To provide against extreme emergencies, provision is made for the increase of federal reserve notes. The Federal Reserve Board may suspend, for a period not exceeding 30 days (though it may from time to time renew such suspension, for periods not exceeding 15 days) any reserve requirement of the Federal Reserve Act, provided it assesses at the same time a certain tax on the notes. That is, notes may be issued reducing the reserve below the required 40 per cent on the condition that the Federal Reserve Board assesses a graduated tax of not more than 1 per cent per annum upon the deficiency of the reserve, until the reserve is reduced to 32 1/2 per cent, and thereafter a graduated tax of not less than 1 1/2 per cent on each additional 2 1/2 per cent deficiency or fraction thereof. The following table indicates the tax rates if the board fixes the maximum 1 per cent and the minimum 1 1/2 per cent as just described:

Reserves

Tax Rate

Below 40.0% to 32.5%...........

1.0%

32.5 "30.0 ...........

2.5

30.0 " 27.5 ...........

4.0

27-5 "25.0 ...........

5.5

25.0 " 22.5 ...........

7.0

22.5 "20.0 ............................

8.5

20.0 to 17.5 ...........

10.0

17.5 " 15.0...........

11.5

15.0 " 12.5...........

13.0

12.5 " 10.0...........

14.5

10.0 "7.5....................................

16.0

17.5 " 5.0...........

17.5

5.0 " 2.5 ...........

19.0

2.5 " 0 ...........

20.5

This indeed provides an elastic limit and makes possible the use of reserves for defensive purposes, but the tax rates soon become prohibitive. It is further provided that the federal reserve bank must add an amount equal to these tax rates to its rates of interest and discount. The discount rate, therefore, will also soon become prohibitive. This elastic limit is less awkward of initiation than the English plan of suspending the reserve requirement by act of Parliament. As compared with the German 5 per cent flat tax rate on the excess issue, the American plan is less severe at first but more severe ultimately.