The monetary history of the United States, essentiaslly the history of the U.S. dollare is particularly pertinent as monetary policy and the soundness of the dollar is becoming an important political issue. When the United States Continental Congress declared independence from Britain (1776), it meant departing from reliance on the British pound and other British financial institutions. The dollars issued by the Continental Congress steadily declined in value. The Congress printed paper currency denominated in Continental dollars, but had no real taxing authority to support the currency. The phrase "not worth a Continental" expressed that decline. The need for a common currency became obvious, especially after the success of the Revolution (1783). The Articles of Confederation did not grant money powers to the Congress and money became a serious issue. There were a variety of coins (including gold and silver) circulating in the early United States, but it was an inadequate money base for a growing economy. States issued "bills of credit" which served as legal tender, but it was not clear what these paper bills were worth even within a state and trying to figure out what bills from other states were worth was a virtually unsolveable problem. Government at the time given the Revolutionary experience was seen as a threat. Thus for many, limiting the power and size of Governent was seen as the best way of preventing abuse of the public trust. Experience which state bills mase it clear that money had to be precisely defined. Without being so defined it could not play its central role as a meaningful unit of account. Without a precise definition, states could debase money for political reasons or to reduce debts. Thomas Jefferson wrote at the time, "If we determine that a dollar shal be our unit, we must say with precision what a dollar is" (1784). This was one of many questions addressed by the Constitutioinal Congress (1787). The framers in the Constitution limited legal tender coinage to gold and silver. Congress was authorized to coin money and "regulate" its value. Thast meant the vaue (number of dollars) of the coins issued. Congress was also given the authority to borrow money, but that was a fiscal matter unrelated to monetary (creating money) policy.
Huge quantities of bullion (gold and silver) flowed from Spain's American colonies into Spain and on to the rest of Europe. Partly as a result, during the English colonia period, the Spanish Dollar coin was virtually an unofficial national currency in the American colonies. The actual term dollar originated from the Bohemian silver Thaler (15th century). Many countries minted Thalers and the spelling varied from country to country. , Thalers and Thaler-sized silver coin were minted all over Europe with equivalent coins, including the crown, daalder (from which the English word dollar is derived), and krona. The Spanish began minting the 8 reales piece (1497). So much silver flowed into Spaon that the Spanish 8 real piece was especially important, minted in much larger quantities than English coins. The term Thaler/Daalder was so prevalent in England and the English colonies that the Spanish coins were commonly valled dollars. The Massachusetts Bay Colony was the first American colony to issue paper currency (1690). Other colonies followed the prcedent. Paper currency was needed because the supply of coins in the Colonies was inadequate to facilitate commercial transactionss. Public acceptance varied. The colonies issuing the paper currency were not always able to redeem it for gold or silver as promised. This varied from colony to colony and ovedr time. One of the worstr cases was Massachusetts which printed a huge quantity of notes (1744-48). They quickly depreciated 50 oercent. [Tarnoff] As a result, the value of the paper currency depreciated. The first conunterfeiter od any importance was Owen Sullivan, a Irishman who organized a counterfei\ting ring in a disputed strip between New York and Connecticut. He was hanged (1756).
As the Colonies moved toward independence, the Continental Congress authorized the limited issuance of paper currency (1775). These new notes, called Continentals, were denominated in dollars and backed by the "anticipation" of future tax revenues, with no backing in silver or gold. They could be redeemed only upon the independence of the colonies. When the United States Continental Congress declared independence from Britain (1776), it meant departing entirely from reliance on the British pound and other British financial institutions.
Continentals were thus an expression of America's new sovereignty. They pointedly did not feature images of the the crown or King. Some were printed from plates engraved by none other than Paul Revere to read "The United Colonies" and an image of colonial minutemen. The first Continentals with the the words "The United States" were issued (1977). They bore the sinatures of notable revolutionary figures to lernd credibility.
