these profits consisted of over $300,000,000 capital and surplus and
$1,864,000,000 average net deposits, both contributed by the member banks,

and $2,219,000,000 notes, against which there was held an average available
gold reserve of $2,492,000,000.

Such a change would also be in line with the practice followed
by the governments of other great nations as to the taxation of central
banks.

The Bank of England pays to the government a lump sum of 180,000

pounds annually, in lieu of a stamp tax upon circulation.

The Bank of

France pays to the government a stamp tax upon productive circulation at
the rate of .50 francs per 1,000 franca; upon unproductive circulation at
the rate of .20 francs per 1,000 francs.

Prior to 1914 the note_issuing

banks of Germany were required to pay a tax of 5% per annum upon notes outstanding in excess of the "contingent" limit prescribed for each bank, the
"contingent" circulation being that circulation in excess of cash holdings.

Under the Statutes of 1900, the National Bank of Belgium paid to the government 1/4 of 1% each half_year on the excess of average circulation of notes
above 275 000,000 francs.

The Italian banks of issue pay a tax of 1/10 of

upon notes issued up to a fixed "normal limit" and a "supplementaly normal
limit" granted in 1914.

Upon circulation in excess of these amounts a grad-

uated tax is imposed equal to 1/4, 1/2, or 3/4, or the whole, of tne discount

rate.

The Bank of Japan is privileged to issue note currency up to

its amount of gOld and silver specie reserve without taxation.

It may

issue an additional 120,000,000 yen against government bonds or other
approved security, subject to a tax of 1 1/4% per annum on the monthly
average thus outstanding.

When required by the exigencies of the market,

it may make an excess issue subject to the approval of the Minister of
State for Finance, taxed at not less than 5% per annum, the actual rate
to be fixed on each occasion.

It is also to be observed that, if such a change were made,
some reduction in the aggregate amount payable to the government over a
period of years would be an entirely reasonable concession, inasmuch as
the government would not only get a reasonably certain return in place of
a wholly uncertain return, but would in addition get its share early in
the division, instead of last.

At the present time, the gross earnings

of a Federal Reserve Bank are applied first to operating expenses, second
to dividends, third to accretions to surplus, and fourth to the payment
of the government franchise tax.

Under the change suggested, the first

charge on gross earnings would be the operating expenses, in which the
interest charge or return to the government would be included, secondly
dividends, and third accretions to surplus.

After all three of these re-

quirements had'been made, there would still be a surplus Of earnings, unless the interest charge were made unduly high, which brings us to the
important question of what disposition should be made of this surplus.

The Federal Reserve Act as originally drafted by Senator (then
Representative) Glass and passed in the House of Representatives, provided

that the surplus evnings of Federal Reserve Banks, after the payment of

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6% dividends, should go 60% to the government and 40% to the member
banks.

In the Senate, it was suggested that this surplus be used to

build up a guarantee rand to protect depositors from loss in the event
of the failure of banks that were members of the System.

This proposed

change was not acceptable to the House conferees, and the result was
that the Bill finally took its present form.

The capital and surplus

and the great bulk of the deposits of Federal Reserve Banks have been
contributed by the member banks.

Upon their contributions to capital

stook they receive 6% dividends, but upon their reserve deposits, which
amount to eighteen times the capital stock, they receive nothing.

This

fact is unquestionably the most potential fact in deterring state banks
from becoming members.

Recognizing the vary limited direct return which

can be made to member banks, it has been the policy of the Federal Reserve
Banks to be liberal in the rendering of "services!' to member banks - paying

charges on both incoming and outgoing shipments of currency, custody of
securities, collection of checks and non-cash items, and various other
things.

Notwithstanding a very considerable liberality in these services,

membership has proved attractive to only a very small proportion of the
state banks, and many national banks chafe at what they regard as the injustice of the present division of earnings.

The Federal Reserve Board

has recently given unofficial intimations of a disposition to curtail
these services.

If such a change

in policy is

adopted, the

accession of

state bank members would almost entirely cease, and a considerable number
of the present state bank members will withdraw, while the resentment or
lack of interest on the part of national bank members will be intensified..

The idea of having a unified banking system, in which the great
bulk of the banks of the country will participate, will therefore have to

be abandoned, unless some compensating advantage can be given them.

The

payment of interest upon their reserve balances is unsound and impossible.
The only alternative, therefore, would seem to be to allow them some participation in the profits to which they have so largely contributed.

Our

suggestion would therefore be - first, that Section 16 of the Federal Reserve Act be amended to provide that the Federal Reserve Banks shall pay
a rate of interest on their uncovered circulation equal to one-half of their
average discount rate on commercial paper for the year; second, that Section

7 of the Act be amended to provide that after stockholders shall have received a dividend of 6%, and the authorized accretion to surplus fund shall
have been made, 60% of the remaining earnings shall be paid to the United
States as a franchise tax, and the remaining 40% divided among the member
banks in proportion to the average reserve balances maintained; and, third,

that both the interest charge on circulation and the 60% of final net earnings paid to the United States shall be used as it is now provided that the
franchise tax shall be used.

