The new kind of notes provided by the act are called Federal reserve notes.  They are not secured by the deposit of government bonds, but they are secured beyond all question in other ways.  First, they are obligations of the United States receivable for all taxes, customs, and other public dues, and are redeemable in gold on demand at the Treasury of the United States.  Secondly they are receivable by all member banks in the twelve districts and by all Federal reserve banks, and redeemable by the latter in gold or lawful money (which includes greenbacks and gold and silver certificates).  Thirdly, their credit and prompt redemption is insured by certain elastic rules as to reserves in gold which must be kept for the redemption of outstanding notes.  Fourthly, they are secured by collateral, consisting of notes and bills accepted for rediscount from member banks, which must be deposited by a Federal reserve bank with the Federal reserve agent of its district, dollar for dollar for every note it receives.  Fifthly, the notes become “a first and paramount lien on all the assets of the bank.”  This is what gives the notes their character of asset currency.  It is evident that the notes unite in a manner without example the characteristic of asset bank notes with the characteristics of political paper money.[7]

No notes, it will be observed, are issued by or on request of the member banks, but only on request of a Federal reserve bank.  After the notes have been issued, the bank may reduce its liability any day by depositing lawful money with the Federal reserve agent who is right there in the bank.  The Federal reserve banks and the United States Treasury must promptly return to the banks through which they were issued all notes as fast as they are received, and “no Federal reserve bank shall pay out notes issued through another on penalty of a tax of ten per centum.”  The regulations do not apply to the member banks, but their effect must be to keep notes from circulating long in any district except that for which they were issued.

Sec. 5. #Reserves against Federal reserve notes.# The rule applying in normal times to reserves against note issues is that each bank must provide a reserve in gold equal to 40 per cent “against the Federal reserve notes in actual circulation, and 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]