CHAPTER © 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. 19 Money, Prices, and Finance in the Postbellum Era

© 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. Main Topics:  Money  Money Supply Following the Civil War  Form of Monetary System  Fiat System? Bimetalic Standard? Gold Standard?  Evolution of the Banking System  Dual System  Banking Panics  Creation of the Federal Reserve System

© 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. Forms of Currency  Before the Civil War, the Money Supply was determined by Gold  The inflow and outflow of Gold (and new Gold mined) in the United States determined the money supply  Silver was undervalued at the mint: Silver coins were not circulated (Gresham’s law)  People stop using silver coins  Paper notes created to make change and postage stamps are used.

© 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. How is the Civil War Financed?  Limited ability to borrow -Europeans unwilling to buy bonds -Excise taxes, tariffs, land sales not enough, so income taxes are introduced  Demand Notes:  Treasury issues notes redeemable in specie (they can be turned in for gold)

© 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.  The Union army continues to lose battles early in the Civil War.  What would you do if you were holding a bond, backed by a government losing a war that could be converted into gold?

© 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.  When the Union army loses battles, people redeem the Treasury Notes for Gold  Gold was flowing out of the banking system  December 30, 1861 government suspends payment in specie

© 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.  1862 Congress proposes new notes: Greenbacks  Legal tender of payment of debts but not redeemable for specie  Fiat money

© 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. Greenbacks  Greenbacks are a form of fiat currency.  They are not backed by Gold or Silver, so there is no limitation on how much money the government can print.

© 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. Money During the Civil War  If you expect greenbacks to depreciate relative to gold and silver, how does this affect your behavior?  Keep gold and silver, use greenbacks now  By the end of the Civil War few coins of any kind are in circulation  At stores, there are two sets of prices, one in greenbacks, one in gold.

© 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. Forms of Currency  After the Civil War, the base of the money supply (the currency) was:  Gold and silver coins plus gold/silver certificates  Greenbacks  Bank notes

© 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. After the Civil War  What to do with all the Greenbacks?  Go back to a gold standard?  Going back on gold standard implies deflation

© 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. Gold Standard  Before Civil War, $1=23.22 grains of gold (1/20 of an ounce)  If other countries are on the gold standard, exchange rates between countries are fixed.  Example: $4.77= 1£ because $4.77 would buy the amount of gold which the pound was equal to.

© 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. Gold Standard Example:  Suppose: $20 = 1 ounce of gold and  4£ = 1 ounce of gold  This would fix the exchange rate between the $ and £: $20 = 1 oz. of gold = 4£ $20 = 4£ ; Exchange Rate: 5 $/ £

© 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. Back to a Gold Standard?  During the Civil War, the government printed a lot of money.  Prices rose significantly (inflation)  The dollar lost value against gold  each dollar was worth less in gold than before and could not be directly converted at prewar rates

© 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. Gold Standard  Because the US Money Supply had increased, prices in US had risen much more than in England:  Pre-War Exchange Rate: $4.77= 1£  New Exchange Rate: $7.69=1£

© 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. The Gold Standard  What if the US goes back on the gold standard at pre-war rates?  This would overvalue the dollar compared to gold  People would convert $ to gold, take gold, export it overseas and buy British pounds.  The Treasury department would be drained of gold as people turned in their (less valuable) currency for gold.

© 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. Back to a Gold Standard?  To set the value of the dollar to gold at prewar rates, prices would first have to fall  A fall in prices, however, might have negative consequences on the economy

© 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. Back to a Gold Standard?  Democrats argued that the US should not try to get back on the Gold Standard at the original rates.  Prices would have to fall in the United States, before the dollar could be converted to gold at the rate fixed before the Civil War.  The argued that the deflation (falling prices) would be harmful to the economy, particularly to farmers and other people who were in debt

© 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. Back to a Gold Standard?  Republicans argued for a resumption of the Gold Standard at pre-war rates.  Creditors who had lent to the government deserved to be paid in Gold  Too dangerous to allow the government to continue to print fiat currency (not tied to gold)  Necessary to retain credibility abroad and continue to have access to international credit markets

© 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. Back to a Gold Standard?  Two options to reestablish the original gold standard rates:  Price level could be reduced quickly by running a government surplus and burning the extra currency (reducing the money supply)  Price level would fall gradually as the economy grows while the money supply remains constant.

© 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. Deflation Prices fall from s

© 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. Deflation (Falling Prices) Who is hurt? Who benefits? Unexpected inflation benefits borrowers and hurts lenders and anyone with fixed income. Deflation benefits lenders and hurts borrowers.

© 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. Falling Prices  Why do prices continue to fall throughout this period?  The demand for money is growing faster than the money supply.  As the country and the economy grows, more money is needed for transactions.  Because money is in short supply, it becomes more valuable and each dollar can buy more stuff.

© 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. Falling Prices  How could we stop the deflation and cause prices to rise?  Print a lot more money  However, money supply is limited by gold supplies.  Leave the Bimetallic Standard?  What about Silver?

