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  institutions ­
  subscribing  to  the  issue  of  certificates  on
their  own  behalf  or  for  their  customers,  and  remitting ­
  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  Treasury, ­
  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  respect ­
  to  subscriptions  on  its  own  account,  a  part  of
the  bank’s  resources  heretofore  loaned  to  private
borrowers  will  now  be  loaned  to  the  government. ­
  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