America's Money Machine

102 PART II / THE GREAT REVERSAL
vance the date on which balances with correspondent banks would no
longer count as reserves and to increase the required reserves to be
maintained by member banks at the Reserve banks, but to reduce the
maximum amount ofreserves to be carried as vault cash. The significant
item was the provision that Federal Reserve notes held in the vaults of
member banks could be counted as part of their vault cash reserve. This
provision would permit the member banks to substitute Federal Reserve
notes for gold and gold certificates, thereby releasing the gold to the
Reserve banks and increasing the free gold of the Reserve banks, that is,
the surplus of gold holdings over the amounts that the Reserve banks
were required to hold as reserves against notes and deposits. The Board
explained, somewhat euphemistically, that the proposed amendments
were "designed to provide means of controlling an _overextension of
loans based on new accretions to our gold stock and to provide for the
mobilization and concentration ofthe gold holdings ofthe United States
so that the flow of gold back to Europe, or to South America, or to the
Orient, may be arranged without forcing any violent contraction ofloans
or causing undue disturbance to legitimate business."4
The Board's suggestions were not acted upon at once, but the decision
to enter the war was persuasive with the Congress that the Federal Reserve
System's powers should be increased and the changes requested
were enacted by an amendment to the Federal Reserve Act approved
June 21, 1917.
At the same time, Congress also generously made substantial reductions
in the reserve percentages required to be held by member banks.
The old National Bank Act, it will be recalled, had required a reserve
against deposits and circulation of 25 per cent for reserve city banks and
15 per cent for other banks. The Federal Reserve Act had reduced this
percentage to 18 per cent for Central Reserve city banks, 15 per cent for
Reserve city banks, and 12 per cent for so-called "country banks," and
5 per cent for time deposits for all classes ofbanks. The new percentages
against demand deposits established by the amendment were 13'per cent
for Central Reserve city banks, 10 per cent for Reserve city banks and 7
per cent for country banks. To secure the concentration ofthe gold stocks
ofthe country, the act provided that all reserves must henceforth be held
with the Reserve banks, eliminating any requirement as to cash in vault.
The immediate result of these amendments was to transfer additional
gold to the Reserve banks and thereby to increase the lending power of
the Reserve banks.