Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1975

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F E D E R A L FlffiSICTlVH: B A N K

W h y Not Pay Interest on M em ber Bank
Reserves?
Should the Fed Sell Its Services?
Annual Operations and Executive Changes


http://fraser.stlouisfed.org/
Federal
_____ Reserve Bank of St. Louis

IN THIS ISSUE . . .
Should the Fed be permitted to pay interest on
member bank reserves and charge for services it
provides to the nation's banks? That is the issue
discussed in the two articles in this issue. These
articles, when taken together, raise the possibil­
ity that a change in the current operating proce­
dures of the Fed could make for a more effective
monetary pol icy as wel I as a more efficient use of
society's resources.
Currently, when the Fed conducts monetary
policy it does so largely through affecting bank
reserves. W hile this special role for bank reserves
benefits society, it can be costly for banks. The
Fed is prohibited from paying interest on mem­
ber bank reserves which means that these banks
forego potential income. Partly in order to offset
this loss, the Fed provides member banks with
services “ free" of charge. However, this offset
may not be sufficient as more banks continue to
leave the Federal Reserve System. Perhaps more
important, both the lack of interest payment on
reserves and the provision of “ free" services can
be inefficient and generally inequitable. Paying
member banks interest on reserves and charging
them for the services they use, the authors argue,
would not only alleviate these problems but
would be in keeping with the tradition of a free
enterprise economy.

On our cover: Construction of the new headquarters building for the Federal Reserve Bank of Philadelphia
at Sixth and Arch Streets in Philadelphia has reached the midpoint. Shown here is an artist's conception of
the eight-story structure that is scheduled for completion in early '76.

B U S IN E S S R E V IE W is produced in the Department of Research. Editorial assistance is provided by Robert
Ritchie, Associate Editor. Ronald B. Williams is Art Director and Manager, Graphic Services. The authors will be
glad to receive comments on their articles.
Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania 19105. Phone: (215) 574-61 15.



FEDERAL RESERVE BANK OF PHILADELPHIA

Why Not Pay
Interest on
Member Bank
Reserves?
By Ira Kaminow

cies in the economy and is widely viewed among
bankers as unfair. Moreover, removal of the
"tax " by Congress need not impair the Fed's
ability to conduct monetary policy and might
well set the stage for some improvement. There­
fore, a good case can be made that the law
should be changed to allow the payment of in­
terest on reserves. Such a change, of course,
would mean a drop in revenues to the Treasury
unless Congress chose an alternative source of
income to compensate for the loss.

When monetary policy swings into action,
banks are thrust into the front lines. For it is
largely through the creation of bank reserves that
the Fed has a handle on the money stock and
interest rates. The special role that bank reserves
play can be extremely valuable to society but
costly to banks and their customers. The law
prohibits the payment of interest on member
bank1 reserves, so every dollar of reserves a
member holds means a loss of potential interest
income.
Last year, member banks were required to
hold about $36 billion of reserves. At current
interest rates, that sum could have earned in­
terest in the neighborhood of $3 billion for the
year. This $3 billion is like a "tax " on banks,
especially because the Fed invests the funds
made available and turns the lion's share of the
interest earned over to the Treasury.
The special "ta x " may cause some inefficien­

NO-INTEREST RESERVES: UNFAIR?
Member bankers can get upset when they
think of the interest lost because of reserve re­
quirements. After all, making funds available is
the business of banks and interest from these
funds is banking's major revenue. So member
bankers think that the law that requires them to
give up interest on billions in assets is unfair,
especially when their competitors— including
nonmember banks— don't have similar re­
quirements. (See Box 1 for a discussion of the
view that bankers are not entitled to this interest.)
Bank customers are also affected. Because
banks must forego some interest, the cost of

1Mem ber banks are com mercial banks that are members of
the Federal Reserve System and hence subject to Fed reserve
requirements. Mem bership carries advantages (for a discus­
sion of some advantages, see Lee Hoskins's article in this
issue) and disadvantages and is compulsory for nationally
chartered banks, but voluntary for state-chartered banks.




3

BUSINESS REVIEW

JANUARY 1975

BOX 1

ARE NO-INTEREST RESERVES
REALLY A TAX ON BANKS?
ANOTHER VIEW . . .
W e have taken the view that requiring banks to hold no-interest reserves is like a tax in the
sense that the Government, through due process, deprives banks of interest income that
otherwise would rightfully be theirs. There is another view that the banks are in no sense
entitled to interest on reserves.
The argument that banks are not entitled to interest on reserves first makes the observation
that member bank reserve assets are the liabilities of the Federal Reserve (every financial asset,
of course, is someone's liability) and in that sense they are “ issued” by the Fed. The argument
then forks in two directions. For one thing, reserves are issued or “ produced” by the Fed under
authority of the Congress and in the pursuit of the public welfare. The proceeds earned from
such a process should rightfully be turned over to the Treasury. W e should note, however, that
the Department of Defense procures weapons under Congressional authority in the pursuit of
the public welfare. Wouldn't the argument that banks are not entitled to interest on reserves
also suggest that profits earned by enterpreneurs and wages earned by workers in the process of
producing weapons for national defense should likewise be turned over to the Treasury?
Reserves are important for an effective monetary policy but that hardly means that banks are
not entitled to a return on their assets.
The second part of the two-pronged argument notes that banks need reserves in order to
expand profitable loans through the multiple credit-expansion process. Therefore, the argu^ment goes, rather than a “ tax” on banks, reserves are profit-makers. To put this argument in
perspective, suppose that some steel companies (not all steel companies and no other industry)
were prohibited from earning a return on 10 percent of their assets. In this example, would it
be convincing to tell steel producers that they are not entitled to the profits that are taken away
because (by law) they were “ allowed” to earn a return on the other 90 percent of their assets?
Therefore, they should view construction of the no-profit part of their plants as an opportunity
to make profits on the other 90 percent rather than as a cost.

tections or privileges from Government and so
should pay a supplemental tax or fee. Two com­
mon examples are the protections provided by
the Federal Reserve's commitment to provide a
stable financial environment and the banks'
“ franchise” or “ license” to issue demand
(checking) accounts. Bankers reply that they
should not have to pay extra for special services.
Many other firms and individuals who receive
special protections or privileges aren't asked for
a special payment. Tariffs provide many indus­
tries protection from foreign competition, pub­
lishers receive the protection of copyright laws,

banking goes up and at least some of the higher
cost is passed on. So, for example, if banks
are required to keep 15 cents of no-interest
reserves for every dollar of checking deposits,
these deposits are 15 percent less profitable.
Banks will have that much less incentive to
attract deposits so they w ill provide fewer
services or levy higher service charges to
checking account customers. In the case of
savings deposits they may pay lower interest
than otherwise.
An argument against paying interest is that
banks and their customers receive special pro­




