Exam Three Public Policy
. The Banker's Panic of 1907 was caused by which of the following?
A failed attempt by Wall Street stock traders to corner the market in the stock of the United Copper Company.
What is a "gold clause" in a U.S. Government contract?
A gold clause is a provision within a contract that requires consideration to be paid in gold or another particular type of currency upon request. The creditor can insist on payment either in gold or another type of currency equivalent to gold. Joint Resolution: FDR and Congress repeal all gold clauses in all government contracts. The clause also allowed for paper money.
Who was Alan Greenspan?
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. First appointed Federal Reserve chairman by President Ronald Reagan in August 1987, he was reappointed at successive four-year intervals until retiring on January 31, 2006
Which type of economist would argue that easy credit policies of the Federal Reserve in the 1920's led to an unsustainable credit boom in asset prices that inevitably led to a market bubble and the eventual bursting of that bubble, resulting in the Great Depression?
Austrian economists.
What is the BLS?
Bureau of Labor Statistics (BLS) responsible for calculating the Consumer Price Index (CPI).
What happened after inflation destroyed the value of the continental dollar?
Many people switched to using silver Spanish milled dollar coins that had an intrinsic value.
Who said ""inflation is always and everywhere a monetary phenomenon? What does that mean?
Milton Friedman ... believed that "inflation is always and everywhere a monetary phenomenon." In other words, he believed prices could not increase without an increase in the money supply. To get the economically devastating effects of inflation under control in the 1970s, the Federal Reserve should have followed a constrictive monetary policy. This finally happened in 1979 when Federal Reserve Chairman Paul Volcker put the monetarist theory into practice.
Which type of economist would argue that the Great Depression started as an ordinary recession but that Federal Reserve mistakes resulting in a shrinking money supply made the recession turn into a Great Depression?
Monetarist economists.
What does it mean when we say the Fed "provides liquidity" to the banking system and financial markets?
When the Federal Reserve uses the term "provision of liquidity" it is referring to the injection of new money in the form of Legal Reserves into the financial system.
When the Fed uses the term "injecting liquidity into the financial system" what do they mean?
When the Federal Reserve uses the term "provision of liquidity" it is referring to the injection of new money in the form of Legal Reserves into the financial system. This is a standard Federal Reserve response to any crisis whether it is a financial crisis or some other shock to the financial system. Slide 25 - Part 6
Now the Coinage Act of 1792 was a response, in part, to the inflation of the Continental dollar. This act first set the gold price at _____.
$19.39 per ounce
In 1834 Congress changed official price of gold to ___?
$20.67 per ounce
What was the official gold price in US dollars from 1834-1933?
$20.67 per ounce
Under the Bretton Woods Agreement what was the official gold price?
$35 per ounce
What was Regulation Q? How did it contribute to disintermediation?
1. Regulation Q placed ceilings on the interest rates banks could pay on interest to depositors. A lot of money left the bank accounts because people were making more money elsewhere. 7. This outflow of money from Commercial Banks and Savings and Loan Associations (referred to as "financial intermediaries") was called "disintermediation"
What was the relationship between a monetary policy that expanded the money supply to try to keep interest rates low, a fiscal policy that increased government spending for social welfare programs, infrastructure spending, and defense, tax cuts, and inflation in the 1960's?
1. Increased fiscal policy spending and tax cuts resulted in rising deficits. 2. Rising deficits resulted in more government borrowing 3. More government borrowing resulted in the need for the Fed to keep interest rates low 4. The Fed attempted to keep rates low by increasing the money supply and monetizing the new debt 5. Increasing money supply resulted in rising inflation 6. Rising inflation led to rising nominal interest rates (Fisher equation) 7. Go back to step 4 8. Continue cycling through steps 4 to 7 until you create a rising inflation environment
What are the Fed's two main goals?
1. Keeping inflation low and steady — it aims for 2 percent annual increases in prices on average over time 2. Fostering maximum employment.
When we say "Nixon closed the gold window" what do we mean? What does that act have to do with the evolution of the US $ into a pure fiat currency?
1. President Nixon "closes the gold window" to other central banks August 15th, 1971 a) no more redeeming $US for gold by other Central Banks. b) The dollar completed its evolution into a 100% fiat currency - since the dollars are not backed by gold, the dollar becomes a fiat "free floating" currency with nothing behind it. http://en.wikipedia.org/wiki/Nixon_Shock By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies.
