FEDERAL RESERVE BANKS Capitalization of Federal Reserve Banks The Federal Reserve Act prescribes a minimum capitaliza tion of $4,000,000, divided into $1oo shares for each of the twelve federal reserve banks. The outstanding capital stock increases or decreases from time to time with the increase or decrease in the capital or surplus of member banks. When a new bank joins the system it is required to subscribe 6 per cent of its capital and surplus to the stock of the federal reserve bank, and when a bank already a member increases its capitalization or surplus it must at the same time increase its subscription so as to reach 6 per cent of the new amount. Half this original subscription is payable in three quarterly instalments, and the rest at the call of the Federal Reserve Board. If a bank buys reserve bank stock it contracts to pay par value plus ,q per cent a month for each month since the last dividend payment. When a bank reduces its capital and surplus or withdraws from the system, refunds are made to it on the same basis. The shares may not be transferred nor hypothe cated.
To date, the Federal Reserve Board has not called for any part of the second half of the stock subscriptions of member banks. The accumulation of a goodly surplus in recent years makes it improbable that the uncalled subscription will ever be called. It will simply remain as a contingent asset of the reserve bank.
The advisability of capitalizing the reserve banks, or at least requiring the members to pay subscriptions to their stock, has been questioned. The objection arose because of the low earnings of certain reserve banks during the period 1914-1917. The ar guments were that the requirement of a 6 per cent subscription, as explained above, was arbitrary and no more than a guess at what the capital requirements of the reserve banks would be, and that the mere liability of the member banks for the required capital would have been as effective as its payment; that the paid-in capital of the reserve banks created a dividend responsibility which forced them to undertake banking operations in the open market in competition with the member owners; that the gold reserves paid into the reserve banks were ample to take care of the rediscounting needs of the member banks; and that the sub scription requirements for member banks discouraged state banks from entering the system.
The capitalization of the reserve oanks, however, serves many useful ends: It provides an initial working capital; it gives the member banks a decided interest in the operation of the reserve bank other than if the institution were a mere depository; it provides resources sufficient to insure to the reserve bank stability and continuity; it furthers open-market operations, through which the board and reserve banks can control the banking situa tion; and it is a fair investment for the members.
Surplus The act provides for an annual 6 per cent cumulative dividend on the paid-in capital stock of the reserve bank. Any excess of net earnings above the 6 per cent accrues to the United States as a franchise tax, except that the whole of such net earnings shall be paid into a surplus fund until it shall amount to Ioo per cent of the subscribed capital stock, and thereafter io per cent of the net earnings shall be paid into surplus. The earnings derived by the United States from this source are, at the discretion of the Secre tary of the Treasury, put into the gold reserve fund for the re demption of the greenbacks or used to reduce the government debt.
If a federal reserve bank should be dissolved or go into liquida tion, any surplus remaining after the payment of its debts, dividend requirements, and the par value of the outstanding stock, would be paid to and become the property of the United States. In other words, any surplus accrued is a contingent asset of the United States government rather than of the member banks.
The Federal Reserve Act differs from the charters of most foreign central banks in that it names no specific annual franchise tax, but provides first for the payment of dividends to the stock holding banks at a moderate rate of return, leaving the excess of earnings, whatever that may be, for the government.