The original provisions against excessive issues of notes seemed ample to prevent inflation. A 40 per cent gold reserve was required, and this requirement could only be obviated by the payment of a progressive tax, which soon became prohibitive. The discount rate also increased as fast as this tax on the deficiency of the reserve. How these three limitations are being evaded under present practice has been explained above.

When a federal reserve bank applies to its federal reserve agent for a certain amount of notes, the Federal Reserve Board has the right, acting through the federal reserve agent, either to grant the application in whole or in part, or to reject it entirely.

The board may at its discretion fix a rate of interest which shall be charged for the use of the federal reserve notes issued to the reserve bank and in this way force the retirement of the notes when redundant. To date (1921) the board has not deemed it necessary to impose any such interest rate.

In addition the board may impede inflation in any federal reserve district by directly raising the discount rate of the federal reserve bank, either at the instance of the reserve bank or on its own initiative.

As the denominations of the federal reserve notes range from $5 to $100 and many are too large, therefore, to stay in general circulation, the notes, particularly of the larger denominations, drift to tills of business concerns and into the vaults of banks, and ultimately to places of redemption.

The board has another means of control in that it may more strictly define the paper eligible for rediscount if it is found desirable to restrict the pledging of paper for the purpose of securing notes. A stricter definition would reduce the volume of eligible paper and thereby restrict the possibility of note issues except against gold. By requiring that the paper be strictly commercial paper, not only is the volume limited by the amount of business transactions, but the paper, being self-liquidating, provides a means for its payment before maturity. Paper that covers fixed investments and speculations is specifically excluded from rediscounts. Moreover, only short-term paper may be rediscounted, and therefore it is impossible to rediscount to an unlimited amount since some paper is coming due every day and must be paid through the member bank that discounted it. But this limitation on inflation is defeated by the permission granted to member banks to procure advances from the federal reserve banks on their promissory notes secured by the deposit or pledge of United States securities. Under this permission the federal reserve banks have been surfeited with "war paper" and their liabilities for notes and deposits have expanded altogether too easily. To the degree that the assets of the reserve banks consist of such promissory notes secured by pledge of government securities, to that degree does the character of the federal reserve notes approach that of the national bank notes so far as the non-commercial quality of their security is concerned.