4

FEDERAL RESERVE BANK OF PHILADELPHIA

sury. Others would have to make up the differ­
ence by paying higher taxes. Proponents of
interest on reserves offer a rebuttal to this. W hile
it is true that someone's taxes might rise if interest
were paid, the tax would be explicit rather than
implicit. Legislators would then be able to raise
the revenue through taxes that are based on the
common criteria of fairness and efficiency.
Member bankers might be right in arguing that
no-interest reserves are unfair. But, paradoxi­
cally, to change the law and start paying interest
on reserves after so many years would also be
unfair. No-interest reserves are now part of the
rules of the banking game. Businesses, individ­
uals, banks, and other financial institutions have
all made adjustments because of it. Changing
the law now would be changing the rules during
the game and that can be unfair.
Take, for example, a well-publicized objec­
tion to payment of interest. Because no-interest
reserves have made member banks costlier and
less profitable to operate, stock in those banks is
cheaper. A switch to payment of interest would
drive up the price of member bank stock and
leave the owners of banks with a windfall. The
windfall would not be as large as many believe
because competition would force banks to pass
much of the cost reduction on to customers. (This
would be especially true if proposals to pay in­
terest on reserves were linked with an end to
ceilings on rates banks pay to their customers.4
Nevertheless, the point is still well taken. And
this is not the only example of windfall gainsand
losses that would result from an unexpected re­
duction in banking costs.
Some, of course, will justify these gains and
losses as being among the unforeseen risks and
rewards of doing business and so quite fair.
Others will argue that risks of nature and the
market are unavoidable and fair, but risks of

and physicians have licenses to provide medical
services. Yet, none pays supplemental taxes or
fees.
Another justification for not paying interest on
reserves is that since the Federal Reserve pro­
vides banks with free or subsidized services such
as check clearing and currency distribution, it is
fair that banks pay for these services through no­
interest reserves. Commercial banks frequently
pay other banks for services for making interestfree funds called correspondent balances avail­
able. So, the argument goes, it seems well within
banking tradition for the Fed to “ charge” for
services by requiring banks to keep no-interest
reserves.
The counter argument to this position, how­
ever, is that when commercial banks compen­
sate one another with interest-free loans, the
quantity of funds loaned, quite expectedly,
depends on the volume of services performed.
(You expect to pay more for a hundred apples
than you do for one). But the volume of reserves
required by the Fed depends on each bank's
deposits, and not on the quantity of services it
“ buys” .2 Moreover, the cost of the services
exceeds the foregone interest by a wide margin.
In 1973, when member bank reserves could
have earned in the neighborhood of $3 billion,
the total operating cost of the Fed was about
$500 million.3
This large differential, incidentally, may ex­
plain partofthe reluctance of some to change the
law. If the Fed were permitted to pay interest on
reserves, its net earnings would decline so that it
would have less money to turn back to the Trea­

2There is some loose connection between the volume of
reserves and services. Large banks on an average use more
services (and hold more reserves) than small banks. But this
linkage ignores individual bank differences. For an alterna­
tive and direct method of charging for Fed services, see Lee
Hoskins's article in this issue.

4lnterest ceilings currently make it illegal for banks to pay
more then a stated maximum rate to depositors. For a discus­
sion of this important point and the case for removing the
ceilings see James O 'B rie n "Interest Ban on Demand De­
posits: Victim of the Profit M o tive?” Business Review of the
Federal Reserve Bank of Philadelphia, August 1972,
pp. 13-19.

3This large difference raises interesting questions. W h at are
the Fed's profits and what does it do with them? In 1973 the
Fed earned a profit of $4.4 billion of which $4.3 billion was
turned back to the Treasury. The remaining $100 million was
divided roughly equally between addition to the Fed's
surplus and payment to member banks of the 6 percent
return on their capital paid into the Federal Reserve Banks.




5

BUSINESS REVIEW

JANUARY 1975

positor's cost of holding a checking balance will
reflect the "true" costs of servicing and maintain­
ing the account. That way the depositor will have
the appropriate incentive to keep the right bal­
ance. No-interest reserves impose an artificial
cost on member banks which is passed on to
depositors. The cost is artificial because it is not
compensation for a true sacrifice someone must
make to provide bank services. Wages and rent,
for example, are genuine costs because they
compensate for time and space diverted from
other uses. Because no-interest reserves push the
costs of holding deposits artificially high, the
public is unduly discouraged from using bank
deposits and it does not take maximum advan­
tage of checking account services.
Some may argue that the case is not as simple
as this. In addition to no-interest reserves, other
sorts of imperfections are at work and some of
these may counterbalance no-interest reserves
by pushing in the direction of overutilization.
The clearest reasons for overuse of bank de­
posits can be found in restrictions on other forms
of money and "near money". Currency performs
much the same functions as checking accounts.
Both are used primarily to make payments and as
a result both areconsidered "m oney". Yet, while
we get services or reduced charges (in lieu of
interest) from banks for holding checking bal­
ances, we get nothing but convenience from
currency. Technical difficulties would make it
extremely costly to pay interest on currency. This
clearly puts currency at a disadvantage, and so
we are likely to be overutilizing checks relative
to currency. Similarly, Government regulations
that keep interest rates low on some "near
monies" (such as savings bank deposits) may
give an artificial boost to commercial bank ac­
counts. However, this "advantage" is uncertain
since similar and perhaps more stringent limita­
tions are placed on commercial banks.
W hile it is difficult to tell whether bank de­
posits are overutilized relative to other forms of
money and near money, it seems that money and
near money in general (whether currency,
checking accounts, savings accounts or U.S. sav­
ings bonds) are at a disadvantage in the race for
people's assets. The disadvantages include not

sudden changes in Government policy are unfair
and should be compensated.
Fairness, like beauty, is in the eye of the be­
holder. Whether the inequities of keepingtheold
rules outweigh the inequities of changing them
depends on individual judgment and individual
self-interest. The case for payment of interest on
reserves, though, does not rest on fairness alone.

NO-INTEREST RESERVES: INEFFICIENT?
No-interest reserves may contribute to a waste
of scarce resources. Remember that banks can
pass on some of the cost of holding reserves by
lowedng the interest they pay (in the case of time
deposits) or by raising the charges and reducing
services to depositors (especially in the case of
demand deposits). This, of course, discourages
the use of bank deposits in favor of other assets.
So no-interest reserves may lead to underutiliza­
tion of bank deposits (as do ceilings on interest
rates banks can pay on deposits). Checking
accounts will provide a good illustration. Check­
ing accounts are useful and keeping them near
the empty mark can be as inconvenient and
wasteful as filling your gas tank only half way.
Keep a low checking balance and you run the
risk of running out of money or running down to
the bank to fill 'er up when unexpected expenses
pop up, not to mention the added risk that an
error in arithmetic will turn into a rubber check.
So it doesn't pay to run checking balances too
low.
How low is too low? A person's (average)
checking balance is too low if the added con­
venience of increasing the balance would repay
the cost of holding the larger balance. And the
net cost of holding a larger balance is the interest
that could have been earned from, let's say, a
bond less any rewards the bank provides for
holding the larger balance.5
If the economy is working "right" the de­
5More generally, the cost is the difference between the rate
of return on the most desirable alternative to a checking
account and the rate of interest on checking deposits.
Explicit interest is prohibited on demand deposits, but banks
pay implicit interest in the form of more services or reduced
service charges.




6

FEDERAL RESERVE BANK OF PHILADELPHIA

that's why we have them. That they are also
effectively a tax on banks should be incidental.
The problem is that the secondary tax feature of
reserves gets in the way of the primary policy
aspect.
Control of the money stock (currency plus
demand deposits) is easier if required reserve
ratios (the ratio of required reserves to deposits)
on demand deposits are high and if they are the
same for all banks (see Box 2). Reserves that carry
a cost burden encourage low reserve ratios on
member banks and different ratios from one class
of bank to another. They encourage lower
reserve requirements on member banks because

only no-interest reserves but other factors such as
the artifically low interest on savings and check­
ing accounts. The result: we probably hold too
little of these highly liquid assets and too much of
the other kinds of assets. Paying interest on bank
reserves (as well as relaxing interest rate ceilings)
would help shift the balance back toward a more
efficient mix and improve the allocations of fi­
nancial assets.

