Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economic History of the US Reunification Era, 1860-1920 Lecture #2 Peter Allen Econ 120 1 Public Controversy over Monetary System, 1865-1913 After Civil War…continuous controversy over money Gold standard… + no central bank and + very rapid economic growth = inadequate money supply and deflation Hurt agriculture, helped industry Critics proposed inflationary schemes culminating in W. Jennings Bryan in 1896 2 Classical Gold Standard After 1873 Central benefit: …confidence in long-run value of $ The way S & D turned out… …tight liquidity …may have reined in financial speculation and panics Supported by political and financial leaders Central costs: Inability to increase money supply to needs of the economy during rapid growth MV = PY Deflation Hurt debtors…esp. farmers Helped creditors, esp. banks 3 End of Civil War, 1865 … How to Resume Convertibility to Specie 76% inflation during the War Options discussed… 1. 2. 3. Keep greenbacks/fiat Gold only Return to Bi-metallism Preference for Gold No consideration to staying off specie Hamilton system… US$ = 0.85 ounce silver or 0.053 ounce gold Now, 76% or so too much fiat money Options to get back to specie, in whatever form… Devaluation Deflation 4 Resume Convertibility to Specie? Options discussed… Keep greenbacks Bi-metallism Gold Devaluation or Deflation Republican-dominated Congress, argued for resumption… 1. Gov. creditors deserved to be paid in a gold 2. Fiat currency was dangerous 3. Restoration of prewar gold parity necessary to maintain US gov. credibility overseas HOW TO RESUME CONVERTIBILITY 1861 1865 1873 1879 United States Index Inflation 100 176 76% 129 -27% 104 -19% Gold ($ per oz.) 20.67184 36.38243 26.66667 21.49871 ← Old Parity ← Resumption 5 Path Chosen…..deflation Contraction Act, 1865 – “Fast-track” Fed. gov. runs a budget surplus… …and “burns” the surplus, i.e. greenbacks Caused a sharp drop in prices…but also… MV = PY Sharp contraction of the real economy Contraction extended in 1868 Grant‟s Treasury…gradual approach… Hold money constant and allow economy to grow Rough parity between US, British prices and gold reached by 1879 Legal Framework for Resumption Coinage Act of 1873, which specie Resumption Act of 1875, timetable Resumption planned for 1879 6 7 Coinage Act of 1873 Listed coins to be minted Omitted the standard silver dollar …simpler, solved Gresham‟s $1 = 0.053 oz. gold Resumption, successful January 1, 1879 Holy alliance…silver producer, farmers “Crime of 1873” “Free coinage of Silver,” 1873-96 Bland-Allison Act, 1878 Sherman Silver Purchase Act, 1890 William Jennings Bryan, 1896 8 Returning to the Gold Standard 1861 1865 1873 1879 United States Index Inflation 100 176 76% 129 -27% 104 -19% Index 100 105 113 96 Britain Inflation 5% 8% -15% Index 4.85 7.69 5.55 4.85 $ per £ Inflation 59% -28% -13% 9 1869 to 1879 200 End of the Civil War, Apr. 1865 180 160 price index 140 Resumption, 1879 120 100 80 1894 60 40 1860 1870 1880 1890 1900 1910 Economy grew by 3% per year in real terms Prices fell by 3.8% per year Monetary base grew by 1.1% per year… …not enough to allow prices to rise Brutal effect on agriculture/West 10 Resumption didn‟t Stop Deflation Deflation continued for another 15 years… …roughly 1.7% per year until 1896 Forces pushing prices down continued… Until the mid-1890s… Gold discovered in South Africa Use of cyanide to extract gold from ore 1896-WWI – heyday of international gold standard Inflation, roughly 1.7% per year Ms and Md in balance Monetary base = gold in the ground 11 Monetary History of the US, 1867-1960 “…the drastic and sustained price decline occurred, despite a mild rise in the stock of money, because of an exceedingly rapid rise in output…” Friedman/Schwartz, 1963 MV = PY Friedman is saying that with Y rising “exceedingly,” V constant (or falling slightly) and M rising slightly, P has to fall If inflation is: …”too much money chasing too few goods…” Then deflation must be… “too little money chasing too many goods…” Friedman on Crime of ’73 •Gold standard was a mistake •Bi-metallism in „79 would have prevented deflation •But, by 1896, i.e. campaign of Bryan •for president on “Free-silver” •…may have caused another bout of deflation 12 Forms of Currency in the US, 1860–1915 13 Post-Civil War, Dual Banking System National Bank Act, 1863 National Banks National Bank Notes Only banks issuing currency State banks Taxed 2-10% on note issuance during War 1866, fewer than 100 Revived after 1870 with business model of deposit and loan Tight money and Free Banking… …limited resources of Commercial Banks Industrial Age…rise of Investment Banks Peculiar to US Big companies raise money from savers directly… …by issuing stocks and bonds Underwriting and trading 14 Panics in 1873, 1893 and 1893 Same Pattern Despite tight monetary conditions overall Fractional reserve banking allowed banks to increase profits with leverage commercial banks create money…on top of…specie reserve investment banks bought stock/bonds with borrowed $$ Bank Run…fear of what a bank had done with “the other fraction”… ...safety of banks‟ investment of depositors‟ money can happen in all monetary conditions…though… more likely when money supply is growing fast…inflation… under gold or bi-metal standards 15 Financial Panics of 1873, 1893, 1907 Panic of 1873 Occurred prior to Resumption, deflation Railroad bonds… Vast speculation, bubble Bond default by Northern Pacific Railroad… …triggered more defaults as indebted railroads couldn‟t refinance…and… …failure of investment bank Jay Cooke and Co. Chain reaction…contraction of Ms and bank failures Panic of 1893 Caused by re-emergence of the “Free-Silver” movement Run on gold Fear US was going to forced off of the gold standard Suspension of specie payments by P. Grover Cleveland 16 Panic of 1907 Prompted the Federal Reserve Act of 1913 Preceded by boom in Trust companies offering high interest on deposits and invested in stock of large corporations failure of Knickerbocker Trust banking panic…suspension of convertibility… bear market in stocks and 13 month-long recession JP Morgan, lender of last resort, rescued… Citibank Chemical→Chase→JP Morgan consensus for a new central bank 17 What to do about Bank Panics? Three theories in 1865-1913 1. Hard money: no fractional reserve = no panics 2. “Sound Banking Doctrine:” somebody monitors banks, usu. federal government Fractional reserve, but with statutory reserve requirements Present paper currency for specie Clearing houses National banking, standard currency lender of last resort Need a new central bank 3. Fiat money, “free banking” pure-competition Money, creation of free market not government 18 Federal Reserve Act, 1913 Sound money approach 12 Federal Reserve Banks Permanent Federal Reserve Board Compulsory membership for National banks Optional for state banks Members, purchase Fed stock = 3% of its capital Deposit reserves with the district Fed bank Can create reserves in a crisis 19