Washington telegraph., 1924-10-31
WHAT ARE FEDERAL
RESERVE NOTES?
Way in Which Currency Is In
creased or Decreased Accord
ing to Business Needs.

Federal reserve notes are direct OBJ
legations Of the United States and are
receivable by all national banks and
member banks and by Federal reserve
banks, and for all taxes, customs and
other public dues, but they are not
legal tender for private debts. These
notes are redeemable in gold upon
the demand of the holder at the Treas
ury Department of the United States
In Washington, or in gold or lawful
money at any Federal reserve bank.
The means by which Federal re.
serve notes are issued and the securi-
ty behind them is of considerable In
terest. Any Federal reserve bank
may make application to the Federal
reserve agent (the local representa-
tive of the Federal Reserve Board
for such amounts as it may require,
accompanying its application by a
tender of collateral equal to the
amount OF notes applied for This
collateral consists of notes or bills
acquired either by rediscount from
member banks or by purchase in The
open market, or gold or gold certifi-
Gates.
Against its Federal reserve notes
that are in active circulation Fed
eral reserve bank is required to hold
gold reserve of 40 per cent. But
any gold deposited with the Federal
reserve agent as collateral may be
counted as part of this required re-
serve In order to redeem its notes
In gold when presented at the United
States Treasury each reserve bank
must carry a gold fund with the treas
urer Of the United States Of at least
per cent of its outstanding notes
not covered by gold collateral, but
this redemption fund counts as part
of the required reserve of 40 per cent.
Federal reserve notes, then, are Sc
cured as follows: % they are a d.
rect promise or obligation OF the
United States and of the issuing Fed
eral reserve bank; (2) they have col
lateral behind them of at least 100
per cent, consisting OF eligible paper
or gold; (S) gold reserve of 40 per
cent is required; (D they are a first
lien on the assets of the issuing Fed
eral reserve bank.
One of the prime reasons for pro-
viding for the issuance of Federal re.
serve notes was to secure an elastic
currency-that is, currency that
would expand and contract with the
needs OF business. This was accom-
plished by permitting the issue OF
these notes largely against CONNER
cial paper. For example, when mem
Der banks are being called on heavily
for loans they rediscount with their
Federal reserve bank some OF their
eligible notes. The reser.e bank in
turn deposits this paper with the Fed
eral reserve agent, receiving from
him like amount of Federal reserve
notes which may be turned over to
member banks in return for the notes
1t has rediscounted, or circulated in
some other way.
Contraction Is practically automat-
ic. IL the needs of business diminish
there is less need for currency and
less borrowing at the member banks.
These In turn reduce their rediscounts
at their reserve banks by turning over
to II funds received from the repay
ment Of loans and from deposits In
times Of declining business 1t is usual
for the member banks to repay much
OF their borrowing with Federal re-
serve notes deposited with them by
their customers.