Board of Governors of the Federal Reserve System

Data Dictionary

Item Number J925

Call confidentiality applies to FFIEC 031/041.

Data Description:

Under authority of Section 16 of the Federal Reserve Act, the Board has determined that the Reserve Banks will pay to the U.S. Treasury, as interest on Federal Reserve notes, all net earnings after providing for dividends and the amount necessary to equate surplus with paid-in capital. This concept originated in 1947. As a result of operations essential to Government financing during the war, and operations required by the needs of business and the public for credit and currency, earnings of the twelve Federal Reserve Banks were at relatively high levels. It was expected that net earnings of the Federal Reserve Banks for 1947, after payment of the statutory dividends to member banks, would aggregate more than $60,000,000. In view of these facts and the fact that at the end of 1946 the surplus of each Federal Reserve Bank was equal to its subscribed capital, the Board decided to invoke the authority, granted to it under Section 16 of the Federal Reserve Act, to levy an interest charge on Federal Reserve notes issued by the Federal Reserve Banks. The purpose of this interest charge was to pay into the Treasury approximately 90 percent of the net earnings of the Federal Reserve Banks for 1947.

The authority to levy an interest charge on Federal Reserve notes not covered by gold certificates had not been used previously, chiefly because of the existence, prior to 1933, of so-called franchise tax provisions of the law that had a similar effect; that is, of transferring excess earnings of the Reserve Banks to the Treasury. Under these provisions, which were repealed in 1933, each Federal Reserve Bank was required to pay a franchise tax to the government equal to 90 percent of its net earnings after it had accumulated a surplus equal to its subscribed capital. To the end of 1932 the Federal Reserve Banks had paid franchise taxes to the United States Treasury amounting to $149 million. At that time the Federal Reserve had accumulated surplus accounts of $278 million, as compared with subscribed capital aggregating $302 million. In the amendment of the Federal Reserve Act, contained in the Banking Act of 1933, providing for the establishment of the Federal Deposit Insurance Corporation, Congress 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 FDIC on which no dividends would be paid. These stock 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 restore their surplus accounts from future earnings. Net earnings for the next ten 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 two years, however, net earnings increased substantially, due primarily to large holdings of Government securities accumulated through open market operations. This made possible transfers to surplus accounts that increased the combined surplus of the Federal Reserve Banks to $439,823,000 at the end of 1946, as compared with subscribed capital of $373,660,000.

Under the circumstances, the Board concluded 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 the statutory dividend. In effect, this involved paying currently to the Treasury funds which, under existing law, would otherwise come to it only in the event of liquidation of the Federal Reserve Banks. The Federal Reserve Act still provides that, in case of liquidation of the Federal Reserve Banks, any surplus remaining after the payment of all claims shall be paid to the Treasury. By invoking its authority under Section 16 of the Federal Reserve Act, the Board was able to accomplish the same results as were accomplished by the payments of franchise tax, i.e., the transfer of excess earnings to the Government.

The Reserve Banks currently remit payment to the U.S. Treasury on a weekly basis. The amount consists of all net earnings after dividends and amounts necessary to equate surplus with paid-in capital.