Download TAKS Remediation Lesson #1

Supporting standards comprise
35% of the U. S. History Test
15 (E)
Readiness Standard (15)
The student understands domestic & foreign issues
related to U. S. economic growth from the 1870s to
1920.
The Student is expected to:
(E) Describe the emergence of monetary policy
in the United States, including the Federal
Reserve Act of 1913 & the shifting trend from a
gold standard to fiat money
Readiness Standard (15)
The student understands domestic & foreign issues
related to U. S. economic growth from the 1870s to
1920.
The Student is expected to:
(E) 1 Describe the emergence of monetary policy
in the United States, including the Federal
Reserve Act of 1913
Federal Reserve System — commonly called “the Fed” — serves
as the central bank of the United States. Congress passed the
Federal Reserve Act in 1913, which President Woodrow Wilson
supported and signed into law on December 23, 1913.
It was the most comprehensive overhaul of the nation’s banking
system since the Civil War and represented one of the crowning
achievements of President Wilson’s New Freedom program. It
helped to safeguard America’s financial institutions, the
American economy, and the supply of U.S. currency, and it
created a new system that allowed a level of governmental
control of the monetary supply that was unprecedented in
American history.
Congress structured the Fed as a distinctly American version of a
central bank: a “decentralized” central bank, with Reserve Banks and
Branches in 12 Districts spread across the country and coordinated by
a Board of Governors in Washington, D.C. Congress also gave the
Fed System a mixture of public and private characteristics.
The 12 Reserve Banks share many features with private-sector
corporations, including
boards ofPlan”
directors
and stockholders (the
The “Aldrich
was the
member banks within
their Districts).
The Board of Governors,
predecessor
to the Federal
though, is an independent
government
agency, with oversight
Reserve Act,
being proposed
responsibilities in
for1912
the Reserve Banks.
The Federal Reserve System would then become a privately owned
banking system that was operated in the public interest. Bankers
would run the twelve Banks,
butcalled
thosefor
Banks
The Plan
the would be supervised
and by the Federal establishment
Reserve Board
members included the
of whose
a National
Secretary of the Treasury,
the Association
Comptroller
of 15
the Currency, and other
Reserve
with
officials appointed
by thedistrict
President
to represent
regional
branches
and 46 public interests.
geographically dispersed
Federal Reserve System
is the
central
system of the
directors
primarily
frombanking
the
profession.
The Reserve
United States of banking
America,
and granted
it the legal authority
Association would make
to issue Federal Reserve
Notes, now commonly known as
emergency loans to member
the U.S. Dollar, and
Federal
Reserve
Bank
banks,
print money,
and act
as Notes as legal
the fiscaltender.
agent for the U.S.
government.
Fed conducts monetary policy, supervises and regulates banking,
serves as lender of last resort, maintains an effective and efficient
payments system, and serves as banker for banks and the U.S.
government. Conducting the nation’s monetary policy is one of the
most important — and often the most visible — functions of the Fed.
Prior to 1913, panics were common occurrences, as investors were
unsure about the safety of their deposits. The Federal Reserve Act
(also known at the time as the Currency Bill, or the Owen-Glass Act.)
gave the 12 Federal Reserve banks the ability to print money in order
to ensure economic stability. In addition to this task, the Fed had the
power to adjust the discount rate/the fed funds rate and buy & sell
U.S. treasuries
The Federal Reserve Act intended to establish a form of
economic stability through the introduction of the Central
Bank, which would be in charge of monetary policy, into
the United States. The Federal Reserve Act is perhaps one of
the most influential laws concerning the U.S. financial system.
The Federal Reserve Act required national banks to join the federal system
and contribute six percent of their capital to the system. State banks and
trust companies could also join the system. Federal Reserve banks issued
notes to member banks with the amount of currency issued regulated by a
central Federal Reserve Board in Washington, DC. This board was
comprised of the secretary of the treasury, the comptroller of currency, and
six other presidential appointees. The act allowed a more flexible system of
currency distribution that could respond to economic conditions unique to a
given region or that impacted the entire nation. The flexibility of the system
benefited both farm and business interests.
