A Brief Monetary History Of The United States: Part VIII

Today we bring you Part VIII of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:

  • Part I – Colonial Money and the Coinage Act of 1792
  • Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
  • Part III – Government Begins to Monopolize Currency
  • Part IV – The Legal Tender Cases and the “Crime of ’73”
  • Part V – The Rise of the Fed
  • Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
  • Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
  • Part VIII – The 1980s to the Great Recession and on to the Future
  • The 1980s to the Great Recession

    Economic conditions became so bad by the late 1970s that calls to return to the gold standard increased. Congress established a Gold Commission in 1980 to examine the possibility of a return to gold. Although President Reagan was publicly sympathetic to the gold standard, he did not restrain the anti-gold members of his administration. As a result, the Gold Commission was packed with supporters of the existing unbacked fiat monetary system. Despite the Commission’s ultimate endorsement of the fiat paper money system, the Commission’s work did provide some impetus towards the eventual adoption of legislation to authorize the minting of Gold Eagle coins by the U.S. Mint—the first gold coins minted by the United States since 1933.

    Former Federal Reserve Chairman Paul Volcker

    Former Federal Reserve Chairman Paul Volcker

    While Chairman Volcker’s moves to combat inflation temporarily calmed fears, monetary growth began again in earnest after this period, and the three decades since have seen a series of booms and busts. Monetary pumping in the mid-1980s resulted in the stock market crash of 1987 and the ensuing recession, which Chairman Greenspan attempted to paper over with yet more inflation. This led to the dot-com bubble of the late 1990s, the popping of which was countered with even more inflation, leading to the overheated housing market and the financial crisis of 2008-2009, an economic crisis that has been prolonged and papered over by more artificially cheap credit.

    Each economic boom has been the result of the Federal Reserve pumping newly created credit into the banking system. Just as in previous economic booms, the expansion of credit by the Federal Reserve leads to malinvestment of resources. Once the malinvestment is discovered, the economy must correct itself. Bad debts must be liquidated, malinvested resources repurposed, etc. Just as in the 1920-21 Depression, allowing the economy to self-correct will remedy the problems caused by the Federal Reserve’s monetary intervention.

    Unfortunately, just as during the Great Depression, the Federal Reserve over the past 30 years has resorted to credit expansion to counter economic recessions. The seeds of the recession are sown as the Fed lowers the federal funds rate and expands credit in the banking system. When the credit expansion ceases and the malinvestments are discovered, the Fed tries to solve the problem it created by expanding further, driving the federal funds rate down even lower than during the last economic boom, and sowing the seeds for yet another economic downturn. This cycle continues, resulting in more of the same economic problems. Each boom seems to take the economy to higher and higher heights, and each bust to deeper and longer-lasting lows.

    The Fed now finds itself with no room to maneuver in terms of its normal monetary policy actions since it has lowered the federal funds rate to zero, causing real rates actually to be negative. It has resorted to unconventional measures such as quantitative easing to purchase trillions of dollars worth of mortgage-backed securities and newly-issued Treasury debt. With all the talk in Washington about systemically important financial institutions (SIFIs) and how to wind them down in the event that they threaten the stability of the financial system, the one SIFI whose importance is completely ignored is the Federal Reserve. No other organization can be and has been as destructive to the economy as the Federal Reserve System.


    Monetary policy is the most important, yet also the most ignored, issue facing this country. Congress has abdicated its responsibility for monetary policy to the Federal Reserve, with disastrous results. Now that the recent financial crisis has exposed the malfeasance of the Federal Reserve’s monetary policy, more and more Americans are beginning to understand the destructive nature of the Fed’s monopoly on money. As prices continue to rise and the value of the dollar continues to fall, the necessity of a return to sound money becomes more evident every day.

    However, without a firm understanding of the past, one can neither understand the present nor advance to the future. Far too many people today, both in Washington and outside of it, take our present monetary system as a given. To anyone under the age of 50, Federal Reserve Notes have been the only paper money they have ever known, and coins have always been made of copper, nickel, and other base metals. The idea that our monetary system could be and in fact has been different sounds utterly implausible to most, and so, calls for change too often fall on deaf ears.

    Yet it is clear that the current monetary regime has been a complete and utter failure. In fact, the course of American economic history is riddled with economic crises caused by some sort of government intervention into money and banking. Almost from the beginning of the republic the federal government sought to exert control over monetary matters. The history of the 19th and 20th centuries demonstrates this slow, steady, methodical march towards government control over money.

    Just in the last 100 years, since the Federal Reserve’s creation in 1913, the dollar has lost 96% of its value according to the government’s own statistics, and nearly 99% of its value when compared to gold. The U.S. has seen a cycle of booms and busts that seem to be getting larger and more severe with each passing. This latest business cycle has been one of the worst financial crises the nation has ever faced, one which shows no signs of abating. And because of the Federal Reserve’s insistence on creating ever more money and credit, it is only sowing the seeds for another, even worse financial crisis. Will that crisis be the depression to end all depressions, the final bust that utterly destroys the economy? One can only hope not. But one thing is certain: the monetary and banking system of this country needs a major overhaul.

    There are many within the financial and political establishment who see nothing wrong with the current monetary regime, and who in fact want to give the Federal Reserve even more power. There are others who seek a more tightly-controlled and regulated international monetary framework or even a single world currency. There are even those whose sympathies towards gold cause them to advocate for a return to gold-backed currency, albeit through a system closer to that of the 1920s gold-exchange standard or Bretton Woods than a true gold standard.

