﻿THE PRICE LEVEL

179

serve Banks as fiscal agents. But the essence of the
operation will be the creation of additional credit by
the subscribing bank. The subscribing ability of a
bank will be limited — in the absence of reserve re-
quirements against such government deposits —
only by the extent that it must be in a position to meet
withdrawals. If the bank is able by rediscounting
to supply a credit balance at the Federal Reserve
Bank or to secure Federal Reserve notes to meet
currency withdrawals, there is not even this re-
straint. The first step of the borrowing process —
in so far as the banks make payment for certificates
by credit — is the creation of an additional volume
of credit in the form of government deposits.

The course of such newly created credits, when
liberated in process of government expenditure, pre-
sents the same variety of possibilities heretofore
noted. Paid over to the public creditors (munition
makers, ship-builders, etc.) in the form of the
Treasury’s drafts upon its balances, they may be used
by the recipients to discharge maturing loans, to
swell deposit accounts or to obtain additional circu-
lating medium. In the first event the inflation
effected will be limited to the period within which the
government deposits were dispersed; in the other
cases there will be a continuing effect.

The final stage in the operation will be the tender
of some part of the certificates in settlement of bond
subscriptions, and the liquidation of the remaining
part at maturity (unless called for prior redemp-
tion) from out the proceeds of taxes, Liberty Loans
or refunding certificates. If these new proceeds are
obtained from savings the result will be (a) de-