The Federal Reserve system as it exists today is not quite
the same creature that was produced in 1913. The system
has undergone rare, but substantial overhauls over the
years. The two most important changes occurred in
response to the Great Depression and to the mini-crisis of
the late 1970’s. Both of these reforms will be discussed later.
Throughout the history of the United States, there
has been an enduring economic and political debate
regarding the costs and benefits of central banking.
Since the inception of a central bank in the United
States, there were two major opposing views to this
type of economic system. Opposition was based on
1) protectionist sentiment; a 2) central bank would
serve a handful of financiers at the expense of small
producers, businesses, farmers and consumers, and
could destabilize the economy through speculation
and inflation. Proponents argued that a strong
banking system could provide enough credit for a
growing economy and avoid economic depressions.
Readiness Standard (15)
The student understands domestic & foreign issues
related to U. S. economic growth from the 1870s to
1920.
The Student is expected to:
(E) 2 Describe the emergence of monetary
policy in the United States, including the
shifting trend from a gold standard to fiat
money
Currency that a government has declared to be legal tender, but is not
backed by a physical commodity. The value of fiat money is derived
from the relationship between supply and demand rather than the
value of the material that the money is made of. Historically, most
currencies were based on physical commodities such as gold or silver,
but fiat money is based solely on faith. Fiat is the Latin word for “it
shall be,” “let it become,” “let it be done.”
Most modern paper currencies are fiat currencies, have no
intrinsic value and are used solely as a means of
payment. Historically, governments would mint coins out of a
physical commodity such as gold or silver, or would print paper
money that could be redeemed for a set amount of physical
commodity. Fiat money is inconvertible and cannot be
redeemed. Fiat money rose to prominence in the 20th century,
specifically after the collapse of the Bretton Woods system in
1971, when the United States ceased to allow the conversion of
the dollar into gold.
Silverite Movement of the Late 19th
Century—a mechanism of controlling
the value of money
• Free, independent silver
coinage at a ratio of 16
ounces of silver to every one
ounce of gold
• Free coinage meant U.S.
mints would coin all silver
given to them
• Inflation—higher prices
and lower purchasing
power due to rising costs
The Silver Controversy—A Quick
Fix for Economic Troubles?
Who supported silver and why?
• People wanted quick solutions to the
economic problems of the day
• Americans in the South and West—
particularly those in the Democratic
Party—favored a silver policy
• Why Did Farmers Favor Unlimited Coinage
of Silver?
Farmers Who Supported Silver
• They believed that the coinage of silver
would cause inflation and help them repay
their debts with less valuable money than
they had borrowed
• They believed it would raise wages and crop
prices
• They believed it would challenge the hated
power of the gold-oriented Northeast
Two Free Silver Cartoons of
the 1890s. At left, William
Jennings Bryan advertises
free silver as an elixir to
heal what ails you. See
Election of 1896 below. To
right, an ex-Confederate
soldier—now a farmer—
argues his case for free
silver as a panacea that will
restore favorable economic
conditions across the United
States of America
Who Supported the “Gold
Standard”?
Gold Standard—currency based solely on
gold; it held down the money supply and
kept prices from rising
• Bankers and established business people,
especially in the East
• Workers who feared inflation would lessen
the purchase power of their wages
Sherman Silver
Purchase Act, 1890
• U.S. Treasury directed to purchase 4.5
million ounces of sliver a month
• Treasury to issue legal tender—Treasury
notes—in payment for this silver
• Both sides—silver and gold—were satisfied
with this compromise
Repeal of Silver
Purchase Act, 1893
• President Cleveland repealed the bill
• This reduced the flight of gold out of the
U.S. but did not solve the Treasury’s gold
problem
• It boosted business confidence
• It contracted currency when inflation was
needed
Continued. . .
• It failed to revive business or the stock
market, reduce unemployment, or prevent a
fall in farm prices
• The repeal discredited President Cleveland
• It confined the Democrats to the South
• It propelled the Republicans into the
majority party by 1894
Trouble of the Farm—Demanding a
“Fairer Share” of Economic and
Social Benefits
• Plentiful supplies on foreign market drove
down crop prices
• Credit was difficult to obtain
• Deflation
• Rising freight charges imposed by railroads
(although rates actually fell during this
period)
Continued. . .