NO-INTEREST RESERVES AND MONETARY
POLICY
Member bank reserve requirements are impor­
tant for controlling the money supply. Basically,

BOX 2

RESERVE REQUIREMENTS
AND MONEY STOCK CONTROL
Over the years, the Fed has been able to count on a fairly stable relationship between the
money stock (currency plus demand deposits) and member bank reserves. If historical experi­
ence is a guide, every dollar increase in member bank reserves will eventually lead to growth in
money of about $7.80. Money and reserves are chained together by two links.
Link 1: Banks generally issue about $6 in demand deposits for each dollar of reserves.
Link 2: The public mixes money about 1 part demand deposits to .3 part currency. So, $6 of
demand deposits means about $7.80 worth of money ($6 + .3 x $6 = $7.80).
If the links held tight, the Fed could simply inject one dollar in reserves for every $7.80 in
money it desired. Unfortunately, the links hold together only loosely, especially in the short
run.
The impacts of slippages in the links could be reduced by changing the reserve requirements
structure. Two examples are closely related to the discussion in the text: in general, (1) higher
reserve requirements on checking deposits and (2) uniform reserve requirements on checking
deposits give better control of these deposits.
Higher Reserve Requirements. The Fed does not have perfect control of bank reserves. So
even if it could (and it can't) counton $7.80 in money for every dollar increase in reserves, the
Fed can never really be sure what reserves and therefore for money stock will be.
Suppose, for example, reserves turned out to be $30 million higher than expected. Based on
link 1, this would mean deposits $180 million above expectations and based on link 2, the
money stock would be $234 million above plans.
Errors in the money stock resulting from miscalculations in bank reserves would fall if the
ratio in link 1 could be cut from six to one to let's say four to one. Then a $30 million miss in
bank reserves would mean unexpected checking deposits of only $120 million (instead of
$180 million under six to 1) and therefore an unexpected use in the money stock of only $156
million (as opposed to $234 million).
In general, the deposit to reserve ratio will fall if reserve requirements rise. The higher reserve
requirements the more reserves the banks need per dollar of deposits. Or, turned around the
fewer deposits per dollar of reserves. Thus errors from miscalculations of bank reserves can be




7

BUSINESS REVIEW

JANUARY 1975

reduced if reserve requirements would increase.
Uniform Reserve Requirements. Not only is the volume of reserves variable, but so too is the
six to one ratio, and fluctuations in this ratio lead to problems in money stock control. For
example, if the Fed wanted the money stock to be $234 billion, it would shoot for $180 billion
in checking accounts (based on link 2) and $30 billion in reserves (based on link 1). But
suppose that instead of the anticipated six to one ratio the actual ratio turned out to be 6.1 to
one. $30 billion in reserves would then mean $183 billion in checking accounts (link 1) and
$237.9 in money, $3.9 billion above target. One important reason for fluctuations in the
deposit to reserve ratio is nonuniformity in bank reserves.
Small member banks, for example, are required to hold only 7V.i cents in reserves for every
new dollar in customers' checking accounts. Or, turning it around, they can issue up to $13.33
of checking deposits for every dollar of reserves. Large banks are required to keep up to 16V2
cents in reserves for every new dollar of checking deposits; that is, they can add no more than
$6.06 in checking accounts for every dollar of new reserves.
So, for example, if a withdrawal from a small ($13.33 to 1) member bank and a subsequent
redeposit in a large ($6.06 to 1) member bank can reduce the deposit creation power of the
banking system by $7.27 ($13.33-6.06) with no change in bank reserves. If reserve require­
ment ratios were uniform the potential for this problem would be eliminated.
The problem can be even more serious in the case of a shift in reserves from a member bank
to a nonmember. Using the Fed's definition of acceptable reserve assets, nonmembers have
about $25 of checking accounts outstanding for every dollarof reserves. (In addition, nonmem­
bers hold other reserve assets as defined by state law but these are not issued by nor under the
control of the Fed). This means that a shift in Fed-type reserves from a nonmemberto a member
could greatly expand checking accounts with no change in reserves outstanding. Attracting
more member banks by paying interest on member reserves could reduce this problem
substantially.

the Federal Reserve Board must set requirements
on the basis of all relevant factors. Because
no-interest reserves are considered unfair and
because they may lead to inefficiencies, reserve
requirements are probably lower than they
should be or would be if member banks earned
interest on them.
Burdensome reserves encourage varying re­
serve ratios from bank to bank in part because of
voluntary membership in the Federal Reserve.
The Fed determines the reserve requirements
only of banks that choose to join the System.
Banks that do not choose System membership
are subjected to one of the fifty sets of state
reserve requirements.6 If interest were paid on
altogether, about 8,500 of the nations 14,000 ban
nonmembers. They account for about 26 percent^ xa]l
checking deposits.
rS ) , r




S 4U

member reserves, the burden of membership
would be reduced or eliminated so more banks
would join or stay in the Federal Reserve and be
subject to national rather that state requirements.
Increased membership would clearly contribute
to uniformity of reserve requirements across all
banks.
However, even if every bank in the country
joined the Fed, there would still be different re­
serve ratios. Reserve ratios among member
banks are graduated according to bank size (see
box). One reason for this may be a feeling on the
part of monetary authorities that small banks
should carry a smaller reserve burden than large
banks. If reserve requirements cease to be bur­
densome, one possible reason for treating small
large banks differently would vanish.
VTourse, just as the burden of no-interest
reserves keeps reserve requirements from being

LIBRARY

FEDERAL RESERVE BANK OF PHILADELPHIA

different jobs at once, it may do none of them
well.

a more effective policy tool, the policy aspect
probably keeps them from being a good tax or
fee— even if we did want to take the suggestion
of some that we use reserve requirements for one
of these purposes. It would take us too far afield
to discuss the factors that make for a good tax or
fee. But whatever they are, it would only be a
very fortunate coincidence if a reserve require­
ment structure designed to give good monetary
control would also provide a fair and efficient tax
of fee. If we give any weight to good policy, we
would have to compromise our standards for a
good tax. In short, the reserve requirement struc­
ture is a single tool. If we ask it to do several




SU M M IN G UP
Reserve requirements lead a double life. They
are an important tool of monetary policy and in
effect act as a tax on bank deposits. Linking
taxes or fees and monetary policy through no­
interest reserves leads to compormise. You can't
get a good tax or fee because of policy considera­
tions, and you can't get the strongest policy tool
because of cost considerations. So the question
remains, why not change the law and pay in­
terest on member bank reserves?
S

9

JANUARY 1975

BUSINESS REVIEW

ECONOMICS
of INFLATION
Inflation is currently a major problem
facing the U.S. Can policymakers
curtail it? If so, how much will their
actions "cost" society? Is inflation
"b a d ," and if so, why? Are there
ways of "living with inflation" that
cushion its negative impact on the
individual and society? Six articles
reprinted from the Philadelphia
Fed's Business Review address
these questions in detail and
seek to promote an
understanding of the
problem for both
policymakers
and the general
public.
Copies are available free of charge. Please address all requests to Public Information,
Federal Reserve Bank of Philadelphia, Philadelphia, PA 19105