Thomas Jefferson argued in favor of which of the following (more than one may be true)?
1. Strict interpretation of the Constitution 2. Weak central (Federal) government 3. Strong state governments (States' rights of self-determination) 4. No Central Bank and no national bank charters (licenses to do business) 5. State government control of banking, the granting of bank charters 6. Rural states with strong agricultural interests backed this view 7. The Democratic-Republican Party, created by Thomas Jefferson and James Madison had strong support in the South and the "West" (Kentucky, Tennessee, and what is now Mississippi and Alabama - east of the Mississippi - see map).
When was the Federal Reserve Act passed?
1913
During WWI what did the government do with respect to the income tax to help finance the war effort?
1914 - 1918 World War I (1917 US enters the war) In addition to the increased borrowing by the Treasury income taxes were raised to help pay for the WW I. After the war was over tax rates were lowered.
What happened in October of 1979 at the Federal Reserve that changed the trajectory of rising inflation? (Who was it and what did he do?)
3. Paul Volcker is appointed as Chairman of the Fed in October of 1979 and he shifts the Fed's policy to one of controlling the growth of the money supply and allowing nominal interest rates to find free market equilibrium. This results in an extended deep recession with very high nominal rates as the inflationary forces are purged from the economy.
Before the financial crisis of 2008, what the usual size of the Fed's balance sheet?
=> under $900 billion, or under $900,000,000,000
In the 1960's the Federal Reserve (and the U.S. Treasury) had to intervene in gold markets to try to maintain the official $35 per ounce gold price mandated by the Bretton Woods agreement. How did they do this?
By selling gold on global markets
In the 1960's the Federal Reserve (and the U.S. Treasury) had to intervene in gold markets to try to maintain the official $35 per ounce gold price mandated by the Bretton Woods agreement. How did they do this?
By selling gold on global markets and shifting the supply curve to the right.
In a few short sentences, describe George Bush's fiscal policy from 2000 to 2007. In general terms, be sure to mention what happened to marginal income tax rates, tax revenues, defense expenditures, and annual budget deficits during this period. Ignore the additional expenditures that are associated with the financial crisis in 2008.
Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 "Bush tax cuts" 1. lowered top marginal income tax rate from 39.5% to 35% 2. Cut capital gains and dividend tax rates, accelerated depreciation write-offs 3. Increased exemption limits for the Alternative Minimum Tax
When George W. Bush (Jr.) was president what major changes to the tax code were enacted? Did income tax rates go up or down?
Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 "Bush tax cuts" 1. lowered top marginal income tax rate from 39.5% to 35% 2. Cut capital gains and dividend tax rates, accelerated depreciation write-offs 3. Increased exemption limits for the Alternative Minimum Tax
The U.S. government borrowed a lot of money from the government of France to help finance the Revolutionary War. After the War, it repaid its entire debt to France.
False
What did the Gramm-Leach Bliley Act (1999) (also known as the Financial Services Modernization Act) do?
Gramm-Leach Bliley Act (1999) = Financial Services Modernization Act (1999) Removes many barriers between commercial banking, investment banking, and insurance (repeal last parts of Glass-Steagall) Financial Holding Company (FHC) can diversify activities Allowed commercial banks to enter more risky investment banking activities.
In general, what happened to inflation and interest rates during the 1980's?
Low and declining inflation and interest rates result in strong economic growth
In the late 1920's both the economy and the stock market were "overheated" and the stock market had evolved into a "bubble". What did the Federal Reserve do in 1929 with respect to interest rates?
In 1929, the Federal Reserve raised interest rates several times in an attempt to cool the overheated economy and stock market. By October, a powerful bear market had commenced. On Thursday, October 24th 1929, a spate of panic selling occurred as investors began to realize that the stock boom was actually an over-inflated speculative bubble.
What was the highest marginal income tax rate during WW II?
In 1944 and 1945 the top marginal income tax rates = 94%
In 1992 President Bill Clinton is elected. In his first year in office there are tax increases on the wealthy as some of Reagan's tax cuts are reversed. What is the impact on the size of government deficits in the years after this tax increase?
In 1992 Bill Clinton elected president a) Large tax increases on upper income earners in his first-year b) Economy grows - tax revenues rise from economic growth c) Cuts in defense spending d) Deficits shrink.
What was the impact of the combination of the Reagan Tax Cuts and increased defense spending on the federal government's deficits from 1980 to 1988?
Increased deficits and rising national debt. Part 6, Slide 22
Which type of economist would argue that the Great Depression was caused by a widespread loss of confidence that resulted in under consumption and under investment?
Keynesian economists.
What was the McFadden Act and what did it do?
Lecture Notes: · The McFadden act gave national banks equality with state charter banks. Provided competitive equality with state charter banks by letting national banks branch off to the extent they were allowed by state law. · The final focus of the reform activities focused on the financial and banking laws, there were two major laws that were passed. The first was the McFadden act. And the act sought to give national banks competitive equality with state-chartered banks by letting national banks branch to the extent permitted by state law.
Over the last 46 years, under which presidential administration did the federal government ever experience an annual budget surplus?
Note: President Clinton's administration experienced a surplus. 1998-2000
Who is Paul Volcker and why is he so important for monetary policy from 1979 to 1984?
Paul Volcker is appointed as Chairman of the Fed in October of 1979 and he shifts the Fed's policy to one of controlling the growth of the money supply and allowing nominal interest rates to find free market equilibrium. This results in an extended deep recession with very high nominal rates as the inflationary forces are purged from the economy.
The Second Bank of the United States was known for excessive lending to speculate in agricultural farmland. What was the impact of these activities?
People began to think farm prices could never fall. As an article in a publication called The Cultivator said in 1836: "Who ever heard of a man buying and selling a farm at the same or a lessened price? It is so well understood that the seller is to have more than he gave, that it has almost become a settled principle in the purchase of real estate." The bubble burst with the Panic of 1837, and was followed by the first great depression in United States history, from 1837 to 1843.
What happened to the free market price of gold after Nixon closed the gold window?
President Richard Nixon laid the gold standard to rest for good when he slammed the "gold window" shut, severing the last ties that the dollar had to gold. Nixon uncoupled gold from its fixed $35 price and suspended the convertibility of dollars into gold by foreign governments and central banks. The gold window was an informal name for a two-tiered system of gold pricing. The price of gold rapidly increased. Part 6, Slide 3. Free Market is the trading "marketplace" cost.
The U.S. Navy had been decommissioned after the end of the Revolutionary War but was reestablished in the late 1700's to do which of the following?
Protect private merchant ships that were owned by wealthy shipping magnates from the French Navy.
In today's political environment, you would associate which political viewpoints with the views of Thomas Jefferson?
Republicans and libertarians
What did the Riegle-Neal Interstate Banking and Branching Act (1994) do?
Riegle-Neal Interstate Banking and Branching Act (1994) - Repeal McFadden Act and allow interstate branching in 1995 More geographic competition for banks and more consolidation into large banks - Slide 18
What is stagflation?
Stagflation is defined as slow economic growth occurring simultaneously with high rates of inflation.
What would the Fed do if it appeared that inflation was rising in a sustained way?
Taper bond purchases would allow the lifting of interest rates relatively quickly.
What were the results of Paul Volcker's policies at the Federal Reserve?
The 1980's 1. Fed (under Volcker) continues to slow growth of money supply a. Falling inflationary expectations b. Falling nominal interest rates c. Falling oil prices (demand destruction due to conservation efforts) d. Increased economic growth e. 1987 Paul Volcker steps down and is replaced by Alan Greenspan f. 1987 Stock Market Crash
What was the official price of gold under the Bretton Woods Agreement?
The Bretton Woods system was drawn up and fixed the dollar to gold at the existing parity of US$35 per ounce
What is the CPI-U?
The CPI inflation tables below use the end of year Consumer Price Index for Urban consumers (CPI-U). This data represents changes in prices of all goods and services purchased for consumption by urban households.
During WW II the Federal Reserve's monetary policy was focused on keeping interest rates low to help the government finance the war with low interest Treasury Bonds. What was the impact on the CPI in 1947?
The Consumer Price Index rose 14% in 1947
96. Why is the Fed fearful of recent inflation measures increasing?
The Fed is concerned as inflation has been elevated this year as the economy has begun to reopen from the pandemic and supply has struggled to keep pace with rapid consumer demand, and some measures of consumer inflation expectations are creeping higher. If that continues, rapid price gains could become more permanent. That would run counter to one of the Fed's two main goals which is the central bank is in charge of keeping inflation low and steady.
What happened to the paper Continental Bank Notes issued in 1775 to finance the Revolutionary War?
They lost almost all their value within 5 years of issue
What was the Glass Steagall Act and what did it do?
The Glass-Steagall Act was passed in 1933 and separated investment and commercial banking activities in response to the commercial bank involvement in stock market investment · The second law was the Glass Steagall law. It was part of the 1933 Banking Act, and it separated commercial banking activities from investment banking activities.
What did the Gold Standard Act of 1900 do? What does it have to do with bimetallism?
The Gold Standard Act of the United States was passed in 1900 (approved on March 14) and established gold as the only standard for redeeming paper money, stopping bimetallism (which had allowed silver in exchange for gold).
What did the 16th Amendment to the Constitution do?
The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows Congress to levy an income tax without apportioning it among the states on the basis of population. Reference: History Notes - Part 3: 1875 to 1929, Slide 14
Which of the following are true about the paper money issued by the Continental Congress?
The bank notes were backed only by the promise to redeem the notes with silver coins in the future.
The stock market crash signaled the beginning of the Great Depression. According to Milton Friedman, what happened to the money supply during the Great Depression?
The money supply shrank 30-40% due to mismanagement.
96. What was the 2013 "taper tantrum"?
The phrase, taper tantrum, describes the 2013 surge in U.S. Treasury yields, resulting from the Federal Reserve's (Fed) announcement of future tapering of its policy of quantitative easing. The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy. The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.
Describe the role of fiscal policy stimulus under the New Deal. (25 words or less)
The role of fiscal policy stimulus under a Keynesian orientation is to increase consumption and investment in the economy. This is mainly accomplished by government spending on a variety of programs that creates jobs so workers have money to spend.
Describe the role of monetary policy under the New Deal. (25 words or less)
The role of monetary policy under a Keynesian orientation is to provide a low interest rate environment through money creation in order to minimize the cost of government borrowing that is used to finance the fiscal policy spending programs and to encourage borrowing by businesses and individuals.
During WW II, how did the Fed keep interest rates low?
To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock. (Slide 13 - history notes part 5). So, the Fed expanded the money supply to keep rates low.
Why did the stock market crash cause banks to fail? Explain.
To make matters worse, many banks had invested their deposits in the stock market, causing these banks to lose their depositors' savings as stocks plunged. Bank runs soon occurred when bank patrons tried to withdraw their savings from banks all at the same time. Major banks and brokerage firms became insolvent, adding more fuel to the stock market crash.
The Coinage Act of 1857 repealed prior legal tender laws concerning foreign specie and ended the use of foreign coins as legal tender (only U.S. coins were allowed).
True
Toward the end of the 1800's the U.S. developed a new Foreign Policy orientation as it expanded its military power to support American companies that were operating overseas.
True
What were the two general goals of the DID-MCA (1980)? Depository Institutions Deregulation and Monetary Control Act (DID-MCA) of 1980 Two general goals:
a) Begin deregulation for banks, thrifts, and credit unions b) Increase Fed's power to conduct monetary policy
The Coinage Act of 1792 did which of the following (more than one may be true)?
a) Created the United States dollar as the country's standard unit of money b) Set the official gold price at $19.39 per ounce e) Established the U.S. Mint f) Pegged the value of the newly created U.S. dollar to the Spanish silver dollar. g) Authorized the issue of coins made from copper, silver, and gold h) Allowed individual citizens to take gold and silver to the mint and have those metals melted down and struck into coins i) The value of a dollar was defined in terms of both a certain amount of gold and a certain amount of silver. j) Established a bimetallic system of money
The War of 1812 is associated with which of the following (more than one may be true)?
a) Government borrows to help finance the war and is $100 million in debt by 1814. b) The Government increased import taxes and instituted property taxes and excise taxes on goods. e) Excessive paper money creation as banks create money to lend to government
Which of the following is true of the Treasury Accord of 1951?
a) In the years following WW II president Harry Truman argued for a monetary policy that focused on keeping interest rates low. c) The Treasury-Fed Accord eliminated the obligation of the Fed to monetize the debt of the Treasury at a fixed interest rate. d) The Treasury-Fed Accord increased the independence of the Fed.
Which of the following is true of the Second Bank of the United States (1816-1836) (more than one may be true)?
a) It acted as fiscal agent for the Federal Government. b) It issued paper notes backed by gold, silver, and bank notes from State banks. c) It was created to help the Government raise funds to pay off War of 1812 debt. d) Excessive money creation and lending for speculation in land created our nation's first "boom, bubble, crash, financial panic" cycle. e) President Andrew Jackson feared control of a powerful central bank by wealthy financiers and vetoed a bill to renew the bank's charter.
In the first few years of the Great Depression, the Hoover Administration did which of the following?
a) Organized a government bailout of the financial industry b) Organized a bailout of the transportation (railroad) industry
The decade of the 1970's was known for which of the following (more than one may be true)?
a) Overall, the 1970's was a period of stagflation. d) Rising gold prices e) Increasing inflation
The coinage Act of 1834 did which of the following (more than one may be true)?
a) Raised the price of gold relative to silver. c) Supported the argument for a money that was backed by only gold rather than a money backed by both gold and silver. e) Weakened the Second Bank of the United States by lowering the value of their paper notes that were backed by silver.
Which of the following is true (more than one may be true)?
a) Rural states in the Midwest and South supported the Thomas Jefferson view b) Northeastern seaboard states with large cities supported the Alexander Hamilton view c) Farmers generally supported the Thomas Jefferson view f) Bankers and Industrialist supported the Alexander Hamilton view
In 1971 the Bretton Woods agreement collapsed. Which of the following assets did global investors buy? Which did they sell? a) the US $ - b) gold - c) the Japanese Yen d) the Swiss Franc - e) the German Deutschmark
a)sell b)buy c)buy d)buy e)buy
. Franklin D. Roosevelt (FDR) was elected President and took office in 1933. Which of the following is a true statement about this President (more than one may be true)?
b) In terms of economic theory, you would consider him a Keynesian. d) His focus was on fiscal policy stimulus of the economy. h) He essentially outlawed individual or corporate ownership of gold j) He forced everyone to sell their gold to the Federal Reserve at $20.67 per ounce. k) He outlawed the export of gold or gold money out of the US. l) He raised the official gold price from $20.67 per ounce to $35.00 per ounce. m) He was responsible for a 40.94% devaluation of the paper dollar in terms of gold.
The decade of the 1980's was known for which of the following?
b) Slowing inflation d) Decreasing nominal interest rates e) The Savings & Loan Crisis that was (partially) caused by deregulation f) A deep recession in the first few years and then economic growth
Which of the following were characteristics of the "Free Banking Era" during 1837-1863 (more than one may be true)?
b) State banking authorities regulated reserve requirements and the money supply. e) Only state-chartered banks existed. h) Wildcat banks issued paper money that had no gold or silver backing and, as a result, these bank notes rapidly lost their value.
Under the Bretton Woods agreement which of the following statements was true?
b) The U.S. dollar was convertible into gold at the U.S. Treasury by foreign central banks. e) All currencies of countries belonging to the Bretton Woods agreement were pegged to the U.S. dollar at fixed exchange rates outlined in the Bretton Woods agreement.
Which of the following is true about the First Bank of the United States (1791-1811) (more than one may be true)?
b) The bank issued paper money backed by gold and silver. d) The bank was forbidden to buy government bonds (to lend money to the government). f) There was strong opposition from other private banks outside of northeastern cities
When the Federal Reserve was first created, it was supposed to do which of the following?
c) Issue Federal Reserve Notes in order to provide a flexible money supply f) Act as a lender of last resort to member banks g) Maintain a check clearing system to speed the clearing of payments between banks h) Regulate all national banks i) Hold National Bank reserves j) Regulate bank reserve requirements
Which of the following is true about the National Currency Act (1863) / National Banking Act (1864). (More than one may be true)?
c) It established Office of the Comptroller of the Currency e) Created a Dual Banking System where banks could be either State Banks or National Banks f) Allowed national bank notes (paper money) issued by National Banks h) All paper money issued by National Banks had to be backed by Treasury Bonds i) Taxed state bank notes 10% to drive them out of existence j) It created Federal Government monopoly control of the money supply through control of the National Bank system
Which of the following are characteristics of a chained consumer price index (Chained CPIU)? (More than one might be right)
c) Its use results in lower reported rates of inflation. d) It is based on the idea that in a period of inflation consumers will shift their purchasing to lower priced goods so their cost of living rises more slowly.
Between 1913 and 1920 what happened to consumer prices once the Fed's was in control of the money supply?
c) Prices doubled, resulting in consumers losing ½ of their money's buying power
After the stock market crash of 1929 how much of the value of the stock market had been lost by 1932?
