EXHIBIT A HISTORY OF PAYMENTS TO THE TREASURY OF EARNINGS OF THE FEDERAL RESERVE BANKS The original Federal Reserve Act imposed a franchise tax on the Federal Reserve banks which would have ceased to be operative in 1933 when the banks had accumulated a surplus equal to subscribed capital. In the amendment of the Federal Reserve Act contained in the Banking Act of 1933 establishing the FDIC, the Federal Reserve banks were required to use one-half of their surplus ($139 million) as to stock subscriptions to the FDIC. The franchise tax was eliminated to permit the restoration of surplus accounts. This capital contribution to the FDIC, by the way, was later paid by the FDIC to the United States Treasury and not back to the Federal Reserve banks. In 1947 the accumulated surplus of the Federal Reserve banks was about to equal their paid-in capital, and the Federal Reserve Board concluded that "It would be appropriate for the Federal Reserve banks to pay to the Treasury the bulk of their net earnings *** since the Federal Reserve Act still provides that, in the event of liquidation of a Federal Reserve bank, any surplus remaining after payment of all claims shall be paid to the Treasury." Since 1947 payment to the Treasury of approximately 90 percent of the net earnings of the Federal Reserve banks has been accomplished by the Federal Reserve Board operating under— "Section 16, paragraph 4, of the Federal Reserve Act provides that each Federal Reserve bank shall pay such rate of interest as may be established by the Board of Governors of the Federal Reserve System on the amount of its outstanding notes less the amount of gold certificates held by the Federal Reserve agent as collateral security."' These interest payments to the Treasury are made quarterly and the interest rates levied "are part of an arithmetic device used for the purpose of paying to the Treasury each year approximately 90 percent of the net earnings of the Federal Reserve banks after dividends. The components of this device are of no significance in themselves, and standing alone could be misleading." Accordingly, it has not been the practice of the Federal Reserve Board to release to the public the actual interest rates charged. The fact of the matter is that the amount of true credit extended by the Board, as measured by the amount of Federal Reserve notes not collateralized by gold certificates, is usually very small and 90 percent of the net earnings of the banks is very large. Thus, the interest rates charged, if thought of in the usual sense of simple interest or conventional discount, would, if revealed, likely be at rates exceeding legal maximums. THE EXCHANGE NATIONAL BANK, SUGGESTED CHANGES IN FINANCIAL INSTITUTIONS ACT OF 1957 (S. 1451) I. Section 7 of title II (the Federal Reserve Act portion) of Financial Institutions Act of 1957 (S. 1451) provides that 90 percent of the net annual earnings of the Federal Reserve banks after dividends be paid the United States Treasury as a franchise tax. Section 34 of title III (the Federal Deposit Insurance Act portion) of Financial Institutions Act of 1957 (S. 1451) authorizes the Federal Deposit Insurance Corporation "to borrow from the Treasury, and the Secretary of the Treasury is authorized and directed to loan to the Corporation for insurance purposes not exceeding in the aggregate $3 billion outstanding at any one time." These earnings should not be turned over to the Treasury but should be accumulated in the banks for a period of 10 years in order to "fund" the United States Treasury's obligation to lend the Federal Deposit Insurance Corporation up to $3 billion as provided above. To the extent that a sinking fund is accumulated in the Federal Reserve banks, the Federal Reserve banks would assume 1 Board of Governors of the Federal Reserve System statement for the press, April 23, 1947. 2 Letter from Board of Governors of the Federal Reserve System, Ralph A. Young, Director, Division of Research and Statistics, dated April 4, 1957. a corresponding obligation to lend to the FDIC, and the Treasury's commitment would be correspondingly reduced. II. How much money is involved? The net earnings of the Federal Reserve banks during the 9-year period 1948-56 averaged $412 million annually as set forth below. During the 9-year period only $135 million was paid to the member banks in dividends while payments to the United States Treasury were 18 times greater, nearly $2.4 billion. On an average annual basis, dividends to member banks were only $15 million while payments to the United States Treasury were $264 million. The magnitude of this additional annual tax on bank earnings can be seen by comparing it to the 19551 net profits after income taxes, of all member banks, which only equaled $985 million. Earnings of all commercial banks in 1955 were as follows: Income before taxes.. Income tax: Federal Net profits--- $1,950, 000, 000 754, 000, 000 40, 000, 000 794, 000, 000 1, 156, 000, 000 Viewed another way, the $219 million average annual payments to the Treasury equal 25 percent of the net profits of all commercial banks in 1955. It can also be seen that the aggregate of these payments to the Federal Government and Federal income taxes is only slightly less than the total net profits of all commercial banks, which in 1955 equaled $1,156 million. The magnitude of this $291 million tax is the more jolting when compared with the total dividends of $566 million paid to stockholders of all commercial banks in 1955. III. What is the source of the earnings of the Federal Reserve bank? And to whom do they rightfully belong? Earnings of the Federal Reserve banks are derived primarily from the $19 billion of required reserve balances of member banks invested by the Federal Reserve banks in United States Government securities. From the consolidated balance sheet and profit and loss statement of the banks set forth below, it is apparent that there are virtually no other earning assets than United States Government securities. Correspondingly, Federal Reserve notes are noninterest bearing, and no one would argue that if the member banks were able to invest their own reserves in Government bonds at 3 percent they would gross nearly $600 million. It is obvious therefore that these earnings properly belong to the Nation's banking industry. It is hardly logical that they should continue to be paid to the United States Treasury. The net profits of banks in 1956 and Federal and