an equal amount of notes issued by the several Federal reserve banks. These 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, but only by the amount of bonds deposited as security. Under the Act national banks are not required to retire their outstanding circulation, but may do so at any time within twenty years after December 23, 1915. In this way there probably will be a gradual shifting of the bonds held by the national banks to the Federal reserve banks and a substitution of Federal reserve notes for national bank notes. These new reserve bank notes, however, will give no elasticity to the currency system, since they are based upon bonds, just as are national bank notes.

37. Federal reserve notes.—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.

CHAPTER V

THE MONEY SYSTEM OF THE UNITED STATES

38. Kinds of money used in the United States.—On June 1, 1914, there were eight different kinds of money in circulation in the United States. Since then two new kinds of paper money, reserve bank notes and Federal reserve notes, have been added.

The following table based upon the circulation statement issued by the Treasury Department, June 1, 1914, shows the total stock of money and the amount of each kind in circulation and in the Treasury on that date. The total

money supply amounted to $3,779,051,631, of which $298977,319 was held in the Treasury as assets of the Government, leaving in circulation $3,480,074,312, which represents a per capita circulation of $35.19.

39. Metallic money. The metallic money consists of gold coin and bullion, standard silver dollars, subsidiary silver and minor coins. The total stock of gold, including coin and bullion, amounts to over $1,931,000,000. The statement shows over $615,000,000 of gold in circulation, but as a matter of fact comparatively little of it is in actual circulation, but is held in the banks as reserves. Of the $177,307,660 in the Treasury, $150,000,000 constitutes a reserve fund held for the redemption of the United States notes and the maintenance of the gold standard. The gold coins are the double-eagle ($20), the eagle ($10), the half-eagle ($5), and the quarter-eagle ($21). While the gold dollar is the unit and standard of value, no $1 gold pieces have been coined since 1890. The three-dollar gold piece was discontinued also at that time. The eagle weighs 258 grains and consists of a mixture of nine parts of pure gold to one part of copper; the pure gold in the eagle weighs, therefore, 232.2 grains. Gold is coined free of charge, the coining value of an ounce of pure gold being $20.67 or of an ounce of standard gold $18.60. Gold coin is legal tender in unlimited amounts for all debts public and private.

Gold bullion consists mainly of bars made by the United States mints for the convenience of jewellers and gold-exporting houses. Since gold is not well-suited for coins of small denominations, and since paper money is more convenient for everyday use, the chief use of gold is for bank reserves and for the settlement of interregional and international balances. For this latter purpose, bars of bullion properly assayed and stamped are quite as serviceable as coin.

The total stock of standard silver dollars amounts to $565,813,363, of which only about $70,000,000 are in actual circulation. The bulk of the silver dollars are stored in the United States Treasury where they are held in trust.

for the outstanding silver certificates issued against them. The story of the silver controversy which agitated the country for a quarter of a century has been told in Chapter III. Originally the silver dollar was standard money, but because of depreciation in the relative value of silver with relation to gold its coinage was discontinued in 1873. By the act of 1878 limited coinage of the silver dollar was renewed; and the law of 1890 provided that it should be coined only as needed to redeem the treasury notes issued under that law to pay for silver bullion. Finally, in 1893, the silver-purchase clause of the law of 1890 was repealed, since which time no new silver has been purchased for coinage into dollars. Though still retaining the name "standard" silver dollars they are not in fact standard money. They should be classed rather as subsidiary or token money, for their bullion value is only about one-half their face value, and since 1873 there has been no free coinage of silver. Silver dollars, however, are legal tender for all payments, public and private, except where otherwise expressly stipulated in the contract. They are not legally redeemable in gold, but ordinarily there is no difficulty in exchanging them for gold.

What to do with the enormous hoard of silver dollars stored in the vaults of the Treasury is a question that has been much discussed from time to time. Though these silver dollars are nominally the security back of the silver certificates which circulate in their stead, yet, as Professor Seager says, "Really they contribute nothing to the acceptability of these certificates. It is confidence that the Government will redeem them in gold and the need there is for small bills to carry on the country's trade, not the prospect of getting in exchange for them silver dollars which no one wants, that maintain these certificates at par with other kinds of money." Two plans have been suggested for disposing of these silver dollars. One is to withdraw the silver certificates and convert the silver dollars into bullion to be disposed of as the Secretary of the 1 See Seager: Principles of Economics, p. 339.