Definition of Elastic currency


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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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Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

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