The Continental Congress substantially increased the issue of paper currency. This was the first attempt at national tender or currency. It was issued as a way of funding the War. The dollars issued by the Continental Congress steadily declined in value. The Congress not only printed paper currency in great quantities, but had no real taxing authority to support the currency issued. The phrase "not worth a Continental" expressed the decline in the value of the currency. General Washington wrote, "A wagonload of currency will hardly purchase a wagonload of provisions." The public experience with Continentals gave rise to a lingering distrust of paper currency.
The need for a common currency became obvious, especially after the success of the Revolution (1783). The Articles of Confederation did not grant money powers to the Congress and money became a serious issue. There were a variety of coins (including gold and silver) circulating in the early United States, but it was an inadequate money base for a growing economy. States issued "bills of credit" which served as legal tender, but it was not clear what these paper bills were worth even within a state and trying to figure out what bills from other states were worth was a virtually unsolveable problem.
Government at the time given the Revolutionary experience was seen as a threat. Thus for many, limiting the power and size of Governent was seen as the best way of preventing abuse of the public trust. Experience which state bills mase it clear that money had to be precisely defined. Without being so defined it could not play its central role as a meaningful unit of account. Without a precise definition, states could debase money for political reasons or to reduce debts. Thomas Jefferson wrote at the time, "If we determine that a dollar shal be our unit, we must say with precision what a dollar is" (1784). This was one of many questions addressed by the Constitutional Congress (1787). The framers in the Constitution limited legal tender coinage to gold and silver. Congress was authorized to coin money and "regulate" its value. That meant the value (number of dollars) of the coins issued. Coinage was less complicated than issuing paper money because the value of the coin was based on its metal cointent not on the credit worthiness of the government or bank issuing paper money. The U.S. Mint began producing coins (1792). Congress was also given the authority by the Constitution to borrow money, but that was a fiscal matter unrelated to monetary (creating money) policy.
President Washington chose Alexander Hamilton as the fiest Secretary of the Treasurer (1789). It was surely his single most important appointment. The credit of the Federal Government because of the policies of the Continental Congress was sorely in question. Hamilton established a Federal monetary policy that firmly established the goof dfaith and credit of the new govrnment, The Hamilton Plan was the payment of federal war bonds at face value, the assumption of state debts, and setting up a mechanism for collecting taxes. His program not only etanlished Federal credit, but tied the interests of war veterans and the emerging merchant class to that of the Federal Government.
A national mint was an important part of establishing arand new contry. A country needed a currency and in 1789, Americans were still using an odd collection of foreign coins. And in many rural areas in prt because of a shortage of coinage, livestock and produce often had to serve as a form of currency. Congress as auauthorized under the Constitution, passed the Coinage Act of 1792. The Act created the United States Mint which was founded in the same year. It was originally for some reason placed under the authority of the state Department rather than the treasury Department. The building in Phildelphia was the first building built by the new Federal Goverment. The Coinage Act funded construction. The Mint was made a separate agency (1799). It was not transferred to the Treaury Department until nearly a century later (1873). The silver dollar becamne the main unit of cirrency for America. The Act also established a decimnal curreny system. The first dollar coins were similar in size and composition to the widely circulated Spanish dollar. The Coinage Act specified a "dollar" to be based in the Mexican (Spanish) peso at 1 dollar per peso and between 371 and 416 grains (27.0 g) of silver (depending on purity) and an 'eagle" to be between 247 and 270 grains (17 g) of gold (depending on purity). Hamilton based the values on the basis of Spanish coins circulating in the United States at the time to maintain price stability. Secretary Hamilton's suggesteda fixed 15:1 ratio of silver to gold. Early American gold coins, however, were not given any denomination. They traded for a market value relative to the Congressional standard of the silver dollar. All of this was very important given the prevailing economic chaos. The new coins helped create the beginning of an American currency and along with Secretary Hamilton's credit policies, some level of financial organization fir the new country. Banking was a different matter.
