Money in America

Class Notes

NVFAQ’s – Not Very Frequently Asked
Questions

The advent of currency in America is very much
tied to the industrial revolution and the growth of trade. It was
difficult to trade commodities for the reasons we discussed
yesterday. The problem with moving to currency, however, was that it
was a new system with few rules and those rules that existed were
often vague and untested. The new government needed to establish
consistency so that the economy would remain stable. These laws and
changes were made over many years. As the US moved to create a
national currency there was still the question of worth and
stability. The bonds issued by the government to support the new US
Notes were ok but many still feared the solvency of the government
could be in jeopardy. Americans were still basically simple
breed.

How was the use of the dollar
originated?

In the late 1700’s the Spanish had
instituted the use of specie known as pesos. The Spanish had long
mined the silver in Mexico, melting and creating bullion or
ingots, The treasure ships stopped in the West Indies and often
fell prey to pirates who spent their stolen treasure in the
Southern Colonies.
The Triangle Trade brought Pesos to America
as well, Molasses to Rum To Slaves
Pesos were known as pieces of eight because
they were divided up into parts of eight called bits. The pesos
resembled Australian currency called Talers, which the colonists
had seen because Australia was also a colony of England, the term
became so popular that Franklin and Hamilton decided to name the
new currency Dollars,
The new Dollar was divided by units of 10,
not 8, because it was easier.

How was money first issued in the
colonies

The Constitution in Article 1, section 8
gives Congress the power to deal with money.
Article 1 section 10 further states that no
state shall have these powers but it was basically understood at
that time that the government could not print paper
money.

If the Federal Government could not print paper
money, who could?

State Banks – Banks chartered by states.
These banks printed paper currency , mostly backed by gold or
silver. Some banks abused this and printed large amounts of
currency to be spent in far away cities. These wildcat banks
presented a problem.

What did the federal government do at that time
to regulate money?

Very little. The Bank of the United
States, created by Alexander Hamilton and then destroyed by
Jackson, acted as a department of the treasury. It had a federal
charter and collected fees, taxes and made payments on behalf of
the federal government.

What problems arose as result of this lack of
supervision?

By the civil war there were 1,600 different
banks issuing over 10,000 different types of currency. Each bank
was supposed to base their currency on existing gold or silver
reserves but this was often no the case. As a result lists of
“bad notes” were circulated and often a person went to buy
something and found they had bad currency. This meant that the
money they had was now essentially worthless.

When did the Federal government start printing
currency?

When the Civil War began in 1861 the north
needed currency so Congress passed a law authorizing the printing
of $60 million of demand notes. These were declare legal tender
even though they had no gold or silver backing. In 1862 they
printed another $150 million. These United States Notes were
known commonly as Greenbacks because they were printed green on
the front and back.

Why weren’t people afraid the money would be
worthless?

They were

What did the government do to support the
Greenback?

Created a National Banking System.
Rigorously inspected banks were chartered by the federal

government. Each bank would issue national currency or the US
Notes. They were uniform in appearance and backed by US
Government Bonds.
State banks still existed and few could
afford to buy the bonds and get a charter.
In 1865 Congress passed a 10% tax on all
privately issued currency. This killed the state banks and left
only greenbacks and national currency in circulation.

What did the government do to calm fears that
US Notes weren’t good?

It issued Gold Certificates (1863) printed
in yellow. These became known as Yellow backs. They were backed
by gold reserves. They were originally used by banks to settle
differences but in 1882 the government printed $20 bills for
general use.
It issued Silver Certificates (1886) in
part to support prices for silver miners in the west. In 1878 the
government began buying huge silver reserves and mint them into
dollars. Later they kept the silver in reserve and printed silver
certificates (1886).
Treasury Coin Notes were printed from 1890
to 1913 and were redeemable for gold and silver coin.

When did Congress start to back dollars with
gold?

(1900) – This is known as the “Gold
Standard” The government didn’t actually have all the gold for all
the money in circulation but it was acknowledged that all wouldn’t
redeem at one time.

Why was this done?

Support the currency and provide it with
inherent value.

How much was a dollar worth in gold?

1/20.67 of an ounce

What are the advantages of being on the gold
standard?

People feel more secure about their
money.
Prevents the government from printing too
much money and therefore value remains high, this can also be a
disadvantage.

What are the disadvantages if the gold
standard?

Growing economy needs a growing money
supply which requires growing gold stocks. If these cannot be
found then economic growth is stunted.
In event of financial crisis many may
convert therefore depleting national reserves.

Why did the US go off the Gold
Standard?

During the depression many began hoarding
gold, banks began to fail and people began to cash in their
dollars for gold. In 1933, fearing the government could not back
the money supply a national emergency was decreed and we
officially went off the gold standard.

What happened to those that had
gold?

Anyone with more than $100 of gold had to
file a treasury form.
Citizens, Banks and businesses were
required to hand over their gold and gold certificates in exchange
for Federal Reserve Notes and national currency. Those who did
not hand it in had their gold and certificates
confiscated.

What did it mean that we were no longer on the
Gold Standard?

It meant we were on a inconvertible fiat
money standard. The money supply cannot be converted to gold
or silver. It is fiat, decreed, money.
Since 1975 Americans have again been able
to own gold.
The government now manages the value of
money by regulating the economy and the money supply.

What other types of currency exist
today?

Silver Certificates – not
redeemable
Travelers Checks