18 
Larger Dividends 
Earlier Reasons 
for Limitation 
Rarnings from 
Competitive 
Dperations 
Decrease in 
Franchise Tax 
(nterest to 
Member Banks 
»n Their 
Reserves 
Impracticability 
COMMITTEE REPORT 
net earnings to surplus until that equals one hundred percent of 
its subscribed capital (which is two hundred percent of the present 
paid in capital). After that, its net earnings go ten percent to surplus 
and ninety percent to the government as a franchise tax. 
In recommending that reserve banks, under adequate safe- 
guards, be permitted to declare larger dividends to member banks, 
there is no purpose to make the capital subscriptions of the member 
banks extraordinarily profitable. An increase of a full one percent 
in the dividend rate would increase the distribution to a bank with a 
capital and surplus of $100,000 by only $30. While the financial ad- 
vantage of the suggested change would not be great, it is believed 
that it would be attractive and would be fair in principle. It would 
stimulate good will and, with the experience which has been gained 
n reserve operation, would not result in deviation from sound proce- 
dure in order merely to enlarge earnings of reserve banks. The 
earlier reasons for limiting dividends on stockholdings in reserve 
banks to six percent, such as the fear of undue emphasis upon earn- 
tngs and the fear of stimulating competition by the reserve banks 
with their member banks, are no longer applicable. Under present 
law there have been years of small earnings and there is likelihood 
of their recurrence. No pressure to earn the dividend now permitted 
has been exerted. Six percent, is today not as reasonable a measure 
Of proper expectancy from such an investment as in earlier years. 
Future operations of the reserve system may require a larger de- 
velopment of the reserve banks’ open-market dealings. Member 
>anks which may meet, even to a slight extent, competition on this 
ground from the reserve banks have a right to share in the profits 
erived from such operations. Even though the monetary return to 
the member banks be small in amount, it is thought to be important 
n principle that the member banks be permitted a larger participa- 
ion in the earnings of the reserve banks; such larger participation 
should be so devised as to permit of the amassing of ample surpluses 
by the reserve banks. In other words, the larger participation in 
sarnings of reserve banks should be given to member banks prin- 
cipally through a proportionate reduction of the earnings now re- 
quired to be paid to the federal government. 
Permitting an increase in the dividend rate or provision for 
extra dividends would serve to overcome a frequent proposal that 
interest be paid on reserve balances, which we do not favor. 
No method has been proposed by which interest could be safely 
dffered by reserve banks upon member balances. At the beginning of 
the current year member bank reserve accounts were nearly two and 
1 half billions of dollars. Two percent of this sum would amount to 
(Continued on page 40)