The requirements as to reserves against demand deposits are not uniform, being the lowest for banks in smaller cities (the great majority), larger for banks in the reserve cities, and largest for banks in the three central reserve cities (New York, Chicago, St. Louis).  The act substitutes the new Federal reserve banks for the banks in reserve and central reserve cities as the depositories of funds that may[9] be counted as a part of the reserves of member banks.  The new rule requires that one-third must be in the bank’s own possession, a fraction slightly over a third must be in the Federal reserve bank, and the remainder may be kept in either place.  This may be tabulated as follows: 

Not in    In reserve  In central
reserve cities  cities    reserve cities

Total reserves, per cent             12      15      18
Must be in its own vaults           4/12    5/15    6/18
May be either place                 3/12    4/15    5/18
Must be in a Federal reserve bank   5/12    6/15    7/18

These requirements as to total reserves are, as compared with requirements of national banks under the old law, a reduction respectively of 20 per cent, 40 per cent, and 28 per cent.  The total decrease in the amount of reserves required for all three classes of national banks was about $400,000,000 on the amount of deposits held in September, 1914.

Sec. 8. #Rediscounts by Federal reserve banks.# More important than any other single feature of the act is, however, that by which each Federal reserve bank is to rediscount notes, drafts, and bills of exchange arising out of actual commercial transactions, when indorsed and presented by any of its member banks.  This, quite apart from the note issues, gives a power to the banks collectively, under the general supervision and control of the board, to expand credits indefinitely at any time for real business purposes.  Any business man able to offer any commercial paper of sound quality should now be able to borrow on it at some rate of discount, even in the most stringent times.  And, in turn, every member bank will now be able at such times to rediscount such paper and thus secure credit toward its reserve requirement on the books of its Federal reserve bank.  Suppose, for example, that a member bank (in a central reserve city) saw its reserve in the Federal bank fall below 7 per cent of its deposits.  It could by rediscounting $7000 worth of notes increase by $38,888 the amount to which it might legally extend credit to its customers (i.e., $7000 is 18 per cent of that sum).  The deposits of the Federal reserve bank would then be increased $7000, against which it must have a reserve of 35 per cent, or $2450.  If the reserves of any Federal reserve bank fall too low, it can in turn rediscount its paper with the other Federal reserve banks.[10] If the time comes when no one of the twelve banks can longer maintain a 35 per cent reserve, the board may reduce or suspend the requirement, levying a tax graduated according to the deficiency.  The provision here for elasticity of credit combined with union and solidarity of all the central banking reserves of the country to meet unusual demands in emergencies, exceeds any needs which can be expected to arise.