10

FEDERAL RESERVE BANK OF PHILADELPHIA

Should the Fed
Sell Its Services?
By W. Lee Hoskins

THE PRICE: MEMBERSHIP

No one likes to waste resources, yet in the
United States banking system such waste may be
occurring daily. The culprit is the current pricing
mechanism, or rather the lack of it, for services
provided by the bankers' bank— the Fed. Many
of the Fed's services are tied to one "price," the
price of admission to the Federal Reserve Sys­
tem. By bundling many services under one price,
the Fed inadvertently may be encouraging ineffi­
cient or wasteful use of resources. In addition,
some problems of fairness or equity arise regard­
ing the commercial banks that deal with the Fed.
One method of moving toward more efficient
and equitable use of resources in banking would
be for the Fed to unbundle its service package
and charge an explicit price to all comers for
each service it can econom ically produce.
Fiowever, shifting to a fee-for-service system
would handicap member bankers unless it were
accompanied by a reduction in the cost of mem­
bership. Paying member banks interest on their
reserves held at the Fed would be a suitable
companion for a fee-for-service system.1

Currently, Fed services range from check col­
lection to storing securities for member com­
mercial banks (see Box 1). The Fed provides
these services to member banks in order to facili­
tate the smooth functioning of the financial sys­
tem as mandated by Congress. But it also pro­
vides services as a "paym ent" for membership in
the System. For example, a member banker has
the privilege of having all checks taken in during
a business day "cleared " by the Fed, and he can
receive this Fed service "fre e ."2
2At present a member bank collects all checks that were
cashed or handled at all of its branches and returns them to
the main office. Here each check is specially encoded with
magnetic ink revealing the amount of the check. (This pro­
cess allows the high-speed sorting machine to “ read” the
amount of the check). W h en all the checks are encoded they
are brought to a special collection station by the bank. From
this point the checks are transported, at the Fed's expense, to
the Regional Check Processing Center (RCPC) for that dis­
trict. Here they are sorted by a high-speed sorter-computer
and the amount of each check recorded on the computer and
sorted according to “ drawn-on" bank. W h en all of the day's
checks have been recorded and sorted, the reserve accounts
of all of the banks are adjusted by computer. W h en all of the
checks are sorted, they are returned to the main offices of the
banks, along with a slip of paper revealing the banks' new
reserve account balance, in time for the next business day.

’See Ira Kam inow's article in this issue.




11

JANUARY 1975

BUSINESS REVIEW

BOX 1

A SUMMARY OF SERVICES PROVIDED BY THE FED
The Discount Window. The Fed will lend money to member banks as a source of temporary
liquidity. Under special circumstances it can also lend to nonmember banks at a higher interest
rate than the discount rate. No nonmember bank in the Third District has ever borrowed from
the Fed.
Check Collections. The Fed will collect any check that a member bank wants to deposit.
There is no limit to the number of checks the Fed will collect but the bank must provide a
minimal amount of presorting (such as sorting checks by Federal Reserve Districts). The Federal
Reserve banks will accept checks from nonmember banks who are within their respective
districts or if the checks are those drawn against the U.S. Government.
Cash Distribution. All banks within a district may order cash from the Reserve banks.
Nonmember banks, however, must assume all risks, pay for the transportation of the cash, and
pay for any and all insurance. The Fed assumes all risks and costs when sending currency to
member banks.
Noncash Deposits. Member banks can use the Fed for any and all noncash deposits (such as
bankers acceptances, certificates of deposit, and maturing bonds) they wish to make. Member
banks forward these items to the Fed, and the Fed in turn credits their accounts and forwards the
items to the issuer.
Wire Transfers of Funds. The Fed will wire money from a member bank account on a phone
call from that bank and send it to any bank in the country. There is no charge for this service
except for transfers within a Reserve district and an amount of less than $ 1,000. Nonmembers
can use this service only through members.
Custody of Securities. The Fed will provide for the safekeeping of securities. Nonmembers
cannot keep securities in the Fed vaults unless they are pledged against Treasury tax and loan
accounts. The Fed will also wire securities to other banks in the U.S., but this wiring must go
through another Fed bank. Also included in this service is the buying and selling of Govern­
ment securities for member banks.

W h y don't all commercial banks flock to the
Fed for these services? The answer is simple.
There is a “ price" for admission. Member banks
are subject to the regulations of the Federal Re­
serve System, and these regulations can impose
costs on members. For example, members must
keep reserves equal to a stated portion of deposit
liabilities with the Fed. The Fed currently pays no
interest on these reserves. Last year these re­
serves could have generated about $3 billion in
interest for banks at current market rates. Thus,




one cost or price of membership is the interest
payments foregone as a result of joining the Sys­
tem. In recent years, with market interest rates
at record levels, the cost has been high. Conse­
quently, many members, finding the Fed's
package of services not worth the price, have
withdrawn from the System.
Aside from the membership problem,3the lack
3See June 1974 Business Review of the Federal Reserve
Bank of Philadelphia for detailed account of this problem.

12

FEDERAL RESERVE BANK OF PHILADELPHIA

avoid the full cost of using checks for payments.
They in turn pass this "benefit" along to custom­
ers. Thus, "overconsumption" in terms of the
number of checks written may occur. It is "over­
consumption" because the additional resources
that are flowing into check production, handling,
and distribution are more highly valued by soci­
ety in other uses. That is, if bankers and their
customers had to pay the full costs of check
processing, resources would probably be
released for other uses.
One moral of the check story is that the Fed, by
attempting to facilitate the smooth functioning of
the payments mechanism, has inadvertently
added to its problems. By spending over $135
million annually to process checks,4 the Fed is
providing an incentive for a continual heavy
flow of autographed paper through the banking
system.

of explicit prices for services can lead to ineffi­
cient use of resources for both banking and soci­
ety. Moreover, not all banks or bank customers
receive benefits in proportion to the costs they
bear as a result of the Fed's tying its services to
the price of membership in the System. Con­
sequently, some equity issues arise.

SPO NSO RIN G "O V ER C O N SU M PT IO N "
The Fed's intention in supplying particular
services to member banks is not only to make
membership attractive but also to promote an
efficient banking system. W h ile the provision of
services to member banks may facilitate the
functioning of the banking system, it may be an
inefficient means of doing so from society's point
of view. The problem occurs because the ser­
vices are " f r e e " once a bank becomes a
member. Thus, without an explicit price at­
tached to each service member banks have little
incentive to limit the amounts used. The out­
come can be "overconsumption" or an ineffi­
cient use of resources.
The check collection service offered by the
Fed illustrates this point. The Fed will "clea r" all
the checks a member bank cares to take in. There
is no charge per check. A bank can bring a
thousand or ten thousand checks to be cleared
and pay no fee. However, banks do bear some
additional costs because they must presort and
encode the checks.
As a consequence of this "free" check col lec­
tion policy, bankers have little incentive to cut
down on the number of checks for clearance. In
fact, they may profit from the arrangement by
soliciting correspondent business from non­
member banks in return for seeing that their
checks get processed. Moreover, bankers may
find it advantageous to compete with each other
for deposits by offering "fre e " checking ac­
counts to customers, since the Fed picks up a
portion of the tab for additional check process­
ing. Then, the customer has no incentive to
economize on the use of checks as a means of
payment since he is not charged for writing a
check.
The outcome of this process is that bankers




PROBLEMS FOR THE PRODUCER— THE FED
In addition to the "overconsumption" prob­
lem, the "free" services policy of the Fed can
lead to inefficiency on the production side as
well. First, the Fed has the problem of determin­
ing which services should be produced. Second,
it lacks information about the best methods of
producing them.

