TeachMeFinance.com - explain Elastic currency
Elastic currency -- Elastic currency is currency the volume
of which would be regulated automatically by the demands of
business. In order to attain that end it would be necessary to
authorize the issue of circulating notes by banks under such
conditions as would make it profitable to the banks to increase
the volume of their oustanding notes in times of trade activity
and large demand for money and make it expensive for them
to maintain a large volume of outstanding circulation in times
of business depression and stagnation in the money markets.
Various propositions to provide for such a currency have
been advanced, all based on the theory of note issues secured,
at least in part, by the general assets of the banks instead of by
a deposit of bonds and regulated by a graduated tax on the
amount of circulation issued, the high tax being expected to
discourage excessive issues, except at times when the need for
more money is marked and imperative and when its absence
would result in stringency and abnormal interest rates , thus
discouraging enterprise and restricting business.
There was a plan at one time for an elastic currency based
on bond s. It was proposed that the government should issue
bonds which might at will be converted by the holders into
currency and which might be reissued by the government for
currency. The bonds were to bear interest only while outstanding.
It was assumed that when money was in excessive
supply the bonds would be held in preference to currency,
while on the other hand, when the supply of currency was inadequate
the deficiency could readily be made up by converting
bonds into currency. The bonds were to be sold by the government
for gold which was to be held as a special fund so that
when bonds were turned back to the government the currency
exchanged for them would be secured by the gold received for
the bonds. Two objections to the plan were raised and caused
it to be abandoned. One objection was that the proceeds of
the bonds would not be available for the general purposes of
the government. The other objection was that the plan made
the government responsible for the regulation of the money
market and imposed an additional tax on the people to the extent
of the interest paid on the bonds.
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