Money & Banking. History of Money.
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Most early societies operated on a barter system. Goods and services were exchanged for items of tangible value. Societies eventually evolved to the use of commodity money or fiat money. This was brought upon by the realization by goldsmiths (the original bankers) that money could be created so long as their own precious metal deposits remained relatively stable.
This system of money creation was essentially flawed in that it could be abused out of greed or manipulated for profit. It would become necessary for governments to oversee the money supply and set rules and regulations for banks to abide by. These rules have been altered dramatically, and the greed and corruption are still present. The power to control it has simply shifted.
The Knights Templar were able to provide security for much of the gold in and around Europe after the Crusades. This allowed them to enter the world of banking by issuing usury notes in exchange for deposited treasure.
Medium of Exchange – any time you buy something, money is operating as this
Measure of Value – common system that all agree on that places value on goods and services
Store of Value – the ability to save, money must hold it value over time so that savings can be accumulated
The barter system was not completely eliminated however as it still remained common for individuals to trade items of value. Colonial America was no different. Tea, tobacco, gun powder are examples of commonly exchanged items. Tobacco even became so common that it was accepted as commodity money as well.
Cost of Tobacco - 3 shillings per pound
Continental Dollars – Used to financed the Revolutionary War, printed by the Continental Congress, no gold or silver backing, 550 million in circulation by the end of the war, virtually worthless
Coins also existed and were the most desired form of money due to their limited supply and because they were made from actual precious metal.
The Spanish peso was the most common form of currency in America at the time that Washington took office. This was a result of the Spanish mining silver in Mexico and engaging in a triangle of trade with the U.S. that involved molasses, slaves, and silver. This led to abundant supplies of all three in the colonies.
The U.S. then created its own “peso” borrowing also from the Austrian “taler” essentially creating the U.S. dollar.
Portability – Has to be accessible to be effective in a consumer driven economy
Durability – Must hold up over repeated use and constant handling
Divisibility – Be able to “change”
Limited Availability – Too much money in circulation devalues quickly
Several have existed for the U.S. throughout history.
After the disaster that was the Continental Dollar, private banks in the newly formed states began issuing their own currency.
Results were the same. Unregulated issuance and a lack of uniformity eventually doomed this particular monetary standard.
President Andrew Jackson fought hard against the 2nd National Bank. Ultimately, he won as he vetoed the Bank’s charter and deposited tax revenues in state banks or “pet banks.” Jackson thought a Federal bank was a threat to civil liberties.
The Civil War required once again each side to print their own currency to finance their end of the War. The Union funds were known as “greenbacks.”
The Confederacy mirrored this action by creating its own currency
Legal Tender Act (1862)
Gold Certificates – Issued by the Federal Government, backed by gold deposits
Silver Certificates – Also issued by the Federal Government, backed by silver deposits.
Treasury Coin Notes – Issued in 1890, last currency issued until the banking overhaul of 1913.
All forms of currency existed together until 1913
Prior to the creation of the Fed and the modern banking system the country had experimented numerous times with a “Central” bank to govern bank activity nationwide. The 1st and 2nd Banks of the United States were destroyed by accusations of corruption and the public’s distrust of the Federal Government.
A third attempt was made shortly after the Civil War in an attempt to keep greenbacks from becoming devalued. The NBS was created and included numerous national banks that printed and issued currency secured by the Federal Government. The NBS forced out private run banks by heavily taxing any deposits into these banks essentially establishing itself as the “only bank in town.”
Promotes discipline in regards to the circulation of money
Idea is that money will only be printed relative to the amount of gold deposits
Price of gold really can’t be controlled by a single government – Swiss Example
Limits growth in an economy by not being able to increase money supply effectivelyPros & Cons of the Gold Standard