By action of the Board of Governors.-The provisions of the Federal Reserve Act are specific in authorizing the Board of Governors to establish a rate of interest to be paid by a Federal Reserve bank on its outstanding Federal Reserve notes not covered by gold, and the discretion of the Board in this regard is unrestricted by the terms of the statute. Accordingly, it is the Board's opinion that it is clearly authorized to require the Federal Reserve banks to take the action it did in 1947 and annually since that time.

However, the authority to take this action has been questioned in some quarters and the procedure involved is somewhat complicated in the calculation of the amounts of the payments. To clarify this matter, the Board could be given a specific authority or direction to require the Federal Reserve banks to transfer annually to the United States such portion of their net earnings as the Board may deem appropriate in the circumstances, without the necessity for relating the requirement to outstanding Federal Reserve notes not covered by gold collateral. Such an amendment, if acceptable to Congress, would put at rest all questions in the matter and would simplify the mechanics of the operation.

By restoration of the franchise tax.-The other method of accomplishing the desired result would be to restore to the law a provisions requiring each Federal Reserve bank, whenever its surplus equals or exceeds the amount of its subscribed capital stock, to pay annually to the United States as a franchise tax 90 percent of net earnings after provision for expenses and dividends and such reserves for contingencies as may be necessary. This would in effect restore the situation as it existed prior to 1933.

55. USE BY TREASURY OF FUNDS RECEIVED FROM FEDERAL RESERVE BANKS

Existing Law

The first sentence of the second paragraph of section 7 of the Federal Reserve Act (12 U. S. C. 290) reads:

"The net earnings derived by the United States from Federal Reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States under regulations to be prescribed by the Secretary of the Treasury.

Recommendation

That this sentence be repealed. Reasons

From the date of the original enactment of the Federal Reserve Act of 1913 until the passage of the Banking Act of 1933, the law provided that the Federal Reserve banks should pay a portion of their net earnings to the United States as a franchise tax. This provision for a franchise tax was included in section 7 of the Federal Reserve Act immediately prior to the sentence quoted above with reference to the use by the Secretary of the net earnings derived by the United States from Federal Reserve banks. In view of the fact that the payment of the franchise tax by the Federal Reserve banks to the United States has not been a part of the law since 1933, the first sen

tence of the second paragraph of section 7 is believed to be obsolete and might well be eliminated from the law.

It is understood that for many years the total amount of outstanding United States notes has been approximately $347 million, against which there is a reserve held in the Treasury of about $156 million, moreover, the use by the Secretary of earnings derived by the United States from Federal Reserve banks to reduce the outstanding indebtedness of the United States would not necessarily have any net effect upon the amount of the outstanding debt, since under other authority the debt could be increased within the limit permitted by recent statutes. Thus, any practical effect which this provision in section 7 might have had on the use of funds by the Treasury appears to have been superseded by the general statute governing the administration of the public debt, and this is another reason, in addition to the repeal of the franchise tax, why the provision might well be deleted as obsolete.

56. TAXATION OF FEDERAL RESERVE BANK STOCK

Existing law

The third paragraph of section 7 of the Federal Reserve Act (12 U.S. C. 531) provides:

"Federal reserve banks, including the capital stock and surplus therein, and the income derived therefrom shall be exempt from Federal, State, and local taxation, except upon real estate."

Section 6 of the Public Debt Act of 1942 amended section 4 (a) of the Public Debt Act of 1941 to read as follows:

"SEC. 4. (a) Interest upon obligations, and dividends, earnings, or other income from shares, certificates, stock, or other evidences of ownership, and gain from the sale or other disposition of such obligations and evidences of ownership issued on or after the effective date of the Public Debt Act of 1942 by the United States or any agency or instrumentality thereof shall not have any exemption, as such, * * *.” Recommendation

An amendment to remove the exemption from taxation of dividends on Federal Reserve bank stock issued before the effective date of the Public Debt Act of 1942 so as to put such dividends on the same footing as dividends on stock issued after that date.

Reasons

а

The effect of the Public Debt Act of 1942 was to remove the exemption with respect to dividends on Federal Reserve bank stock issued after the effective date of that act, March 28, 1942, but to leave the exemption in effect with respect to dividends on such stock issued before that date. This results in a differentiation between banks admitted to membership after that date and those admitted previously. It also results in a differentiation between stock issued before, and stock issued after that date, to banks admitted before that date, for example, where a bank admitted to membership before that date increases its capitalization after that date and acquires additional Federal Reserve bank stock.

The differentiation results from considerations having no relation to the System on membership therein, but rather to the considerations

which led to the enactment of the above provisions of the Public Debt Act of 1941 and the Public Debt Act of 1942.

The Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report (Patman) recommended in 1952 that the exemption be removed entirely, saying:

"The subcommittee does not believe that the analogy between the contractual tax-exemption provisions of United States securities and the statutory tax exemption of dividends on stock of the Federal Reserve banks is well taken, and recommends that the appropriate legislative committees consider the subjection of all dividends on Federal Reserve bank stock to Federal income taxation, either by direct legislation or by provision for the recall and reissue of all outstanding stock of the Federal Reserve banks."

