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peared no evidence of competition among the federal reserve banks to see which can show the largest profits. Under the leadership of the federal reserve board, the great emphasis has been on competition for public service. The result is that the federal reserve banks have been conserving their strength for times of emergency. Under such circumstances the federal reserve banks should have substantial powers of credit expansion to call upon in times of emergency, before their reserve position is forced down to anything like the 85 per cent legal limit.

This limit itself, however, is not a rigid one. It

may be passed in times of extreme emergency, although only by paying a price. The federal reserve law provides, as we have previously noted, that the federal reserve board may "suspend for a period not exceeding thirty days, and from time to time ... renew such suspension for periods not exceeding fifteen days, any reserve requirement specified in this act: provided, that it shall establish a graduated tax upon the amounts by which the reserve requirements” against deposits are permitted to fall below the level of 35 per cent (Section 11). Inasmuch as this tax would presumably be added to the rate of discount charged by the reserve bank, there would be an increasingly heavy charge upon loans made when the reserve was below the normal legal minimum. None the less, such loans could be

made without limit to those who could give the security and would pay the price. .

The most important device of the federal reserve system for securing elasticity of deposit currency, as well as of bank-note currency, is found in the machinery enabling member banks to borrow funds of their federal reserve bank. Funds so borrowed, when left on deposit with the federal reserve bank, serve as legal reserve money for the member banks. The making of such loans to member banks is one of the chief functions of federal reserve banks. Broadly speaking the loans are of two kinds, rediscounts, and loans on collateral. Let us consider briefly each of these types of loans.

Rediscount Federal reserve banks always stand ready to rediscount in time of need eligible paper for member banks.

A member bank, say a country bank, whose reserve is in danger of running below the 7 per cent of demand deposits, and 3 per cent of time deposits, required by law, or which is in need of more cash for till money, may take, say $10,000 of its eligible commercial paper to its federal reserve bank and have it rediscounted for, say, 60 days at 41/2 per cent. The proceeds would be $9,925, which at 7 per cent would represent a legal reserve sufficient for $141,714 of demand deposits, and would therefore greatly increase the bank's lending power. Any part of the proceeds of the rediscount in excess of that needed to maintain the bank's ņ per cent legal reserve with the federal reserve bank could be checked against and taken in cash, presumably in federal reserve notes, for the bank's till money.

For the purpose of keeping the assets of federal reserve banks liquid, the law and the administrative regulations of the federal reserve authorities place rigid limitations upon the kinds of paper eligible for rediscount. These limitations have reference both to the length of time the paper is to run, and to the purpose for which it is issued. As to time, notes rediscounted must have a maturity at the time of rediscount of not more than 90 days (exclusive of days of grace); except that a limited amount of bills drawn for agricultural purposes or based on live stock may be rediscounted, provided they have a maturity not exceeding six months (exclusive of days of grace). As to the purpose for which the bills are issued, the law limits rediscounts to two classes of paper. They are: (1) Notes, drafts and bills of exchange bearing the endorsement of a member bank and “arising out of actual commercial transactions,” that is, issued or drawn “for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used for such purposes”; and (2) Notes, drafts and bills of exchange bearing the endorsement of a member bank and issued or drawn for the

purpose of carrying or trading in "bonds and notes of the Government of the United States.” Except for United States Government securities, the law specifically prohibits the rediscounting

by federal reserve banks of paper issued or drawn “for the purpose of carrying or trading in stocks, bonds, or other investment securities."

Collateral Loans The second type of loan is the discount of collateral notes of member banks. These notes must be for periods not exceeding fifteen days, and the only permissible collateral is “such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchase by federal reserve banks,” and bonds or notes of the United States Government. There was no provision in the original act for collateral loans, but experience soon showed that member banks frequently wished to secure from federal reserve banks advances for brief periods, so brief that they were reluctant to rediscount customers' paper for the purpose. To meet the difficulty an amendment to the federal reserve act was passed September 7, 1916, authorizing these short-time collateral loans. The authority to make such loans has proven to be particularly useful in connection with the financing by the banks of Liberty bond purchases either for themselves or for their customers—purchases which are likely to involve heavy drains upon the banks for very brief periods. During the years 1917, 1918, and 1919

these collateral loans have constituted by far the most important form of advance made by federal reserve banks to member banks. The great bulk of them are secured by United States certificates of indebtedness and Liberty bonds.

Contraction of Circulating Credit So far we have been speaking of the elasticity of deposit currency under the new banking system in the direction of expansion in times of increasing currency demand. The contraction of deposit currency, as soon as the need for it falls off, is brought about by the pressure of high discount rates, to which the pressure of the graduated tax is added. This double pressure encourages borrowers to pay off their loans. This fact, and the increasing restrictions which federal reserve banks place upon rediscounts as money market conditions become easier, tend to contract the circulation of deposit currency and restore the reserves to a normal condition. In this respect a great public responsibility rests upon the federal reserve authorities to conserve the banking strength of the country in times of easy money, so that it can be called upon in times of emergency. Some critics of the federal reserve system believe that the machinery it provides for contracting both deposit and bank

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