Economic History of the US

Transcription

1 Economic History of the US Revolution to Civil War, Lecture #5 Peter Allen Econ 120

2 Financial Issues, Revolutionary War, Articles of Confederation, Practical aim, victory and independence, but.. Financial disaster Federal gov. and some states defaulted Worthless Continental currency hyperinflation Banks suspended payment in specie 1790, Need to build a real financial system Public finance Money Banking Three financial crises (1819, 1837, 1857)

3 Hamilton Treasury Secretary, Financial Base for US 1. Tariff Act, Public Credit Act, Fed. gov assumes all Rev. War debt of fed./states 3. Coinage Act, 1792 US Mint 4. First Bank of the US,

4 Part 1: Income Stream Tariff Act of 1789 Established base tax revenue to fund new debt and other spending New constitution fed. gov. control international and interstate commerce and power to tax 99% of all revenue Import Tariffs 5-15% of dutiable products

5 Part 2: Pay all Rev. War Debt Hamilton ( Report on Public Credit, 1790) wrote to Congress US needs to be able to borrow and have a good credit rating US must pay all federal/state Rev. War debts at par!!! Properly funded Fed. gov. bonds could help solve problem of shortage of liquid capital by enabling banks to issue currency backed by it

6 Revolutionary War Financing 1. Continentals = est. $400 million o ½ fed. and ½ state o Denominated in spanish milled dollars o Fiat currency, not backing by specie o Depreciated in value to $1000 to $1 2. US Gov. debt = est. $54 million o $11 million foreign, Dutch and French o $43 million domestic (actually only $29 million) o defaulted 3. States debt = est. $25 million o Some defaulted and some paid

7 Assumption Rejected 4X in Congress helping speculators veterans sold at 25 Some states paid off debt (e.g. Virginia) Hamilton trying to take over state finances Deal Jefferson & Madison support, Hamilton agreed new capital in DC $77.1 million 40% of 1791 GDP ($193 million) US gov. has not defaulted on Hamiltonian system Hamilton s numbers, Public Credit Act, passed by Congress in 1790

8 U.S. Government Debt as a Percentage of GDP, % 100% WW2 80% 60% 40% Revolutionary War Civil War WW1 20% 0%

9 Part 3: Coinage Act of 1792 Bi-metallic specie standard, gold and silver US Dollar unit = one spanish milled dollar or peso Specie weight of 1 US dollar grains silver and or grains of gold Mint ratio of 15 to 1 (prevailing market prices) Form of price control Foreign coins 80% of all specie in 1800 (MB) US Mint anyone can bring bullion to be coined No fiat paper! States prohibited from issuing currency

10 1787 gold Brasher doubloon was sold for $7.4 million in Dec Minted by Ephraim Brasher, Virginia goldsmith and neighbor of George Washington grams of gold slightly less than an ounce. Worth about $15 when it was minted, the gold value today would be more than $1,500. First American-made gold coin denominated in dollars the U.S. Mint in Philadelphia didn't begin striking coins until the 1790s.

11 Gresham s Law Problem with any Bi-metallic standard Fixed exchange price for 2 precious metals each with a market price determined by Supply and Demand, and therefore fluctuate in price relative to each other People always take metal which is relatively underpriced at the official mint ratio out of circulation Bad money drives out good Why?...arbitrage profits , gold was underpriced and only silver coins circulated Gold Market prices Silver Bimetallism: usually just one metal circulates at a time

12 Effect of a Below-market Price Control Gold price, In terms of Silver (oz.) P S 16 Market price 15 shortage D Mint ratio Q

13 Gresham s Law Several adjustments to mint ratio until 1860 Problem of price controls chasing market price 1834: official mint ratio changed to 16 to 1 Now gold was overpriced, silver underpriced gold discovery in California made it worse Gold replaces silver in circulation Theoretical benefit of bimetallism Market-based money supply and twice as much monetary base i.e. So, other metal can be used to maintain stock of money Never worked in this way

14 Banking System, After 1793, rise in # of banks all State-chartered Issued own paper notes (i.e. currency) backed by specie Demand for bank loans, farmers & manufacturers Fractional reserve banking Strictly business, laissez faire, regulated by market forces only Early problem over-issue of bank notes Periodic depositor runs to redeem notes for specie Lack of knowledge of far away banks, discounting

15 Part 4: First Bank of the U.S., In 1790, Hamilton proposed a central bank modeled on the Bank of England (1694) Functions Issue notes backed by specie Regulate bank note issues by periodically presenting them for conversion to specie Fiscal agent of fed. gov. (deposits) Collect taxes Lend money to Treasury Lender of last resort Opposition: unconstitutional, against states rights, for. owned Chartered by Congress for 20 years

16 First Bank of the U.S., Successful Stable monetary conditions Prevented banks from over-expanding note issuance & credit no banking crises but Congress terminated it 1811 First major banking crisis straight away War of 1812 ( ), War financing , banks allowed to suspend specie payments on notes Over-issue (fiat), inflation Panic of 1819, depression of Sentiment: No paper currency, no fractional reserve

17 Bank Holdings ($ million) Specie Bank notes Reserve Ratio US Treasury Bonds 15 Reserve Ratio 0.36 Jan.1811 end of First Bank Jan.1817 start of Second Bank