Money in America – Outline

Money in America

Class Notes

NVFAQ’s – Not Very Frequently Asked

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

How was the use of the dollar

  • 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

  • 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

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

  • 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

  • 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

  • They were

What did the government do to support the

  • 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

  • (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

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

What are the disadvantages if the gold

  • 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

  • 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

  • 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

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

  • Silver Certificates – not
  • Travelers Checks