4 The Act does not explicitly say by whom the notes are issued: it says that they are "to be issued at the discretion of the Federal Re serve Board"; that "the said notes shall be obligations of the United States." Further on the notes are spoken of as "issued to" a Federal Notes, it will be observed, are issued only on request of a Federal Reserve bank, and not by or on request of the mem ber lianks. After the notes have been issued, the bank may re circulation by months until the latter part of 1920, a level for several months as credits began to be curtailed, and a fall beginning the first of 1921.
duce its liability any day by depositing lawful money with the Federal Reserve agent, who is right there in the bank. The Federal Reserve banks and the United States Treasury Reserve bank, and again as "issued through" a Federal Reserve bank, but not by it. But the phrase occurs (sec. 16), "its [i. e., the Federal Reserve bank's] Federal Reserve notes." The notes thus are technically issued by the United States, but not as ordinary political (fiat) money, for they are not given a forced circulation by the government in pay ing its indebtedness. But the banks "shall pay such rate of interest on" the amounts of notes outstanding as may be established by the Federal Reserve Board (i. e., to the government of the United States). Practically the notes (as respects choice of time of issue, amounts, profits from them, commercial assets to secure them and to redeem them) are asset currency issued by the several Federal Reserve banks, must promptly return to the banks through which they were issued all notes as fast as they are received, and "no Federal Reserve bank shall pay out notes issued through another on penalty of a tax of ten per centum." This regulation does not apply to the member banks, but its effect must be to keep notes from circulating long in any district except that for which they were issued.
§ 5. Reserves against Federal Reserve notes. The rule applying in normal times to reserves against note issues is that each bank must provide a reserve in gold equal to 40 per cent "against the Federal Reserve notes in actual circulation, and not offset by gold or lawful money deposited with the Federal Reserve agent." At least 5 per cent is to be on de posit in the Treasury of the United States. The proportion of reserves to the liability for note issues by any bank, how ever, may be allowed to fall below 40 per cent, on condition that the Federal Reserve Board shall establish a graduated tax of not more than 1 per cent per annum (it evidently might be made less if the Board chose) upon such deficiency, until the reserves fall to per cent and thereafter a graduated tax of not less than per cent on each additional per cent, deficiency or fraction thereof!' This tax must be paid 1,y the Reserve bank, hut it must add an amount equal to the tax to the rates of interest and dis h This may be shown in the following table: count charged to member banks. The effect of these rules is
to give a power of note issue in time of emergency without compelling the Reserve banks to lock up their reserves held against notes. Suppose, for example, that the circulating notes were in normal times $1,000,000,000, and the reserves, therefore, were $400,000,000, and the rate of discount 5 per cent. Then the circulation might be doubled with the same reserves, the proportion thus falling to not less than 20 per cent of outstanding notes, and the rate of discout to cus tomers rising to 13.5 per cent (5 plus 8.5). Or, to take a most extreme supposition, suppose that the withdrawal of gold had been so great as to reduce the reserves against notes to $50,000,000; yet outstanding notes might still be doubled, becoming $2,000,000,000, the proportion of reserves falling to 2.5 per cent, the rate of discount rising to 24 (5 plus 19).
the twelve Federal Reserve banks, combined, in the first seven years. It was above 80 until 1917, and about 90 in April just as we entered the war. It fell to about 55 in the war period, where it remained until the latter part of 1919, and fell to 40 the first half of 1920, the period of greatest speculation and highest prices. The reserve of some of the banks fell several points below 40. (The average reserve re quirement against notes and deposits together was about 38.) Recall this chart when considering if 11-13 below.
§ 6. Reserves against Federal Reserve bank deposits. Every Federal Reserve bank shall, under normal conditions, maintain reserves in lawful money of not less than 35 per cent against its deposits. But the Federal Reserve Board may suspend any reserve requirement in the Act for a period not exceeding thirty days and from time to time renew the sus pension for periods not exceeding fifteen days; but in that case it must establish a graduated tax upon the amounts by which the reserve requirements may be permitted to fall be low the levels specified as to note issues. Although the amount of the tax on the deficiency of reserves against de posits is not indicated in the act, it is plainly the thought that the Board will follow somewhat the same rule as in re spect to excess note issues. The great discretionary power as to reserve requirements thus lodged in the hands of the Board makes possible at times of emergency the use of the reserves both of the Reserve banks and of the member banks, down to the last dollar, if need be, without violation of law. This gives practically unlimited opportunity to expand credit both by the issue of bank-notes and by discount and deposit in periods of financial crises.