Notes may now be issued against commercial paper or gold, or both, so long as every federal reserve note is covered by roo per cent commercial paper or gold, and so long as there is not less than 4o per cent gold reserve against all notes outstanding. Argu ments for the direct issue of federal reserve notes for gold are: 1. It is the common practice of Europe. In every country of Europe gold importations go directly into the central bank in exchange for its notes, just as in this country they go into the Treasury in exchange for gold certificates.
2. Gold that backs gold certificates supports only its face value in credit, but gold used as reserve for federal reserve notes may support z I z times its face value in credit, and in emergencies even a greater multiple. The gold stock of the country is, there fore, more efficient if it is in the custody of the federal reserve bank (or federal reserve agent) than if it is in circulation, or is in the Treasury backing gold certificates which are in circulation. When the gold for the country is concentrated in its reserves, the federal reserve system will be strongest and the federal reserve notes will answer all the purposes of gold certificates.
3. When exportation of gold is necessary, the central bank is able to supply it with the least possible disturbance to financial conditions. For example, if the $1.5 billion of gold certificates were concentrated in the federal reserve banks, these banks would be able, if necessary, to release $600 million of gold for export and still have a 6o per cent reserve against their outstanding notes; and these changes might take place without affecting the amount of currency in circulation or disturbing domestic credits.
4. The direct issue of federal reserve notes for gold or gold certificates is the better method of substituting reserve notes for gold or gold certificates in circulation, since it permits the direct accomplishment of what was formerly done indirectly.
Amendment Providing for Direct Issue The effects of the amendment of June 21, 1917, and the use made of the privileges conferred by it are indicated in the follow ing statistical statement covering the month before and the month after that date: By the amendment the federal reserve bank may count the gold held with its federal reserve agent as part of the required reserve against its outstanding federal reserve notes, and may substitute commercial paper for the gold to any extent desired, provided that the gold remaining in the hands of the agent or specially segregated as a reserve against notes in the vaults of the bank itself does not fall below 4o per cent of the notes outstanding.
During the strain that existed in the latter part of June 1917, due to the Liberty Loan payments and the tax and other payments at the end of the fiscal quarter, the Federal Reserve Bank of New York, which had carried roc per cent gold and no commercial paper with its federal reserve agent, now carried $roo,000,000 of paper to the federal reserve agent and withdrew a like amount of gold to strengthen its gold position with respect to deposits. As a result, the per cent gold reserve against notes declined. Since June 21, 1917, however, the matter of the per cent gold reserve against notes considered by themselves is wholly without significance, for the reserve bank can at any time shift notes or gold from the deposit-banking side to the note-issuing side, or vice versa. The reserve banks, following the recommendation of the board, endeavor to keep an equable distribution of funds held by the banks and the reserve agents, so as to be able to show in their reports approximately equal percentages of reserves against federal reserve notes and against deposits.
Reserves of Federal Reserve Banks Before June 21, 1917, there was, after the manner of the Bank of England, a severe separation of the gold held against notes (roo per cent or nearly that amount being carried with the federal reserve agent, and at least 4o per cent being carried in the bank itself) from the gold held (wholly in the bank itself) against de posits. The amendment made the system more logical by pro viding a means of combining or interchanging the reserves against notes and deposits. Gold which was lodged with the federal reserve agent, and which was the basis of roo per cent credit at most, now became the basis for 250 per cent credit, or even more if the reserve requirements were suspended or the tax on deficient reserves was paid.