Federal reserve bank notes, it will be recalled, are obligations of the reserve banks themselves, and are based on bonds acquired from the national banks in the open market or through allotment by the Federal Reserve Board up to the maximum of $25,000,000 per year, as provided in section 18 of the Reserve Act. Bonds acquired from member banks and bearing the circulation privilege may be used as a basis of federal reserve bank notes, or, if they be 2%, may be converted into 3% one-year gold notes or 3% thirty-year bonds. In a communication to the Reserve Board under date of February 28, 1916, the Secretary of the Treasury announced that $30,000,000 worth of 3% bonds and notes would be available for conversion during the year 1916.1 By October the full thirty millions had been converted and a corresponding amount of two per cents were withdrawn. As the reserve banks had purchased in the open market the bonds necessary for this purpose it was not necessary for the Reserve Board to enforce the purchase of allotments. Another thirty millions of the 3% notes and bonds has been made available for the year 1917. The reserve bank of Kansas City in March, 1916, was the first to avail itself of the privilege of issuing the federal reserve bank notes. The Dallas bank followed in September. By the end of October, however, the issue of the Dallas bank had been withdrawn and before the end of December the Kansas City bank had also retired its quota. Liability has been extinguished through the deposit of lawful money and through return of notes for destruction. The combined issue had reached a maximum of only $3,214,000 on September 15, yet during 1916 national bank-note circulation decreased $44,511,968.

First made in 1915

Reserve banks as fiscal agents

Conversion of bonds and issue of notes

1 See below, p. 287,