In historical times, when metals such as gold or silver were used as money, easy money resulted from the actual quantity of the metal available. However, in modern times, easy money results from monetary policy by the central banking authority. In the United States, the Federal Reserve System can pursue of course of easy money through expansionary monetary policy.

A Blast From The Past

For example, when beaver pelts were used as money in the colonial days of North America, a surge in the beaver population led to abundant beaver pelts and easy money. When gold was used as money in the United States during the 1800s, the discovery of a major new deposit, such as California in the 1840s and Alaska in the 1890s, led to a surge in the available quantity and easy money.

Modern Manipulation

Modern monetary policy makes use of three tools--open market operations, the discount rate, and reserve requirements. Expansionary monetary policy and easy money arises when the Fed uses these tools to increase the quantity of money available.

• Open Market Operations: This occurs when the Fed buys and sells U.S. Treasury securities. Such buying and selling affects the amount of excess reserves that banks have available to make loans and to create money and is the primary monetary policy tool used by the Fed. Expansionary monetary policy and easy money result if the Fed buys Treasury securities. This provides banks with more reserves that they use to make more loans at lower interest rates, which increases the money supply.


• Discount Rate: This is the interest rate that the Fed charges banks for borrowing reserves. Higher or lower rates affect the amount of excess reserves that banks have available to make loans and create money. Expansionary monetary policy and easy money result if the Fed lowers the discount rate. In this case, banks can borrow more reserves, which they can use to make more loans at lower interest rates, which then increases the money supply. Changes in the discount rate are most often used as a signal for monetary policy actions.


• Reserve Requirements: These are the rules established by the Fed to regulate the amount of reserves that banks must keep to back outstanding deposits. Higher and lower reserve requirements affect the amount of deposits banks can create with a given amount of reserves. Expansionary monetary policy and easy money result if the Fed lowers reserve requirements. With this change banks can use existing reserves to make more loans and thus increase the money supply. This tool is seldom used as a means of controlling the money supply.

The Good, The Bad

• The Good: On the positive side, easy money stimulates the economy. People are able to purchase more goods and services, which increases production and employment, and reduces the unemployment rate. More workers have jobs and those jobs pay higher wages. The economy is likely to be expanding and growing. With easy access to money, anyone in debt will find it easier to pay off loans.


• The Bad: On the negative side, easy money induces higher prices and inflation. While this might be good for sellers, it is not so good for buyers. The value of the monetary unit declines as more monetary units circulate through the economy. This is particularly bad for people who own a lot of monetary units. In particular, anyone with a great deal of financial assets are hurt by easy money. This includes those on the lending side of a financial transaction. The payment received on a debt is worth less than the amount originally loaned.

• The Winners: The beneficiaries of easy money are usually working class folks, with very little financial savings and a significant amount of financial debt. They are likely to benefit from an expanding economy, lower unemployment, and higher wages. They have little financial wealth hurt by inflation, but they find it easier to pay off outstanding debt. Historically, political liberals and Democrats have counted these sorts of folks among their constituency and thus tend to favor easy money when in power.


• The Losers: Those hurt by easy money tend to be on the higher end of the income spectrum, with a great deal of financial wealth. With money more abundant, what they have is worth less. To the extent that they are also on the employer side of the labor market, then they have pay higher wages for labor. To the extent that they are net lenders, then loan repayments are worth less as well. Historically, political conservatives and Republicans have counted these sorts of folks among their constituency and thus tend to oppose easy money when in power.

The Tight Money Alternative