§ 4. Federal Reserve notes. In 1914 there were outstanding about $750,000,000 of what we may now call the old-style bank-notes (bond-secured). These were not retired by the new act; but the law was shaped with the purpose of retiring them at the rate of about $25,000,000 a year, so that they would all disappear from circulation in thirty years.3

3 These notes were all secured by the deposit of bonds of the United States, a large share of them bearing interest at the artificially low rate of 2 per cent. Two per cent was less than the market rate for government loans, for 3 per cent bonds without this privilege sold above par. Therefore these 2 per cent bonds were held almost exclusively by banks, and would have lost a good share of their value had the note-deposit privilege been withdrawn.

Whenever the banks having old-style bank-notes outstanding desire to retire any of their circulating notes, the Federal Reserve banks may be required by the Federal Reserve Board to purchase the bonds in due quota (not to exceed $25,000,000 in any one year). On the deposit of these bonds with the Treasurer of the United States, the Federal Reserve banks may receive other circulating notes (essentially of the old style) called Federal Reserve bank-notes, or may receive 3 per cent bonds not bearing the circulating privilege.

The other kind of notes provided by the act is called Federal Reserve notes. They are secured in several ways. First, they are obligations of the United States receivable for all taxes, customs, and other public dues. Secondly, they are receivable by all member banks in the twelve districts and by all Federal Reserve banks, and are redeemable by the latter in gold or in lawful money (which includes greenbacks, Treasury notes, gold certificates, and silver dollars). Thirdly, their credit and prompt redemption is insured by certain elastic rules as to reserves in gold which must be kept for the redemption of outstanding notes. Fourthly, they are secured by collateral, eligible paper, such as notes and bills that are rediscounted for member banks, or gold or gold certificates which must be deposited by a Federal Reserve bank with the Federal Reserve agent of its district, dollar for dollar for every note it receives. Fifthly, the notes become " a first and paramount lien on all the assets of the bank." The notes unite the characteristics of asset bank-notes with those of political paper money.4

* The Act does not explicitly say by whom the notes are issued: it says that they are "to be issued at the discretion of the Federal Reserve Board"; that "the said notes shall be obligations of the United States." Further on the notes are spoken of as "issued to" a Federal

Notes, it will be observed, are issued only on request of a Federal Reserve bank, and not by or on request of the member banks. After the notes have been issued, the bank may reduce its liability any day by depositing lawful money with the Federal Reserve agent, who is right there in the bank. The Federal Reserve banks and the United States Treasury must promptly return to the banks through which they were issued all notes as fast as they are received, and "no Federal Reserve bank shall pay out notes issued through another on penalty of a tax of ten per centum." This regulation does not apply to the member banks, but its effect must be to keep notes from circulating long in any district except that for which they were issued.

Fig. 2, Chapter 9, shows the steady rise of Federal Reserve note circulation by months until the latter part of 1920, a level for several months as credits began to be curtailed, and a fall beginning the first of 1921.

Reserve bank, and again as "issued through" a Federal Reserve bank, but not by it. But the phrase occurs (sec. 16), "its [i. e., the Federal Reserve bank's] Federal Reserve notes." The notes thus are technically issued by the United States, but not as ordinary political (fiat) money, for they are not given a forced circulation by the government in paying its indebtedness. But the banks "shall pay such rate of interest on" the amounts of notes outstanding as may be established by the Federal Reserve Board (i.e., to the government of the United States). Practically the notes (as respects choice of time of issue, amounts, profits from them, commercial assets to secure them and to redeem them) are asset currency issued by the several Federal Reserve banks.

Federal Resureve Notes Circulation