57. CAPITAL NOTES AND DEBENTURES ELIGIBLE FOR PURCHASE BY RECONSTRUCTION FINANCE CORPORATION

Existing law

The first paragraph of section 9 of the Federal Reserve Act (12 U. S. C. 321), relating to applications by State banks for membership in the Federal Reserve System, provides in the third sentence thereof that:

"***For the purposes of membership of any such bank the terms 'capital' and 'capital stock' shall include the amount of outstanding capital notes and debentures legally issued by the applying bank and purchased by the Reconstruction Finance Corporation. ***"

Section 345 of the Banking Act of 1935 (12 U. S. C. 51b-1), provides that if any part of the capital of a national bank, State member bank, or bank applying for membership in the System consists of preferred stock, the determination of whether or not its capital is impaired shall be based on the par value of its stock even though the amount which holders of the preferred stock are entitled to receive in the event of liquidation shall be in excess of the par value of such preferred stock. The section then further provides:

***If any such bank or trust company shall have outstanding any capital notes or debentures of the type which the Reconstruction Finance Corporation is authorized to purchase pursuant to the provisions of section 304 of the Emergency Banking and Bank Conservation Act, approved March 9, 1933, as amended, the capital of such bank may be deemed to be unimpaired if the sound value of its assets is not less than its total liabilities, including capital stock, but excluding such capital notes or debentures and any obligations of the bank expressly subordinated thereto. *

Recommendation

An amendment to repeal the sentences contained in the first paragraph of section 9 of the Federal Reserve Act and in section 345 of the Banking Act of 1935, as quoted above, which relate to capital notes and debentures of the kind authorized to be purchased by the Reconstruction Finance Corporation.

Reasons

The Reconstruction Finance Corporation is in liquidation and very few, if any, of the capital notes or debentures purchased by the Cor

poration are now outstanding. The reasons for which the purchase of such notes and debentures was authorized in the 1930's and for which they were allowed to be considered as part of a bank's capital have ceased to exist, and consequently the provisions of the statutes quoted above no longer have any real significance.

Existing law

58. REPORTS FROM MEMBER BANKS

The second sentence of the sixth paragraph of section 9 of the Federal Reserve Act (12 U. S. C. 324) provides that State banks admitted to Federal Reserve membership

** shall be required to make reports of condition and of the payment of dividends to the Federal reserve bank of which they become a member. Not less than three of such reports shall be made annually on call of the Federal reserve bank on dates to be fixed by the Board of Governors of the Federal Reserve System. *** Such reports of

condition shall be in such form and shall contain such information as the Board of Governors of the Federal Reserve System may require and shall be published by the reporting banks in such manner and in accordance with such regulations as the said Board may prescribe." Recommendation

An amendment broadening and clarifying the above-quoted authority of the Board of Governors so as to permit the reduction and simplification of the reporting requirements with respect to many banks and at the same time facilitate the collection of better statistical data. Such an amendment would empower the Board to prescribe different forms for reports of condition and earnings and dividends for various groups of State member banks, such as reserve city banks and country banks, or large banks and small banks; to require such reports on a sample basis, instead of requiring that every State member bank report on every call; and to require or waive publication of such reports. Reasons

The above-quoted provisions of law (like the corresponding provisions of the National Bank Act) have been interpreted as requiring the submission of reports by every State member bank on uniform report forms. There are wide differences in the nature and scope of operations of banks; some are small, serving primarily local needs, while others are large, conducting widely diversified banking operations. Some are single-office institutions and others operate branches in varying numbers. Consequently, a single, uniform report form that adequately reveals the condition and operations of a large bank may be too burdensome for hundreds of small banks.

If the Board had the broader power above suggested, it could call for relatively simple reports from the great majority of State member banks and obtain the more detailed reports only from the larger banks engaged in a variety of banking operations. It also could take advantage of the techniques that have been developed in recent years whereby the collection of reports from a relatively small number of banks on a sample basis might adequately reflect the banking situation as a whole.

Under the above-quoted provisions of existing law, every report of condition submitted by a State member bank must be published, re

gardless of whether the Board of Governors deems publication necessary or desirable and regardless of the fact that nearly all State authorities may require publication of reports by State banks, member and nonmember alike. There is no corresponding mandatory publication requirement applicable to similar condition reports required by the Federal Deposit Insurance Corporation from insured nonmember banks. There is, in fact, no requirement that the Corporation call for not less than three reports annually, and in practice it calls for reports semiannually. Removal of the mandatory requirements for publication would do away with overlapping in some instances between State and Federal requirements and would reduce the burden and cost to State member banks.

Existing law does not provide for publication of the reports of earnings, expenses, dividends, etc., which are made semiannually. Some banks, nevertheless, do publish such data, usually in annual reports to stockholders released to the press. The published data differ a good deal from bank to bank, and do not conform to the official reports of earnings and dividends required by the Board. If the Board were empowered to require publication of reports of earnings and dividends, either by all State member banks or by groups of them, it undoubtedly would work toward more nearly uniform presentation of such data to the public by the banks themselves. Such a move would also be in harmony with the requirements of the Securities and Exchange Commission with respect to presentation of earnings, expenses, dividends, etc., by corporations whose securities are listed on the stock exchanges.

If the above proposals are given favorable consideration, presumably they will suggest consideration of corresponding provisions of law pertaining to national banks and insured nonmember banks, respectively.

59. REFERENCES TO SECTION 12B OF THE FEDERAL RESERVE ACT Existing law

The 12th paragraph of section 9 of the Federal Reserve Act (12 U.S. C. 329a) provides:

"In order to facilitate the admission to membership in the Federal Reserve System of any State bank which is required under subsection (y) of section 12B of this Act to become a member of the Federal Reserve System in order to be an insured bank or continue to have any part of its deposits insured under such section 12B, the Board of Governors of the Federal Reserve System may waive in whole or in part the requirements of this section relating to the admission of such bank to membership: Provided, That, if such bank is admitted with a capital less than that required for the organization of a national bank in the same place and its capital and surplus are not, in the judgment of the Board of Governors of the Federal Reserve System, adequate in relation to its liabilities to depositors and other creditors, the said Board may, in its discretion, require such bank to increase its capital and surplus to such amount as the Board may deem necessary within such period prescribed by the Board as in its judgment shall be reasonable in view of all the circumstances: Provided, however, That no such bank shall be required to increase its capital to an amount in excess of