The Bemidji daily pioneer. [volume] (Bemidji, Minn.) 1904-1971, 1920-11-23
rofit entered into the issuing of bank

~ u how ola Cne element OF prom
enter into the issuance of bank notes?
A. Prior to the passage Of the Fed
eral Reserve Act, National bank
could issue currency only. by the de-
post of an equal amount of United
States government bonds with the
Treasury department in Washington.
For instance, a bank desiring to issue
100000 bank. notes would purchase
100000 United States government
bonds, which might cost it, say $685.
900, as such bonds usually sold at a
premium. 1t would deposit these
bonds in Washington and receive
100000 in bank notes with the
banks name engraved thereon, and
it would have back 100000 of the
sos, 000. it paid for tbesbonds,. These
bonds usually carried 2 per cent IN
terest which the bank would receive,
or $4,000 per annum, against which
it would have invested only $1,000.
On the other hand, it must get
back out of the interest it received,
the $4,000 premium it had paid on: the
bonds; it must keep redemption de-
post with the Treasury Department
in Washington equal to per cent Of
the notes outstanding; it must pay. g.
circulation tax on the amount of
notes outstanding, and it was oblig-
ed to pay part Of the expenses of
operating the Redemption Bureau in
Washington. Ii money were in de-
mand and interest rates were high
and the bank did not pay too much
premium for the bonds it purchased,
then the issue of bank notes was
profitable. But if there were not
much demand for money, the bank
notes would lie idle. in the bank vaults
or, if the notes were retired, the bank
would have its money invested in gov
eminent bonds paying only 2 per
cent, or sustaining possible loss
If it tried to sell the bonds, as all
other banks would probably be selling
their bonds for like reason.
..Q.How did the Federal Reserve Act
change the issue of currency?
A. In addition to the gold and sill
yer certificates, the United States
government can now issue what is
known as Federal Reserve notes Sc
cured by 40 per cent in gold and go
per cent in agricultural, industrial
and commercial notes, drafts, bills
Of exchange or acceptances. These
notes can also be secured by 100 per
cent in gold. - - "@.A
@. Why is this an improvement
over the old method of issuing bank
notes? .s Ta,
A. 1t provides greater elacticity
and facilitates the transaction Of
business when there is heavy call
for money, and as the demand for
money to move crops, ETC., eases off
and 1.-The crops are paid for, the
amount Of Federal Reserve notes out
standing is automatically reduced.
In the past, the expansion in bank
notes was limited by the amount of
capital stock of the National banks
and government bonds having circu-
lating privilege, and II money was
needed beyond that point 1t was not
available--with resultant failures
and panics. g...@ -. ~
Under the Federal Reserve Act.
notes for business transactions sub
ject to certain restrictions making
them eligible can be taken by bank
to the Federal Reserve Bank Of which
it Is member and exchange for Fed
eral Reserve notes. The Federal Re-
serve Bank in turn pledges so per
cent Of such notes, together with 40
per cent of gold, with the United
States government as collateral for
the Federal Reserve notes. which are
issued for the full amount.