Mr. MARTIN. Not without considerably more study than I have been able to give it up to this moment, Mr. Chairman. Representative PATMAN. You would want to study this some more? Mr. MARTIN. I would want to study it some more. Representative PATMAN. But you admit it would be a fine weapon to fight inflation? Mr. MARTIN. It would be a weapon to fight inflation. Representative PATMAN. Well, its usefulness would depend on the amount that the banks would pay, would it not? Mr. MARTIN. That is correct, but it would also introduce a major new factor in the money market. Representative PATMAN. And the ability of the banks to pay a sufficient amount, to make it sufficiently attractive, to induce people to keep their deposits there and not spend them. Mr. MARTIN. They can shift their demand deposits now into time deposits or over into savings banks. Representative PATMAN. They get nearly as much there as they do on the E bonds. Mr. MARTIN. That is correct. Representative PATMAN. But that requires a change. Was that law to make it unlawful for banks to pay interest on demand deposits, was that considered as permanent legislation at the time it passed? I do not recall just the debate in question. Mr. MARTIN. I am afraid I do not know, Mr. Chairman. Mr. YOUNG. I am not familiar with that, Mr. Chairman. Representative PATMAN. My recollection is rather indistinct, but I thought Mr. YOUNG. It was an amendment to the act. Representative PATMAN. But I believe it was more of a temporary device. Mr. YOUNG. I believe not, sir. Representative PATMAN. I think it was passed in 1935. Mr. YOUNG. It was in the Banking Act of 1935 for insured banks and in the Banking Act of 1933 for member banks. Representative PATMAN. And the best of my recollection is that there was not a great deal of discussion about it on either floor, and was it not put in in conference? Mr. YOUNG. I think the feeling about it, Mr. Chairman, was that the practice of paying interest on demand deposits had been a factor in the twenties operating to result in the deterioration of the quality of our banking. Representative PATMAN. I recall that, sir. Mr. YOUNG. It got rather competitive in that period. Representative PATMAN. That was a persuasive argument. Mr. YOUNG. And it was a factor in the crisis of 1930 to 1933. Representative PATMAN. Would that argument be equally persuasive now in view of the fact that deposits are insured up to $10,000? Mr. YOUNG. It is not so persuasive now, but it would have to be given careful consideration. Representative PATMAN. Anyway, you are not recommending it and you are not deciding against it? You are going to consider it? Mr. MARTIN. Yes. Representative PATMAN. The Federal Reserve bank earnings now are practically all from Government bonds, Government securities, are they not, Mr. Martin? Mr. MARTIN. That is correct, sir. Representative PATMAN. It was contemplated in the original act that a certain amount would be paid to the Treasury over and above expenses; I believe they call it a franchise tax, do they not? Mr. MARTIN. That is right, sir. Representative PATMAN. And 90 percent and then the law was amended two or three time; first it said after a surplus of a certain amount had been accumulated, then it was amended again to increase the amount of the surplus, but finally the banks commenced to pay into the Treasury 90 percent. When was the law changed to repeal that provision? Mr. MARTIN. The law was never actually changed, Mr. Chairman. Both committees in the House and Senate were informed of the practice that was going to be used. I would personally be glad to see the law formally changed or see a franchise tax restored. Representative PATMAN. You say the law was not changed? I think you are mistaken there, Mr. Martin. Mr. MARTIN. Am I? Representative PATMAN. I think the law was changed. In other words, the 90 percent provision was repealed. Mr. YOUNG. That was repealed. The 90 percent that is now in operation Representative PATMAN. The what? Mr. YOUNG. The 90 percent payment that is now in operation is by an agreement between the Treasury and the Representative PATMAN. I did not ask you about that, Mr. Young. I am going to get to that. Mr. YOUNG. You are correct; it was repealed by the Banking Act of 1933. Representative PATMAN. The original law was that after the payment of the expenses and after the accumulation of a certain amount in the reserve fund of each bank, the remainder-90 percent of the remainder-would go over to the Treasury as a franchise tax. Now, in some way that law got repealed. I do not know how. I have not looked into the history of it. I just know it was repealed, but the question I am asking you is, When was that repealed? Mr. MARTIN. We will get you the data and put it in the record, Mr. Chairman. That is some more homework I will have to do. Representative PATMAN. And any discussion that you find in either House about it, I would like to have my attention called to that, too, if you please. Mr. MARTIN. Right, sir. (The supplementary statement by Chairman Martin follows:) PAYMENTS TO TREASURY BY FEDERAL RESERVE BANKS FRANCHISE TAX ON FEDERAL RESERVE BANKS In section 7 of the original Federal Reserve Act, it was provided that all earnings, after necessary expense and dividends, should be paid to the United States as a franchise tax, except that one-half of such net earnings should be paid into the Federal Reserve bank surplus until it amounted to 40 percent of its paid-in capital stock. In 1919, this provision was amended to provide that the net earnings after expenses and dividends should be paid into the surplus fund until it amounted to 100 percent of the bank's subscribed capital stock, and that thereafter only 10 percent should be paid into