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 cases.  The great discretionary power as to reserve requirements thus lodged in the hands of the Board makes possible at times of emergency the use of the reserves both of the reserve banks and of the member banks, down to the last dollar, if need be, without violation of law.  This gives practically unlimited opportunity to expand credit both by the issue of bank notes and by discount and deposit in periods of financial crises.

Sec. 7. #Reserves in member banks.# A fundamental change is made in the rules as to the reserves against deposits that must be maintained by the member banks.  A new distinction is made between time and demand deposits.  Time deposits are defined as those payable after thirty days or subject to not less than thirty days’ notice; and demand deposits as those payable within thirty days.  In every case the reserve requirement against time deposits is only 5 per cent.  This gives encouragement to banks to maintain savings departments.