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What is Elastic Money?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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Elastic money is a term that is used to identify changes in the availability of currency and coin as changes in the economy occur. In many instances, the balances of checking and savings accounts are also understood to fall under the designation of elastic money. Here is some background on the development of the term, and how it relates to the control of the money supply in various economic climates.

In the United States, one of the essential functions of the Federal Reserve System in its early days was to regulate the amount of money supply that was allowed to be in circulation. Essentially, this was necessary to make sure that the reserves held in trust by the government were adequate to back the amount of coins and currency that were allowed to circulate. In order to deal with shifts in the economy, the Reserve would respond in a manner that was understood to prevent excessive conditions that would lead the country into financial ruin.

The basic strategy employed with elastic money involved issuing additional currency during expansions in the economic climate. By increasing money supply to consumers, this would help to keep the economy healthy. However if a contraction in the economy occurred, the response would be to cut back on the money supply that was in circulation. Decreasing money supply amounts was thought to be a way to slow the contraction, and restore a more equitable economic climate.

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There is some amount of controversy as to how well the process of elastic money has been managed in years past. While some economists believe that the strategy has worked with a considerable level of success, others have questioned whether or not decreases in money supply have always taken place when circumstances called for the action. Still others believe that an elastic money supply system can artificially create circumstances that can lead to extreme periods of inflation.

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