How come the Fed is losing so many member banks these days? What's going on there?

The penalty for belonging to the Federal Reserve System is now so high that everybody's getting out. It cost the shareholders of Citicorp a hundred million dollars last year for the privilege of belonging to the Fed. That's the opportunity cost[23]  on one billion two hundred million of reserves at, say 10 or 11 percent.

Smaller banks across the country, even though their numbers are lower, just can't afford that kind of hit. So the Fed's membership is shrinking every morning--it's the lowest ever now--and they're trying to legislate a way to hold an uneconomic system together.

Sure, the prestige is great. But there is a cross-over point. The way to get members back, of course, is to pay interest on reserve balances, but then the Fed might cease to be the most profitable corporation in the world.

Last year they made $7.9 billion. That would make Tom Murphy of General Motors happy. You and I could make that kind of profit, too, if we didn't pay anything for our inventory.

One of the Fed's important functions is clearing checks. But with automated clearing houses and the bank wires and the electronic funds system, you really don't need that anymore.

So, this will become a hot topic: Should all financial institutions have reserve requirements and, if so, how much? And how much interest is to be paid? The industry is widely split on it. If regulation follows its customary course they will exempt all banks under $100 million. That's about 80 percent of all the banks in the country. Then they'll hit the bigger banks. That's what usually happens.

[23] The amount of interest earnings foregone on the portion of deposits that member banks are required to keep unused in reserve.