Which Services? Lately, Fed membership has
been dropping off, indicating that a growing
number of bankers either find the value of the
service package offered less than the cost of
membership or find the desired services cheaper
elsewhere. Unfortunately, this evidence pro­
vides little information about the value to
bankers and ultimately to the rest of us of each
service provided by the Fed. Without this infor­
mation it's difficult to judge whether the Fed is
efficiently using its resources. For example, the
Fed currently will wire money from a member
bank's account on a phone call from that bank
and send it to any bank in the country. The Fed
can total up the costs of making such transac­
“George W . M itchell, “ Banking and the Payments M ech­
anism ," speech at the Annual Meeting of the Association
of Reserve City Bankers, Boca Raton Florida, April 1972, p. 3.

13

JANUARY 1975

BUSINESS REVIEW

tions, but it has no idea how bankers (and
society) value this service. If these costs exceed
the value bankers place on the service, then
resources are being used inefficiently. That is,
these resources— phone lines, operators, and
cabling machinery— are valued more highly by
society in other productive uses. Thus, without
information about the value of each service the
Fed has no way of knowing which services are
worthwhile in an economic sense. Conse­
quently, the Fed may be tying up resources that
could be more productively used elsewhere.
An additional problem appears on the cost
side. Although the Fed does generate "profits," it
is not a profit-motivated institution. The Fed,
therefore, does not face the usual cost considera­
tions enforced by the marketplace. Conse­
quently, it may or may not use the most efficient
methods in producing services. For example,
high-powered computers may result in greater
speed in processing or "clearing" checks, yet the
ti me saved may not be worth the cost of the more
sophisticated machinery (the Fed receives some
information in this regard since it competes, in a
fashion, with banks offering correspondent-type
business). Again, information about how bank­
ers and the public value speedy debiting and
crediting of their account is needed if resources
used in the provision of services to member
banks are to be efficiently employed.

hefty portion of the check clearing system, has
lessened the incentive for banks and their
customers to seek alternative means of transfer­
ring debits and credits. If banks and ultimately
their customers had to pay the full costs of using
checks it may have been economical to seek
electronic transfers at an earlier date. Much of
the current interest in electronic transfer comes
from the rising cost of processing checks gener­
ated, in part, from the rapid growth in their
popularity (the number of checks processed
increased by some 35 percent from 1970 to
1973).
The point is that, without information about
how people value alternative methods of pay­
ments, choosing when to innovate is difficult.
And this information will not be forthcoming as
long as prices and costs remain im plicit.
Moreover, without this cost-price information
there is less incentive to develop new technology
that could ultimately lead to new directions in
banking services.
Finally, entrepreneurs will be reluctant about
developing new banking products when they
may end up competing with an institution such
as the Fed that is not subject to the normal
profit-and-loss discipline of the marketplace.

Innovation: Too Much or Too Little? Over the
long haul this loss of information could have an
important impact on innovation and the de­
velopment of specialized technology for bank­
ing. The reason is that economic consideration
plays an important role in each. For example, the
technology for trips to the moon for Americans
seeking exotic vacations is clearly with us, but
the economics of transporting numerous human
bodies through space keeps them out of the
travel brochures. And, so it goes in banking.
The basic technology for electronically trans­
mitting debits and credits to individuals' bank
accounts has been around for some time, yet
only recently have preliminary efforts been
made to apply it. One reason for the delay may
be the subsidizing of check collection and
processing. Put simply, the Fed, by paying for a

In addition to efficiency questions, the policy
of tying services to membership can raise some
equity orfairness issues for banks. Many member
banks may not be able to take advantage of the
whole range of services offered by the Fed
because of the nature of their business. Member
banks differ considerably in size and in the kinds
of customers they service. Some banks have a
wholesale orientation; others are strictly retail.
These differences mean that some banks will
make greater use of Fed services than others.
Moreover, even if two banks of equal size use the
same amount of services, it may cost the Fed
more to service one than the other. Yet, both
these banks pay the same price— the implicit
costs of membership. The likely outcome is that
some banks may "p a y " more per unit of any
service than others.




UNEVEN DISTRIBUTION

14

FEDERAL RESERVE BANK OF PHILADELPHIA

to member banks, a fee-for-service system would
require a reduction in the cost of membership
(such as paying interest on reserves).
The pricing of each service would provide
information about how bankers and their cus­
tomers value them. Suppose the Fed charges a
fee for check clearing aimed at covering the
entire cost of providing this service. (The Fed
could get a handle on the prices to charge by
looking at the prices charged in the marketplace
for these services). Bankers are likely to pass a
portion of this charge along to customers. At a
higher charge per check, customers are likely to
write fewer checks. The Fed could then scale
down its check-clearing operation (and perhaps
its charge) so that the full costs are covered by the
revenue generated from the charges. The result
of such pricing is that resources are released from
check processing to flow into other higher­
valued uses. Moreover, the payment system will
not always seem to be choked with a rapidly
growing volume of checks.6
The attempt to match prices and costs for other
Fed services would also result in a more efficient
use of resources. The point is that by charging
prices that more accurately reflect the cost of
producing a service, the Fed gains information
about the value of these services to its customers.
The Fed then would know which services to cut
back and which to expand. And through making
these adjustments it would provide for a more
efficient use of society's resources (see Box 2).
Moreover, if the Fed had an announced policy
of pricing its services based on costs rather than
subsidizing them, then private producers of
these services would likely evolve. Currently,
private production is probably stunted because
of the Fed's bundle-pricing policy and implicit

For example, suppose a member bank oper­
ates in an area where a private firm provides a
regional check-clearing service that is quite
efficient. Thus, rather than use the Fed's clearing
service, this bank chooses to use that of the
private company. Yet, another member bank in a
different locale clears all its checks through the
Fed. The outcome is that both banks are required
to "p a y " for the Fed service, but one receives
nothing for the payment while the other does. If
the Fed charged on the basis of the number of
checks cleared, then both banks would pay in
proportion to the amount of check-clearing
services used.
Another example of an equity problem occurs
when two banks of equal size receive the same
amount of a service yet the cost to the Fed for
servicing each differs. Take the case where one
member is located next door to the Fed while
another is a hundred miles away and both
receive the same amount of cash distribution
from the Fed each week. The cost to the Fed of
providing this service to the bank next door is
quite low relative to the more distant bank since
the Fed bears all transportation and insurance
costs. However, both banks "p a y " the same for
the service— membership in the System. Thus,
the more distant bank, in a sense, is being
implicitly subsidized by the bank next door to
the Fed.5
In both of these examples, member banks do
not receive Fed services in proportion to what
they "p a y " for them. Consequently, the Fed's
policy of tying all services to the implicit price of
membership leads to inequities among member
banks.

