"It must never be forgotten that, although £19 to £20 million in notes are almost constantly supposed to be in the hands of the public, nevertheless, the portion of these notes which actually circulates, and, on the other hand, the portion which is held idle by the banks as a reserve, continually and significantly vary with respect to each other. If this reserve is large, and therefore the actual circulation small, it means, from the point of view of the money-market, that the circulation is full, money is plentiful; if the reserve is small, and therefore the actual circulation full, in the language of the money-market the circulation is low, money is scarce — in other words, the portion representing idle loan capital is small. A real expansion or contraction of the circulation, that is independent of the phases of the industrial cycle — with the amount needed by the public, however, remaining the same — occurs only for technical reasons, for instance, on the dates when taxes or the interest on the national debt are due. When taxes are paid, more notes and gold than usual flow into the Bank of England and, in effect, contract the circulation without regard to its needs. The reverse takes place when the dividends on the national debt are paid out. In the former case, loans are made from the Bank in order to obtain circulating medium. In the latter case, the rate of interest falls in private banks because of the momentary growth of their reserves. This has nothing to do with the absolute quantity of circulating medium; it does, however, concern the banking firm which sets this circulating medium in motion and for which this process consists in the alienation of loan capital and for which it pockets the profits thereby.
In the one case, there is merely a temporary displacement of circulating medium, which the Bank of England balances by short-term loans at low interest shortly before the quarterly taxes and also before the quarterly dividends on the national debt become due; the issue of these supernumerary notes first fills up the gap caused by the payment of taxes, while their return payment to the Bank soon thereafter brings back the excess of notes obtained by the public through the payment of dividends."
http://www.marxists.org/archive/marx/works/1894-c3/ch33.htm
In other words, when reserves are injected into the banking system by deficit spending (as Marx notes above, taxes drain reserves and spending injects them) the interbank loan interest rate would fall to zero (or the interest on reserve rate) in the absence of federal reserve policy. Rather then discount loans like the bank of england did primarily, the federal reserve currently injects (drains) reserves by buying (selling) government bonds or by entering overnight repurchase or reverse repurchase (reselling) agreements. What Galbraith is talking about is the spread between lending on the interbank loan market and the return of holding a government bond (either outright or through a reverse repo). If the price of the government bond falls too far, banks have an incentive to purchase because that has a higher return then interbank loans. If this happens then there would be upward pressure on the interbank loan interest rate which triggers federal reserve policy (because they have a target interest rate) to purchase government bonds which puts even further upward pressure on government bond prices in multiple ways. This has nothing to do with the outstanding holding of government bonds. It's basic day to day policy and coordination between the federal reserve and the treasury.
-- -Nathan Tankus -----------------------------------------------------------------------------------------------------------------------------------------------