Every reserve bank is required to keep on deposit with the Federal Treasury a sum in gold sufficient, in the judgment of the Secretary of the Treasury, for the redemption of its notes outstanding, but in no event less than five per cent of the amount. This re demption fund may be counted as a part of the re serves required against notes, however, and so it works no hardship on the banks. The notes are issued in denominations of $5, $10, $20, $50, and $100, and they bear the distinctive numbers of the issuing banks.
5. Contraction of Federal Reserve adequate provision is made for expanding the Federal Reserve notes, it is to be feared that the same is not true of contracting them. The Board may force con traction arbitrarily by levying a tax upon them, or it may use its influence to have the reserve banks deposit lawful money for retiring them. So far as arbitrary, power goes, there is plenty. Moreover, the law for bids any reserve bank to pay out notes of another re serve bank under penalty of a ten per cent tax upon all notes paid out. Notes of other reserve banks must be returned to the issuing bank for credit or re demption or to the Federal Treasury for redemption. This is good as far as it goes. As soon as a Federal Reserve note gets into a reserve bank it is retired. If it goes to the issuing bank, it is retired at once. If it goes to another reserve bank, it is immediately sent home.
What provision is there to draw the notes into the reserve banks as soon as business needs them no longer? There is no incentive which makes member banks and others send them in for redemption as bank notes are sent home in Canada or as they were sent in by New England banks under the Suffolk System. They may be paid in to one bank and out again, in to another and out again, and so on for months before they reach a Federal Reserve bank. In some states, state banks are even permitted to count them as part of their legal reserves. There is no adequate way to contract the notes thru the natural channels of trade and without arbitrary interference, as there is in Canada. Of course, it is true that the notes are issued against a deposit of short-time commercial paper, and that the Board may force redemption of issue as fast as the collateral matures, by simply refusing to per mit the reserve banks to substitute new collateral for that which comes due. A considerable inflation may be developed, however, in ninety days, which is the time the collateral ordinarily has to run.
6. Reserves of Federal Reserve banks are required to maintain a forty per cent gold reserve against reserve notes outstanding and not off set by gold or lawful money deposited with the Fed eral Reserve agent. In emergencies the Reserve
Board may permit any reserve bank to lower its re serves, provided the Board establishes a graduated tax of not more than one per cent per annum upon any de ficiency below forty per cent until reserves fall to thirty-two and one-half per cent. When the reserves fall below thirty-two and one-half per cent, a tax is levied at an increasing rate. There is an increase of not less than one-half per cent per annum upon each two and one-half per cent or fraction thereof that such reserve falls below thirty-two and one-half per cent. The tax on deficiency of reserves must be added to the rates of interest and discount fixed by the Reserve Board.
The reserve banks must maintain reserves in gold or lawful money of not less than 35 per cent against demand deposits. This requirement also may be sus pended by the Board provided that a graduated tax is imposed on deficiency of reserves. The amounts of the tax in this case are to be fixed by the Board.
7. National bank is made for the gradual retirement of national bank notes. At any time within twenty years after December 23, 1915, any national bank wishing to retire the whole or any part of its notes may file with the Treasurer of the United States an application to sell for its account, at par and accrued interest, United States bonds se curing the circulation to be retired. These applica tions are turned over to the Reserve Board, which may, at its discretion, require the reserve banks to pur chase the bonds so offered. It is provided, however, that the reserve banks may not be permitted or re quired to purchase bonds in this way to the amount of over $25,000,000 in any one year. The amount al lotted to each reserve bank is in proportion to its capi tal and surplus. The reserve banks may also buy bonds in the open market, and there is no limit to the amount which may be bought in this way, except as the Board may determine. Bonds purchased in the open market must be taken into account by the Reserve Board when it considers the matter of requiring any reserve bank to buy bonds thru the Federal treasury as described above. They must be subtracted from the bank's share of the allot ment to be required. As was stated before, the re serve banks can issue Federal Reserve bank notes against the bonds purchased.