Any federal reserve bank may at any time reduce its liability for outstanding federal reserve notes by depositing with the federal reserve agent its federal reserve notes themselves, gold, gold certificates, or other lawful money. Federal reserve notes so deposited may not be reissued, except upon compliance with the conditions of an original issue. The federal reserve agent must hold the gold, gold certificates, or lawful money exclusively for exchange for the outstanding federal reserve notes. Upon request of the Secretary of the Treasury the Federal Reserve Board must require the federal reserve agent to transmit to the Treasury of the United States so much of this gold as may be needed for the exclusive purpose of redeeming these outstanding notes.

This method of retirement at first resulted in impounding gold and gold certificates in the hands of the federal reserve agents and substituting in the circulating media of the country federal reserve notes for the gold and gold certificates. On the basis of pledges of eligible commercial paper - bought in the open market or received as rediscounts - federal reserve notes were issued by the federal reserve agent to the reserve bank; at maturity of this paper the bank would recover it with gold, gold certificates, and lawful money, leaving the federal reserve notes in circulation. This policy was deliberately pursued by the Federal Reserve Bank of New York, which retained the gold and gold certificates that came into its hands, and paid out its federal reserve notes. The gold and gold certificates thus acquired it used to recover commercial paper pledged with the federal reserve agent, and did not present its notes for redemption. This was a roundabout method of issuing federal reserve notes for gold, the direct issuance of notes for gold being prohibited by the Federal Reserve Act as originally passed.

The purpose of the New York bank in so doing was to concentrate the gold reserves of the country in the federal reserve system, and put them behind the federal reserve notes rather than behind the gold certificates. Since the gold certificate is but a warehouse receipt for the gold itself, the impounding of the receipts was equivalent to the impounding of the gold, and both may be counted as reserves.