The experience of these years proved that the expansion or diminution of national-bank currency was powerfully affected by an influence quite distinct from the need of bank currency for use by the public. Mr. Chase, when advocating the adoption of the national system, had foreseen the possibility that payment of the public debt might compel "a future generation" to find for the bank-notes some security other than United States bonds, but it probably did not occur to him or to the other founders of the system that the rise of public credit by itself might cause the curtailment and even threaten the extinguishment of the note-issue.

These unexpected results of the bond requirement were moderated by provisions of the Currency Act of 1900 relating to the issue of notes. Banks were allowed to issue notes to the amount of the paid-in capital and to one hundred per cent. of the market value of the bonds deposited, but not exceeding one hundred per cent. of their par value. The act authorized the refunding of the greater part of the funded debt into two per cent. bonds, payable after thirty years, in exchange for several former issues paying higher rates of interest but all redeemable before 1909. Upon notes secured by the new bonds the tax on circulation was reduced fromone to one half of one per cent. For at least another generation, then, an ample basis of bonds to secure circulation was provided, and for the time being at any rate the profit to be gained from the issue of notes was slightly increased. Within less than four months after the passage of the law the note-issue, which had remained almost stationary for more than a year, rose from $214,000,000 to $265,000,000 and thereafter continued to expand slowly but almost continuously until 1912 when there was more than $700,000,000 of the notes in circulation. But the system of note-issue was not essentially altered by the act of 1900. The aggregate circulation continued to depend proximately upon the current price of bonds and not upon the demand of the community for that form of bank currency. Real elasticity, whether for contraction or expansion, was still lacking fifteen per cent. The provisions for determining what should "Be counted as reserve were, however, less simple. The general requirement was that the reserve shall be "lawful money," or in other words gold and silver coin and certificates and also legal-tender notes of the United States. But Clearing House certificates, which represent lawful money specially deposited for the purposes of the Clearing House association, of which the bank owning them may be a member, and the cash reserve of five per cent. of its circulation, which every bank is required to keep in the Treasury, could also be counted as a part of the reserve against deposits. And it was further provided that, for any bank in a reserve city one half of its reserve might consist of cash deposits in the city of New York, or in any other "central reserve city,"1 and for any bank outside of the reserve cities three fifths of its reserve might in like manner consist of deposits with banks in reserve or in central reserve cities.

In its regulation of the deposit business of the national banks, the act of 1863 followed the example of legislation adopted in many of the States in the years immediately preceding the Civil War, and prescribed a minimum reserve to be held for the protection of the liability for deposits which continued with no fundamental change until the Federal Reserve banks were established in 1914. For banks in the "reserve cities," named in the original act of Congress or provided for by later legislation,1 a reserve of twenty-five per cent. of the deposits was required; for all other banks,

1 By an act of 1887, any city having fifty thousand inhabitants could be made a reserve city, upon application made by three fourths of the national banks established in it. Since 1913 the power to designate reserve cities has been lodged with the Federal Reserve Board.

For the enforcement of the provisions as to reserve, the law provides that whenever the reserve of any bank falls below the prescribed limit, the bank shall neither "increase its liabilities by making any new loans or discounts," otherwise than by the purchase of sight bills of exchange, nor shall it make any dividend, until the reserve has been restored to its due proportion. The Comptroller of the Currency is also authorized to notify any bank whose reserve is insufficient that it must be made good, and in case of failure to comply within thirty days, he may, with the concurrence of the Secretary of the Treasury, appoint a receiver to wind up the business of the bank. Although the ample discretion thus given to the Comptroller has been used with moderation, the prohibition of further discounts, when the reserve falls below a given point, makes a hard and fast line, the approach to which never fails to cause uneasiness, while in any actual crisis, the fear that the usual accommodation of the public must stop and liquidation must begin is the surest means of increasing the pressure for loans and of thus converting a crisis into a panic.

1 After 1887, a city having two hundred thousand inhabitants could be made a central reserve city upon application made by three fourths of the national banks established in it. Chicago and St. Louis at once became central reserve cities but the banks of other cities manifested no inclination to follow their example.

The permission to count as reserve balances with other banks, which were in fact only demands for cash, had a marked effect upon the composition of the reserve held by the banks as an aggregate, and therefore upon the strength of the whole mass of banks at any given moment. If we take for example the returns of the national banks for September 7, 1899, we find their deposits amounting in the aggregate to $3,031.5 millions, requiring a reserve of $630.8 millions. They were returned as holding $890.5 millions of reserve in all, and were, therefore, on the average, far above the legal minimum. But this great apparent reserve was composed as follows: