History of Money and Banking in the U.S.
Private banknotes, redeemable in specie, began in
Venice in the fourteenth century
The last colony to begin issuing fiat paper money was
Virginia (in 1750, to prosecute the French and Indian War)
Some of the most important agitators for the creation of the 2nd BoUS were
Wealthy businessmen who had invested heavily in war debt
Inflationary banks were most heavily lobbied for by
Wealthy merchants and land speculators. These men were, ironically, some of the heaviest debtors.
One hard money senator gave exactly the same description of the role of Central Banks as Rothbard, quote
"(The central bank is) ostensibly for the purpose of correcting the diseased state of our paper currency by restraining and curtailing the overissue of bank paper, and yet it came prepared to inflict upon us the same evil, being itself nothing more than simply a paper making machine." (William H. Wells)
The colonies' monetary system, when they did not create shortages through worked well over all. A good quote on the matter:
"Here was a silver standard... in the absence of institutions of the central government intervening in the silver market, and in the absence of either a public or private central bank adjusting domestic credit or managing a reserve of specie or foreign exchange with which to stabilize exchange rates. The market... kept exchange rates remarkably close to the legislated par.... What is most remarkable in this context is the continuity of the specie system through the seventeenth and eighteenth centuries.1"
Condy Raguet's statement to Ricardo on the power of banks in the U.S.
"You state in your letter that you find it difficult to comprehend, why persons who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society."
By the Spring of 1781, the continental currency had gone from a value of about __ in specie to about __
$1 to $1.25, $1/168
The total money supply in the U.S. at the beginning of the Revolution was __, but the Continental Congress had increased this to __ before the end of 1775
$12 million, $18 million
The reserve ratio of banks in Philadelphia by the end of the War of 1812 had dropped to
.052
On the even of the Panic of 1819, the second BoUS had a reserve ratio of only
.11
The reserve ratio of banks at the end of the War of 1812 had declined to
.17
By 1811, there were __ banks in the U.S., pyramiding notes at a ratio of __ on top of specie
117, 4.26-to-1 (a reserve ratio of .23)
Morris transferred the Bank of North America into a private bank chartered by Pennsylvania in __
1783
The monetary expansion of the Bank of the United States spurred the creation of
18 new banks in five years.
In 1744, another losing expedition against the French led Massachusetts to issue __ pounds over the next four years, resulting in depreciation so severe that __
2.2 million, the price of silver rose to 60 shillings an ounce, ten times what it had been in 1690.
In 1690, before the issue of paper money, __ pounds of silver money was available in New England; by 1711, there were __ pounds of paper money and __ silver in circulation
200,000, 240,000, almost none
Wholesale price increases from 1811 to 1815 averaged
35%
For complicated, Gresham's Law related reasons, by the 1820's, Bimetallsim in the U.S. had led to
A near disappearance of gold coins and the existence of only fractional Spanish silver coins in circulation by 1820.
In 1764, Parliament forced all colonies to prohibit the new issues of paper money and required the gradual retirement of outstanding notes. Only Rhode Island refused The result was:
After a brief adjustment, the resumption and retirement led to a far more prosperous trade and production, the harder money and lower prices attracting an inflow of specie. With Boston on specie and Newport on paper money, the balance of trade swung wildly in favor of Boston.
The U.S. established a bimetallic standard in the 1790's on the advice of
Alexander Hamilton (Report on the Establishment of a Mint)
There was not a scarcity of money before the issue of paper money in the American colonies because
Americans were able to import Spanish and other foreign coin, including English, from other countries. (It was the issuance of paper money that led to diappearance of specie from the colonies.)
Clear evidence that the purpose of the Second Bank of the United States was to support the state banks in their inflation rather than crack down on them
As soon as it opened in 1817, the 2nd BoUS issued $6 million worth of credit to state banks before insisting on the resumption of specie by the state banks.
Monies arose naturally in the colonies without government involvement. For example
Beaver fur and wampum were used as money in the North, and fish and corn served as money there and elsewhere. Rice was used as money in South Carolina, and the most widespread commodity money was tobacco, used in Virginia. The pound-of-tobacco was the currency unit in Virginia (with warehouse receipts in tobacco circulating as money backed 100 percent by the tobacco in the warehouse.)
Britain during the colonial period was officially on a silver standard (one shilling defined as 86 pure Troy grains of silver, and silver so defined as legal tender.) However
Britain also coined gold and maintained a bimetallic standard by fixing the gold guinea, weighing 129.4 grains of gold, as equal in value to a certain weight of silver.
By establishing bimetallism in the colonial period
Britain became perpetually subject to Gresham's Law, because they consistently overvalued gold, with the result that silver fell out of circulation
What happened to the paper issues of North Carolina after the war?
By 1788, the specie value of the paper had shrunk by more than fifty percent. Coin vanished (because of Gresham's Law), and since the paper had practically no value outside the state, merchants could not use it to pay debts they owed abroad; hence they suffered severe losses when they had to accept it at inflated prices locally. North Carolina's performance warned merchants anew of the menace of depreciating paper money which they were forced to receive at par from their debtors but which they could not pass on to their creditors.
The effect of the legal privileges of paper money in the colonies
By Gresham's Law, specie disappeared from the colonies in favor of paper. This in turn drove up prices and hampered exports from the colony.
Rothbard's slogan for the post central bank pre Civil War banking system
Decentralization without Freedom
Depreciation of paper money proceeded in the colonies despite government penalties of
Fines, imprisonment and total confiscation of property for the crime of not accepting paper at par
There is no need to have the national government monopolize coinage, as evidenced by the fact that
Foreign gold and silver coins constituted much of the coinage in the United State until Congress outlawed the use of foreign coins in 1857. (In fact, the leading specie coin circulating in America was the Spanish silver dollar, defined as consisting of 387 grains of pure silver.)