State Goverments in the early Federal period granted thousands of bank charters. Little attention was given to the financial standard of the banks chartered. Often the charters were obtained thriough bribes to legislators. As a result there were a huge number of entities issduing bills for circulsation and no regulation of those institutions. Some of the bills had real value or at leadt dome value. Others had no value wahatsioever.
Congress chartered the Bank of the United States (1791). It operated until 1811. Congress then chatered the Second Bank of the United States (1816). Both Banks performed the functioins of a central bank. They were privately owned as was the approach in Englanbd and the rest of Europe. They had the authority to issue paper currency and serve as the financial agent for the Deferal Government. These two banks proved unpopular, especially with agrarian interests and America at the time was an agriculktural country. Western agrarian interests in particular wanted easy credit with the Banks did not provide. With the election of Andrew Jackson (1828) a conflict betweem Jack and Bank president Nicholas Biddle was set up. President Jackson vetoed the recharter of the Second Bank (1832).
The United States slightly changed the gold/silver relationship (1834). The gold standard was changed to 23.2 grains (1.50 g), followed by a minor further adjustment to 23.22 grains (1.505 g) (1837). This meant a 16:1 ratio. Weare not sure just why these changes were made at the time.
The demise of the Second Bank of the United States ended the period of realtive monetary stability.
What followed was three decadeds of monetary instability--the Free Banking Era. Essentially the United States no longer had a monetary system. The country's banking system became an unregulated hodgepodge of state-chartered banks. The chartering system in mony states was highly influenced by political influence. Many unsound banks were chartered. There was no federal regulations. State lawa and regulations varied widely. Sone states did not serious regulate banks. State Bank notes of various sizes, shapes, and designs appeard to fill the void created by the destruction of the Second Bank of the United States. Denominations varied from ˝ cent to $20,000. Some of the the state bank currency was backed up by solvent, well capitalized institutioins. It could be redeemed at par value. Other state bank notes were worthless paper issued by poorly capitalized if not fradulent banks. Speculators and counterfeiters were active. As many as 8,000 different state banks were circulating "wildcat" or "broken" bank notes at the time the Civil War broke out (1861). The term "wildcat" began to be used, referring to banks in remote , backwoods regions that had more wildcats than customers. It was very difficult to know the real value of the paper currency in circultion. Some people found that they could not redeem their notes. Others found their currency worthless when banks failed which was a not uncommon occurence in the poorly regulated environment of the era.
It took another war for Congress to reserect a national currency. The Treasury began issuing paper money without the backing of bullion breserves (1862). Congress authorized the issuance of paper currency to help fund the Civil War (1863). The Condeferacy also issued paper currency. Condeferate currency rapidly declined in value when Confederate officials ran the oprinting presses without any relationship to the bullion backing. Economic mimanagement and battlefield defeats futher undermined the Confederate dollar. A few people attempted to counterfeit Confederate currency. One of the most coloful was Sammurl Curtis Upham. Bored with New England, he joined the California gold rush, became a pickle vender, and sold newspapers before returning home and setting up a stationary shop in Philadelphia. Than he noticed a reproduction of a Condererate bill in the newspaper and printed some up to sell as a lark in his stationary shop. He had a strip at the bottom identufying them as a famsimile, but it could be cut off and some people did so. He claims to have printed $15 million in Confederate currenvy--3 percent of the Confederate money supply. [Tarnoff] Winthrop E. Hilton decided he could make money while at the same time undrmining the Confederacy.
. The Greenback remained strong and was a major part of the Federal Governents ability to finance the Civil War. Counterfeiters found it even more lucrative to create greenacks and printed substantial quantities. The Federal Government contiued to issue money after the War.
As a result of the green ink used, it became called the Greenback. The early bills proced very easy to counterfeit. Historians estimate that as much as a third of the currency in circulation during and immeditelly followsing the War was counterfeit. This prompted the creation of the Secret Service. The Bureau of Engraving and Printing followed (1874). The Federal Government as a result of greatly improved financial strength restablished the link between paper money and gold and silver coins.
