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WAR BORROWING

not have increased; but a part of the deposits here-
tofore to the credit of individuals will now stand to
the credit of the Government. Only in the event of
customers making payment in cash or of reserves
being in the first instance in excess of lawful re-
quirement is the reduction of commercial deposits
in consequence of certificate payments by customers
likely to be repaired by further discounts, and the
volume of deposits to be increased. Nor is there
likely to be any inflation incident to the liberation in
the course of public expenditure of government de-
posits of this kind. The credits so dispersed will
run their course through ordinary banking channels,
eventually into loan reductions, deposit increases,
currency withdrawals — but only to a compensatory
or alternative degree. Upon the maturity of the cer-
tificates the Treasury, presumably put in funds by
the receipt of tax revenues or the proceeds of funded
loans drawn from deposits or from circulation, will
discharge its debt to the banks and to investors,
thereby restoring deposits and circulation to the
prior state.

The assumption that the banks pay for certificates
entirely in cash and current exchange is however un-
real to a very great extent. Credit will have been
used, wholly or in part, and the results that may be
expected are notably different. The subscribing
banks will in such case make payment for certificates
in the form of a book credit or government deposit.
The actual technique will include qualification by the
subscribing bank as a government depositary by the
hypothecation of approved collateral, and the trans-
action will be effected throughout by the Federal Re-