CHAPTER Vil

BANKS RENDER THE CURRENCY ELASTIC IN RESPONSE
TO THE NEEDS OF TRADE

The elasticity of bank currency, except in its mischievous aspects, generally ignored.
— But a few writers did give attention to it.

THE elasticity of the media of payment that banks furnish occupies
 a prominent place to-day among the benefits attributed to
them. This consideration played a most conspicuous part in the
criticism of the National Banking System and in the discussion
that attended the framing of the Federal Reserve Act. Such was
not the case, however, in the literature which we are reviewing.
For here the elasticity of bank currency, except in its mischievous
aspects, received very little attention. In large measure, no doubt,
the prominence of troublesome expansions and contractions accounts
 for this. And the prevalence of long loans, frequently
subject to renewal, may have contributed to obscure the function
of banking in giving a desirable flexibility to the volume of media
of payment.
It was almost universally agreed that the best currency is one
composed wholly of specie, or one consisting in part of bank
notes! but conforming in quantity exactly with the norm of a
purely metallic medium. There were few to take a stand against
notes secured by government stocks, or against the currency
principle as embodied in the English Bank Act of 1844, on the
ground that the desirable elasticity of the currency was interfered
with.2 The adherents of the ¢ commercial principle” of banking,
as the English “banking principle” was frequently called in this
country, argued, for the most part, simply that convertible bank

1 Of course, the elasticity of bank deposits is of no less significance than that of
bank notes. But the early writers were concerned chiefly with the latter, and in this
chapter, as elsewhere, we shall frequently use the term bank notes, reserving for a
later chapter consideration of the question to what extent the similarity of deposits
was recognized.
2 Jufra. Chapter XIII.