Money which can
be expanded or contracted according to commercial needs.
ELASTICITY is one of the essential qualities of a good medium of
exchange, and a sound currency system should provide this characteristic.
Before the Federal Reserve Act our currency system failed to provide
for an elastic currency, but Federal Reserve notes, issued under the authority
of the Federal Reserve Act, now supply the elastic element which is lacking
in other forms of U.S. currency.
Since Federal Reserve notes now represent the largest portion of
our circulating medium, elasticity is imparted to the entire circulation.
Elasticity is secured by basing the volume of circulating medium
upon the volume of credit. Federal
Reserve notes expand as business expands, as indicated by increased turnover
of member bank deposits and demand for currency to meet withdrawals by
drawing on free balances (excess reserves) at the Federal Reserve banks.
Likewise when business contracts, the volume of currency in excess
of till requirements is turned in, excess reserves are increased, and
the excess of Federal Reserve notes is withdrawn from circulation.