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Both bank-note currency and deposit or ch currency are more elastic under the new syst than under the old.

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Bond-Secured Bank Notes In order to prevent the alleged danger of undue contraction of the currency and to prot from loss the banks owning the two per c bonds, which were largely pledged with the G ernment as security for national bank-note cir lation and which by reason of the circulat privilege had a value far above their investm value, the Government decided not to withdr from circulation at once the old bond-secu bank notes. The federal reserve law accordin continued the circulation of these notes, but a tained provisions looking toward their gradual tirement. From the time of the enactment of federal reserve act (December 23, 1913) February 1, 1920, the national bank notes in

culation were only reduced, however, from $726 millions representing about 21 per cent of our total monetary circulation to $655 millions, representing about 11 per cent. To this sum there should be added, to be accurate, $201 millions of so-called federal reserve bank notes which are merely bank notes of the old type that are issued by the federal reserve banks instead of by the national banks. They are secured by a specific deposit, with the United States treasurer, of bonds or of certain short-time obligations of the United States. Up to the early fall of 1918 these federal reserve bank notes were of comparatively little consequence, but with the gradual substitution of them, for silver certificates and silver dollars in circulation, since that time, under the provisions of the act of April 23, 1918, they have been assuming increasing importance.

Federal Reserve Notes The notes upon which the federal reserve system places its sole reliance for bank-note elasticity are the so-called federal reserve notes. These notes, which are obligations of the United States Government and are “first and paramount lien on all the assets” of the issuing federal reserve banks, have back of them specifically pledged with the federal reserve agent to the

amount of 100 per cent certain forms of high grade collateral. This collateral may consist of: (1) Paper endorsed by member banks and drawn for strictly commercial, industrial or agricultural purposes, or for the purpose of carrying or trading in securities of the United States Government, in other words, paper of the type hereafter described" which is eligible for rediscount at a federal reserve bank. (2) Bills of exchange endorsed by a member bank and bankers' acceptances bought by the federal reserve bank in the open market. (3) Gold and gold certificates.

Except under special circumstances, to be considered later, a gold reserve of not less than 40 per cent must be kept by each federal reserve bank against its outstanding federal reserve notes. Gold specifically pledged with the federal reserve agent as collateral for the notes


be counted in making up this 40 per cent reserve, as may also gold kept in the redemption fund with the treasurer of the United States at Washington for the redemption of the notes.

Elasticity of Federal Reserve Notes As regards the matter of elasticity, these notes have in a high degree the quality of expansibil1 Pages 61-63. 2 Pages 53-54.

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ity, namely, of having their circulation easily increased in times of need. If member banks in a given section of the country need an increased supply of currency to meet local demands, they may rediscount eligible paper with their federal reserve bank and take the proceeds of the rediscounts in federal reserve notes, which pass readily as hand-to-hand money and are satisfactory till money for the banks. The federal reserve bank, if its supply of notes is inadequate, secures, on application to the federal reserve agent, additional notes by depositing with the agent the rediscounted paper or other eligible paper in its portfolio. This process may continue as long as the federal reserve bank has paper available for deposit with the federal reserve agent and its gold reserve does not fall below the normal legal minimum of 40 per cent. In case of great emergency, however, the federal reserve board may permit a reduction of the note reserve below 40 per cent, provided it imposes a graduated tax upon the amount of the deficiency—a tax which must be added to the rates of interest and discount fixed by the federal reserve board. Furthermore, to meet extreme emergencies the board is authorized "to suspend for a period not exceeding thirty days, and from time to time to renew such suspension for periods not exceeding fifteen

days any reserve requirement” specified by the Act. It is thus seen that the federal reserve notes have ample power of expansion in time of emergency and that there no longer exists a stone-wall limit beyond which expansion cannot go and go promptly. There is no fixed limit, but beyond a certain point further expansion can be secured only at a rapidly increasing expense to those wishing the notes.

The notes issued by federal reserve agents to the twelve federal reserve banks amounted to $3,222 millions on February 20, 1920. Back of these notes there was held by the twelve federal reserve agents the following collateral:

Millions (1) Gold coin and certificates...... $241 (2) Gold in redemption fund at Washington

108 (3) Gold with federal reserve board 807 (4) Eligible paper, (representing

$763 millions above the minimum
required by law)



$3,985 The figures show that 36 per cent of the federal reserve notes issued were backed dollar for dollar by gold collateral. The total gold resources of the twelve federal reserve banks on

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