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FED ER A L R E S E R V E BANK
OF NEW YORK
r Circular No. 3 2 0 8 * 1
L
April 24, 1947
J

INTEREST CHARGE ON FEDERAL RESERVE NOTES

To all Banking Institutions, and Others Concerned,
in the Second Federal Beserve District:

For your information we quote below the text of a statement released by the Board of
Governors of the Federal Reserve System to the press for publication April 24, 1947:
As a result of operations essential to Government financing during and since the war, and opera­
tion's required by the needs of business and the public for credit and currency, earnings of the twelve
Federal Reserve Banks have been at relatively high levels. On the basis of present estimates, it is
expected that net earnings of the Federal Reserve Banks for 1947, after payment of the statutory divi­
dends to member banks, will aggregate more than $60,000,000. In view of these facts, and of the fact
that at the end of 1946 the surplus of each Federal Reserve Bank was equal to its subscribed capital, the
Board has decided to invoke the authority, granted to it under Section 16 of the Federal Reserve Act,
to levy an interest charge on Federal Reserve notes issued by the Federal Reserve Banks. The purpose
of this interest charge is to pay into the Treasury approximately 90 per cent of the net earnings of the
Federal Reserve Banks for 1947.
This action will add about $60,000,000 to the receipts of the Government for this calendar year.
The initial payment covering the first quarter of 1947 will be made on April 24, and will amount to
approximately $15,269,000.
Section 16, paragraph 4, of the Federal Reserve Act provides that each Federal Reserve Bank shall
pay such rate of interest as may be established by the Board of Governors of the Federal Reserve
System on the amount of its outstanding notes less the amount of gold certificates held by the Federal
Reserve Agent as collateral security. The Board has now decided to establish such rates of interest as
will make it possible to transmit to the Treasury approximately 90 per cent of the net earnings after
dividends of each of the Federal Reserve Banks for 1947.
The authority to levy an interest charge on Federal Reserve notes not covered by gold certificates has
not been used previously, chiefly because of the existence, prior to 1933, of so-called franchise tax provi­
sions of the law which had a similar effect; that is, of transferring excess earnings of the Reserve Banks to
the Treasury. Under these provisions, which were repealed in 1933, each Federal Reserve Bank was
required to pay a franchise tax to the Government equal to 90 per cent of its net earnings after it had
accumulated a surplus equal to its subscribed capital. To the end of 1932, the Federal Reserve Banks
had paid franchise taxes to the United States Treasury amounting to $149,000,000, and at that time
the Federal Reserve Banks had accumulated surplus accounts of $278,000,000, as compared with sub­
scribed capital aggregating $302,000,000. In the amendment of the Federal Reserve Act, contained in
the Banking A ct of 1933, providing for the establishment of the Federal Deposit Insurance Corpora­
tion, Congress required each Federal Reserve Bank to pay an amount equal to one-half of its surplus




(o v e r )

on Janu ary 1, 1933, as a subscription to the capital stock of the F D IC on which no dividends would be
paid. These stock subscriptions amounted to $139,000,000 and reduced the surplus of the Federal
Reserve Banks to an equivalent figure, or considerably less than one-half of their subscribed capital.
Congress, therefore, eliminated the franchise tax in order to permit the Federal Reserve Banks to restore
their surplus accounts from future earnings.
Net earnings for the next ten years were relatively small, and at the end of 1944 the combined
surplus accounts of the Federal Reserve Banks were less than 75 per cent of their subscribed capital.
During the next two years, however, net earnings increased substantially, due primarily to large hold­
ings of Government securities accumulated through open market operations. This made possible
transfers to surplus accounts which increased the combined surplus of the Federal Reserve Banks
to $439,823,000 at the end of 1946, as compared with subscribed capital of $373,660,000.
Under the circumstances, the Board concluded that it would be appropriate for the Federal
Reserve Banks to pay to the Treasury the bulk of their net earnings after providing for necessary
expenses and the statutory dividend. In effect, this will involve paying currently to the Treasury
funds which, under existing law, would otherwise come to it only in the event of liquidation of the
Federal Reserve Banks. The Federal Reserve A ct still provides that, in case of liquidation of a
Federal Reserve Bank, any surplus remaining after the payment of all claims shall be paid to the
Treasury. It is expected that the present payments will be made at quarterly intervals. B y invok­
ing its authority under Section 16 of the Federal Reserve A ct, the Board is able to accomplish
the same results as were accomplished by the payment of a franchise tax, i. e., the transfer of excess
earnings to the Government. The payments can thus be reflected in current revenues and taken into
account in the Government’s budget without further legislation.
In the event of restoration of a franchise ta x by the Congress, the Board would, of course, with­
draw the requirement that Federal Reserve Banks pay interest on Federal Reserve notes, as there
would be no justification for utilizing both means of accomplishing the same purpose— namely, payment
of excess earnings of the Federal Reserve Banks to the Treasury.
In his budget message for 1948 the President recommended that Congress authorize the F ed ­
eral Deposit Insurance Corporation to repay the $139,000,000 of capital furnished by the Federal
Reserve Banks, and accepted the proposal of the Board of Governors that Congress at the same time
authorize the payment of this sum to the Treasury instead of to the Reserve Banks. Similarly, the
President in his budget message concurred in the B o ard ’s further recommendation that Congress
release to the Treasury General Fund approximately $139,000,000 earmarked for payments to the
Reserve Banks to enable them to make loans to industry under Section 13b of the Federal Reserve
Act. Legislation has been introduced in Congress to repeal Section 13b and to substitute therefor
authority for the Reserve Banks, upon request of any commercial bank, to guarantee in p art loans
made by such bank to business enterprises. If this legislation be enacted, the Federal Reserve Banks
would rely upon their own surplus funds for this purpose, without resort to Government funds.

Additional copies of this circular will be furnished upon request.




A ll a n S pr o u l,

President.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102