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V \ • • ^ \ * \ ^ !J LIBRARY ^ ^ m m ^ x-3999 Speaking on the subject of "Currency m a s t i c i t y " in the course on Federal Reserve P o l i c i e s , before the New York University School of Comnerce, Accounts end Finance, Mr. A. C. M i l l e r , Member of the Federal Reserve Beard, took occa.sion to emphasize the importance of the currency functions of the Federal Reserve Banks. "There is some misconception", said Mr. M i l l e r , "of the r e l a t i v e importance of the functions performed by the Federal Reserve Banks. The Federal Reserve Banks are frequently described as bankers' banks or as banks of rediscount; ano and such they are; in a more important sense, banks of issue. but they are a l s o , They are the banks wnich supply currency to their member banks and f o r the use of the PMbli c when the currency sup^ily needs to be increased. To r e s t content with simply saying that the Reserve Banks are banks of r e discount overlooks wfa&t i t is that leads member banks to rediscount w itn their Federal Reserve Banks. Taking the Federal Reserve Banks a whole a review of their h i s t o r y w i l l disclose that rediscountiqg as takes place on a large scale only vten additional circulating medium S r e c i u ired by member banks to meet the demands of their customers fn pocket currency. r There i s great constancy in the "reserve deposits" tern in the Federal Reserve Bank statement over f a i r l y long periods ot tins, but there is much fluctuation in the "note issues" and the earning assets" items. tr *at I t w i l l be founa to be pretty invariably true 'Ahen the earning assets, that i s the loans and investments, of the •v - 2 - x-3999 Federal Reserve Banks r i s e i t is because of increased currency issues. There is a. very close parallelism observa.ble between variations in the total volume of the earning assets of the Federal Reserve Banks and the total volume of their Federal Reserve notes in circulation. This means that while the Reserve Banks are banks of rediscount, red iscounting member banks, looking at the matter in the a.&gregate, is for the purpose of obtaining currency. Essentially, therefore, the Reserve Banks are currency banks, banks to which the other banks turn when they need more cash, and more cash s p e c i f i c a l l y in the form of currency hand. "The Reserve Banks, of course, perform several other functions f or their member banks and the public, but these are either not bank- ing functions s t r i c t l y speaking, such f o r example as acting as custodian of s e c u r i t i e s , making collections and transfers, performing f i s c a l functions, and acting a.s a clearing house, e t c . , or they are functions that are also performed in one decree or another by the ordinary banks the country, such as acting as reserve agent, depositary, etc. In E d i t i o n to doing a l l these things the Reserve Banks also issue currency are the only institutions permitted under law to create fiduciary c u rrency (that is currency not covered by gold) against other c o l l a t e r a l than United States bonds with the circulation p r i v i l e g e . In their ® s sential nature, therefore, Federal Reserve Banks are best conceived a-^d described as banks of issue. Currency issue i s their d i s t i n c t i v e " ^ - function. X-3999 They were set up and invested with broad powers in the creation of fiduciary currency in order to provide a. much needed e l a s t i c element in our national circulation. The reserve moneys previously carried by member banks are concentrated in the Federal Reserve Banks in order to give them an ample and secure basis f o r the exercise of their currency functions. In b r i e f , the Federal Reserve Banks are reserve banks because they are currency banks. The supplying of currency i s their primary function. The reserves taken over by them from their member banks constitute reserve p r i marily for the protection of their currency issues. "An examination of the currency history of the United States ln the last f i v e years c l e a r l y demonstrates the manner in which the Reserve Banks supply the e l a s t i c element in the nation's currency, There has "been considerable variation in the total volume of money in circulation in this period of time. That variation i s closely Paralleled by the volume of Federal Reserve notes in circulation. During the great expansion of 1919 and 1920 i t was the expansion of federal Reserve notes that supplied the great increase in the v o l Un>e of money in c i r c u l a t i o n . The decline in the total volume of circulation in the year 1921 is f u l l y r e f l e c t e d in the decline in the volume of Federal Reserve notes. A characteristic of an e l a s - t i c currency is that i t shall expand or contract according to the - h x-3999 - volume of currency required by the country to take care of the v o l ume of trade at a given price l e v e l . A large upward or downward swing in the trade curve of the United States i s usually pretty well mirrored in the upward or downward swing of the Federal Reserve note curve. The one exception to this statement in recent years is found in the year 1923. That was a year of expanded trade calling f o r a.n increased quantity of circulating medium. No increase, however, took place in the volume of Federal Reserve notes. This was f o r the reason that the continued heavy influx of gold into the United States tfade i t expedient f o r the Federal Reserve Banks to supply the increased currency d-emands o'fi the community by paying out gold c e r t i f i c a t e s instead of by issuing Federal Reserve notes. In b r i e f , our unprecedentedly strong gold position caused gold to be used to s u pply the e l a s t i c element in our national circulation in this i n - stance. But i t s t i l l continued to be true, nevertheless, that the Federal Reserve Banks were providing the increase needed in the country's total circulation. "This shows that there are two methods by which the Federal Reserve Banks provide currency e l a s t i c i t y . The one method is to Pay gold or lawful money out of their holdings of reserve money when these are abundant and this course seems advisable on other grounds. The other method is to create new currency by the issue additional Federal Reserve notes against the kinds of c o l l a t e r a l prescribed by the Federal Reserve A c t . "
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