Pending the inauguration of the new system, the Aldrich-Vreeland Act of 1908, which would have expired by limitation June 30, 1914, was extended to June 30, 1915, and the tax on emergency currency authorized by the act was reduced. Under the original act any number of national banks not less than ten, situated in contiguous territory, each having its capital unimpaired and a surplus of not less than 20 per cent, and already having circulating notes outstanding secured by government bonds to an amount not less than 40 per cent of its capital, might organize a national currency association with a capital of not less than $5,000,000 for the purpose of issuing emergency currency. The Secretary of the Treasury was authorized to accept as security for the emergency currency to be issued to members of such associations, state and municipal bonds and commercial paper at not more than 75 per cent of the cash value of such securities; but no bank was to be permitted to issue circulating notes based on commercial paper alone in excess of 30 per cent of its capital and surplus. The original act provided that the total amount of such outstanding additional circulation should at no time exceed $500,000,000. This emergency currency was to be taxed at the rate of 5 per cent per annum for the first month and an additional tax of 1 per cent per annum for each succeeding month until a maximum of 10 per cent was reached. The Federal Reserve Act amended this law by reducing the tax to 3 per cent per annum for the first three months and an additional 1/2 per cent per annum for each month until 6 per cent should be reached.

Prior to August, 1914, only a small number of currency associations had been organized, and though a large amount of emergency notes had been printed and stored, ready for immediate use in case of need, no occasion arose for the banks to issue emergency currency. The outbreak of the European war, accompanied as it was by the declaration of moratoria1 by the principal countries of Europe, the paralysis of international trade and the derangement of foreign exchange operations, the closing of the leading stock exchanges, and the danger of a heavily increased outflow of gold, necessitated prompt measures of financial relief. One of the first steps taken by Congress was to amend the Federal Reserve Act so that the privilege of securing emergency currency under the Aldrich-Vreeland Act might be open to all national banks. By an act passed August 4, 1914, the Secretary of the Treasury was given discretionary power to extend the provisions of the Al-drich-Vreeland law to all national banks having an unimpaired capital and a surplus of at least 20 per cent, irrespective of the amount of their outstanding circulation, and also to permit them to issue circulating notes up to 125 per cent of their capital and surplus, instead of 100 per cent as under the original act. He was also authorized to extend the benefits of the act to "all qualified state banks and trust companies which have joined the Federal Reserve system or which may contract to join within fifteen days after the passage of this Act.' The act stipulated that the Secretary should require each bank and currency association to maintain on deposit in the United States Treasury a sum in gold sufficient in his judgment to redeem such notes, but in no event less than 5 per cent. The amount of additional national bank currency issuable under this Act was over $1,000,000,000.

1 A moratorium is an official declaration or decree by the Govern-ment postponing all or certain types of maturing debts for a given period.

The emergency measure of August 4 authorized the Secretary of the Treasury, at his discretion, to permit national banks not members of the currency associations to issue additional circulation based on state and municipal bonds, but a Treasury circular sent out August 20 stated that the Secretary disapproved direct applications, preferring that all banks desiring additional currency should make their application through a national currency association, and urged that all banks needing additional currency should join a currency association, preferably one located in their own Federal reserve district. By the end of August over forty national currency associations had been organized or had given notice of their intention to organize, and by October 1 a total of over $300,000,000 of emergency currency had been issued. As it was understood that this additional currency was not to be subject to the tax until actually put into circulation, many banks which had no immediate need of more notes took them out and stored them in their vaults so as to be prepared for any emergency.

The practical cessation of all export trade with Europe and the temporary derangement of foreign exchange following the outbreak of the war caused grave apprehension as to the financing of the cotton, tobacco and grain crops. Secretary of the Treasury McAdoo called a conference in Washington, August 24-25, which was attended by bankers and brokers from the Southern states and by government officials, to discuss ways and means of coping with the situation. The Secretary announced that as a means of aiding the cotton interests the Treasury Department had decided to accept from national banks, through their respective national currency associations, as security for the issue of currency, notes secured by warehouse receipts, properly certificated and issued by responsible warehouse companies, for cotton or tobacco, and having not more than four months to run, at 75 per cent of their face value. In explanation of this plan of relief, the Secretary said: "It means that the national banks of this country can borrow to the extent of 70 per cent of their unimpaired capital and surplus on notes secured by warehouse receipts for staple products, not alone cotton, that I think it is safe to lend on."

At this so-called "cotton conference" various ill-considered measures of financial relief were proposed, including a plan of valorization for the cotton crop and a proposal that state banks be permitted to issue circulating notes, but Secretary McAdoo took a firm stand against all valorization schemes and sounded a note of warning against paper money inflation. He said: "There is enough currency authorized by law to-day to wreck the United States of America, and the danger in this situation is that, by ill-considered views and ill-considered actions, we may put out so much inflationary paper money that we will ruin the country. . . . The issue of currency that you are speaking of is currency issued to the national banks of this country upon live assets, and even that currency cannot be issued safely unless those banks put behind it a fair measure of gold reserve, because, after all, in order to get a safe basis of credit and a safe basis for the conduct of the business of the country you must have a metal base behind this currency proposed to be issued, and therefore the law imposes the duty on the Secretary of the Treasury of requiring that a gold redemption fund, not less than 5 per cent, shall be put behind this identical currency, and that at any time when it becomes necessary in his judgment to require an increase of that redemption fund he shall exact it, and that is exactly what he is going to do. So long as he has power to deal with this situation he intends to see that all these currency issues are safe, because, I tell you, gentlemen, you cannot bring upon this country a greater disaster than an inflation of currency to a point that is going to wreck the whole fabric of credit.' The Secretary stated that he was "satisfied that the Government is in a position to aid the banks through the Federal reserve system and the emergency currency act."