The intention of the system was to provide an elastic currency, which would provide not only for emergencies but also for the seasonal variations in the demand for money. The system seems altogether capable of doing both. It was not inaugurated in time to meet the emergency in 1914, and since that date no emergencies have occurred to really test it, although the giant operations in financing the war would have proved real emergencies under the old national bank system. The unused potential loaning power of the federal reserve banks is 2.5 times their surplus gold reserves; but even this does not represent their full potentiality, for the •federal reserve banks may loan more than 2.5 times their gold reserves, provided they pay taxes on the deficiency of reserves, and in great emergencies the Federal Reserve Board may suspend all reserve requirements. The real limitation consists, therefore, not in the scarcity of gold reserves, but in the scarcity of paper eligible for rediscount and for hypothecation for notes. The dearth of double-name paper is due to the American system of business with its single-name paper, open book accounts and cash discounts and to the want of a system of bankers' acceptances. Spirited efforts are being made to develop a trade acceptance system, a bankers' acceptance system, and a discount market. In order to facilitate war finance there was developed the plan of member banks selling securities to the federal reserve banks with agreements to repurchase, and the plan of member banks borrowing from the federal reserve banks on the basis of their notes accompanied by government securities as collateral. By these devices the federal reserve system has attained great capacity to meet emergencies. In practice the member bank in any payments of rediscounts, loans, or collections made to it, largely takes deposit credit at the federal reserve banks, rather than reserve notes, but this is a matter of arrangement between the two banks and is based on convenience.

The Federal Reserve Act planned to effect elasticity of note issue by ready issue of federal reserve notes in payment of re-discounted commercial paper, and by the contraction of the issue as this paper matured. If business should increase in a community, the loans and discounts of the member bank would increase until its reserve fell to the required minimum; to enlarge its credit reserve with the federal reserve bank and to get quantities of federal reserve notes to pay out over its counter, the member bank would rediscount some of its discounted commercial paper to the federal reserve bank. To procure these notes, the federal reserve bank would pledge rediscounted paper with the federal reserve agent. The volume of federal reserve notes issued would, therefore, be determined by the business needs of the federal reserve district. Member banks could not use these notes as reserve, but they could pay them out over their counters, or send them to the federal reserve banks or to the United States Treasury for redemption. The federal reserve bank receiving the note of another reserve bank would be required to send on the note for redemption or credit, and would not be permitted to pay it out over the counter under penalty of a 10 per cent per annum tax. When the pledged paper became due it presumably would be covered with federal reserve notes or gold. Federal reserve notes worn out or mutilated would also be sent to the Treasury for redemption. By these devices it was thought that the reserve notes would fluctuate in volume with the business needs of the country.

It has been shown above, however, that the policy of the federal reserve banks, while they were concentrating the gold supply, was to cover the pledged paper with gold, leaving the federal reserve notes in circulation and not reduced in volume. By this covering process the total volume of circulating media was reduced, and although the federal reserve notes did not tend to fluctuate greatly in volume to meet the seasonal demands, the total currency did so fluctuate. Federal reserve notes are readily issued to meet the demands of business, and, when the strain has passed a certain amount of gold, federal reserve notes, or some other kind of currency is subtracted from the total currency. The total volume of currency, therefore, rather than the volume of federal reserve notes alone, is elastic, varying with the needs of business and the international adjustment of the gold supply. The greenbacks, silver dollars and certificates, national bank notes, and federal reserve bank notes, are inelastic credit instruments in our circulating media; but over and above these are the federal reserve notes, which, as shown, provide an elastic super-structure.

Statistical verification of this seasonal elasticity has been made quite impossible during the last few years on account of the dominating influence of the Treasury financing. Figure 8 is arranged for seasonal comparisons.

Figure 8. Graphic Chart Showing Seasonal Variations in Federal

Figure 8. Graphic Chart Showing Seasonal Variations In Federal