the surplus fund. In other words, the law required that, after accumulation of the prescribed surplus, 90 percent of net earnings of the Reserve banks be paid to the United States as a franchise tax; and this situation continued until 1933. The Banking Act of 1933 eliminated the requirement for the payment of a franchise tax but, at the same time, required the Federal Reserve banks to subscribe $139,000,000 for Federal Deposit Insurance Corporation capital stock, an amount equal to one-half of their surplus on January 1, 1933. The bill which became the Banking Act of 1933, as reported in both Houses of Congress and as passed by the Senate, contained the provision eliminating payment of the franchise tax by the Federal Reserve banks. However, when the bill was under consideration by the House, this provision for the elimination of the tax was stricken from the bill. The conference committee, however, followed the Senate version in this respect and restored the provision. The reports of the Banking and Currency Committees on the Banking Act of 1933 do not show reasons why the franchise tax was being eliminated. However, when the bill was presented to the House the chairman of the House committee stated, with respect to the subscription of $150,000,000 by the Treasury for stock in the Federal Deposit Insurance Corporation, that "This fund covers the larger part of sums that have been paid into the Treasury by the 12 Federal Reserve banks in lieu of a franchise tax. Approximately $150,000,000 is to be subscribed by the Federal Reserve banks, the plan requiring that each Federal Reserve bank subscribe for the capital stock of the Deposit Insurance Corporation in an amount equal to one-half of its surplus" (Congressional Record, vol. 77, pt. 4, p. 3836). During debates in 1932 on an earlier draft of a similar bill, Senator Glass had stated his reasons for a proposal to eliminate the franchise tax. When the 1933 bill came before the House of Representatives, Representatives Patman and Keller expressed their opposition to the proposal. Excerpts from the statements by Senator Glass and Representatives Patman and Keller are attached. SUBSCRIPTION TO CAPITAL STOCK OF THE FEDERAL DEPOSIT INSURANCE CORPORATION The Banking Act of 1933 creating the Federal Deposit Insurance Corporation required that each Federal Reserve bank subscribe to non-dividend-paying stock of the Corporation in an amount equal to one-half of the Reserve bank's surplus on January 1, 1933. When the proposal for cancellation of the Federal Deposit Insurance Corporation stock was under consideration, the Board recommended, and the legislation provided, that the amount received by the Corporation from the Federal Reserve banks for such stock be paid to the Treasury rather than returned to the Reserve banks. This was done in October 1947. PAYMENT OF INTEREST ON FEDERAL RESERVE NOTES In April 1947 the Board of Governors announced that it had 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 to the Treasury approximately 90 percent of the net earnings of the Federal Reserve banks for that year. Such payments have been continued for succeeding years. The statement pointed out that at the end of 1946 the surplus of each Federal Reserve bank was equal to its subscribed capital and that under this policy the Board would be able to accomplish the same results as were accomplished by the payment of a franchise tax. Prior to the adoption of the policy the proposal was discussed by Chairman Eccles with Representatives of Congress and with the Secretary of the Treasury. In particular, the matter was the subject for discussion between Representative Patman and Chairman Eccles at the hearings March 4, 1947, before the Committee on Banking and Currency on H. R. 2233 (p. 29). DISTRIBUTION OF FEDERAL RESERVE BANK NET PROFITS, WITH SPECIAL REFERENCE ΤΟ ΡΑΥΜENTS TO THE TREASURY From earnings of the Federal Reserve banks since organization through 1951 the Treasury has received $1,175,000,000 as franchise tax, contribution for the purchase of stock in the Federal Deposit Insurance Corporation, and interest on Federal Reserve notes. Net profits of the Federal Reserve banks since organization has been disposed of as follows: 2,000,000 Paid U. S. Treasury from earnings on funds received from the Treasury for the purpose of making working capital loans to industry (sec. 13b loans) Net transfers to Reserves for contingencies. Net profits since organization.. ATTACHMENTS 106,000,000 538,000,000 2, 127, 000, 000 Excerpts from statement by Representative Patman (Congressional Record, vol. 77, pt. 4, p. 3842) During debates in 1933 on the bill, Representative Patman, in commenting upon this proposed amendment, stated: "The money [for the Federal Deposit Insurance Corporation] is coming from three sources; namely, $150,000,000 from the Treasury of the United States. $150,000,000 from the surplus fund of the Federal Reserve banks, which, as a matter of right, should be in the Treasury of the United States today. That money does not belong to the Federal Reserve banks. It belongs to the United States Treasury. It never has belonged to those banks. It never was intended that those banks should get that money. Therefore, of the $450,000,000 appropriated, $300,000,000 of it represents the people's money, coming from the Treasury of the United States. The other one-third will come from the depositors, one-half of 1 percent being assessed against the deposits of the banks. "Surplus fund of Federal Reserve banks. Now, let me tell you about this surplus fund of the Federal Reserve banks. When those banks were organized, they were not intended as profit-making institutions. It was stated they were going to use the credit of