Early Banking

Privately Issued Bank Notes A monetary standard keeps the money supply portable, durable, divisible, and limited in supply.

The United States Constitution gave the federal government the power to coin Money. Private banks produced paper money.

State banks received a charter from the state governments. People could exchange the paper notes for gold or silver.

Each bank had its own currency design so hundreds of different notes were in circulation. Counterfeiting became a problem.

The Greenback Standard To finance the Civil War, Congress authorized in 1861 the printing of $60 million of demand notes, called greenbacks because of their green ink.

Post Civil War Congress created a National Banking System (NBS) of national banks, which were privately owned but chartered by the federal government.

The Gold Standard In 1900, Congress passed the Gold Standard Act, making the basic currency unit, the dollar, equivalent to a specific amount of gold.

Advantages of gold (1) the security Americans felt about their money (2) it prevents the government from printing too much paper currency.

Disadvantages (1) the gold stock may not grow fast enough to support a growing economy (2) people may decide to convert their paper to gold, draining the government’s gold reserves (3) the price of gold will respond to the market and it may lose value

Question Why do you suppose the United States went off the gold standard in 1934?

The Inconvertible Fiat Money Standard Since 1934 the United States has been on an inconvertible fiat money standard. The money supply of the United States is managed by the federal government.

Modern money must be portable durable divisible limited in supply