We believe that these changes would not only be advantageous to
the Treasury of the United States, but would also make the entire structure
of the Act more logical and equitable; encourage banks to maintain full reserves, instead of keeping them down, as at present, to or below the legal
limit; substitute good feeling and cooperation by those national banks whose
membership is

present reluctant; and stimulate the accession of state

bank members, thereby making the Federal Reserve Banking System what it was
intended to be.

We venture to hope that the Treasury Department shared our belief
that the proposed changes will strengthen the Reserve System by relieving it

-9-

from a considerable portion of the more or less political pTessure in
Congress to which it is now subject.

As long as the United States Govern-

ment remains the residuary legatee of all the earnings of the Federal
Reserve Banks, the Congress will naturally be disposed not only to criticise, but to supervise and interfere.

If it were possible to fix an

."interest charge" which would approximate in amount to the present "franchise tax," we would favor the absolute elimination of the government as
a participant in profits.

Owing to the many uncertain factors in the

calculation, that seeis to be impossible.

We would hope, however, that

the interest charge suggested would, over a period of years, constitute
tha bulk of the government's profit from the operation of the banks, and
would leave little divisible surplus.

We would hope that 60% of this

divisible surplus would not be sufficiently great in amount to justify

the Congress in interfering with the building programs or routine operations of the Federal heserve Banks.

COPY

September 26, 1923.

George W. Norris, Esq., Governor,
Federal Reserve Bank of Philadelphir,
Philadelphia, Pennsylvnnia.
Dear Governor Norris:

I regret that I have not been able to answer sooner your letter of
September 14, with enclosures, in regard to the proposed amendment to the present provision of the kederal Reserve Act for payment to the United States of a
franchise tax consisting of the balance of earnings remaining after the payment
of dividends on stock and appropriation to surplus.

I wanted to confer with

Mr. Jay, Mr. Harrison, and Mr Mason before renewing the verbal approval I gave
you of the plan.

We are all agreed that the proposal is in general sound.

But the di-

vision of earnings remaining after dividend tb stockholders and accretion to surplus fund, on the boais of 40% to member banks and 60% to the United States as a
franchise tax, is open to an objection.
is that the government shall
earnings.

not

The principle we are seeking to establish

directly profit by contribution from our excess

The plan, in 80 far as it provides for such a contribution to the gov-

ernment, violates this important principle.

Do you not think it might be possible

to devise some method of adjusting the tax, perhaps by a sliding scale, whereby an
amount equivalent to about 60% of surplus earnings provided for the government

your plan could be made available toit in the form of a further tax on uncovered'
4notes outstanding?

Might not this be done without making the tax unduly:..high?

I should like very much to have your views on this, because it seems to
me essential that we stand on the proposition that the reserve banks should pay

COPY

September 26, 1923.

George W. Norris, Esq., Governor,
Federal Reserve Bank of Philadelphir,
Philadelphia, Pennsylvania.
Dear Governor Norris:

I regret that I have not been able to answer sooner your letter of
September 14, with enclosures, in regard to the proposed amendment to the preeent provision of the Federal Reserve Act for payment to the United States of a
franchise tax consisting of the balance of earnings remaining after the payment
of dividends on stock and appropriation to surplus.

I wanted to confer with

Mr. Jay, Mr. Harrison, and Mr Mason before renewing the verbal approval I gave
you of the plan.

We are all agreed that the proposal is in general sound.

But the di-

not

The principle we are seeking to establish

directly profit by contribution from our excess

The plan, in 80 far as it provides for such a contribution to the gov-

ernment, violates this important principle.

Do you not think it might be possible

to devise some method of adjusting the tax, perhaps by a sliding scale, whereby an
amount equivalent to about 60% of surplus earnings provided for the government

your plan could be made available toit in the form of a further tax on uncovered.
4notes outstanding?

Might not this be done without making the tax unduly:ligh?

I should like very much to have your views on this, because it seems to
me essential that we stand on the proposition that the reserve banks should pay

W. Norris, Esc., Governor,
B., Philadelphia.

F. R.

a note tax to the

-2-

Sept, 26/23.

government rather than make a contribution to it from excess

earnings and that we advance no plan inconsistent with this position.
You will of course understand that I am attempting here simply to adiress myself to the plan itself, without reference to the question of when it
will be desirable to present it to Congress.
With kind regards,

Very truly yours,

J. H. Case
Deputy Governor.
LBIVI.GSK

Full text of Papers of Benjamin Strong, Jr. : Correspondence with the Federal Reserve Bank of Philadelphia : Officers of the Federal Reserve Bank of Philadelphia, 1915-1927

FRASER