State income taxes paid were undoubtedly greater than in 1955 but are not available at this time. 1As payment of interest on Federal Reserve note. IV. How and why did member bank required reserved accounts at the Federal Reserve banks and the portfolio of United States Government securities owned by the Federal Reserve banks reach the $20 billion level which produces average annual net profits of over $260 billion? The answer is simply that the United States Government elected to finance a $200 billion portion of the cost of World War II on credit, by the issuance of securities, rather than by taxation. Between war-bond drives as the Treasury drew on its accumulated bank balances to meet its current deficit, deposits of businesses and individuals increased. The result between 1940 and 1945 was a $90 billion increase in total bank deposits. The banks invested $53 billion of this increase in United States Government securities, $10 billion in loans to finance war industry, and the remainder had to be set aside as reserves in the Federal Reserve or in correspondent banks. The required reserves of member banks rose $8 billion. The members met this increase in reserve requirements by selling securities to the Reserve banks. The Reserve banks not only purchased whatever amounts of Government securities were necessary to supply banks with reserves but also to meet the steady growth in demand for currency by the public. To make possible this inflation of bank credit and currency, temporary legislation was passed which permitted the Federal Reserve banks to collateralize Federal Reserve notes with United States Government securities. The temporary legislation was permanently codified in June 1945 by Senate bill 510 which also permanently reduced to a uniform amout of 25 percent the gold certificate required as a reserve against Federal Reserve notes and deposit liabilities. The parts played by the commercial banks and the Federal Reserve banks in financing World War II which brought about the large reserve deposits of the members in the Federal Reserve banks invested in United States Government securities is apparent from the following data: Selected items from statements of condition, Federal Reserve bank, Dec. 31, ' Required reserves in 1940 were only $7 billion, the remaining $7 billion was excess. Selected items from statements of all United States commercial banks V. Is it not logical to assume that the Federal Reserve banks might dispose of the major portion of their Government bonds sometime in the future and revert to their 1940 status when Reserve balances of $14 billion vastly exceed their $2 billion holdings of United States Government securities? Present Federal Reserve law accommodates an inflated and radically changed monetary situation which appears to be rather permanent, with bank deposits, reserves at the Federal, and their holdings of United States Governments at higher levels. Unless further increases in the public debt are expected, there would be no need for the Treasury to sell any substantial amount of Government securities to the banks to create reserves. A decline in business activity and reduced demand for currency would bring about an automatic increase in bank reserves. With a concomitant decline in deposits, a reduction in reserve requirements would occur. If we enter a deflationary period, it would be desirable for the United States Treasury to retire its $63 billion worth of nonmarketable United States Government bonds, most of which are in the hands of nonbank investors. This would bring about an overall increase in the deposit structure of the country and bank reserves. In such a period the Federal Reserve banks would have to increase further their holdings of United States Government securities. Liquidation of the public's holdings of E, F, H, and K bonds would create a better capital market for United States Government securities in the event of another war or other period of large deficit financing. A final reason why the Federal Reserve banks might not be disposed to sell their holdings of Government securities below a certain level is the absence from their portfolio of any considerable volume of other earning assets. The need for earning assets incidentally was among the reasons given by the Federal Reserve Board for the passage of the 1945 law mentioned above. VI. What was the original intent of Congress? The original Federal Reserve Act was not a revenue bill to produce income for the United States Treasury. Furthermore, the original acts were passed before Federal income taxes imposed any burden on the banking industry. VII. Why should the Federal Reserve banks build up a sinking fund which will permit the elimination of a $3 billion contingent liability of the United States Treasury? 1. There is precedent for the Federal Reserve banks to underwrite the capital requirements of the Federal Deposit Insurance Corporation. In 1935 the Federal Reserve banks made a $139 million capital contribution to the FDIC. This recognized that the entire commercial banking industry including both member and nonmember banks would benefit directly from the establishment of the FDIC. So today, banking as a whole will benefit by this plan which will encourage self-reliance by the banking industry, in contrast to continued dependence upon the Federal Government for credit. 2. It is in the interest of the banking industry to encourage the reduction of the direct, indirect, and contingent debt of the Federal Government. The example set will be a good one for other segments of the financial industry which rely on Federal subsidy and guaranty, which are major causes of increases in the Federal debt, both direct and indirect, which hit an alltime high in 1956, as shown below. Combined total, direct debt and investment, guaranties, and insurance of U. S. Government, 1945–58 The preceding figures do not include contingent liabilities of the United States Treasury to lend : Federal Deposit Insurance Corporation__. Federal home loan banks___. Federal Savings and Loan Insurance Corporation_. Total__ $3, 000, 000, 000 1, 000, 000, 000 750, 000, 000 4, 750, 000, 000 3. The elimination of the United States Treasury's obligation to lend the FDIC will in effect take the Government out of business-the bank deposit insurance business. When accomplished, the ultimate ownership of the FDIC would become "mutualized," and responsibility for the management and direction of this impor |