· By the time the market bottomed out in 1932, the Dow had lost almost 90% of its value. · When the dust settled, more than $30 billion (roughly $350 billion in today's dollars) in wealth had been obliterated. The Dow sank a total 48% from September to November 1929 and kicked off the 10-year-long Great Depression. It lost another 86% from April 1930 to July 1932 in the crash's aftermath.
What were the 3 large categories of fiscal expenditure increases that were caused by the financial crisis?
· Discretionary spending · Mandatory spending · Net interest payments
Describe what Executive Order 6102 (April 5, 1933) and Executive Order 6260 (August 23, 1933) did. What did FDR do on January 31, 1934 and what was the impact on the paper dollar wealth of American citizens?
· Executive Order 6102 (April 5, 1933) by US President Franklin D. Roosevelt "forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States. The stated reason for the order was that hard times had caused "hoarding" of gold, stalled economic growth, and worsened the depression. Simultaneous with the FDR gold recall came a devaluation of the dollar, which meant that the price of gold was raised from $20.67 an ounce to $35.00. There were $10,000 fines for those not abiding by these orders. · Executive Order 6260 (issued by FDR on August 28, 1933) recalled all gold coins then in circulation, except "rare and unusual" coins, which were subsequently interpreted to mean as any U.S. gold coin minted prior to 1933. Outlawed the export of gold or gold money out of the US. There were $10,000 fines for those not abiding by these orders. · Gold Reserve Act of 1934 (January 30, 1934) - a) Required Federal Reserve to turn over all gold to U.S. Treasury and changed the official gold price from $20.67 per ounce to $35.00 per ounce. Led to a 40.94% devaluation of the dollar in terms of gold.
How did Paul Volcker's implementation of monetary policy in the 1980 to 1988 period differ from Alan Greenspan's implementation after 2000?
· Fed (under Volcker) continues to slow growth of money supply · Greenspan - In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth Remember, when Paul Volcker took over as Chairman of the Board of Governors of the Federal Reserve in October of 1979, he shifted the Fed Policy Orientation to controlling the growth of the money supply in order to stop the increasing inflation problem.
"Greenback" paper money issued to finance the early years of the Civil War in 1861 was referred to as "Demand Notes" because, originally, they could be redeemed for gold. What did the government do in December of 1861 and in the following year?
· In December 1861, the government had to suspend redemption, and the Demand Notes declined. Chase authorized paying interest on Demand Notes, which sustained their value. · The later United States Notes could not be used to pay customs duties or interest on the public debt, which could be paid only by gold and Demand Notes. Importers, therefore, continued to use Demand Notes in place of gold. In March 1862, Demand Notes were made legal tender. As Demand Notes were used to pay duties, they were taken out of circulation. By mid-1863, about 95% of them had been gone.
Explain how the practice of buying stock on margin contributed to the market crash.
· Investors soon purchased stocks on margin, which is the borrowing of stock for the purpose of gaining financial leverage. For every dollar invested, a margin user would borrow nine dollars worth of stock. The use of leverage meant that if a stock went up 1%, the investor would make 10%. Unfortunately, leverage also works the other way around and amplifies even minor losses. If a stock drops too much, a margin holder could lose all of their investment and possibly owe money to their broker as well. · On Thursday, October 24th 1929, a spate of panic selling occurred as investors began to realize that the stock boom was actually an over-inflated speculative bubble. Margin investors were being decimated as large numbers of stock investors tried to liquidate their shares to no avail. Millionaire margin investors went bankrupt almost instantly when the stock market crashed on October 28th and 29th.
Explain how the Specie Payment Resumption Act of 1875 solved the inflation problem of the "Greenback" United States Notes that were issued by National Banks during the Civil War.
· Late in 1861, seeking to raise revenue for the American Civil War effort without exhausting its reserves of gold and silver, the United States federal government suspended specie payments, or the payments made in gold and silver in redemption of currency notes. Early in 1862, the United States issued legal-tender notes, called greenbacks. By war's end, a total of $431 million in greenbacks had been issued, and authorization had been given for another $50 million in small denominations, known as fractional currency or "shin plasters." The issuance of greenbacks caused inflation during the period. · The Specie Payment Resumption Act of 1875 reversed inflationary government policies promoted directly after the American Civil War. · The decision further contracted the nation's money supply (The decrease in the money supply will lead to a decrease in consumer spending.)
