tions rather than to the needs of business. No currency system can be elastic where bonds are used as a basis for the notes. To be elastic, a bank note system must be so regulated that banks will find it profitable to issue additional notes when more currency is needed, as evidenced by the withdrawal of deposits, and to retire them when they become redundant, as indicated by a heavy increase in deposits. But under a system of bond-secured note issues the tendency of bank notes is to contract when expansion is desirable and to expand when the currency is already redundant. National banks were formerly required to deposit with the Treasury government bonds in a certain proportion to their capital. Against these bonds they could issue their own circulating notes up to the par value of the bonds so deposited. To insure the redemption of its notes each bank was required to keep a deposit of lawful money in the Treasury equal to five per cent of its outstanding circulation. When, therefore, large amounts of currency were being withdrawn from the banks, for instance, in the crop-moving season, and they wished to increase their available funds, they found that they could not do it profitably by issuing notes, for they would have to pay more for government bonds, which were usually at a premium, than they would receive in circulating notes. Indeed, in times of active demand for currency, when banks are able to lend all their credit at high rates of interest, it has sometimes been more profitable for them to retire part of their circulation, since for $95 in lawful money sent to the Treasury for note redemption they would receive a bond that might promptly be sold for more than $100. On the other hand, when the currency was already redundant, banks might find it profitable to increase their note issues. When money accumulated in their vaults, banks, rather than have it idle, were tempted to buy government bonds, which returned them two or three per cent interest and against which they received an approximately equal amount of bank notes, which could be paid out to depositors. This is exactly what happened in 1894-1895, although the re

dundancy of the currency at that time was causing such heavy exports of gold as almost to bankrupt the Treasury. Again, during the business depressions of 1903-1904 and 1907-1908, when the country's need for cash was manifestly declining, the total volume of bank note circulation was very considerably increased.

In considering the question of elasticity it must not be forgotten that in this country banks provide through their deposits a medium of exchange much greater in volume and importance than bank notes and one which is absolutely elastic. "Deposit currency," so called, consists of deposits credited on the books of the bank which circulate in the form of checks and drafts. Theoretically there is no essential difference between the bank note and the credit deposit. When a borrower at a bank secures a loan or discounts a note he may take the proceeds in the form of money, say bank notes, or be credited with a book account against which he can draw as he needs funds or wishes to make payment. A check is drawn only when the depositor has some debt to pay and is always immediately available as a medium of payment in any amount not exceeding his deposit credit at the bank. Then when the check has served its purpose it is returned promptly through the banks and the clearing house and is cancelled. In this country the great bulk of wholesale and other large transactions, and a considerable proportion of smaller business exchanges, are performed by this deposit currency, which rises and falls in exact proportion to the exchanges of goods which call forth loans and bank deposits. Deposit currency makes it possible, therefore, for "any business man to get the money he needs, at the times and in the exact form that he needs it, provided his banker will discount his notes."

36. Federal reserve bank notes.-The Federal Reserve Act of 1913 introduced two new kinds of paper money into our currency system: Federal reserve bank notes and Federal reserve notes. The Act contemplates the gradual retirement of the national bank notes and the substitution therefor of an equal amount of notes issued by the several

Federal reserve banks. These Federal reserve bank notes are the obligations of the Federal reserve banks and are issued and redeemed under the same terms and conditions as national bank notes, except that they are not limited to the amount of the capital stock of the reserve bank issuing them. They are secured by Government bonds or United States certificates of indebtedness. To conserve the gold supply Congress passed the Pittman Act, April 23, 1918, authorizing the Secretary of the Treasury to withdraw silver certificates from circulation and to melt and sell as bullion 350,000,000 silver dollars. To take the place of the silver thus withdrawn from circulation the Federal reserve banks were authorized to issue Federal reserve bank notes against the deposit of United States certificates of indebtedness or one-year gold notes. The Federal reserve bank notes, however, will give no elasticity to the currency system, since they are based upon government obligations, just as are national bank notes.

37. Federal reserve notes.1 The Federal reserve notes are expected to supply the element of elasticity lacking in all other forms of our money currency. These notes may be issued to any Federal reserve bank applying for them, at the discretion of the Federal Reserve Board, upon the deposit of commercial paper rediscounted or purchased, or of gold, or gold certificates 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 1 For extended discussion of Federal reserve notes, see p. 410.

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. Federal reserve banks may retire these notes by depositing them with the Federal reserve agent or the United States Treasury, receiving back the collateral deposited. Thus the Federal reserve notes are expected under normal conditions 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.

Harris: Practical Banking, Ch. XVI.

Kinley Money, Chs. XVI, XVII.

Moulton: Principles of Money and Banking, Pt. I, Ch. V. Taussig: Principles of Economics, Chs. 23, 24.

Willis: The Federal Reserve, Ch. XII.

CHAPTER V

THE MONEY SYSTEM OF THE UNITED STATES

38. Kinds of money used in the United States.-The following table based upon the circulation statement issued by the Treasury Department, May 1, 1920, shows the total stock of money and the amount of each kind in circulation and in the Treasury on that date. The total money sup

CIRCULATION STATEMENT, MAY 1, 1920

bullion in Treasury). . $2,646,615,750 $390,410,080

$851,329,148 3

1 Includes gold held in the Treasury for the redemption of gold certificates ($575,102,809, and Federal Reserve Gold Settlement fund $1,162,819,300) and silver dollars held in the Treasury for the redemption of silver certificates and Treasury notes ($125,426.999).

2 Includes the gold reserve fund held against issues of United States notes and Treasury notes and the gold or lawful money redemption funds held against issues of national bank notes, Federal reserve notes, and Federal reserve bank notes ($258,969,743).

3 Includes $377,339,440 credited to Federal Reserve Banks in the Gold Settlement fund deposited with Treasurer of the United States.