As we have seen the new system continues the policy of requiring banks to carry a fixed minimum reserve. Though our own experience has demonstrated the weakness of this principle and the experience of foreign countries has shown the safety and advantage of leaving the question of reserves to the judgment of the banks, it was believed that since we had always been used to a fixed reserve requirement, its omission would bring distrust upon the new system. In the past our banks, especially those in the central reserve cities which carry so large a proportion of the redeposited reserves of other banks, have aimed to keep as close as possible to the legal requirements. Then when some unusual demand or pressure has come, reducing their reserves below the legal minimum, they have had to stop making loans, thus exciting distrust which frequently has deepened into panic.

1 By an amendment presented in March, 1914, but not enacted into law until August, state banks arc permitted to continue holding reserves when held by them for other state banks and to have such reserves counted as if they were held by national banks, during the period of thirty-six months within which the system is being put into effect.

Under the new system, however, member banks may with greater safety approach the legal limit more closely because they may convert good commercial paper into cash at short notice at the Federal reserve bank. Further elasticity is provided by the authority given the Federal Reserve Board "to suspend for a period not exceeding thirty days, and from time to time to renew such suspension for periods not exceeding fifteen days, any reserve requirements specified in this Act: Provided, That it shall establish a graduated tax upon the amounts by which the reserve requirements of this Act may be permitted to fall below the level hereinafter specified." So long as a Federal reserve bank has ample resources to meet the withdrawals of its members and to rediscount their discounted paper it should have no trouble in sustaining its reserves. Every Federal reserve bank is required to maintain reserves in gold or lawful money of not less than 35 per cent against its deposits, and reserves in gold of not less than 40 per cent against its Federal reserve notes in actual circulation and not offset by gold or lawful money deposited with the Federal reserve agent. As these Federal reserve banks are to be the gold reservoirs of the country from which funds can be drawn by member banks in times of need, it is essential that they shall always have adequate reserves. As we have seen, the great central banks of Europe, though subject generally to no reserve requirements, habitually carry reserves of from fifty to seventy-five per cent against their demand liabilities, and it may be that experience will demonstrate to our Federal reserve banks the wisdom of carrying reserves equally high. Our new system provides twelve central banks, instead of one as in Europe, but provision is made for the piping of these reservoirs together through the power of the Reserve Board to compel one Federal reserve bank to rediscount for another.