MONEY AND BANKING CURRENCY EVOLUTION

CHARACTERISTICS OF MONEY THE EVOLUTION OF MONEY BARTER SYSTEM- DOUBLE COINCIDENCE OF WANTS FIRST TO COIN MONEY WERE THE LYDIANS FIRST TO PRINT MONEY—CHINESE FUNCTIONS OF MONEY: MEDIUM OF EXCHANGE MEASURE OF VALUE STORE OF VALUE CHARACTERISTICS OF MONEY 1. PORTABILITY A. EASILY TRANSPORTED 2. DURABILITY A. DURABLE ENOUGH TO BE CIRCULATED AND HANDLED 3. DIVISIBILITY A. CAN BE DIVIDED INTO SMALLER UNITS 4. LIMITED AVAILABILITY A. IT HAS TO HAVE A LIMITED SUPPLY TO KEEP ITS VALUE. B. NEED TO AVOID INFLATION =

ORIGINS OF THE US DOLLAR MONEY IN EARLY SOCIETIES COMMODITY MONEY FIAT MONEY MONEY IN COLONIAL AMERICA COMMODITY WAMPUM PAPER CURRENCY SPECIE DURING COLONIAL DAYS— SPANISH PESO -- “PIECES OF 8” TRIANGULAR TRADE, PIRACY US CURRENCY ASSIGNED TO FRANKLIN AND HAMILTON NAME DOLLAR WAS A NICKNAME FOR “TALERS” OR “DOLARS” BECAUSE OF JEFFERSON THE US CURRENCY WAS DIVIDED INTO TENTHS. EVEN TODAY SOME PEOPLE REFER TO 25 CENTS AS “2 BITS” (1/4th of a Spanish piece of 8)

DEVELOPMENT OF US MONETARY STANDARD AND HISTORY OF BANKING HISTORY OF US MONETARY STANDARD: CONTINENTAL DOLLARS—Fiat money, no value after the Revolution. CONSTITUTION STATED –Exclusive power to COIN money-CONGRESS [NO PAPER MONEY UNTIL CIVIL WAR DAYS]. ALL PAPER CURRENCY ISSUED BY PRIVATE BANKS— 1790s-1860s– All Us Paper currency—Bank Notes CONSTITUTION DID NOT FORBID BANKS FROM ISSUING PAPER CURRENCY. BACKED BY SPECIE ON DEPOSIT IN THE ISSUING BANK. Convertible Currency GROWTH OF STATE BANK--BANKING BY 1811—100 STATE BANKS PRINTING BANK NOTES ABUSES IN BANKING: WILDCAT BANKS—FRAUDULENT BANK NOTES (RECKLESS BANKING) PANIC OF 1819—ANDREW JACKSON AND NICHOLAS BIDDLE 2ND BANK OF UNITED STATES CRISIS MAJOR PROBLEMS WITH PRINTED CURRENCY IN EARLY 1800S: TOO MANY BANK NOTES CIRCULATED PRINTED MORE NOTES THAN WHAT COULD BE BACKED. COUNTERFEITING BY 1860 THERE WERE 1,600 BANKS ISSUING > 10,000 KINDS OF PAPER CURRENCY. PUT DISTRUST IN THE MONEY SUPPLY.

GREENBACKS AND OTHER US PAPER CURRENCY BY 1850S US CURRENCY WAS IN TURMOIL BUT POWERFUL BANKERS RESISTED CHANGE. CHANGE IN CURRENCY CAME AS A RESULT OF THE CIVIL WAR. TO FINANCE THE WAR BOTH UNION AND CONFEDERACY: SOLD WAR BONDS 1861 US CONGRESS AUTHORIZED THE PRINTING $60 MILLION “DEMAND NOTES”.—NO SPECIE BACKING BUT WERE LEGAL TENDER. –Fiat Money 1862 LEGAL TENDER ACT—AUTHORIZED AN ADDITIONAL $150 MILLION “US NOTES” BY 1863 50% OF US MONEY SUPPLY= “GREENBACKS”. NATIONAL CURRENCY DURING THE WAR PEOPLE FEARED THE “GREENBACKS” WERE LOSING THEIR VALUE. CONGRESS CREATED NATIONAL BANKING SYSTEM. FED. GOVT. ISSUED CHARTERS TO PRIVATE BANKS. THESE BANKS WOULD PRINT GOVT. BACKED NATIONAL BANK NOTES. THE BANKS WOULD BE GOVT. REGULATED AND INSPECTED. BANKS WHO JOINED HAD TO PURCHASE WAR BONDS. BY 1865, THE FEDERAL GOVT. FORCED STATE BANKS TO JOIN BY PLACING A 10% TAX ON ALL BANK NOTES. Many state banks had to recall their bank notes. CURRENCY BY THIS TIME WAS PUBLICALLY ISSUED.