• Drought
• Mortgages that were burdensome (although
not crippling)
• Crisis of Self-Esteem
“Farm discontent was a worldwide phenomenon
between 1870 and 1900. With the new means of
transportation and communication, farmers
everywhere were caught up in a complex
international market they neither controlled nor
entirely understood.”
Fading of Populism and Rise of
William Jennings Bryan
Bryan was a powerful leader who was able to
unite the “Silver Faction” One reporter aptly
prophesied, “All the Silverites need is a
Moses,” and in Bryan, they certainly found one
Bryan’s Qualities
• Dramatic public speaker—“The Voice”
• Used gestures dramatically
• Called the “Great Commoner” in reference
to his identification with the common man
• Religious upbringing
Bryan’s father, a Baptist deacon and his mother,
devout Methodist. He learned in both
denominational environments, eventually becoming
an expert on the Bible and a spokesman for
Fundamentalist views
Bryan the Man
• Barely 36 years old in 1896
• Little political experience
• His “Cross of Gold” speech at the 1896
Democratic Convention
• Spoke as in defense of a righteous, holy
cause
• Captivated delegates at the Convention
Bryan’s “Public Event”
Bryan’s rousing conclusion:
“Having behind us the
producing masses of this nation
and the world. . . we will
answer their demand for a gold
standard by saying to them:
‘You shall not press down upon
the brow of labor this crown of
thorns, you shall not crucify
mankind upon a cross of gold.”
During the American Civil War, the Federal Government
issued United States Notes, a form of paper fiat currency
popularly known as “greenbacks.” Their issue was limited by
Congress just slightly over $340 million. During the 1870s,
withdrawal of the notes from circulation was opposed by the U.
S Greenback Party. The term “fiat money” was used in the
resolutions of an 1878 party convention.
By World War I most nations had a legalized government
1920s
monopoly on
bank notes and the legal tender status thereof.
Germany:
buying
In theory, governments
still promised to redeem notes in
vegetables
specie onwith
demand.
However, the costs of the war and the
baskets
of notes
afterward made governments suspend
massive expansion
(Photo:
Roger-Viollet)
redemption
in specie. Since there was no direct penalty for
doing so, governments were not immediately responsible for
the economic consequences of printing more money, which
led to hyperinflation – for example in Weimar Germany.
From 1944 to 1971, the Bretton Woods agreement fixed the
value of 35 United States dollars to one troy ounce of gold.
Other currencies were pegged to the U.S. dollar at fixed rates. The
U.S. promised to redeem dollars in gold to other central banks. Trade
imbalances were corrected by gold reserve exchanges or by loans
from the International Monetary Fund. This system collapsed when
the United States government ended the convertibility of the US
dollar for gold in 1971, in what became known as the Nixon Shock.
Because fiat money is not linked to physical reserves, it risks
becoming worthless due to hyperinflation. If people lose faith in a
nation’s paper currency, like the dollar bill, the money will no longer
hold any value.
While gold- or silver-backed representative money entails
the legal requirement that the bank of issue redeem it in
fixed weights of gold or silver, fiat money’s value is
unrelated to the value of any physical quantity. Even a coin
containing valuable metal may be considered fiat currency
if its face value is defined by law as different from its
market value as metal.
The Nixon Shock of 1971 ended the direct convertibility of
the United States dollar to gold. Since then, all reserve
currencies have been fiat currencies, including the U.S.
dollar and the Euro.
When a country goes off the gold standard and onto the fiat
standard, it adds to the number of “moneys” in existence.
In addition to the commodity moneys, gold and silver, there
now flourish independent moneys directed by each
government imposing its fiat rule. And just as gold and
silver will have an exchange rate on the free market, so the
market will establish exchange rates for all the various
moneys.
When a currency changes its character from goldreceipt to fiat paper, confidence in its stability and
quality is shaken, and demand for it declines.
Furthermore, now that it is cut off from gold, its far
greater quantity relative to its former gold backing
now becomes evident.
Fini