The Federal reserve notes are expected to supply the element of elasticity lacking in all other forms of our currency. These notes may be issued to any reserve bank applying for them, at the discretion of the Federal Reserve Board, upon the deposit of commercial paper and bills rediscounted by it for member banks. The reserve notes are obligations of the Government and are receivable by all member banks and reserve banks and for all taxes, customs and other public dues, but they are not legal tender for other purposes. They are redeemable in gold on demand at the Treasury or at any reserve bank in gold or lawful money. The notes issued by a particular reserve bank bear the distinctive number of that bank, and all expenses incident to their issue and retirement must be borne by the bank issuing them. Reserve banks receiving these notes are required to pay on them a rate of interest to be fixed by the Reserve Board. No reserve bank may pay out the notes of another except under penalty of a 10 per cent tax. Against these notes the reserve bank must keep a reserve in gold of not less than 40 per cent of the amount of notes actually in circulation and not offset by gold or lawful money deposited with the reserve agent. Each reserve bank is also required to maintain in the Treasury a deposit of gold sufficient to redeem the Federal reserve notes issued to it, but not less than 5 per cent of such issue. This deposit of gold may be counted as part of the 40 per cent reserve required. To provide some elasticity in the reserve requirements, the Act authorizes the Federal Reserve Board to suspend any reserve requirement for a period of thirty days and to renew such suspension for periods not exceeding fifteen days. If, however, the gold reserve against these note issues falls below 40 per cent, the reserve bank concerned must pay a tax graduated according to the deficiency. This tax is paid by the reserve bank, but it is required to add the tax to the interest and discount rates fixed for it by the Federal Reserve Board. Under the foregoing terms of issue and retirement the Federal reserve notes are expected to give elasticity to our currency, being issued only in response to the business demand for additional money and being retired promptly when that demand subsides.

Reading References

Bullock: Essays on the Monetary History of the United States, Chs. IV-VII. Conant: Principles of Money and Banking, Vol. I, Bk. III,

Chs. VIII, IX. Jevons: Money and Mechanism of Exchange, Chs. XV, XVI, XVIII. Johnson: Money and Currency, Chs. XIII-XV. Kinley: Money, Chs. XVI, XVII.

Schwab: The Confederate States of America, 1861-1865. Taussig: Principles of Economics, Chs. 23, 24.