Tag Archive for Monetary History

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.

    A Brief Monetary History Of The United States: Part VII

    Today we bring you Part VII 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
  • V. THE DOLLAR REIGNS SUPREME

    Bretton Woods and Gold

    Mount Washington Hotel, site of the Bretton Woods Conference. Image: Richard Hicks

    Mount Washington Hotel, site of the Bretton Woods Conference. Image: Richard Hicks

    In the aftermath of World War II, the United States cemented its position as the world’s largest and most powerful economy. The new international monetary order created at Bretton Woods, New Hampshire in 1946 was based in part on the gold-exchange standard of the 1920s, only with the dollar as the sole international reserve currency—since it was as good as gold. All countries tied their currencies to the dollar at fixed exchange rates, with the dollar being defined as FDR had left it, at 1/35 ounce of gold (i.e. $35 per ounce of gold). While individuals in the United States were still unable to own gold or to redeem their dollars for gold, foreign governments were able to cash in their dollars to the U.S. government and receive gold in return, a process that became known as the “gold window.” While the United States would pyramid its dollar issue on top of its gold reserves, other countries were supposed to hold dollars, and not gold, as their primary foreign exchange holdings.

    A Brief Monetary History Of The United States: Part VI

    Today we bring you Part VI 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 Great Depression

    Soup Line During the Great Depression

    Soup Line During the Great Depression

    The Federal Reserve’s monetary inflation throughout the mid- to late-1920s resulted, not surprisingly, in the Great Depression. As with any credit-induced economic boom, the newly created credit caused a distortion in the allocation of resources. Instead of economic growth resulting from increased real savings and investment, the boom of the 1920s was caused by an artificial increase of credit in the banking system by the Federal Reserve.

    Whereas savings-induced growth aligns consumers’ present and future preferences, credit-induced growth does not. An artificial increase in credit allows banks to make more loans to businesses, and these increased loans signal to businesses that consumers are saving more in the present in order to consume more in the future. Businesses begin to undertake longer-term, more capital-intensive projects which, once they are finished, they find to be unsustainable because consumers either do not actually want them or cannot afford them because they have not saved enough money to purchase the goods. These resources have been malinvested, or invested badly, into sectors of the economy that do not actually serve the needs and wants of consumers. And it is not just one or two businesses which find themselves in such straits, but a whole slew of businesses, often across many different sectors of the economy.

    The way out of a crisis had traditionally been to allow these malinvested resources to liquidate. Bad debts had to be liquidated so that prices could fall in order for markets to clear. In doing so, resources that were malinvested would be shifted to be used productively in other sectors. This was what was done during the Depression of 1920-21, in which President Harding refused to allow any sort of intervention by the federal government to alleviate the crisis. As we have seen, that crisis, although quite sharp, came to a quick end as the economy rebounded and returned to normal.

    A Brief Monetary History Of The United States: Part V

    Today we bring you Part V 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
  • IV. THE RISE OF THE FED

    The Panic of 1907

    The year 1907 saw a particularly severe financial panic and recession. The underlying cause of the recession, as in previous instances, can be found in the government’s intervention into banking and monetary affairs. The Treasury Department sought to conduct itself as a central bank, even to the extent of making purchases on the open market to supply liquidity to the financial system. Once the Treasury-created inflation bubble burst, banks began to fail and the stock market plunged. Specie redemption was once again suspended, leading to runs on banks.

    In the aftermath of the panic, calls for reform of the monetary and banking systems intensified. The nascent central bank movement acted with renewed vigor in its attempt to create a central bank. The Aldrich-Vreeland Act, passed in 1908, established a National Monetary Commission, which ostensibly sought to examine possible reforms to the American banking system. Like many commissions established by Congress, its conclusions were pre-ordained. It was intended to solicit expert opinions in favor of central banking in order to convince the public of the necessity of creating a central bank. The commission surveyed the banking systems of the United States, Canada, Mexico, and many European countries, eventually recommending the creation and formation of a national reserve association, similar in structure to what eventually became the Federal Reserve System.

    A Brief Monetary History Of The United States: Part IV

    Today we bring you Part IV 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
  • Legal Tender Cases

    Supreme Court Justice William Strong, author of the majority opinion in Knox v. Lee.

    Supreme Court Justice William Strong, author of the majority opinion in Knox v. Lee.

    The government understood the need to return to specie redemption, but was loath to let go of its issue of greenbacks. After all, greenbacks were an interest-free form of debt that circulated as money and could be used to pay off creditors, thus saving the government from having to use its valuable gold and silver. However, from the very inception of the Legal Tender Act, the constitutionality of legal tender paper currency had been called into question. That question was finally resolved after the decisions handed down in a series of Supreme Court cases known as the Legal Tender Cases.