The leader in the drive to finance the Revolutionary War with fiat paper money was
Governor Morris, a scion of the New York landed aristocracy
It is important to realize that gold and silver are __ and therefore, when not prohibited by government decree __
International commodities, foreign coins are perfectly capable of serving as standard monies.
The Bank of North America received the privileges from the government of
It notes being receivable in all duties and taxes to all governments, at par with specie, and being the only bank allowed to operate in the country.
Consolidation of power by the Bank of North America
It was made the depository of all congressional funds. In addition, it loaned $1.2 million to Congress shortly after its inception.
Morris and Hamilton wanted the government to assume the debts of the states because
It would build up agitation for taxing power in congress, which the Articles of Confederation had forbidden it.
In 1716, the Massachusetts government formed the first __, and issued 100,000 pounds in notes to be loaned on __
Land bank, real estate
The bulk of federal debt after the Revolution was in the from of
Loan certificates
Gresham's Law
When the government fixes an exchange ratio between two currencies (usually gold and silver), and this exchange rate differs from the market rate, this creates a shortage of the money that is allowed to buy more of the other money than it could on the free market. (For example, people use their silver to buy more gold than they would be able to if gold remained at its "natural" price in terms of silver. Thus silver would disappear from circulation, and gold would dominate.) Thus "Bad money chases out good."
In 1692, the Massachusetts government, faced with the declining value of the paper pound
Made it compulsory legal tender, and granted a premium of 5 percent on all payment of debt to the government in paper notes.
The beginning of fiat paper money in the West (and the colonies in particular)
Massachusetts in 1690. Boston was accustomed to raiding Quebec for silver and paying their soldiers with the proceeds, but this time they were defeated. The government printed paper money to pay the soldiers and avoid mutiny.
In contrast to the view that Central Banks serve, and are looked on as, constraints to inflationary private banks, note that the major forces in favor of rechartering the Bank of the United States were
Merchants, chambers of commerce, and most of the state banks. (Merchants found that the bank had expanded credit at cheap rates. State banks called the BoUS "advantageous" and feared the contraction of credit if it disappeared.)
As the colonies grew, Americans began importing gold and silver (of their own volition) from
Not just Britain, but other European coins as well. (Among the coins circulating in America were the French guinea, the Portuguese "joe," the Spanish doubloon, and Brazilian coins, while silver coins included French crowns and livres.)
England, in a mercantilist attempt to hoard specie,
Outlawed mining in the colonies and prohibited the export of English coin to America.
The inflation of the War of 1812 took place solely
Outside of New England
The result of the Massachusetts land bank
Prices rose so dramatically that the tide of opinion in Massachusetts began to turn against paper, as writers pointed out that prices had doubled in the past 20 years, and Spanish silver had disappeared.
Enforcing redemption on nominally specie-paying banks was done by
Professional "money brokers" (people who would buy up a mass of depreciated notes and travel to the home office fo the bank to demand redemption in specie.) and monthly journals called "bank note detectors"
The second BoUS never fulfilled its legal obligation to do what in 1817-1818
Raise the $7 million in specie required of it, raising instead only $2.5 million.
The mass of federal and state debt could have depreciated into nothingness by the end of the war, but this process was stopped and reversed by
Robert Morris (So called "financial czar" of the continental congress)
The first fractional reserve commercial bank in the U.S. was
Robert Morris's Bank of North America (A privately owned central bank)
Even after resumption of payments in 1817
Specie redemption was not certain and universal, and there was still a premium on specie and a discount on bank notes.
The promise the Massachusetts government gave with the first issue of fiat paper
That they would redeem the notes in gold or silver out of tax revenue within a few years, and that absolutely no further paper money would be issued. (Neither promise, characteristically, was kept.)
The major reason for both the central bank and the constitution itself was
The Federalist desire to fund federal and state public debt via federal taxation.
General suspension of specie payments was allowed in
The Panic of 1819 The Panic of 1837 The Panic of 1857
Why was the Spanish silver dollar the most commonly used coin in the Americas
The Spanish colonies has put out a vast quantity of silver. Also, the Spanish dollar, from the sixteenth to the nineteenth century, was relatively the most stable and least debased coin in the Western world.
When New England called on the other states' banks to redeem the money they had used to pay for New England munitions in 1815,
The banks, which had been operating at reserve ratios of about five percent, faced imminent insolvency. The governments outside of New England responded by allowing the banks to suspend payments in specie. The number of private banks thereafter expanded rapidly, in recognition of this new government privilege.
There were no banks of deposit in England until __. Before this time Merchants stored excess savings in __, until __
The civil war (mid 17th century.), the King's mint. Charles I confiscated 200,000 pounds of gold from the mint in 1638, shortly before the outbreak of the Civil War.
What did merchants do with excess gold after the King's mint proved to be untrustworthy? How did the lead to the creation of a new form of money? How did it lead to the creation of fractional reserve banking?
The deposited it in the coffers or private goldsmiths, who were accustomed to storing valuable metal. The warehouse receipts of the goldsmiths came to be used as a surrogate for the gold itself. In the 1660's, goldsmiths began issuing pseudo-warehouse receipts not actually covered by gold.
Banks were greatly encouraged to inflate by
The government's two and a half year suspension of the necessity of specie payments 1815-1817. (If you get into trouble, I'll bail you out.)
Banking in the sense of lending out the savings of other began in England with
The scriveners (clerks who wrote contracts and bonds)
