Postbellum Banking and Money outline
Postbellum Banking and Money outline ECON 2200
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E. December 1913: The Federal Reserve System (“The Fed”) was the first “true” US central bank. It began operations in 1914. Created because of the report from the AldrichVreeland Act o What is a central bank? A governmentcreated bank that holds a monopoly on the issuing of banknotes. Other functions may include: Lender of last resort bank that lends to commercial banks when the run short on reserves Bankers’ bank serve the banking system, not personal use Clearinghouse for banking system clears balances of checks from one bank to another bank, commercial banks keep reserves at district bank so district bank can clear the balances of checks Fiscal agent for federal government bank for federal government Exercise of macroeconomic (monetary) policy countercyclical policy to combat that idea that banks feed booms and starve recessions o Permanent charter: reduces political pressure on the Fed FED does not have to recharter every so often protects FED from being lobbied by Congress (similar to how SC Justices are removed from currentday politics and opinions) st 1 Bank of U.S. (1791) Each lasted for exactly 20 years because of charters 2 Bank of U.S. (1816) o Congress got rid of them when their charters were done Neither was a “true” Central Bank as defined above o Original structure (p. 359) READ ABOUT THIS o Membership requirements for commercial banks 1 Must purchase stock in their Fed district bank commercial banks own district banks by owning stock Must deposit cash reserves w/ district bank the reserves that facilitate the clearinghouse effect NBs are required to join Membership is optional for SBs o The early Fed served as clearinghouse for checks/notes (and still does so). Early FED operated well in this role and enhanced the efficiency of the U.S. banking system o The Fed is expected to regulate the supply of currency & to ease business cycles (exercise monetary policy). o Early performance of Fed? (more on this later) FED acted poorly in regards to exercising monetary policy in the 1920s and 1930s, surrounding the years around the Great Depression IV. The Monetary System A. Following the Civil War, money (M) included SB notes NB notes 2 Greenbacks (US notes): fiat currency issued by Federal government during Civil War; legal tender Demand deposits Coins (bimetallic standard) Remember that under the bimetallic standard only the metal that was overvalued at the mint circulated as money, and… In the late1860s and early1870s, silver was worth about 3% more on the bullion market than at the Mint. Only gold would have been circulating as money (“de facto gold standard”) legally we had a bimetallic standard, but in reality only gold circulated B. Dominant issue of late 1800s: What kind of monetary system should U.S. have? As we consider this issue, refer to: The Quantity Theory of Money MV=PY Figures 19.1(data on M) & 19.2 (data on P) 3 C. Greenbacks & Gold (Table 19.2) 18601865: Wartime inflation meant o US prices > International prices → US trade deficit (Import > Export) o Gold flowed out of U.S. countries wanted to be paid in gold o Payment of specie (gold) suspended Recall that greenbacks were fiat money. See column 3 of Table 19.2. Note that depreciation of the dollar mitigated the trade deficit somewhat To resume specie payment, U.S. prices would have to decrease. o Impact of deflation borrowers (especially farmers; BUT see Economic Insight 19.1) lenders (especially U.S. bondholders, p. 346) Both major political parties (Dems and Reps) generally agreed that decrease price level to resume specie payment was a desirable goal, but they disagreed on how to achieve it Severe Contraction (Republicans) v. Moderate Contraction (Democrats) MV=PY decrease M, decrease P MV=PY decrease P, increase Y Burn greenbacks as they are received Hold M failry stable and P will By the federal government fall as the economy grows (Y up) More severe More gradual Democrats thought farmers would be hurt to harshly by having to pay back their debts with money that had less purchasing power than before 1865 Contraction Act – reflects the Republican view 4 o M down led to P down o 1868: Congress abolished Contraction Act because the effect on debtors was considered too severe. 