GOLD AND SILVER CERTIFICATES GOLD CERTIFICATES: 1863--PAPER MONEY BACKED BY GOLD ON DEPOSIT WITH THE US TREASURY. PRINTED IN LARGE DENOMINATIONS USED MOSTLY BY BANKS TO SETTLE FINANCIAL PROBLEMS. 1882—SMALLER DENOMINATION GOLD CERTIFICATES WERE CIRCULATED. CONVERTIBLE CURRENCY SILVER CERTIFICATES: 1878—PAPER MONEY BACKED BY SILVER ON DEPOSIT WITH THE US TREASURY TREASURY COIN NOTES: 1890—PAPER MONEY THAT WAS REDEEMABLE IN GOLD OR SILVER. Convertible currency PRACTICE ENDED IN 1893. THE GOLD STANDARD: 1900 GOLD STANDARD ACT—PRICE OF GOLD FIXED AT $20.67 AN OUNCE. ALL NOTES WERE REDEEMABLE IN GOLD. SILVER TO GOLD RATIO 16:1.

ADVANTAGES AND DISADVANTAGES OF THE GOLD STANDARD. 1. PEOPLE FELT IT MADE THE MONEY MORE SECURE. 2. IT KEPT INFLATION IN CHECK, BECAUSE THE GOVT. COULD ONLY PRINT MONEY BASED ON THE AMOUNT OF GOLD ON DEPOSIT. DISADVANTAGES: 1. THE GOLD STOCK DOES NOT INCREASE ENOUGH TO STAY UP WITH THE GROWTH OF THE ECONOMY. 2. PEOPLE MIGHT SUDDENLY CONVERT THEIR MONEY IN FOR GOLD AND DRAIN THE GOLD SUPPLY. 3. PRICE OF GOLD CONSTANTLY FLUCTUATES AND IF THE GOVT. FIXES THE GOLD PRICE THEN IT MUST MANIPULATE THE MARKET. 4. IT CAN MAKE A GOVT. LOOK BAD IF IT CANNOT HOLD THE PRICE OF GOLD. 5. INDIVIDUALS OR GROUPS COULD CORNER THE GOLD SUPPLY AND MANIPULATE ITS VALUE. ABANDONING THE GOLD STANDARD: FDR GOT THE US OFF THE GOLD STANDARD DURING THE GREAT DEPRESSION 1934 GOLD RESERVE ACT— REQUIRED ALL CITIZENS, BANKS AND BUSINESSES TO TURN IN THEIR GOLD COIN AND GOLD CERTIFICATES FOR FEDERAL RESERVE NOTES.

INCONVERTIBLE FIAT MONEY STANDARD 1934—PAPER MONEY THAT COULD NOT BE CONVERTED INTO GOLD OR SILVER. THE FEDERAL RESERVE SYSTEM ISSUED THE ONLY CURRENCY. NATIONAL CURRENCY AND TREASURY COIN NOTES WERE WITHDRAWN FROM CIRCULATION IN THE 1930s. GOLD CERTIFICATES CONFISCATED IN 1934. SILVER CERTIFICATES RETIRED IN 1968. TODAY US CURRENCY IS FEDERAL RESERVE NOTES AND COINS. INTANGIBLE SOURCES OF MONEY ARE TRAVELER’S CHECKS, CHECKING ACCOUNTS, AND SAVINGS ACCOUNTS. HISTORY OF BANKING : 2 primary Economic Functions of Banks: 13th century trade fairs—bancs- Usury 1694 Bank of England 1792 1st Bank of the US MODERN BANKING REGULATION: 1913 FEDERAL RESERVE SYSTEM—Reserve Requirement, Discount rate, Buying/selling bonds FDIC FINANCIAL INSTITUTIONS (STATE AND NATIONAL) COMMERCIAL BANKS CREDIT UNIONS FINANCE COMPANIES (PAY-DAY LENDERS)--USERY MORTGAGE COMPANIES