During their first years of operation not many of the reserve banks were able to earn the 6 per cent. The amortization of organization expenses, the small volume of business, and the low earnings on their investments, made it impossible to pay full dividends. But by the year 1918 every bank had met its arrears, or nearly so, and some had turned over excess profits to the government. The low earnings at first occasioned demands for the reduction or abolition of the capitalization, for the reduction in number of these expensive institutions, and for the suspension of further subscription payments. These demands have ceased since all the banks are now earning more than 6 per cent, have paid their arrears of dividends, and are accumulating surpluses.

By the end of 1920 all but three of the federal reserve banks had accumulated surpluses in excess of their capital stock, and for that calendar year the ratio of current net earnings to average paid-in capital and reserve balance combined ranged from 5.6 per cent (the Dallas bank) to 11 per cent (the Atlanta bank) and averaged 7.9 per cent.

Table Showing The Distribution Of Earnings Of The Federal Reserve Banks For The Year Ending December 31, 1919 (In Millions, Except "Dividend Payments," Which Are In Thousands)

Federal

Gross Earnings

Net Earnings

Dividend Payments

Transferred to Surplus

Franchise Tax to U. S.

Subscribed Capital

Surplus

Ratio of Surplus to Capital

Boston...................

$ 7.4

$ 5.8

$ 414.4

$ 5.4

....

$ 14.2

$ 8.4

58.80%

New York..........

35.3

27.9

1,291.0

23.9

$2.7

44.8

45.0

100.67

Philadelphia........

8.6

6.7

462.3

6.2

.........

15.8

8.8

55.84

Cleveland..................

7.8

6.0

556.7

5.5

.........

19.1

9.0

47.67

Richmond.................

4.8

3.9

252.9

3.6

.........

8.8

5.8

66.26

Atlanta......................

4.4

3.4

197.4

3.2

.........

6.9

4.7

68.48

Chicago.....................

12.0

8.6

700.8

7.9

.........

24.7

14.3

57.87

St. Louis...........

3.9

2.4

234.6

2.1

.........

8.1

3.7

45.81

Minneapolis........

3.0

2.3

180.2

2.1

.........

6.1

3.6

58.05

Kansas City..................

4.9

3.9

228.7

3.7

.........

8.0

6.1

76.15

Dallas...........................

3.0

2.0

196.3

1.8

.........

6.8

3.0

44.29

San Francisco..........

7.0

5.3

296.2

5.1

.........

11.5

7.5

65.56

$102.4

$78.4

$5,011.8

$70.6

$2.7

$174.8

$120.1

66.71%

The combined gross earnings of the twelve federal reserve banks for the calendar year 1917 were $12.1 million; for 1918, $20.3 million; and for 1919, $102.4 million. This growth of earnings is quite remarkable. It was largely occasioned by the increased use made of the reserve banks by members borrowing or rediscounting at the favorable rates maintained by the reserve banks. This policy of low rates was part of the general policy of war finance. In 1919, of the total earnings, 78.9 per cent came from discounts, largely war paper, 13.7 per cent from bills purchased in open market, and 5.6 per cent from United States securities owned.

These high earnings have had several important effects, some of which strike at the root of the problem of central banking. One effect has been to raise a demand that the reserve banks pay interest on reserve balances. Another demand is that member banks should be permitted to share in the profits of the reserve banks. Thirdly, high earnings have made it possible for the reserve banks to undertake various services for the members and thus to share the profits with them indirectly. Such indirect sharing of profits is illustrated by the absorption of the service charges in the collection of checks, the absorption of the express charges on currency shipments, etc. A fourth effect has been to question the policy of permitting these central banks to make profits without limit. Undoubtedly a central bank should not be run for profits, since it has a greater public responsibility than the other banks, and this fact should take precedence over all other factors in determining its policies. The present situation is peculiar, for the war finance policy demanded low rediscount rates, and these rates made high earnings of the reserve banks inevitable. The operating costs of the federal reserve banks for the year 1919 were $20.3 million. They are expensive institutions. Undoubtedly their number might be reduced and the nation's business be handled as expeditiously as at present. Not only is the expense of their operation large, but this expense is further increased by certain legal provisions which among other things place upon the reserve banks the expenses of the Federal Reserve Board, amounting in 1919 to $595,000; but all this is simply the price paid for the benefits of the regional system.