Evening star., 1963-02-14
THE DEFICIT DEBATE
Active Money Called Economic Spur

- - - -
nancing undertaken for eco
nomic purposes. The idea is
that an increased flow OF
money will stimulate business
activity by increasing consump-
ton and investment.
Methods of Treasury borrow
ing determine to a large de-
gree the effects on the flow
of money.
The Treasury can borrow
from existing savings, by SELL
ing securities to pension funds,
insurance companies, savings
banks, corporations and indi-
viduals.
If there is heavy demand for
loans by corporations and 9TH
ers in the private economy
Treasury borrowing from saw
ings will displace private bor-
rowing as competition for lin
tied funds drives interest rates
up. This kind Of borrowing can
discourage investment and Sc
repress the private economy.
But one Of the economy's
problems now is that corpora
tions are hesitant about in
vesting and so are not borrow
ing heavily. In this situation,
according to the theory, Treas
ury borrowing from existing
savings will not push private
investors aside, but will put
idle capital to work building
the economy.
This kind Of borrowing steps
up the flow of money already
in existence. Another kind Of
Treasury borrowing - through
sale of securities to CONNER
cial banks - can lead to the
creation of new money and so
give the economy extra stimu-
lation.
When a commercial bank
makes a loan, 1t normally cred
its the amount Of the loan to
the borrowers checking ac-
count. Since the borrower can
write checks against the ac-
count, the amount of the loan
is practically as good as cash.
Commercial banks belonging
to the Federal Reserve System
must keep a percentage of
their deposits as readily avail
able reserves, some Of 1t cash
in their vaults and most Of 1t
on deposit in the Federal Re-
serve Banks. For city banks, the
requirement is a reserve Of 1875
per cent Of demand deposits
Checking accounts).
How II Works
If Bank A lends a business
man $4,000 he draws checks
to pay suppliers and others
$40, 900. Suppose the $40, 900 he
pays is deposited by the re-
cipients in their accounts in
Bank B. Bank B gains $4,000
Of deposits and $4,000 of re-
serves.
Bank B must keep $3.50 as
reserves to back the $4,000 of
additional deposits, and may
lend the $3.50 of excess re-
serves. If Bank B lends this
$3.50. other banks receive $8,-
$50 of additional reserves as
the borrowers checks are paid.
These banks may lend 83.5 per
cent-$6,972 25-of their newly
acquired reserves, and so on.
Thus, banks as a group may
increase loans by about six
times the amount Of the origi-
nal $4,000 loan and deposit.
And the supply of money in
the economy is increased by
the amount Of the loans,
through creation of demand de-
posits equivalent to cash.
The capacity of the banking
system to make loans-and to
buy Treasury securities - de-
pends on the size of their re-
serves. Banks as a group can
lend about So for each addi-
tional 81 of reserves acquired.
And the Federal Reserve Board
can increase the banks re-
serves by purchasing Treasury
securities through its open
market committee.
Boosts Loan Capacity
When the Federal Reserve
buys a $4,000 Treasury note
from a dealer, 1t pays by
check, which the dealer depos-
its in his commercial bank. The
bank sends the check to its
Federal Reserve Bank, which
credits the $4,000 to the COM
mercial banks reserve account.
With this additional $4,000
of reserves, the commercial
banking systems capacity to
make loans is increased by
about 100000. Conversely, the
Federal Reserve can decrease
the banking systems lending
capacity about six-fold for each
dollar Of Treasury securities