MARKET PRICES: LESS WASTE, MORE EQUITY
Any move by the Fed toward selling each of its
services for an explicit market price would be a
move against both waste and inequities in the
U.S. banking system. And such a practice would
in the end benefit us all. However, in fairness

6O f course, the payment of interest on reserves may cause
banks to seek more deposits. Banks may try to do so by
offering customers “ free" checking accounts. However, the
banks would have to absorb the full cost of such action and
resources would still be used efficiently. In addition, if the
prohibition against payment of interest on demand deposits
were removed, banks could compete for deposits directly
rather than offering “ free" checking accounts. The outcome
of such a move could also result in important efficiency gains
for society.

5An additional problem occurs when two member banks
of different size use the same amount of service. The larger
bank, because of the lack of interest payments on reserves,
“ pays" more for the service than the smaller bank.




15

BUSINESS REVIEW

JANUARY 1975

BOX 2

GETTING THE MOST FOR SOCIETY
Market prices are an important element in generating information about how best to use
resources. The process works in this way. Competitive prices are signals which direct the flow
of resources to uses most highly valued by society as a whole. And consumers play the
dominant role in determining which uses are most highly valued by bidding up the prices of
goods they prefer more of relative to those they prefer less of. As a result, relative market prices
reflect the tastes or values consumers attach to having additional units of each good. This
information about society's tastes and desires is essential, for it tells producers where to direct
resources.
Profit-seeking producers are important cogs in the workings of the system. Noticing a change
in relative market prices (or anticipating one), a sharp-eyed producer bids resources away from
the lower-valued uses and directs them to the production of goods and services for which
consumers have expressed a desire (or can be expected to desire). His incentive to do this is an
increase in his profits. But, as production expands, a point will be reached where the additional
resources are going to cost the producer more than they can add to his return. He will stop
producing goods which use these resources before that point is reached, if he is interested in
achieving the largest return possible. This return will be kept to a minimum by competition (or
the threat of it) from other producers. Hence, market prices provide producers with both the
necessary information and incentive to ensure that resources flow to uses most highly valued
by society. And, as a consequence, any rearrangement of society's output would leave it worse
off, providing that the current distribution of wealth is acceptable, competitive markets prevail,
and that individuals bear the consequences of their actions.

resources to developing technology and new
banking services if they were able to capture the
returns from their efforts. If the Fed no longer
subsidized services but charged a price that
reflected costs, then entrepreneurs would have
an incentive to develop technology and services
that would lower costs. This occurs because
private firms would realize the gains from
improved techniques.
Second, innovations would be implemented
when it was economical to do so. This does not
mean all available technology would be intro­
duced as soon as it is discovered. For example,
computers have been around for some time, yet
many tasks they could perform are still done “ by
hand." W h y? Because in some cases it is cheaper
to do a job with human calculation rather than
running it through the computer. Thus, explicit
pricing of the Fed's check-clearing service may
lead to a hastening of electronic fund transfers.
Or such pricing may retard it. The point, in either

subsidy. Private producers must cover costs
(including a return on investment) if they are to
stay in business. If the Fed priced accordingly,
then the most efficient producers, either the Fed
or private entrepreneurs, would end up provid­
ing the lion's share of each service. Competition
between the Fed and private firms would ensure
that banks and their customers receive services
at the lowest possible price.7*
An additional benefit of an explicit pricing
policy by the Fed is its impact upon innovation.
Innovation would be affected in two ways. First,
private firms would have an incentive to devote
7lt is possible some of the services currently provided by
the Fed are of such a nature that one producer can satisfy
demand at a lower price than if two existed. In this case,
either the Fed or a private firm should undertake the
operation. In addition, it may not be worthwhile to attempt to
price some services. This would be the case if the cost of
establishing a price for the services is greater than the
potential efficiency gain.




16

FEDERAL RESERVE BANK OF PHILADELPHIA

EVERYBODY GAINS

case, is that economic considerations, the price
of one method relative to the other, would
determine the appropriate time for implement­
ing new techniques. In the marketplace, where it
counts, the newest and most advanced technol­
ogy is not necessarily the best.
Explicit pricing by the Fed also can make its
dealings with banks more equitable, in addition
to less wasteful. Banks, faced with an explicit
price for each service rather than a package deal
in return for membership, could pick the services
they desire and purchase the quantity they want.
Unlike the current system, banks would be
paying for services in proportion to the amount
they actually used. If banks do not want a
particular service, such as wire transfer, they do
not pay for it as they implicitly do under the
current arrangement. Thus, banks that make
extensive use of Fed services would pay more
than banks that use less. Under the current
system, two banks of the same size but using
different amounts of Fed services "p a y " the same
in terms of the cost of membership in the
System.8

Explicit pricing of Fed services can help us all
by making more efficient use of society's
resources. Bankers benefit because they could
choose and pay for only those services they most
desired rather than the whole bundle. The Fed
gains because its "production" headaches are
reduced and it can devote more attention to such
matters as monetary policy. And the public gains
because resources will flow efficiently into the
products they desire.9
Implementing a fee-for-service system will
require some adjustments. In particular in­
stances, Congressional action may be required
to institute fees. In addition, the "p rice " of
membership in the Federal Reserve must be
reduced in order to avoid discriminating against
member banks. Paying interest on member bank
reserves would be an important step in this
direction. In short, charging member banks for
the services they use, coupled with interest
payments on reserves, would alleviate some
equity and efficiency problems and would be in
keeping with the tradition of a free enterprise
economy.

8The Fed, by moving toward market pricing, could cause
bank owners to realize some gains or losses in the value of
their bank stock since current inequities associated with the
free service policy are already capitalized into stock prices.




9W h ile bank customers may have to pay higher prices for
banking services, the higher prices could be offset by
eliminating interest rate ceilings on time, and demand
deposits.
S

17

BUSINESS REVIEW

JANUARY 1975

ANNOUNCING A NEW PUBLICATION SERIES
FROM THE DEPARTMENT OF RESEARCH . . .
Starting this year the Philadelphia Fed's Research Department will occasionally publish
RESEARCFi PAPERS dealing with a wide range of banking and economic issues. Most of these
papers are of a highly technical nature and for the professional researcher.
The following are the first in the series.
• “ Intradistrict Distribution of School Resources to the Disadvantaged: Evidence for the
Courts," Philadelphia School Project, by Anita A. Summers and Barbara L. Wolfe
• “ Branching Restrictions and Commercial Bank Costs," by Donald J. Mullineaux
• “ Economies of Scale of Financial Institutions," by Donald J. Mullineaux
Copies of these are available from the Department of Research, Federal Reserve of
Philadelphia, Philadelphia, PA 19105.




