The view or theory of currency issue which had been embodied in the original draft of the act was maintained throughout its various changes of form and appears in the final statute. The chief note changes introduced in the course of discussion were as follows: (I) The Federal Reserve notes were made eventual obligations of the government and it was provided that they could be obtained only from the government through the Federal Reserve agent of the bank desiring to issue them; (2) provision was made for a new type of note to be called a °Federal Reserve Bank note" secured by bonds on the same basis as the old national bank notes; (3) the redemption of the bonds held by the national banles was fixed at $25,000,000 a year and the Federal Reserve Board was' authorized to dis tribute this amount of old bonds among the reserve banks. At that rate it would have required about 30 years to retire the national bank notes and issue either Federal Reserve notes or Federal Reserve bank notes in their place. During the first three years' life of the system, redemptions proceeded at about this rate, but after the entry of the United States into the European War, 2 per cent bonds fell to a low level and the Reserve Board ceased to call upon reserve banks to take them over at par as before. In the original act of 1913, the outstanding notes had to be covered by gold and paper to 140r cent of their face per but by the act of 21 June 1917, this figure was cut to 100 per cent. Due to this and other causes the issue of Federal Reserve notes rapidly increased during 1917 and at the close of the year was near a billion and a quarter of dollars.
As things stand to-day, therefore, the Fed eral Reserve Act provides an elastic currency, based on business paper, and susceptible of increase as business operations increase and require a larger note issue. Reserve banks discount the paper presented to them by mem ber banks which have themselves discounted it for business men. Such paper may be turned over to the local Federal Reserve agent who will issue an equal amount of notes in exchange. The Federal Reserve bank must, however, carry a gold reserve amounting to 40 per cent of the notes it issues, and of this 40 per cent 5 per cent is deposited with the Treasury as a redemption fund, the other 35 per cent is retained in the Reserve bank's own vaults. The expansive power of the cur rency thus depends on, and is limited by, the gold holdings in the Reserve banks.
Granting the presence of the necessary gold there is no limit to the volume of notes that may be issued except the limit set by the needs of business and the dictates of sound banking. The question whether to call for notes or to take the proceeds of rediscounts in the form of book credit depends on the decision of the member banks. Federal Reserve banks could, however, if they desired issue their notes in exchange for paper bought in the open market with bank endorsements.
The question of foreign banking facilities is dealt with in several ways in the Federal Reserve Act: (1) Federal Reserve banks may established agencies abroad or name agents and correspondents. They have thus designated the Banks of England, France and Italy and others, but thus far operations have been small owing to the War and its effects. (2) Member national banks possessing capitals of 000 or more may apply for, and under speci fied conditions receive, permission to estab lish foreign branches of their own. In this
way, a considerable number of branches have been developed in South America. (3) By the act of 7 Sept. 1916, member banks are allowed to subscribe to the capital of banks formed to engage on their behalf in the for eign trade. Several such banks have been in corporated and have begun business.
The more important step taken in the direc tion of sound foreign trade finance was not, however, one that had to do with the mere establishment of banking machinery but with the introduction of approved banking methods. Foreign practice had long since recognized the banker's acceptance as the staple method of financing movements of goods. This teaching was embodied in the Reserve Act which pro vided that paper resulting from commercial transactions in foreign trade and of proper maturities might be accepted by national banks to 100 per cent of capital and surplus. Federal Reserve banks were empowered to rediscount or buy such acceptances; while by later legis lation domestic acceptance paper was given similar privileges up to 50 per cent of capital and surplus. Finally Congress adopted a pro vision permitting national banks to accept drafts, drawn in countries needing a means of remittance to the United States, intended to create a supply of dollar exchange.
An integral element in most of the plans of recent years for banking reform has been the reorganization of relations between the Treasury of the United States and the banks of the nation. As is well known, the sub Treasury system (dating from 1846 in its present form) and, requiring the actual hold ing of public funds in cash, is obsolete, being employed by no other country. Deposits of public funds -in national banks protected by special security have been made since the Civil War but were only a partial remedy for the evils of the sub-Treasury system. The Federal Reserve Act sought to change the older sys tem by constituting the reserve banks agents," and making them also depositories, thus permitting the government to do business at and through the reserve banks just as their banking members may.
When the act was passed the balances of the government were small and there was no haste in carrying into effect this phase of the law. Early in 1916, however, the banks were made depositories of all Treasury balances then on deposit with national banks in the cities where the reserve banks were located, other funds outside these cities being kept as before. During 1916 and the beginning of 1917, the Reserve banks thus became habituated to methods of transacting Treasury business, and so made themselves ready for the great and unexpected expansion of their functions in this field which was to follow, when, at the entry of the United States into the European War in 1917, this small business suddenly as sumed new and important proportions. The Secretary of the Treasury had determined to employ each Federal Reserve bank as the head of a district organization designed for the distribution of the bonds whose sale in unprecedented amounts was necessary to the conduct of the war, and in each Federal Re serve district such an organization was quickly developed about the local reserve bank as a centre.