Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-02-16
FEDERAL RESERVE
CAPITAL DECLINES
Changes in New York Bank
Are Chief Reason for
Shrinkage.
BY BRADLEY w. TRENT.

SpcCldl DlSpaJCn 10 Inc 6LAr.
NEW YORK, February 16,-For the
first time in many years the paid-in
capital of the Federal Reserve Banks is
on the decline. Last year showed a
considerable drop. due mainly to down.
ward changes in the New York regional
bank, largest in the system.
These downward changes reflect not
alone the heavy bank failures of the
last year, involving some Federal Re.
serve members and necessitating re-
demption at par by the Reserve banks
of their capital held by such failed
banks, but also the loss to the Federal
Reserve System experienced through
mergers. The downward trend of cap
ital of the Reserve banks is continuing,
as shown by nearly every weekly state
ment.
Figures Are Cited.
AS Of February the paid-in capital
of the IL Federal Reserve Banks was
$l69, 361 900. That is only q small
change from the $3.50, SAC, 900 figure De-
cember 81, but a considerable change
from the $174,266,000 as of April 80,
1890. and the $170,973, 900 of December
81, 1929. 1t must be remembered that
this is a net loss, for it Is the shrink
age after deduction of the new Reserve
capital subscribed by banks which are
continually joining the system.
In other words. the membership Of
the system is losing ground faster than
1t Is gaining. 1t is the trend, not the
relatively few millions involved which
is causing some concern to those who
are interested in seeing the system
grow In strength and membership. nota-
bly, owen D. Young, director in the
New York bank.
This drop in capital has another in
fAroCfi00 m0iPh a.
nancial attention. Many of the Reserve
banks pay no franchise tax to the Gov
eminent out of their annual earnings, for
under section of the Federal Reserve
act, all net earnings after, payment Of a
s per cent dividend to member bank
stockholders, must be paid into surplus
until the latter account reaches 100 per
cent Of subscribed capital. Thereafter
only 10 per cent of net earnings need
be paid into surplus and 80 per cent to
the Government as franchise tax.
Franchise Taxes.
Hence, curiously enough, as the Re-
serve System is losing such ground as is
reflected in its capital paid in, the Gov
ernment'S chances Of receiving more
franchise taxes are Frightening. This
Is for the reason that the surplus &C
counts of the reserve banks do not be-
hong to member banks and. when any
reserve bank repays a portion of its
capital. 1t keeps its surplus intact. or
the system as a whole, then, surplus Is
growing more rapidly than Is capital.
At the end of 1880, including the pro-
portion of that years profits added to
surplus, only of the IL Federal Re-
serve banks fulfilled the requirements of
the law respecting the size of their sur
plus accounts In relation 70 a franchise
tax. These were the Reserve banks Of
Richmond, Atlanta, st. Louis, Mime
apolis, Kansas City and Dallas. To
these the Treasury must look for divi-
6endS in the form OF franchise taxes.
Cleveland is close to the franchise
tax-paying stage, as Is the Chicago Re
serve Bank, but large reserve banks such
as those of Boston, New York and
Philadelphia have many millions to earn
yet before their surplus is 100 per cent
OF capital paid in, New York must add
over $4,000 600 to surplus or cut its
capital by $25,0O0O0O before the Treas
ury can hope for share of its earnings.
Later on It Is felt that some changes
in Federal Reserve Bank rules regarding
new members will be enacted. and since
Congress will have to pass new legisla-
ton to make such changes possible, it is
probable that any attempt at a new
membership campaign will not be tried
for some months. Such changes as are
proposed would enable State banks and
trust companies whose condition makes
them ineligible to membership to be-
come members on the understanding
that they would gradually, say over a
two or three year period bring their
condition up to the required standard
For the country as whole only about
third of all banks are now Federal
Reserve members
tCopyright. 1870