not offset by gold or lawful
money deposited with the Federal reserve agent." At least 5 per
cent is to be on deposit in the Treasury of the United States. The
proportion of reserves to the liability for note issues by any bank,
however, may be allowed to fall below 40 per cent, on condition that
the Federal Reserve Board shall establish a graduated tax of not more
than 1 per cent per annum (it evidently might be made less if the
board chose) upon such deficiency, until the reserves fall to 32-1/2
per cent and thereafter a graduated tax of not less than 1-1/2
per cent on each additional 2-1/2 per cent deficiency or fraction
thereof.[8]

This tax must be paid by the reserve bank, but it must add an amount
equal to the tax to the rates of interest and discount charged to
member banks. The effect of these rules is to give a power of note
issue in time of emergency without compelling the reserve banks to
lock up their reserves held against notes. Suppose for example that
the circulating notes were in normal times $1,000,000,000 and the
reserves, therefore, were $400,000,000 and the rate of discount 5 per
cent. Then the circulation might be doubled with the same reserves,
the proportion thus falling to 20 per cent of outstanding notes, and
the rate of discount to customers rising to 13.5 per cent (5 plus
8.5). Or, to take a most extreme supposition, suppose that the
withdrawal of gold had been so great as to reduce the reserves against
notes to $50,000,000; yet outstanding notes might be doubled (becoming
$2,000,000,000,) the proportion falling to 2.5 per cent, the rate of
discount rising to 24 (5 plus 19).

Sec. 6. #Reserves against Federal reserve bank deposits.# Every Federal
reserve bank shall, under normal conditions, maintain reserves in
lawful money of not less than 35 per cent against its deposits. But
the Federal Reserve Board may suspend any reserve requirement in the
Act for a period not exceeding 30 days and from time to time renew the
suspension for periods not exceeding 15 days; but in that case it
must establish a graduated tax upon the amounts by which the reserve
requirements may be permitted to fall below the levels specified as to
note issues. Altho the amount of the tax on the deficiency of reserves
against deposits is not indicated in the act (as it is in respect to
excess note issues) it is plainly the thought that the Board, to which
discretion is left, will follow somewhat the same rule in both case