    A Brief Monetary History Of The United States: Part III

    Today we bring you Part III 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
  • III. GOVERNMENT BEGINS TO MONOPOLIZE CURRENCY

    Coinage Act of 1857

    As the 19th century progressed, the federal government sought to enhance its control over the banking industry and the monetary system. In 1857, Congress passed a coinage act which removed the legal tender status that circulating foreign coinage had until then enjoyed. All circulating foreign coins received by the Treasury were to be melted down and recoined. By driving foreign coinage out of circulation, Congress sought to ensure that only U.S. coins circulated, a step towards federal government dominance of the money supply. This was ostensibly to provide a uniform national currency, a stated goal of the federal government since the country’s founding. By “uniform national currency” the federal government did not mean adherence to a dollar defined as a specific weight of metal with coinage circulating by weight and valued in relation to that dollar. Instead, the federal government sought to ensure that only the United States Mint’s coins would circulate in commerce, regardless of what type of coins the market desired.

    A further strike against market choice in currency came in 1864, when Congress passed legislation to prohibit private production of coins. The minting of any coins intended for use as current money was made illegal, even if the coins were of completely original design. This prohibition remains in force today, and was most famously used in recent years to prosecute the creators of the Liberty Dollar.

    A Brief Monetary History Of The United States: Part II

    Today we bring you Part II 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
  • First and Second Banks of the United States

    First Bank of the United States Building

    First Bank of the United States Building

    The First Bank of the United States was established in 1791 as a national central bank. One of the justifications behind the establishment of the Bank was to combat the supposed scarcity of money and to facilitate commerce through the expansion of credit. The national bank proposal ignored the true cause of specie scarcity, which was the legal overvaluation of one form of money over another. Whenever money was given legal tender status and a fixed legal value, Gresham’s Law took hold and gold or silver vanished from circulation. What proponents of central banking really wanted was an enlarged and eased issuance of credit, especially to the federal government, believing that easy credit was the path to economic prosperity.

    A Brief Monetary History Of The United States: Part I

    On this Throwback Thursday, we’ll run the first part of “A Brief Monetary History of the United States” from Ron Paul’s Monetary Policy Anthology. Subsequent sections of that history will run every Thursday for the next several weeks. If you haven’t downloaded the anthology yet, you ought to do so. The anthology is a compilation of Congressman Paul’s tenure as Chairman of the Subcommittee on Domestic Monetary Policy, including his exchanges with Ben Bernanke, the transcripts of his monetary policy hearings, transcripts of the “Tea Talk” lecture series, and additional commentary from prominent economists from the Austrian School such as Bob Murphy, Tom Woods, and Jesus Huerta de Soto.

    The installments in this monetary history series can be found here:

  • 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
  • A BRIEF MONETARY HISTORY OF THE UNITED STATES

    “Those who cannot remember the past are condemned to repeat it.” – George Santayana

    I. INTRODUCTION

    To avoid repeating the mistakes of the past and to provide for a more prosperous future, the lessons of history must be both explored and understood. This is no less true for something used in everyday life: money. The present monetary regime did not appear overnight. Rather, it is the result of centuries of concerted action, much of which has been forgotten by history. The following pages are intended to provide the reader with a brief yet relatively comprehensive introduction to the history of money and monetary policy in the United States from the late-18th century to the present. While not an all-inclusive look at American monetary history, this section covers the main historical events that have led to the current U.S. monetary system. If America seeks to achieve a sound and stable economy, it is necessary to examine the history of money in the United States and its evolution over time.

    On the Ignorance of Central Bankers

    Bank of Canada Note
    Central bankers are experts in using monotone intonation and innocuous phrasing to advance controversial positions. But every so often something a central banker says is so egregious that it just jumps out and smacks you in the face. Those types of statements merit a response. Consider a speech delivered last month by Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada. Barely a quarter of the way through her speech, she states that:

    The form of money we know best is bank notes. They were issued primarily by commercial banks in Canada and the United States before those countries created central banks in the early 20th century. These privately-issued bank notes ultimately failed to provide what the economy needed and so central banks were given this responsibility.

    Now, I realize that this wasn’t an academic address, and the audience probably wasn’t terribly knowledgeable about monetary history, but to gloss over the development of the monetary system in such a manner just blows my mind. The clear implication in Mrs. Wilkin’s speech is that privately-issued banknotes were tried and failed. Not addressing the fact that private note issuance faced insurmountable hurdles placed in their way by government displays either willing disingenuity, or ignorance of economic history.