18681874: Treasury Department followed more moderate policy o M & P as Y increases – more reflective of the Democrat view (Fairly stable) (fell more gradually) 1879: U.S. resumes payment in gold for greenbacks o Silver still not circulating as money o 18791900: US has de facto gold standard o Table 19.2 shows that after 1879: (1) US pricelevel & British pricelevel are roughly equal, and (2) price of British pound (in dollars) had returned to about its preWar level. D. The “Crime of ‘73” & the Free Silver Movement Coinage Act of 1873: routine legislation in which Congress provided directions to the US Mint on coinage. o 1873 Act included no provision for minting silver coins. o Noncontroversial at the time of passage because silver was not circulating as money. Silver was undervalued at the mint nd only gold was circulating as money But then… After 1874, ↑ output by US silver mines + European countries shifted from bimetallic to gold standard. o Market price of silver decreased o Silver was now overvalued at mint, but… 5 …Treasury was not buying/minting silver! Silver producers joined with “reflationists” in South & West → Free Silver Movement o Opposed the “demonetization” of silver o Wanted coinage of silver at old mint ratio of 16:1 more favorable than market ration at the time Began calling Coinage Act of 1873 the “Crime of 1873” Sound Money Advocates v. Free Silver Movement Wanted to maintain a de facto gold standard Wanted “free” (unlimited) coinage of sliver at mint ratio increase M increase pricelevel Bankers, businessmen, financial sector, manufacturing sector (owners, not laborers) Farmers and silver producers Urban Rural Northeast Midwest and south Republicans Democrats and Populist BlandAllison Act of 1878: Provided for limited purchases/coinage of silver. COMPROMISE o Referred to as a “limping monetary standard.” Hybrid of gold standard and bimetallic standard o Treasury was directed to purchase $24 million of silver per month at market price. not at the more favorable mint ratio o The market price of silver continued to fall despite the Treasury purchases that were made under the BlandAllison Act. 6 7 Sherman Silver Purchase Act of 1890 o Treasury's monthly purchase was increased to 4.5 mill ounces of silver at the market price. Roughly double what was being purchased under BlandAllison Act o Sellers received special Treasury notes legal tender redeemable in gold or silver at discretion of Treasury backed that legal tender so they were not fiat currency the treasury at this time was more in line with the Sound Money oriented, therefore, the Treausry tended to redeem them in gold because they wanted to maintain the de facto gold standard o Preserved de facto gold standard, but... o …market price of silver continued to fall. o Treasury’s gold reserves declined. Treasury was dispensing gold and no silver, thus stock piling silver and running out of gold Treasury officials and Sound Money advocates got nervous that the U.S. would have to suspend specie payment and leave the de facto gold standard 1893: Sherman Silver Purchase Act repealed o President Grover Cleveland signed the repeal → “Sound Money” Democrat Rare case of a “Sound Money” Democrat Angers many democrats due to his repeal of the Sherman Silver Purchase Act Felt that the act may have undermined confidence in the dollar being backed by gold, and led to bank panic and recession 8 o 1896 Election: Bryan (Democrat/Populist) v. McKinley (Republican) Cleveland is not renominated by the Democratic party Instead they nominate William Jennings Bryan McKinley wins This election was mainly focused on the type of money system the U.S. should have (new true gold standard or stick with bimetallic standard?) The Wizard of Oz Article Ultimately the U.S. did adopt a gold standard E. Adoption of Gold Standard After 1896: Gold flowed into US o Favorable international trade situation: US exports ↑ & US imports↓ o New discoveries of gold in Alaska, California & South Africa U.S. experienced a trade surplus Supply of gold increased M increases and P increases If M increases, Y can also increase Farmers and reflationists were satisfied As M increases, P increases Support for silver declined. 1900: Gold Standard Act o legal adoption of gold standard o Dollar = 25.8 grains of 90% pure gold 9 o Paper currencies were redeemable in gold. 18961914: “Heyday of the gold standard” (p. 353354) “Golden Age of American Agriculture” high demand of U.S. export products 10