Alexander Hamilton argued in favor of which of the following (more than one may be true)?
· Loose interpretation of the Constitution · Strong Federal government · Weak State governments · A Central Bank and nationwide system of nationally chartered banks · Federal government control of banking and the granting of bank charters · Northeast states with larger cities backed this view · The Federalist Party, backed by bankers and businessmen in big cities / financial centers (like NY, Boston, and Philadelphia) supported this view
How did rising interest rates contribute to declining Federal Reserve members during the 1970's?
· National banks were required to keep their money with the Fed. State banks could choose to join the Fed or not. Many banks converted to drop their national classification so they would not have to keep the money with the Fed and they could take advantage of rising interest rates. · Keeping non-earning deposits at the Fed represented an opportunity cost associated with the interest not earned on those deposits. As inflation and interest rates rose, the yield on T-Bills rose, and the opportunity cost of keeping deposits at the Federal Reserve Banks also rose for the commercial banks that were Fed members. · Many State chartered Fed member banks gave up their Fed membership so they keep legal reserves in interest earning T-Bills
A second type of "Greenback" paper money was referred to as "United States Notes" and were issued from 1862 to 1865. Were these notes backed by gold? What happened to their value by the end of the war?
· No, United States Notes - Greenbacks were not backed by gold. By the end of the war, the greenbacks were trading for only roughly half of their nominal value in gold. (Due to overproduction, no gold redemption value, and inflation.)
96. What is the "so-called taper"?
· Tapering may also involve the slowing of asset purchases, which, theoretically, leads to the reversal of quantitative easing (QE) policies implemented by a central bank. Tapering is instituted after QE policies have accomplished the desired effect of stimulating and stabilizing the economy. · Tapering can only be instituted after some kind of economic stimulus program has already been operated .· Tapering refers to policies that modify traditional central bank activities. Tapering efforts are primarily aimed at interest rates and at controlling investor perceptions of the future direction of interest rates. Tapering efforts may include changing the discount rate or reserve requirements.
What was the Smithsonian Agreement? What did it attempt to do? How long did it last?
· The Smithsonian Agreement, announced in December 1971, created a new dollar standard, whereby the currencies of a number of industrialized states were pegged to the US dollar. · The Smithsonian Agreement only lasted 15 months, as speculators drove the dollar lower and countries abandoned the peg in favor of floating exchange rates.
What were the Yellowback notes backed by? Explain how the Yellowback Monetary System emerged.
· The Yellowback notes were backed by gold. · The Yellowback monetary system emerged in California during the Civil War. California never left the gold standard and its dollars remained gold-backed.
Explain how the structure of the National Currency Act / National Banking Act of 1863/4 helped to finance the Civil War for the North? Use the word "monetization" in your explanation.
· The act created an active market for Treasury securities to help finance the Civil War (for the Union's side). This meant the National Banks raised the funds to lend to the Treasury to finance the war and, in return, were given the power to issue currency and expand lending · From 1863 to 1935, National Bank Notes were issued by banks throughout the country and in US territories. Banks with a federal charter would deposit bonds in the US Treasury. The banks then could issue banknotes worth up to 90 percent of the value of the bonds. The federal government would back the value of the notes—the issuance of which created a demand for the government bonds needed to back them. The program was a form of monetization of the Federal debt.
What was the official gold price after the Specie Payment Resumption Act of 1875? What was the relationship between the free market price of gold and the official price of gold after it was fully implemented?
· The official gold price was $20.67 per ounce by 1879. · Specie Payment Resumption Act (1875) - The law was implemented over a 4-year period and greenbacks were retired and replaced with gold backed Treasury Notes. It reestablished the official relationship between gold and the U.S. dollar with the price of gold returning to the official price of $20.67 per ounce previously established by the Coinage Act of 1834. · The price of gold dropped then flattened out (remained at price through 1932).
After the National Banking Act of 1864 some National Banks in California issued a paper currency called Yellowbacks while National Banks in the rest of the Northern states issued Greenbacks backed by Treasury Bonds. Why were they called Yellowbacks?
· These noted were called yellowbacks because It issued Gold Certificates (1863) printed in yellow. · The Yellowback monetary systems appeared in California during the entire Civil War. California never missed out the gold standard and its dollars remained back by Gold.