The Greenback or National Greenback Party was founded in 1876 as American was emerging from the depression resulting from the Panic of 1873. Farmers focused on the currency as a cause of the Pacnic. Thus new fiscal policies were seen by some as the solution to the economic crisis. The Greenback Party advocated an expansion of the money supply by issuing paper money. Esssentially this was a policy of inflation as the money supply at the time was primarily a function of the gold supply. "Greenbacks" referred to the paper currency issued by the Federal Government in 1862 to help finance the Civil War. (The bills like modern American currency had green backs.) The Party maintained that a flexible supply of paper money would benefit working people. The also charged that limiting the issuance of paper money to that which could be backed by specie (gold or silver bullion) served the interests of the wealthy. This was a position that had been argued by Edward Kellogg well before the Civil WAr (1841). Alexander Campbell help popularize Kellogg's views on paper money during the 1860s. It was, however, not until the Panic of 1873 that Kellogg's and Cambell's ideas received substantial popular support. It was not understood at the time the extent that working people can suffer from monetary infation or how the savings of the middleclass can be undermined. Or how inflation can undermine job creation.
A bitter controversy developed on the issues of "free silver" and "sound money" during the 1896 presidential election campaign. Democrats and Republicans made impassioned claims as to the impact monetary policy could have on the national economy. Bryan and the Democrats insisted that free silver coinage was needed. He famously cgarged that they 'shall not cruicify mankind om a cross of gold'. The Republicns maintained that adherence to the gold standard was essential to national prosperity. Many sawe it as a matter of national honor. Mckinnley was not as obsessed as Bryan or the Republican platform on the currency isssue. He did not want to be labelled a "monometallist" or "bimetallist". As a result, he was charged with waffling. The issue became almost a religious crusade for Bryan who was not particularly concerned or understand with the actrtual economics. As a Nevreaska Congressman, Bryan was quoted as saying "the people of Nebraska are for free silver, so I am for free silver. I will look up the arguments later." While both candidates had previously been more concerned withb tariff than monetary policy, he turned his 1896 campaign into crusade for the free coinage of silver.
Congress passed the Gold Standard Act (1900). The Act abandoned the bimetallic standard and defined the dollar as 23.22 grains (1.505 g) of gold, equivalent to setting the price of 1 troy ounce of gold at $20.67. Silver coins continued to be issued for circulation,
Congressman Carter Glass and Senator Robert L. Owen introduced a bill to create tge The Federal Reserve System.
Modifications from the Wilson Administrated were incorporated. The bill provided for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress passed the bill amd President Wilson signed it into law (December 23, 1913). The Act created "... Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." The Act created a Reserve Bank Organization Committee that was authorized to set up 8-12 cities to be Federal Reserve cities. The country divided the nation into districts. Each Federal Reserve district was assigned one Federal Reserve City.
A steady stream of countries withdrew from the Gold standard as a result of Depression following the Wall Stree Crash (October 1929). President Hoover clung to the Gold Standard. When Britain left the gold standard, it was no longer possible for America to maintain it. President Franklin Roosevelt upon taking office in the Depression crisis took two initial steps (March 1933). First he closed the Banks so regulators could determine their financial strength. He also moved to take the United States off the gold standard. The gold based dollar was pricing U.S. exports out of world markets. The Government confiscated privately held gold coins. There were exceptions. Dentists, jewelers, and coin collectors were exempt from the President's Executive Order and were as a resulty allowed to own gold. The actual langtage of the Executive Order read, “gold coins having a recognized special value to collectors of rare and unusual coins.” Congress the following year passed the Gold Reserve Act of 1934 which provided a legal basis for the President's confiscation of gold. This act actually criminalised gold ownership. The gold standard was changed to 13.71 grains (0.888 g). This essentially set the price of 1 troy ounce of gold at $35. Preident Roosevelt's New Deal was not very effectiove in ending the Depression. Other countries managed to recover nuch faster than the United States. The Depression in America continued untill war orders from Europe began to revive the economy. The two ininital actions, however, closing the banks to establish which banks were viable institutions and taking America off the gold standard helped to ensure that the Depression would not get worse. The theoretical $35 gold price standard would continue until 1968 by which time this significantly under valued gold. A variety of pegs to gold were put in place (1968-75). Finally the United States let the dollar freely float on world currency markets.
