New-York tribune., 1920-08-03
Rate Profteering
Charge Is Denied
BY Reserve Bank
Big Earnings Reflection of
Existing Degree of Credit
and Price Initiation, Says
Banks Monthly Report

The Federal Reserve Bank of New
York, in it's monthly report of bust
ness conditions, yesterday undertook
to answer those who have criticized
the institution for earning huge profits.
In 1919 the bank made 1870 per cent on
it's capital, and its earnings for the
first half Of this year were at still
greater rate.
"The earnings of the Federal Re-
serve Bank of New York." says the re-
port, "for the first six months of the
year were considerably larger than
those for the corresponding period of
last year. After paying the legal semi
annual dividend of 3 per cent, setting
aside reserves against contingencies,
and adding s6,20O,000 to its surplus, as
provided by law, there remained $14,-
100000, which will be paid over at the
end of the year as a franchise tax to
the United States Treasury.
These continued large earnings
have called forth large number of
comments to the effect that the Fed
eral Reserve banks were protiteering
and that in view of their earnings they
should lower their rates. One critic
quite seriously pictured the Federal
Reserve system as manifesting that
same thirst for power that is charac-
teristic of carnivorous beast when it
has tasted blood for the first time and
announced that its management had
come to the conclusion that these in
stitutions should be money making
concerns and that they should see how
much profit they can show instead of
being used for the purpose of render
ing service to the community While
most Of the criticisms are not as fam
tastic as the foregoing, they evidence
rather generally lack of understand
ing of the policies and workings Of the
Federal Reserve banks. This is not
unnatural, since we are still relatively
unfamiliar with the operations of a
bank Of issue and rediscount, which
are we'll understood in most other
countries. A few words about the op-
erntions of this bank, as they are re-
ihected IN its earnings, may therefore
be appropriate.
"The Federal Reserve banks were
created to provide elastic credit and
currency, which would expand or CON
tract in accordance with the require
ments OF industry, commerce and agri-
culture. They were also expected
measurably to control and regulate the
volume of credit so that credit condi-
tons might be as stable as possible
They came into existence after the Eu-
r.opean war had begun. and upon
Americas entrance into the war thev
were called on to assist in creating the
required by the financing of the war.
Their effective response to the call
not only made possible the prosecution
of the war, but enabled manufacturers,
merchants and farmers confidently to
continue their affairs.
when the peak of the government
debt was passed last autumn and there
was no necessity for further credit ex-
pansion on account of government
operations, the Federal Reserve banks
took steps toward inaugurating grad
ual deAation. They adopted the meth
cd of bringing about a reduction of
and tested in other countries, i. G., in
creased discount rates. These were
advanced, step by step, from the Az
per cent rate prevailing in October to
the per cent rate which was estab-
lished in June. The higher rates re-
suited in larger earnings, which in
turn raised the perfectly natural ques-
ton: Are the Federal Reserve banks
profiteering?
at is one of the ironies of the war
that the one bank not organized for
profit should be making larger profits
than any other bank in the country.
i ,,,1- f,,o.,
the loans which they make to their
member banks to enable them to fur
nish credit to their customers. But, as
the Federal Reserve Banks are an
agency of the people to maintain an
elastic credit and currency system
and to steady credit, the law provides
that after paying dividends of 6 per
cent to the member banks. which are
their only stockholders, and after ac-
cumulating a reasonable surplus, the
Federal Reserve Banks should return
the balance Of their earnings to the
people as a contingent franchise tax
Thus the people are the residuary
legatees OF Federal Reserve Bank oper-
ations, and the Treasury's use of the
money thus returned is restricted tc
the purchase of government bonds OF
placing additional gold behind the
greenbacks.
Federal Reserve Bank earnings are
reflection Of the existing degree OF
credit and price imitation. In times
when credit and prices are normal Fed
eral Reserve Bank earnings will prob
ably be very small. The higher dis
count rates, established to stimulate
detiation. are at present increasing
these earnings, but as the volume OF
credit grows less these earnings viii
decrease proportionately. 1t is not al
all unlikely that if no attempt to stimu-
late defation had been made and the
relatively low rates prevailing last
autumn had been continued the earn
lngs at the lower discount rates might
concelvably have equaled those at pres
ent produced by the higher rates, sc
last was the general expansion and de
mand for credit then proceeding. Blu
the continuance of last autumn's rate
OF expansion to the present time wouit
doubtless have resulted in far highe,
commodity prices and very weak fnan,