Federal Reserve Dividends

The heavy importations of gold into this country, as well as the consequent drop in money rates and trade activities, has had a rather striking effect upon most if not all of the Federal Reserve Banks. Not only have the latter received less interest per dollar loaned, but their loans have contracted very greatly. Few Reserve Banks are at present earning the 6% dividend payable on their stock. The question is thus rapidly coming to the fore--should the Reserve Banks pay dividends out of surplus?

The payment of unearned dividends out of surplus is very generally frowned upon in corporation practice. Yet, in part at least, this is what surplus is for. Moreover the structure of the Reserve Banks might well suffer, should their dividends be long cut or suspended. Their stock is held by the member banks, state or national. The latter must belong to the system under the law. But membership in the state banks is entirely optional, and many state banks have never seen fit to join the system, thereby decreasing the control and leadership of the system over the country's banking business. If Reserve Stock produced no dividends, state banks would scarcely be inclined to invest in it, as they would have to do in acquiring membership in the system.

The real trouble has been that the U. S. Government has, under the specious pretext of a "franchise tax," confiscated the earnings of Reserve Banks over dividends at a modest return to surplus account. The Reserve Banks should be allowed to accumulate large surpluses, so that, in just such times as the present, they could pay dividends out of surplus for years if necessary.