One of the chief objects of the Federal Reserve Act was to replace the unsatisfactory national bank notes with a bank note currency that should be controllable and elastic. The provisions of the act for retiring the national bank notes, creating a market for the 2 per cent bonds, and converting these 2 per cent bonds into 3 per cent bonds without the circulation privilege, have been described in Chapter XVII.

Federal reserve notes are issued at the discretion of the Federal Reserve Board to the federal reserve agents for the purpose of making advances to the respective federal reserve banks. By provision of the original Act of 1913 and the amendment of 1916 a reserve bank may make application to the local federal reserve agent for such amount of federal reserve notes as it may require. The application must be accompanied with a tender to the agent of collateral in amount equal to the notes applied for, the offered collateral to consist of notes, drafts, bills of exchange or acceptances rediscounted for a member bank of its district, bills of exchange indorsed by a member bank of any federal reserve district and purchased in the open market, or bankers' acceptances purchased in the open market. All issues and withdrawals of federal reserve notes to and by the reserve bank to which the federal reserve agent is accredited must be reported by the agent to the Federal Reserve Board, and the board may at any time require from a federal reserve bank additional collateral to protect the notes issued to it.

Any federal reserve bank may, at its discretion, withdraw collateral deposited with the federal reserve agent for the protection of its federal reserve notes, but must at the same time substitute therefor, with the approval of the federal reserve agent acting under regulations prescribed by the board, other similar collateral of equal amount.

When the original pledge becomes collectible it is necessary that the paper be in the hands of the bank for collection, and therefore it is necessary to withdraw the collateral about 10 days before its maturity. Instead of requiring the federal reserve bank to pledge other paper or gold or lawful money as substitutes - operations which would reduce the bank's note-issuing capacity - the Federal Reserve Board has ruled that the federal reserve agent may appoint the federal reserve bank as his collecting agent, and the reserve bank need not make the substitutions of paper, gold, or lawful money until the actual date when the original paper pledged to secure the notes falls due. The federal reserve agents are therefore authorized to turn over maturing paper to their respective federal reserve banks for collection, upon the execution by the bank of a receipt reciting the fact that the papers are taken for collection only, settlement to be made with the federal reserve agent in gold or lawful money on the dates when the papers mature, unless other eligible paper has been already substituted for the maturing paper. Such notes or bills should be indorsed to the federal reserve bank "for collection for account of the federal reserve agent," or a rider should be attached to them showing that they are delivered to the federal reserve bank for collection, in order that any banks used by the federal reserve bank in making the collection may have notice of the transaction.

In order that an adequate stock of notes may be on hand in an emergency for any federal reserve bank needing them, the Federal Reserve Board has provided for the printing of a sufficient supply of notes and turned them over to the federal reserve agents and federal reserve banks, in their joint custody and in trust for the board.