On Consumption and Investment:

When people purchase government securities, it  is not always necessary that they do it out of past savings. Sometimes people buy these securities out of their present income, which they would have otherwise utilized on the consumption of other commodities. Since they get an opportunity of buying government bonds of small amounts, they refrain from consuming something and buy them. Therefore, in this way the consumption is affected in the same way as it is affected by taxes. But, when the people buy government securities out of there past savings it has its specified effects. This does not directly affect the expenditure of the people at present. And, when people buy government securities out of the idle savings, the expenditure in the present remains the same. Private investment also remains unaffected in such conditions. If however, it comes from bank deposits, it reduces the money with the bank. The banks have, therefore, less money to lend to private business. Hence private investment is affected.
It is generally believed that the public borrowings have adverse effects on investment.

However, if the government borrows from Commercial Banks or the Central Bank of the country, it will provide extra purchasing power to the community and therefore, it will provide extra purchasing power to the community and therefore, it will not press for any curtailment of funds for investment. But when purchases of  securities by banks without excess of reserves or from individuals is made out of the funds meant for business expansion, it results in decline in investment. It is however, to be noted that as long as the interest rate is static and government bonds offer special privileges to bond holders over those envisaged in existing  securities, possibility of reduction in private investment is very slight.

There will be no contractionary effect at all, if the bonds are sold to the Central Banking System, or the Commercial Banks if they have excess reserves, or to lenders who purchase them out of funds  which would otherwise lie idle.