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The Elasticity of The Federal Reserve Note

Edward C. Simmons
The American Economic Review
Vol. 26, No. 4 (Dec., 1936), pp. 683-690
Stable URL: http://www.jstor.org/stable/1807996
Page Count: 8
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The Elasticity of The Federal Reserve Note
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Abstract

When the federal reserve system was established, elaborate precautions were taken to provide for the elasticity of the federal reserve note. The original plan of issue called for the use of rediscounted paper as collateral, and the process of issue and retirement was tenuously connected to member bank borrowing. The original plan has been almost entirely abandoned through statutory changes made in response to alterations in monetary and banking practices and structures. The tremendous growth of the gold stock has been of particular significance. The collateral requirements have been modified, and note issue has been divorced from member bank borrowing. The elasticity of the federal reserve note has not been impaired, which suggests that the correct explanation of note elasticity is to be found in the rôle which cash plays in the monetary system rather than in collateral requirements. Vestiges of the original plan of note issue remain and constitute a potential source of embarrassment to the monetary system.

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