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with their member banks, are no longer applicable.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)