﻿THE PRICE LEVEL

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relation to banking credit can be briefly set forth,
both as to the procedure which will and that
vrhich will not result in credit expansion or inflation.
Let us assume that the Treasury uses certificates of
indebtedness as the borrowing device and employs
the Federal Reserve Banks as its fiscal agents. The
loan is made by member banks and other financial in-
stitutions subscribing to the issue of certificates on
their own behalf or for their customers, and re-
mitting funds or transferring credits in payment to
the Federal Reserve Banks. Such remittances are
thereafter either held by the Federal Reserve Banks
as government deposits until disbursed by the Treas-
ury, or are redeposited with the subscribing banks
duly qualified as special depositaries until required,
when they are again remitted to the Federal Reserve
Banks for subsequent disbursement. Against such
government deposits no reserves need lawfully be
held.

Under the simplest conditions payment for cer-r
tificates will have been made by a subscribing bank
in cash or in current exchange. In so far as such
payment is effected without any increase in the cash
holdings of the bank or any reduction in the ratio of
cash holdings to deposits, there will obviously have
been no increase in the volume of credit. With re-
spect to subscriptions on its own account, a part of
the bank’s resources heretofore loaned to private
borrowers will now be loaned to the govern-
ment. With respect to subscriptions on account of
customers there will be a reduction of commercial
deposits and an increase in government deposits.
The total volume of deposits subject to check will