THE  PRICE  LEVEL

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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  requirements ­
  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  restraint. ­
  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,  presents ­
  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  circulating ­
  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  redemption) ­
  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 ­