Democratic presidenbtial candidate William Jennings Bryan crusaded for the free coijnage of silver (1896). It would be a Demoratic President, Lyndon Johnson, thst would end silver coinage. Silver coins continued to be minted and circulate in the Unites States until 1964. By that time, the value of silver in the coins exceeded their nominal value. All silver was removed from dimes and quarters, and the half dollar was reduced to 40% silver. Silver half dollars continued to be issued for a few more years. The last half dollars with silver content were issued for circulation (1969).
President Nixon ended the ability of U.S. trading prtners to exchange dollars for gold at a fixed rate (August 15, 1971). As aesult the dollar declined in world warkets. There were notable declines in purchasing power of the dollar anf increased in gold prices. This meant that the Arabs were receivin less valuable dollars for their oil. Accustomed to a more stable dollar, they were not ar first sure how to respond. Te Yom Kippur War would orove to be a catylst for increasing oil prices and also a convient excuse for acting to compensate themselves for a e=weakening dollar. What transpired would be increases out of all portion to the decline in the dollar.
The Arabs began planning for a massive assault on Isral. The Soviets had provided massive military aid to Egypt and Syria and other Arab states, including weapon systems for which the Iraelis were unprepred. Calculating that the United sttes might intervne, Egyptian President Anwar Sadat met secrelly with Saudi King Faisal (August 23, 1973). They negotiated the use of the 'oil weapon'. The chain of events leading to the Petro Dollar began when Egypt and Syria along wih other Arab states invaded Israel (October 6, 1973). It was a surprise attack and the Arabs chose Israel's holiest day--Yom Kippur. The Arabs calculted that Israel would be least prepared. The ensuing conflict has become known as the Yom Kippur War. The Israeli Air Force was heavily damaged by Russian-supplied anti-airfcraft missles. Egyptian forces poured across the Suez Canal and Syrian tanks threatened the Golan Heights. Israel want on full nuclear alert (October 8). They were prepared to launch nuclear weapons if the country's existence was threatened. Henry Kissinger had been Secretary of state for only 2 weeks. The American response ordered by President Nixon was a massive resupply effort therough a strategic airlift. This allowed the Israelis to beat back the Arab offensive. The war was over with a truce (October 25). And the Israelis even gained territory. The Arab response was to punish the United states for aiding Israel. The Saudis anf Gulf oilstates raised oil prices a whoping 70 percent from $3.00 a barrel to $5.11. More increases followed. By the end of the year the price had exceeded $17.00. This was just part of the oilweapoon. The Saudis also decreased production, but also embargoed unfriendly nations. Arab oil producrs in what became known as the Oil Shock cut production 25 percent (November 5). A threatened additional 5 percent cut was implemnted (December 9). Gas lines formed in America and Europe. A recession began in America (November 1973). This was the most severe recession in america since the Great Depression of the 1930s. It did not end until for more than a year (March 1975). The Stock Market plumeted. The Dow Jones average fell more than a third (October 1973 to Septenber 1974). The Stock Market did not recover until 1982, mking the 1970s an economic lost decade.
Congress repealed the 1934 New Deal law criminalising gold ownership (1974). The new kaw became effective January 1, 1975. Repeal also resulted in the expiration of all regulations relying on criminalization to automatically expire.
As a result, there is no legal limitation on gold oenership.
North Korea is a financial disaster. The country can not profduce enough food to feed its people and their are few profitable enterprises. One of the few such activities is printing high-quality conterfeit American notes. One source suggests that thry have printed $45 million in U.S. currency.
Tarnoff, Ben. Moneymakers (Penguin Press:2011), 369p.
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