I'RKSIDKNTIAL ADDRESS SECTION F. 163 



against deposits, but elasticity is given to the system by giving the 

 Board ix>wer to suspend this requirement, subject to a graduated 

 tax upon deficiencies. The fear that the conclusion of war, or 

 even military expenditure, might cause a great outflow of gold, 

 led to an amendment of the Act in 1917, by which reserves against 

 time deposits were reduced to 3 per cent., and against demand 

 deposits to 13, 10 and 7 i)er cent. These amounts were to be 

 kept wholly in the Federal Reserve Bank for the district. In the 

 days when the United States was a debtor nation these small 

 reserve percentages could scarcely have been regarded as a 

 very efficient protection. Possibly they may afford safety 

 now that she is a creditor nation and, when necessary, can sell 

 securities, and so call in gold from foreign countries. But surely 

 any sound bank would have kept reserves at least as great as 

 these. If this is so, the real safeguard is the power given to 

 the Federal Reserve Board to supervise both Federal Reserve 

 Banks and member banks. The Board may examine their books 

 and, in the case of Federal Reserve Banks, it may require the 

 writing off of doubtful assets. 



Two kinds of paper money are issued — Federal Reserve bank 

 notes and Federal Reserve notes. The former were not intended 

 to give any elasticity to the money system. They were sup- 

 posed gradually to replace the existing notes issued by the 

 national banks. In April, 1918, when it became desirable to 

 export the reserves of silver to the East, Federal Reserve bank 

 notes were also issued to take the place of the silver certificates. 

 In view of present-day controversy the more important form of 

 paper money consists of the Federal Reserve notes, the notes 

 which are intended to give elasticity to the currency system. 

 These notes are obligations of the United States Gk)vernment. 

 They are redeemable in gold at the Treasury, and in gold or 

 lawful money at any Federal Reserve bank. Neither form 

 of note, however, is classed as "lawful money" by the 

 Federal Reserve Law. Thus neither can be used by member 

 banks for reserve against ordinary banking deposits. The law, 

 as amended in 191 7, requires a minimum gold reserve of 40 per 

 cent. against the Federal Reserve notes, the balance of 60 per 

 cent, may consist either of gold or or rediscounted commercial 

 paper. The Federal Reserve Board may suspend the gold re- 

 quirt.'ments, but to prevent abuse a graduated tax is imposed 

 according to the deficiency. 



It is on the use of commercial paper as reserve that con- 

 troversy mainly turns. Its advocates claim for it that it pro- 

 vides an elastic currency in which the note issue depends upon 

 the demands of trade, automatically expanding and contracting 

 according to the real requirements of the country. When trade 

 is brisk, it is said, the notes will be increased, and when trade 

 slackens the notes will be returned to the bank. An increase in 

 the volume of trade requires an increase both in bills of exchange 

 and in currency. Sir Edward Holden argues that, with the 



