that "at the time of their election [they] shall be actively engaged in their district in commerce, agriculture, or some other industrial pursuit." As to class C directors the act provides not only that they "shall have been for at least 2 years residents of the district" but also that one of them shall act as chairman of the board of directors of the Federal Reserve bank (the other two to be, respectively, deputy chairman, and his alternate) and shall maintain the local office of the Board of Governors, making regular reports to the Board of Governors and acting as its official representative.

Obviously these various provisions of the act contemplate that the directors of all three classes shall be at the time of their elections, and should continue to be during their terms of office, residents of the district of the Federal Reserve bank on whose Board they are serving.

Duplication between provisions of the 12th and 20th paragraphs quoted above, regarding appointment of class C directors would be eliminated by recommendation No. 5.

52. SERVICE ON RESERVE BANK BOARDS OR FEDERAL ADVISORY COUNCIL

Existing law

The ninth paragraph of section 4 of the Federal Reserve Act (12 U.S. C. 302) provides as follows:

"Such board of directors shall be selected as hereinafter specified and shall consist of nine members, holding office for three years, and divided into three classes, designated as classes A, B and C."

The first paragraph of section 12 of the Federal Reserve Act (12 U.S. C. 261) provides:

"SEC. 12. There is hereby created a Federal Advisory Council, which shall consist of as many members as there are Federal reserve districts. Each Federal reserve bank by its board of directors shall annually select from its own Federal reserve district one member of said council, who shall receive such compensation and allowances as may be fixed by his board of directors subject to the approval of the Board of Governors of the Federal Reserve System. The meetings of said advisory council shall be held at Washington, District of Columbia, at least four times each year, and oftener if called by the Board of Governors of the Federal Reserve System. The council may in addition to the meetings above provided for hold such other meetings in Washington, District of Columbia, or elsewhere, as it may deem necessary, may select its own officers and adopt its own methods of procedure, and a majority of its members shall constitute a quorum for the transaction of business. Vacancies in the council shall be filled by the respective reserve banks, and members selected to fill vacancies, shall serve for the unexpired term."

Recommendation

An amendment is proposed which would prohibit directors of Federal Reserve banks from serving more than 2 consecutive terms of 3 years each, other than the Chairman of the Board of Directors, and would prohibit members of the Federal Advisory Council from serving more than 6 consecutive terms of 1 year each.

A certain degree of rotation in the directorates of the Reserve banks and the membership of the Federal Advisory Council is desirable in order to obtain the advantages of broader representation and wider experience over a period of time. Such rotation would help to bring a wider variety of experience into the councils of the Federal Reserve System and would also help to bring about a more widespread knowledge of System policies and problems. It would thus serve the public interest in both directions. At the same time, the length of service permitted under the proposed amendment would be adequate to assure for the System and the public interest the benefits of suitable continuity of policy and acquired experience.

În connection with the appointment of class C directors of the Federal Reserve banks, the Board as a matter of policy does not reappoint any such director who has served 2 full terms of 3 years each, except that the class C director who is designated by the Board as Chairman and Federal Reserve agent may serve for a total of not to exceed 3 full terms. The proposed amendment would limit the terms of service of all directors, class A and class B, as well as class C directors, but would continue to permit an exception as to the Chairman.

53. FEDERAL RESERVE AGENTS AND ASSISTANT FEDERAL RESERVE AGENTS Existing law

Paragraphs 20 and 21 of section 4 of the Federal Reserve Act (12 U. S. C. 305 and 306) read as follows:

"Class C directors shall be appointed by the Board of Governors of the Federal Reserve System. They shall have been for at least two years residents of the district for which they are appointed, one of whom shall be designated by said board as chairman of the board of directors of the Federal Reserve bank and as 'Federal Reserve agent.' He shall be a person of tested banking experience, and in addition to his duties as chairman of the board of directors of the Federal Reserve bank he shall be required to maintain, under regulations to be established by the Board of Governors of the Federal Reserve System, a local office of said board on the premises of the Federal Reserve bank. He shall make regular reports to the Board of Governors of the Federal Reserve System and shall act as its official representative for the performance of the functions conferred upon it by this Act. He shall receive an annual compensation to be fixed by the Board of Governors of the Federal Reserve System and paid monthly by the Federal Reserve bank to which he is designated. One of the directors of class C shall be appointed by the Board of Governors of the Federal Reserve System as deputy chairman to exercise the powers of the chairman of the board when necessary. In case of the absence of the chairman and deputy chairman, the third class C director shall preside at meetings of the board.

