The form-seasonal elasticity problem is a phenomenon that led to frequent financial panics in the US economy, particularly with the Panics of 1873, 1893, and 1907. In the late summer, cash would flow out of banks to pay farmers, and when this happened national banks could not easily expand the supply of national bank notes to meet the demand for cash, so national banks had to build large reserves in the winter and spring. If these reserves proved insufficient, national banks would demand immediate repayment on many of their outstanding loans to generate cash. Short-term interest rates could spike from less than 2 percent to more than 30 percent annualized rates; and asset fire-sales to generate cash resulted in depressed asset prices, leaving the US economy vulnerable to frequent shocks and panics in the fall. The severe Panic of 1907 provided momentum for the creation of the Federal Reserve.
Glossary Term