© 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, 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. Between the Civil War and WWI, two issues in the monetary system were dominant: 1)Deflation 2)Banking panics

© 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 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?

© 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. Prior to the Civil War, individual banks issued their own paper currency What are the advantages and disadvantages of this situation?

© 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: US Treasury issued new fiat currency, nicknamed “greenbacks” 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.

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, tax of 10% levied against state bank notes Did this eliminate all 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. 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?

© 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 debate. What should the monetary system be based upon? 1)Keep the greenback 2)Gold standard 3)Bimetallic system- gold and 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. 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.

© 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.

© 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.

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”

© 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. 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”

© 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?

© 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. Advantages of gold standard: Reduced risk of rapid monetary growth International exchange rates were essentially 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. Election of 1896 really settled the debate William Jennings Bryan and Democrats: Paper converted to gold or silver William McKinley and Republicans: Gold standard only West and South supported Bryan; North and East supported McKinley

© 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 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”

© 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. 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

© 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. Three events were catalysts for reform: 1)Panic of )Depression of mid-1890s 3)Panic of 1907

© 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 passed Established 12 district banks National banks were required to join; State banks allowed to join