    But at least the monetary issue is gaining some exposure. The Republican Party recently embraced a gold commission in its party platform, Forbes magazine has called for serious consideration of a gold standard, and even former Federal Reserve Board governors are beginning to question the wisdom of the Federal Reserve’s monopoly on currency creation. Most importantly, the young people of today understand what the Fed is doing. Quantitative easing and the destruction of the dollar inherent in the Fed’s response to the economic crisis is destroying savers and imperiling the economic future of millions of young Americans. More than any other generation before, this current generation understands that we need to end the Fed’s monopoly on money and return to a sound monetary system.

    In the end, however, the only successful monetary system is one that allows the market for money to function free of government interference. Despite the earliest attempts at centralization, such a system existed and, government meddling to the contrary notwithstanding, thrived during the first three-quarters of a century of the United States’ existence. Our present situation affords both hindsight and the means to avoid the mistakes of the past by relying on advances in technology that have made it far easier to do business in foreign currencies, precious metals, and other non-dollar forms of payment. It is past time that we draw the correct lessons from our monetary history and roll back the tide of government intervention.

    Additional Works Consulted:


  • “An Act to amend an Act entitled ‘An Act to provide Internal Revenue to support the Government, to pay Interest on the Public Debt, and for other Purposes,’ approved June thirtieth, eighteen hundred and sixty-four.” Section 6. March 3, 1865. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=013/llsl013.db&recNum=498
  • “An Act to incorporate the subscribers to the Bank of the United States.” April 10, 1816. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=003/llsl003.db&recNum=307
  • “An Act to punish and prevent the Counterfeiting of Coin of the United States.” June 8, 1864. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=013/llsl013.db&recNum=149
  • Coinage Act of 1792. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=001/llsl001.db&recNum=369
  • Coinage Act of 1834. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=004/llsl004.db&recNum=746
  • Coinage Act of 1837. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=005/llsl005.db&recNum=173
  • Coinage Act of 1853. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=010/llsl010.db&recNum=181
  • Coinage Act of 1857. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=011/llsl011.db&recNum=184
  • Coinage Act of 1873. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=017/llsl017.db&recNum=465
  • Legal Tender Act of 1862. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=012/llsl012.db&recNum=376
  • National Banking Act of 1863. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=012/llsl012.db&recNum=696
  • National Banking Act of 1864. Accessed from: http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=013/llsl013.db&recNum=128
  • Supreme Court Decisions

  • Hepburn v. Griswold, 75 U.S. 603 (1870).
  • Juilliard v. Greenman, 110 U.S. 421 (1884).
  • Knox v. Lee, Parker v. Davis 79 U.S. 457 (1871).
  • McCulloch v. Maryland, 17 U.S. 316 (1819).
  • Books and Articles

  • Bogart, Ernest Ludlow, and Thompson, Charles Manfred. Readings in the Economic History of the United States. New York: Longmans, Green and Co., 1916.
  • Catterall, Ralph Charles Henry. The Second Bank of the United States. Chicago: University of Chicago Press, 1902.
  • Federal Reserve Bank of New York Circulars. Accessed from: http://fraser.stlouisfed.org/publication/?pid=466
  • Federal Reserve Bank of Philadelphia. “The First Bank of the United States: A Chapter in the History of Central Banking.” June 2009. Accessed from: http://www.philadelphiafed.org/publications/economic-education/first-bank.pdf
  • Goodhart, C.A.E. The New York Money Market and Finance of Trade, 1900-1913. Cambridge, MA: Harvard University Press, 1969.
  • Hepburn, Alonzo Barton. A History of Currency in the United States. New York: The MacMillan Company, 1915.
  • Koning, John Paul. “How the Fed Helped Pay for World War I.” November 12, 2009. Accessed from: http://mises.org/daily/3828
  • McPherson, Edward. The Political History of the United States: From April 15, 1865 to July 15, 1870. Washington, DC: Philp & Solomons, 1871.
  • Murphy, Robert. “The Depression You’ve Never Heard Of: 1920-1921.” November 18, 2009. Accessed from: http://www.fee.org/the_freeman/detail/the-depression-youve-never-heard-of-1920-1921/
  • Rothbard, Murray N. America’s Great Depression. Auburn, AL: Ludwig von Mises Institute, 2000.
  • Rothbard, Murray N. A History of Money and Banking in the United States: The Colonial Era to World War II. Auburn, AL: Ludwig von Mises Institute, 2002.
  • Rothbard, Murray N. The Case Against the Fed. Auburn, AL: Ludwig von Mises Institute, 1994.
  • Rothbard, Murray N. What Has Government Done To Our Money? Auburn, AL: Ludwig von Mises Institute, 2005.
  • Studenski, Paul, and Krooss, Herman Edward. Financial History of the United States. Washington, DC: Beard Books, 2003.
  • United States. Reports from the Court of Claims, Submitted to the House of Representatives during the Second Session of the Thirty-Sixth Congress, 1860-61. Washington, DC: Government Printing Office, 1861.
  • United States. Office of the Comptroller of the Currency. “National-Bank Act as Amended, the Federal Reserve Act and Other Laws Relating to National Banks.” February 1920. Accessed from: http://fraser.stlouisfed.org/publication-series/?id=432
  • Vieira, Edwin. Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Volumes I & II. Chicago: RR Donne
    lly & Sons, 2011.
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