The deposits in member banks are classified in the law under "demand deposits" and "time deposit" All deposits payable within thirty days are demand deposits. Postal savings deposits and those requiring at least thirty days' notice, or running longer than thirty days, are considered time deposits. Expansion of deposit liabilities by the member banks is specifically limited by the law itself only in connection with the reserve prescriptions. The law provides that no bank falling below the prescribed reserves is at any time to make new loans or to pay dividends until the reserve required by law is restored.

As is the case with the member banks, the specific limitation of deposit expansion by the reserve banks is found in reserve prescriptions. Owing to their peculiar responsibility as well as to the nature of their deposit liabilities, reserve banks are required to keep a relatively high cash reserve, namely 35%. This reserve may be in gold or lawful money.

In order, however, to prevent the reserve prescriptions% from acting as a mere "dead line" in deposit expansion the law contains a remarkable provision, authorizing the Federal Reserve Board " To suspend for a period of thirty days, and from time to time to renew such suspension for periods not exceeding fifteen days, any reserve requirement specified in this Act."

But to safeguard the broad authority given in this clause from being used by a complaisant board as a mere inflationist measure, the law adds an important proviso, namely, that the Reserve Board "shall establish a graduated tax upon the amounts by which the reserve requirements of this act may be permitted to fall below" the level specified. In the earlier chapters of this treatise, it was pointed out that the possibility of controlling credit expansion was in the main a matter of controlling the discount rate. On the other hand, in the field of deposits, owing to the nature of the check, automatic redemption of credit can be expected as a matter of course. Hence in the Federal Reserve Act provision is made only for the orderly control of expansion. The law says that the federal reserve banks may, subject to review and determination of the Federal Reserve Board, establish rates of discount for different classes of commercial paper. Of course, it needs hardly to be repeated that the success of such control depends upon the degree to which the official rates may be made effective.

Member banks

Expansion

Reserve banks

Expansion

Reserve suspension

Control of deposit expansion