Download Money, Prices, and Finance in the Postbellum Era

2/21/2012
Money, Prices, and Finance in the Postbellum Era
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How did the banking system become a dual banking system?
Why couldn’t the US return to the gold standard after the Civil War?
What monetary policies were implemented after the Civil War?
Why was deflation persistent?
Why were investment banks created?
What events led to the Fed being created in 1913?
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Between the Civil War and WWI, two issues in the monetary system were dominant:
1) Deflation
2) Banking panics
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product or service or otherwise on a password-protected website for classroom use.
Prior to the Civil War, individual banks issued their own paper currency
What are the advantages and disadvantages of this situation?
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1862: US Treasury issued new fiat currency, nicknamed “greenbacks”
1863 The National Bank Act created national 1863: The National Bank Act created national banks with new currency‐ national bank notes
Ignore details about national banks buying bonds to support its capital
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
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So the US was operating under a “dual banking system”‐ state and national banks
The goal was to convert all state banks to national banks
March, 1865‐ tax of 10% levied against state bank notes
Did this eliminate all state banks?
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product or service or otherwise on a password-protected website for classroom use.
Regulations were less strict for state banks
Tradeoffs for state banks:
Prestige of membership in national system versus stricter regulations
Tradeoffs for regulators:
Higher standards for the soundness of banks and the system versus losing members
What happened to the number of state banks?
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product or service or otherwise on a password-protected website for classroom use.
The debate. What should the monetary system be based upon?
1) Keep the greenback
2) Gold standard
3) Bimetallic system‐ gold and silver
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product or service or otherwise on a password-protected website for classroom use.
Why not continue with the greenback?
With no central bank, the Treasury would have been responsible for making decisions about how much money to print.
Congress was concerned about the incentive to print too much money.
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product or service or otherwise on a password-protected website for classroom use.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Why couldn’t the US simply return to the Gold Standard?
During the CW, US prices increased much more than British prices. If the greenbacks were converted to gold at the prewar exchange rate, there would have been a flood of conversions in order to obtain the English Pound.
Imports would have soared and gold would have left the country very quickly.
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product or service or otherwise on a password-protected website for classroom use.
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Although not officially, the US acted as if they were on a gold standard
The federal gov’t had to decrease the money supply in order to reduce the amount of gold going overseas
See Bordo (1981) “The Classical Gold Standard: Some Lessons for Today”
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product or service or otherwise on a password-protected website for classroom use.
Skip the details
Main point: the silver exchange rate made it more valuable in the market than to trade it for currency.
Western states and silver advocates wanted the Treasury to buy more of it
See Friedman (1990) “The Crime of 1873”
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product or service or otherwise on a password-protected website for classroom use.
Advantages of gold standard:
• Reduced risk of rapid monetary growth
• International exchange rates were essentially g
y
fixed
• Increased public confidence in money
Disadvantages of gold standard:
• Difficult to implement monetary policy
• Supply and demand could change suddenly
• Minimal control of supply
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Why was deflation persistent?
What causes inflation?
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product or service or otherwise on a password-protected website for classroom use.
Election of 1896 really settled the debate
William Jennings Bryan and Democrats:
P
Paper converted to gold or silver
t d t ld il
William McKinley and Republicans:
Gold standard only
West and South supported Bryan; North and East supported McKinley
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What really caused Congress to officially adopt the gold standard in 1900?
An increase in the supply of gold (both in terms of new mines and new processing methods) led to increasing, but stable, prices and an economic era of prosperity
See Rockoff (1990) “The ‘Wizard of Oz’ as a Monetary Allegory”
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product or service or otherwise on a password-protected website for classroom use.
Three events were catalysts for reform:
1) Panic of 1893
2) Depression of mid
Depression of mid‐1890s
1890s
3) Panic of 1907
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product or service or otherwise on a password-protected website for classroom use.
US firms had difficulty acquiring sufficient capital for large projects.
US banks had more limited resources
Investment banks solved this problem by becoming intermediaries‐ finding sufficient lenders for firms
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1913‐ Federal Reserve Act passed
Established 12 district banks
National banks were required to join; State banks lb k
d
S
b k
allowed to join
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product or service or otherwise on a password-protected website for classroom use.
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