One of the fundamental purposes of the federal reserve system was to eliminate the bond-secured note circulation and substitute the federal reserve note based on commercial paper and gold. The sudden withdrawal of the national bank notes was not feasible, since they constituted a large fraction of our circulating media - in recent years averaging between $700 and $750 million - and to withdraw them would cause a violent contraction of the currency and of credit and a fall in prices. The plan adopted limits the maximum yearly reduction to $25,000,000, at which rate, if the banks made regular applications for the full amount and if the federal reserve banks bought such bonds only from the national banks and not in the open market, it .would be 30 years before all the national bank notes were retired. The law, however, limits the retirement operations to 20 years and to the 2 per cent bonds; it was not, therefore, the contemplation of the law to provide for full retirement, which Congress may have regarded as less conservative and safe than the present plan. Special laws, of course, may be passed later to hasten and extend the retirement if it is found desirable.

No provision is made whereby the board is directed to give preference to the 2 per cent bonds of a bank which is forced to liquidate and throw its bonds on the open market. The board is also without instructions as to the amount of bonds which it shall require the reserve bank to buy from any particular bank. During 1916 the purchases of 2 per cent bonds by the federal reserve banks exceeded the $25,000,000 maximum which the board can compel the reserve banks to buy in any one year, and it was found unnecessary, therefore, to direct the purchase of such bonds.

The purpose of the conversion plan of the act is to maintain the market value for the 2 per cent bonds and to insure a gradual retirement of national bank notes, any resulting deficiency in the volume of circulation being made up with federal reserve bank notes.