18




JANUARY 1975

BUSINESS REVIEW

DIRECTORS AND OFFICERS

Incorporated, was redesignated Deputy Chair­
man of the Board for 1975. In another appoint­
ment, the Board of Governors named Edward W .
Robinson, Jr., Vice President, North Carolina
Mutual Life Insurance Company, Philadelphia,
to his second three-year term as Class C director.
The Board of Directors reappointed James F.
Bodine, President and Chief Operating Officer,
First Pennsylvania Corporation and First Penn­
sylvania Bank N.A., Bala-Cynwyd, to serve in
1975 as the member of the Federal Advisory
Council from the Third Federal Reserve District.
Effective January 1, 1974, G. W illiam Metz,
Vice President in charge of Fiscal-Safekeeping
Operations, began reporting to Alexander A.
Kudelich, Senior Vice President, in a move to­
ward consolidation of operations services.
On May 1, Dominic L. Matteo, Check Process­
ing Officer, became Payments Mechanism Of­
ficer. Jack P. Besse, Assistant Vice President, was
transferred from the Data Processing Depart­
ment to the Collections and Check Processing
Operations and assumed responsibility for
checking processing. Both Messrs. Matteo and

An election was held to choose directors of
this Bank to succeed John C. Tuten, Chairman
and Chief Executive Officer, National Central
Bank and National Central Financial Corpora­
tion, Lancaster, Class A director; and C. Graham
Berwind, Jr., President and Chief Executive
Officer, Berwind Corporation, Philadelphia,
Class B director; who completed their terms of
office. Member banks in Electoral Group 1
elected W illiam B. Eagleson, Jr., Chairman of the
Board and President, Girard Trust Bank, BalaCynwyd, to succeed Mr. Tuten, and reelected
Mr. Berwind to succeed himself. Each will serve
a three-year term ending December 31, 1977.
The Board of Governors of the Federal Reserve
System redesignated John R. Coleman, Presi­
dent, Haverford College, Haverford, Pennsyl­
vania, as Chairman of the Board of Directors of
this Bank, and Federal Reserve Agent for 1975.
Edward J. Dwyer, Chairman of the Board, ESB




20

FEDERAL RESERVE BANK OF PHILADELPHIA

Besse report to W illiam E. Roman, Vice Presi­
dent, who has the overall responsibility for the
Collections and Check Processing Operations.
Kenneth M. Snader, Vice President, Computer
Applications, assumed responsibility for the
Data Processing functions.
Effective April 22, Joseph R. Joyce, Vice Presi­
dent, Human Resources, was designated Equal
Employment Opportunity Officer of the Bank.
On July 19, Robert R. Swander, Vice President
and General Auditor, became Vice President re­
sponsible for Computer Services, General Ser­
vices and Protection, Budgeting, Accounting,
Operations Research and Transportation, report­
ing directly to Mark H. Willes, First Vice Presi­
dent. Hugh Barrie, Senior V ice President,
assumed the responsibility for directing the
move to the new Bank building as well as serving
as chief I iaison officer between this Bank and the
operations departments of the large City banks.
Mr. Barrie continues to report to Mr. Willes and
retains his responsibilities as communications
officer, working on both Bank and System pro­
jections on communications, automated clear­
ing houses, and related matters.
W illiam A. James, Senior Vice President, re­
tired July 1.
Effective September 9, Robert R. Swander be­
came Senior Vice President and Donald J.
McAneny, Assistant Vice President and Assistant




Secretary, became Vice President and General
Auditor, succeeding Mr. Swander. Frederick M.
Manning assumed the title of Chief Examining
Officer and Arthur L. Morath became Banking
Structure Officer.
Lyle P. Bickley, Computer Systems Coor­
dinator, resigned October 15. Joseph R. Joyce,
Vice President, Human Resources, resigned
November 26.
On December 12, Bipin C. Shah joined the
official staff as Vice President, Computer Ser­
vices. Kenneth M. Snader, Vice President, who
will retire in January 1975, will assist Mr. Shah in
effecting an orderly transfer of responsibilities.
Effective January 1, 1975, W . Lee Hoskins,
Vice President, assumed the title of Vice Presi­
dent and Director of Research, and Ira Kaminow,
Economic Adviser, became Vice President and
Economic Adviser. Joseph J. Ponczka, Examin­
ing Officer in the Department of Supervision and
Regulation, was transferred to the Fiscal
Safekeeping Department, replacing Peter M.
DiPlacido, Fiscal Operations Officer, who be­
came Assistant Vice President. Paul E. Kirn, Jr.,
Cash Operations Officer, and Lawrence C. San­
tana, Jr., Building and Security Officer, became
Assistant Vice Presidents. Glennie M. Matthewson, II, became Assistant Counsel. Donald J.
Mullineaux and Ronald D. Watson were pro­
moted to Research Officer and Economist.
21

BUSINESS REVIEW

JANUARY 1975

DIRECTORS AS OF JANUARY 1, 1975
JO H N R. C O LEM A N , Chairman of the Board and Federal Reserve Agent
ED W A R D J. D W Y ER, Deputy Chairman
Term expires
December 31

G RO UP
CLASS A
1

W ILLIA M B. EAGLESON, JR.
Chairman of the Board and President
Girard Trust Bank
Bala-Cynwyd, Pennsylvania

1977

2

JO H N J. HASSLER
President
The City National Bank and Trust Company of Salem
Salem, New Jersey

1975

3

T H O M A S L. MILLER
President
Upper Dauphin National Bank
Millersburg, Pennsylvania

1976

CLASS B
1

W IL L IA M S. M A SLAN D
President
C. H. Masland & Sons
Carlisle, Pennsylvania




1976

22

FEDERAL RESERVE BANK OF PHILADELPHIA

DIRECTORS AS OF JANUARY 1, 1975
CLASS B
2

C. G R A H A M B ER W IN D , JR.
Chairman of the Board and President
Berwind Corporation
Philadelphia, Pennsylvania

1977

3

BERN ARD D. BROEKER
Director
Bethlehem Steel Corporation
Bethlehem, Pennsylvania

1975

CLASS C
JO H N R. C O LEM AN
President
Haverford College
Haverford, Pennsylvania

1976

ED W A R D W . RO BIN SO N , JR.
Vice President
North Carolina Mutual Life Insurance Company
Philadelphia, Pennsylvania

1977

E D W A R D J. D W Y ER
Chairman of the Board
ESB Incorporated
Philadelphia, Pennsylvania

1975

MEMBER OF THE FEDERAL ADVISORY COUNCIL
JAM ES F. BO D IN E
President and Chief Operating Officer
First Pennsylvania Corporation and
First Pennsylvania Bank N.A.
Bala-Cynwyd, Pennsylvania




