BANKS: Reflation

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The result of this new Government credit policy was to increase the funds at the disposal of Reserve member banks for commercial loans in the following manner: Bank A receives from a customer $500,000 in Government securities to sell. It turns them into the Federal Reserve bank which credits Bank A with $500,000. Bank A credits its customer with a $500,000 deposit on which it must pay interest. But it gets no interest on its own $500,000 Reserve deposit. Until it draws its Reserve deposit and puts it to profitable work at the service of commerce or industry, it is losing money.

Last week, as a result of open-market purchases by the Reserve banks, the system's member bank balance increased $69,000,000 to $2,011,000,000. In effect the Federal Reserve was stacking this pile of $69,000,000 (worth approximately $690,000,000 in new credit) in its front window and inviting member banks to come and get it for "reflationary"' purposes rather than to call loans to raise money.