© 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. What Happens to Silver by the 1860s?  At the end of the Civil War no silver coins are in circulation, mint ratio (16:1) was not consistent with price of gold in relation to silver.  Silver is more valuable as silver than as money. No one would want to spend silver coins.  (Gresham’s Law)

© 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. What Happens to Silver under the Bimetallic Standard?  Because silver coins are not being used by people as money, they are officially dropped from the money supply in Coinage act of 1873  At the time no one objected (price of silver was higher in market than mint ratio) but later became known as Crime of 73

© 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. Silver Discoveries in the West  Silver discoveries in west cause the price of silver to fall.  Owners of silver mines could now earn more if they could convert their silver to coins

© 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. What happened?  Farmers also wanted silver monetized in order to the increase in the money supply and stop deflation.  Prices of farm outputs were falling. They blamed deflation (maybe incorrectly- Engle’s Law)  Farmers were borrowers. Borrowers are generally hurt by falling prices.

© 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.  The Monetization of Silver is a major issue in the election of 1896  Republican Candidate is McKinley  Advocates the Gold Standard  Democratic Candidate is William Jennings Bryan  Advocates the unrestricted coinage of silver

© 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. William Jennings Bryan, 1896 “Cross of Gold” Speech, 1896

© 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. William Jennings Bryan, 1896  The most famous speech in American political history was delivered by William Jennings Bryan on July 9, 1896, at the Democratic National Convention in Chicago.  The issue was whether to endorse the free coinage of silver at a ratio of silver to gold of 16 to 1.  This inflationary measure would have increased the amount of money in circulation and aided cash-poor and debt-burdened farmers.

© 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. “Cross of Gold” Speech “…you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold!” The next day the convention nominated Bryan for President on the fifth ballot.

© 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.

 The West and South support William Jennings Bryan (agriculture, mining)  The North and East support McKinley (industrial, urban)

© 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.

Wizard of Oz (1900)  Oz –standard measure of gold ounce – “oz”  Ruby Slippers – these are silver in the book.  Cowardly Lion – Wm. Jenning Bryan, Populist Presidential candidate in 1896 and 1900 Bryan was attacked as being somewhat cowardly for not supporting the US war with Spain  Dorothy –Populist character from the heartland of American Populism- Kansas.  Scarecrow – farmers, agricultural workers, ignorant of many city things but honest and able to understand things with a little education.  Tin Man – industrial workers; in need of oil (liquidity/money) to work  Emerald City – political center of Oz /Washinton D.C. To get there a politician had to take the gold way (gold standard)  Yellow Brick Road

© 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. Government Compromise  In the late 1800s, Congress passes several bills which allow for limited coinage of silver

© 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. Government Compromise  New Gold Discoveries and improvements in gold processing cause the World Gold Supply to begin to rise dramatically in the mid 1890s  Gold Standard Act of 1900 defines the dollar in terms of gold  The permanent end of the bimetallic standard

© 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. Currency in the United States, 1860–1915

© 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. Bank Deposits  Most of the Increase in the Money Supply after the Civil War comes from the growth of bank deposits-  savings and checking accounts  The base money supply (currency) is still important, because it is used by banks as reserves to support these deposits  the more reserves a bank has, the more deposits it can create

© 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. Per Capita Deposits and Currency in Circulation

© 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. The Banking System

© 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. National Banking System  Attempts to establish national banking system started in 1861  2% tax on state bank notes- why?  State Banks continue to thrive  lower regulations allow the potential for high profits  U.S. ends up with a Dual Banking System (National Banks and State Banks)

© 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. Commercial Banks in the United States, 1860–1914

© 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.  Competition between state and national systems lead to weak banks, more bank failures  Financial Panic in 1873  Led to a 65 month recession  Financial Panics: 1884, 1890, 1893, 1907  Many banks suspend payments  Loss of faith in banking system

© 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.  Banking Panic of 1873  Known as “The Great Depression,” before the actual Great Depression in the 1930’s   NYSE closes for 10 days

© 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. Federal Reserve Act of 1913  Established a Central Bank  Functions:  Preventing bank panics  Lender of Last Resort  Setting reserve requirements  Banks deposit reserves with the Fed

© 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. Federal Reserve  Set as a decentralized system. The country is divided into 12 regions  In each region, check clearing and banking regulation is controlled by a Federal Reserve Bank  Board of Governors is located in Washington D.C.  Chairman of Board of Governors  Recent Governors:  Alan Greenspan  Ben Bernanke  Janet Yellen

© 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. Twelve Regions of the Fed

© 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.  Lender of Last Resort by lending to solvent banks caught in panic  Not designed to rescue failing banks  Problems distinguishing between the two situations  Federal Reserve notes become national currency  Open Market Operations (used to increase/decrease the money supply) come later in 1920s  Control of money supply not part of the original vision, goal is to prevent banking panics