The Federal Reserve Act prescribes a minimum capitalization of $4,000,000, divided into $100 shares for each of the twelve federal reserve banks. The outstanding capital stock increases or decreases from time to time with the increase or decrease in the capital or surplus of member banks. When a new bank joins the system it is required to subscribe 6 per cent of its capital and surplus to the stock of the federal reserve bank, and when a bank already a member increases its capitalization or surplus it must at the same time increase its subscription so as to reach 6 per cent of the new amount. Half this original subscription is payable in three quarterly instalments, and the rest at the call of the Federal Reserve Board. If a bank buys reserve bank stock it contracts to pay par value plus 1/2 per cent a month for each month since the last dividend payment. When a bank reduces its capital and surplus or withdraws from the system, refunds are made to it on the same basis. The shares may not be transferred nor hypothecated.

To date, the Federal Reserve Board has not called for any part of the second half of the stock subscriptions of member banks. The accumulation of a goodly surplus in recent years makes it improbable that the uncalled subscription will ever be called. It will simply remain as a contingent asset of the reserve bank.

The advisability of capitalizing the reserve banks, or at least requiring the members to pay subscriptions to their stock, has been questioned. The objection arose because of the low earnings of certain reserve banks during the period 1914-1917. The arguments were that the requirement of a 6 per cent subscription, as explained above, was arbitrary and no more than a guess at what the capital requirements of the reserve banks would be, and that the mere liability of the member banks for the required capital would have been as effective as its payment; that the paid-in capital of the reserve banks created a dividend responsibility which forced them to undertake banking operations in the open market in competition with the member owners; that the gold reserves paid into the reserve banks were ample to take care of the rediscounting needs of the member banks; and that the subscription requirements for member banks discouraged state banks from entering the system.

The capitalization of the reserve banks, however, serves many useful ends: It provides an initial working capital; it gives the member banks a decided interest in the operation of the reserve bank other than if the institution were a mere depository; it provides resources sufficient to insure to the reserve bank stability and continuity; it furthers open-market operations, through which the board and reserve banks can control the banking situation; and it is a fair investment for the members.