"Subject to the approval of the Board of Governors of the Federal Reserve System, the Federal Reserve agent shall appoint one or more assistants. Such assistants, who shall be persons of tested banking experience, shall assist the Federal Reserve agent in the performance of his duties and shall also have power to act in his name and stead during his absence or disability. The Board of Governors of the

Federal Reserve System shall require such bonds of the assistant Federal Reserve agents as it may deem necessary for the protection of the United States. Assistants to the Federal Reserve agent shall receive an annual compensation, to be fixed and paid in the same manner as that of the Federal Reserve agent."

Recommendation

An amendment providing for the delegation by a Federal Reserve agent to an assistant Federal Reserve agent of the agent's administrative functions; eliminating the requirement that the Federal Reserve agent and assistant Federal Reserve agent have "tested banking experience"; and providing that an assistant Federal Reserve agent may serve during a vacancy in the office of Federal Reserve agent as well as during his absence or disability.

Reasons

Under the provisions of existing law, the Federal Reserve Board is required to appoint 3 of the 9 directors of each Federal Reserve bank and to designate one of the directors appointed by it as Chairman and Federal Reserve agent. The person so designated is required to have "tested banking experience" but is forbidden to be a director, officer, employee or stockholder of any bank.

Under the law, the duties prescribed for the Chairman as such are to preside at meetings of the board of directors, to conduct elections of class A and class B directors, and to report to the board with his recommendations any undue use of bank credit by member banks.

As Federal Reserve agent, he is required to maintain a local office of the Board on the premises of the Federal Reserve bank, to act as the official representative of the Board for the performance of the functions conferred upon it by the Federal Reserve Act and to perform any statutory duties of a technical and supervisory nature, such as attending to the issuance and retirement of Federal Reserve notes, holding and releasing collateral therefor and instituting proceedings for the removal of officers and directors of member banks for violations of law or continuation of unsound practices.

The duties of the Federal Reserve agent are thus largely of a ministerial character. There is no sound reason why these duties should necessarily be personally performed by the Federal Reserve agent who, as Chairman of the Board of Directors, must devote his attention to matters of policy involved in the operations of the Federal Reserve bank. As a matter of practice, the agent delegates many of his ministerial functions to assistants. It would seem desirable, however, to clarify the fact that the Federal Reserve agent has authority to delegate to an assistant Federal Reserve agent any of his duties which are of a ministerial character and also to authorize an assistant agent to act in lieu of the agent not only during the absence or disability of the agent but also during a vacancy in his office.

Moreover, under existing law, both the Federal Reserve agent and assistant Federal Reserve agents must be persons of "tested banking experience." However, their duties are not such as to require tested banking experience, and the requirement adds to the difficulty of finding qualified men to serve as chairmen of the boards of directors of Federal Reserve banks. Accordingly, it is believed that the provision for tested banking experience might be eliminated from the law, leav

ing to the discretion of the Board of Governors of the Federal Reserve System the determination of the question whether a person to be appointed is properly qualified for the position.

54. PAYMENT OF RESERVE BANK EARNINGS TO TREASURY

Existing law

The first paragraph of section 7 of the Federal Reserve Act (12 U. S. C. 289) reads:

"SEC. 7. After all necessary expenses of a Federal reserve bank shall have been paid or provided for, the stockholders shall be entitled to receive an annual dividend of 6 per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met, the net earnings shall be paid into the surplus fund of the Federal reserve bank."

