On June 21, 1917, the Federal Reserve Act was amended to permit the direct issue, by the federal reserve agent to the federal reserve bank, of federal reserve notes for gold and gold certificates. By this amendment the federal reserve bank need no longer resort, to the roundabout method described above. Gold and gold certificates were thereby added to the list of collateral receivable by the federal reserve agent as security for notes, and it was provided that, when the federal reserve agent holds gold or gold certificates as collateral for federal reserve notes issued to the bank, such gold or gold certificates are to be counted as part of the gold reserve which the bank is required to maintain against its outstanding federal reserve notes. The 40 per cent gold reserve required by the Act of 1913 was not intended as collateral but as a protection against undue and excessive issues; it was a requirement in addition to that of the 100 per cent deposit of the commercial paper pledged. Today, however, the gold and the paper together make no more than 100 per cent - that is, 40 per cent gold and 60 per cent eligible paper - and the lending power of the banks is therefore increased.

Notes may now be issued against commercial paper or gold, or both, so long as every federal reserve note is covered by 100 per cent commercial paper or gold, and so long as there is not less than 40 per cent gold reserve against all notes outstanding. Arguments 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 2 1/2 times its face value in credit, and in emergencies even a greater multiple. The gold stock of the country is, therefore, 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 60 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.