this Nation, and for the purpose of compensating the people for the use of that credit, when they paid their operating expenses and 6-percent dividends on the amount of capital invested by the member banks the remainder would go into the Treasury as a franchise tax. As conclusive evidence, if a member bank should fail or should withdraw from this System, that member bank would only get its capital stock back. It does not get back a part of that surplus, because that surplus does not belong to the member bank. It belongs to the Treasury of the United States. "Evidence of intent. The law provides that in the event a Federal Reserve bank becomes insolvent and it is necessary to liquidate that bank after the expenses of the bank are paid, the surplus goes into the Treasury of the United States. If the theory of the gentleman from Alabama, Mr. Steagall, is correct, that surplus should go back to the member banks that subscribed to the capital stock in that particular Federal Reserve bank. It is written into the law from beginning to end, that as to those banks using the credit of our Nation in the manner they are, the excess profits they make shall be paid into the Treasury of the United States. Now you come along in section 3 of this bill and attempt to change the entire policy of our Government in that regard. You attempt to divert from the Treasury of the United States back to the Federal Reserve banks that surplus, when there was written into the law language that said it should go into the Treasury of the United States. Now you come here and claim you are going to use that money as an insurance premium to insure bank deposits for private banks, and that it is necessary to do it in the interest of the general welfare. Yes; I say it is all right to do it in the interest of the general welfare, but do not restrict it to just 6,000 banks. Give all banks an opportunity to come in, and when this bill is subject to amendment under the 5-minute rule, I expect to offer two amendments in particular. "One is to strike out section 3 which changes the policy of this Government in regard to the excess earnings of the Federal Reserve banks. * * Excerpts from statement by Senator Glass (Congressional Record, vol. 75, pt. 9, pp. 9885-9886) During debates in 1932 on an earlier draft of the bill, Senator Glass, in commenting upon this proposed amendment, stated: "Section 4 of the bill relates to the distribution of earnings. Although the Federal Government has never expended a dollar in the maintenance of the Federal Reserve System and does not own one dollar of proprietary interest, it has collected in excess of $150,000,000 from the earnings of the Federal Reserve banks upon the pretense that it was a franchise tax for privileges granted. Senators will find upon examination that the 12 Federal Reserve banks do, without charge, a fiscal business for the United States Government that 20 times over compensates the Government for any privilege the Federal Reserve banks may have ** * * * * The Federal Reserve banks do a fiscal business for the United States Government that has never been paid for. The Government has not floated a loan since the beginning of the World War that it has not done it through the agencies and instrumentalities of the Federal Reserve Banking System. "We propose now a different distribution of the earnings of the System. We propose to pay the member banks 6 percent cumulative dividends on their stock, as always has been done. Then we propose to transfer future earnings of the banks to surplus account. We propose to recapture from the Federal Treasury $125,000,000 of the $150,000,000 and odd that has been paid into the Treasury, and pass it to the credit of a revolving fund for prompt liquidation of failed banks. * ** * * * * In other words, we propose to take $125,000,000 from the Federal Treasury, which we conceive to be a recapture of a part of a larger amount paid into the Treasury to which it was not entitled. Then we propose to take onequarter [subsequently changed to one-half] of the existing surplus of the Federal Reserve banks themselves and apply it to this fund; but hereafter the future earnings of the Federal Reserve banks will go to the surplus fund of the Federal Reserve banks and none to the Government." Excerpts from statement by Representative Keller (Congressional Record, vol. 77, pt. 4, pp. 3913, 3914) During debates in 1933 on the bill, Representative Keller, in commenting upon this proposed amendment, stated: "This bill is in most regards a splendid bill. It represents a vast amount of labor on the part of the committee. But for all their thought and care somehow a section has found its way into this bill that would nullify most of its benefits. I refer to section 3, which seeks to turn over to this privately owned bankers' banking system for all time to come every penny of the franchise tax which has existed from the start. "A previous Congress, as representatives of our people, saw fit to give a small group of our citizens the power to issue money. For that privilege it exacted a small tax. That small group has paid itself a generous profit on that privilege in the past, and it now comes to the representatives of a sovereign power and asks that it be given all the profit. . * * * * "Now, what does this section 3 mean? It means this and nothing less, that if section 3 becomes the law we forever give up all claims to any return to the Government whatever. If section 3 had been in the original law, we would not have received the $149,000,000 which we have received, but the Federal Reserve System would have added that amount to the present $279,000,000 surplus, or $428,000,000 would belong to this purely private banking system. |