INTERNATIONAL PAYMENTS 213 
We may turn for a moment to another and different case, that 
of the United States after the establishment of the Federal Reserve 
System. 
The features in this system which are important for our purpose 
are the attenuation of reserves in the ordinary commercial banks; 
the accumulation of a great reserve of gold in the Federal Reserve 
Banks; and very flexible conditions for the issue of notes. The 
credit and money mechanism, one might imagine, thereby was 
made more sensitive, since the banks as a whole operated with less 
cash in hand. Yet in fact it was made less so because of the enor- 
mous store of gold concentrated in the Reserve Banks and the 
wide flexibility of note issue. 
The law, as is well known (I assume the reader to be familiar 
with its main features), prescribes a minimum of 35 per cent 
against the deposits of the Reserve Banks, 40 per cent against the 
notes. But it was expected, when the system was established, that 
substantially more than the minimum would normally be kept — 
perhaps 50 per cent — at all events some very conservative and 
amply adequate proportion. While the proportion actually held 
during the war and for a short period after its close was not 
greatly above the required minimum, the unexampled post-war 
conditions soon brought into the United States such an influx of 
specie that the gold holdings of the Reserve System came to con- 
stitute a formidable problem, not because they were unduly small, 
but because they were quite needlessly large. 
The point important for the present purpose is that the system 
was designed to regulate in some deliberate and systematic way the 
international gold flow and the effects of that flow on domestic 
trade and domestic prices. The system was expected to protect 
the country’s financial and industrial structure against the impact 
of international gold movements, while yet it left the situation 
potentially sensitive, the degree of sensitiveness depending on the 
principles and policy of the governing official bodies. A great 
reserve in the Federal Banks obviously can serve as a buffer against 
external strain. Pressure from an inflowing gold supply may be 
easily absorbed by it: the Federal Banks can prevent the pressure