23

1975

JANUARY 1975

BUSINESS REVIEW

OFFICERS AS OF JANUARY 1, 1975
D AVID P. EASTBURN, President
M ARK H. WILLES, First Vice President
H U G H BARRIE, Senior Vice President
ED W A R D G. BO EH N E, Senior Vice President
ALEXAND ER A. KU D ELICH , Senior Vice President
ROBERT R. SW A N D ER , Senior Vice President
JO SEPH M. CASE, Vice President
H U G H C H A IRN O FF, Vice President and Lending Officer
D. RUSSELL C O N N O R , Vice President
TH O M A S K. DESCH, Vice President
RICHARD W . EPPS, Vice President
HILIARY H. H O L LO W A Y , Vice President and General Counsel
W . LEE HO SKINS, Vice President and Director of Research
IRA K A M IN O W , Vice President and Economic Adviser
D O N A LD J. M cA N EN Y, Vice President and General Auditor
G. W ILLIA M METZ, Vice President
LAW REN CE C. M U R D O C H , JR., Vice President and Secretary
W ILLIA M E. RO M A N , Vice President
BIPIN C. SHAH, Vice President
KENNETH M. SNADER, Vice President
JACK P. BESSE, Assistant Vice President
PETER M. DiPLAC ID O , Assistant Vice President
PAUL E. KIRN, JR., Assistant Vice President
A. LAM O N T MAGEE, Assistant General Auditor
W A RR EN R. MOLL, Assistant Vice President
GLEN N IE M. M A T T H EW SO N , II, Assistant Counsel
LAW REN CE C. SANTANA, JR., Assistant Vice President
ELIZABETH S. W E B B , Assistant Counsel
EVELYN G. BATTISTA, Human Resources Officer and Assistant Secretary
SAM UEL J. CULBERT, JR., Bank Services Officer
G EO R G E C. HAAG, Public Services Officer
JU D ITH H. H ELM U TH , Computer Services Officer
KATHLEEN C. H OLM ES, Research Officer and Assistant Secretary
ED W IN C. LO DGE, Accounting Officer
FREDERICK M. M A N N IN G , Chief Examining Officer
D O M IN IC L. MATTEO, Payments Mechanism Officer
A RTH U R L. M O RATH, JR., Banking Structure Officer
D O N A LD J. M U LLIN EA U X , Research Officer and Economist
STEPHEN M. O N DECK, Examining O fficer— Commercial
JO SEPH J. PO N CZKA, Fiscal Operations Officer
D AVID H. SCOTT, Regulations Officer
ROBERT A. W A LLG R EN , Examining Officer— Trust
RO N A LD D. W A T SO N , Research Officer and Economist




24

FEDERAL RESERVE BANK OF PHILADELPHIA

STATEMENT OF CONDITION
Federal Reserve Bank of Philadelphia

End of Year

1974

(000s omitted in dollar figures)

1973

ASSETS
Gold certificate account ............................................................
Special Drawing Rights Certificate ...........................................
Federal Reserve notes of other Federal Reserve banks
...........
Other cash
.................................................................................

613,730
23,000
81,816
10,164

$ 817,012
23,000
63,038
2,217

23,235
265,883
4,526,831

19,436
106,094
4,296,215

...............................................

$4,815,949

$4,421,745

Uncollected cash items
............................................................
Bank premises ...........................................................................
All other assets ...........................................................................

343,481
30,942
67,078

394,286
10,435
46,196

......................................................................

$5,986,161

$5,777,929

Federal Reserve notes ................................................................
Deposits:
Member bank reserve accounts .........................................
United States Government .................................................
Foreign
...............................................................................
Other deposits ....................................................................

$4,468,137

$4,092,297

864,771
151,723
14,210
28,558

1,028,954
139,424
12,740
39,301

..................................................................

$5,986,161

$1,220,419

Deferred availability cash items
...............................................
All other liabilities ......................................................................

309,619
65,288

330,854
51,176

................................................................

$5,902,305

$5,694,746

Capital paid in ....................................................................
Surplus
...............................................................................

41.928
41.928

41.592
41.592

$5,986,161

$5,777,929

Loans and securities:
Discounts and advances .....................................................
Federal Agency obligations ...............................................
United States Government securities ................................
Total loans and securities

Total assets

$

LIABILITIES

Total deposits

Total liabilities

CAPITAL ACCOUNTS

Total liabilities and capital accounts

............................

Ratio of gold certificate reserve to Federal Reserve note liability




25

13.7%

20.0%

BUSINESS REVIEW

JANUARY 1975

EARNINGS AND EXPENSES
Federal Reserve Bank of Philadelphia

(000s omitted)

1974

Earnings from:
United States Government securities .........................................
Other sources ...............................................................................

1973

$328,474
7,377

$257,976
6,529

..............................................................

$335,851

$264,505

Net expenses:
Operating expenses* ....................................................................
Cost of Federal Reserve currency ...............................................
Assessment for expenses of Board of Governors
.......................

23,670
2,295
2,009

21,089
2,053
2,192

............... ■...................................................

$ 27,974

$ 25,334

...........................................................................

$307,877

$239,171

151

71

Total current earnings

Total net expenses
Current net earnings

Additions to current net earnings:
Miscellaneous nonoperating income
Total additions

.........................................

.........................................................................

$

Deductions from current net earnings:
Loss on sales of U.S. Government securities ..............................
Loss on foreign currency transactions
.......................................
Miscellaneous nonoperating expenses .......................................
Total deductions
Net deductions

......................................................................

*After deducting reimbursable or recoverable expenses.




$

26

6,209

71
1,894
2,323
24

$

4,242

6,058

4,171

301,819

235,000

2,490
298,993
336

$
2,417
229,888
2,695

$301,819

$235,000

................................

Dividends paid .....................................................................................
Paid to U.S. Treasury (interest on Federal Reserve notes) .................
Transferred to or deducted from (—) Surplus .....................................

$

2,291
1,664
2,254

.....................................................................................

Net earnings before payments to U.S. Treasury

151

$

FEDERAL RESERVE BANK OF PHILADELPHIA

VOLUME OF OPERATIONS
Federal Reserve Bank of Philadelphia
Number of pieces (000s omitted)
Collections
Ordinary checks* ............................................................
Government checks (paper and card)
..........................
Postal money orders (card) .............................................
Noncash items ................................................................
Food stamps redeemed ...................................................
Clearing operations in connection with direct sendings and
wire and group clearing plans** .......................................
Transfers of funds
..................................................................
Currency counted
..................................................................
Discounts and advances to member banks ..........................
Depository receipts for withheld taxes ..................................
Fiscal agency activities:
Marketable securities delivered or redeemed ...............
Computerized marketable securities (Book entry
transactions) ................................................................
Savings bonds and notes (Federal Reserve Bank and agents)
Issues (including reissues) ...............................................
Redemptions ....................................................................
Coupons redeemed (Government and agencies)
.................

1974

1973

1972

547,080
41,313
9,295
1,007
121,528

545,463
38,052
11,285
963
89,494

438,534
36,560
12,016
948
79,369

572
448
380,085
3
2,196

585
382
377,043
2
2,038

608
382
372,51 1
(a)
1,664

431

289

292

16

18

12

12,015
8,728
536

12,589
8,609
592

10,665
7,497
726

$184,597
15,134
268
3,195
254

$164,136
13,433
226
2,698
172

$139,115
11,795
219
2,707
152

97,912
914,436
3,227
16,760
10,659

98,938
616,427
3,058
15,502
9,754

87,787
568,433
2,853
2,725
8,275

12,808

11,452

8,950

16,379

30,560

29,657

671
559
377

680
540
356

623
355
158

Dollar amounts (000,000s omitted)
Collections:
Ordinary checks* ............................................................
Government checks (paper and card)
..........................
Postal money orders tcard) .............................................
Noncash items ................................................................
Food stamps redeemed ...................................................
Clearing operations in connection with direct sendings and
wire and group clearing plans** .......................................
Transfers of funds
..................................................................
Currency counted
..................................................................
Discounts and advances to member banks ..........................
Depository receipts for withheld taxes ..................................
Fiscal agency activities:
Marketable securities delivered or redeemed ...............
Computerized marketable securities (Book entry
transactions) ................................................................
Savings bonds and notes (Federal Reserve Bank and agents)
Issues (including reissues) ...............................................
Redemptions ....................................................................
Coupons redeemed (Government and agencies)
.................
* Checks handled in sealed packages counted as units.
** Debits and credit items.
(a) Less than 1,000 rounded.




27

business review

FEDERAL RESERVE BANK
OF PHILADELPHIA
PHILADELPHIA, PA. 19105