The second sentence of the fourth paragraph of section 16 of the Federal Reserve Act (12 U. S. C. 414) reads:

"*** The Board shall have the right, acting through the Federal Reserve agent, to grant in whole or in part, or to reject entirely the application of any Federal Reserve bank for Federal Reserve notes; but to the extent that such application may be granted the Board of Governors of the Federal Reserve System shall, through its local Federal Reserve agent, supply Federal Reserve notes to the banks so applying, and such bank shall be charged with the amount of the notes issued to it and shall pay such rate of interest as may be established by the Board of Governors of the Federal Reserve System on only that amount of such notes which equals the total amount of its outstanding Federal Reserve notes less the amount of gold certificates held by the Federal Reserve agent as collateral security. ***” Recommendation

An amendment to provide specific direction or authority for payment to the United States by the Federal Reserve banks of a percentage of their net earnings after expenses and dividends. This might be done through one of two methods: (1) An amendment specifically authorizing or directing the Board of Governors of the Federal Reserve System to require the Federal Reserve banks to transfer a portion of their net earnings annually to the United States, without regard to the volume of Federal Reserve notes outstanding, or (2) an amendment requiring the Federal Reserve banks to pay 90 percent of their net earnings after expenses and dividends to the United States as a franchise tax, after accumulation in the case of each bank of a surplus equal to subscribed capital. The Board of Governors expreses no opinion at this time as to which of these two methods is preferable.

Reasons

Prior to 1933 each Federal Reserve bank was required by the provisions of section 7 of the Federal Reserve Act to pay a franchise tax to the United States equal to 90 percent of its net earnings, after it had accumulated a surplus equal to its subscribed capital. Up until the end of 1932 Federal Reserve banks had paid franchise taxes to the United States Treasury amounting to $149 million and at that time the Federal Reserve banks had accumulated surplus accounts of $278

million as compared with subscribed capital aggregating $302 million. The Banking Act of 1933 providing for the establishment of the Federal Deposit Insurance Corporation required each Federal Reserve bank to pay an amount equal to one-half of its surplus on January 1, 1933, as a subscription to the capital stock of the Corporation. These subscriptions amounted to $139 million 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 build up their surplus accounts from future earnings.

Net earnings for the next 10 years were relatively small and at the end of 1944 the combined surplus accounts of the Federal Reserve banks were less than 75 percent of their subscribed capital. During the next few years, however, net earnings increased substantially due primarily to large holdings of Government securities. This made possible transfers to surplus accounts, which increased the combined surplus of the Federal Reserve banks to approximately $440 million at the end of 1946 as compared with subscribed capital of nearly $374 million.

In these circumstances, the Board concluded in 1947 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 a statutory dividend on stock. For this purpose the Board invoked its authority under section 16 of the Federal Reserve Act, which provides that each Federal Reserve bank shall pay such rate of interest as may be established by the Board on the amount of its outstanding Federal Reserve notes less the amount of gold certificates held by the Federal Reserve agent as collateral security. The Board, accordingly, decided to establish such rates of interest as would make it possible to transmit to the Treasury approximately 90 percent of net earnings after dividends of each of the Federal Reserve banks for the year 1947, and this has been done annually since that time. By thus invoking its authority under section 16, the Board has been able to accomplish the same results as were accomplished by the payment of a franchise tax, i. e., the payment of excess earnings of the Federal Reserve banks to the Government.

In each annual report since that time, the Board has informed Congress as to the amounts paid by the Federal Reserve banks to the Treasury as interest on Federal Reserve notes. The aggregate amount paid by the Federal Reserve banks to the United States under this authority for the years 1947 to 1955, inclusive, is $2,049 million, the payment for the year 1955 being over $251 million.

It will be recalled that the report of the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report in 1952 included a statement that while the subcommittee approves of the action of the Board by which earnings have been paid to the Treasury since 1947, it believes that it would be better if provision for sucht return were made by legislative action.

In view of the volume of earnings of the Federal Reserve banks in recent years and the present amount of their subscribed capital stock, $639,106,000, and the present amount of their combined surplus, $693,612,000, it is believed that a part of the earnings of the Reserve banks should annually be paid to the United States. This might be done in one of two ways: