Money and Banking Flashcards
A strong domestic financial sector serves what two functions?
- Financial intermediation between savers and borrowers
– Facilitating the transfer of financial claims amongst
economic agents
3 functions of money
unit of account
store of value
medium of exchange
Commodity money
money whose value comes from a commodity of which it is made
Examples of early money
In principle, many commodities could act as money
- cocoa beans
- Hard Cheese
- Salt
- Metals
- Rocks
- Cattle
Dentalium Shells
Indigenous peoples of the coast used shells gathered on the West Coast at Cape Flattery as a store of value and to
conduct some trades
Wampum
- Wampum shells were traded and valuable in eastern North America before Europeans arrived
- Lacking currency, wampum were legal tender in New England from 1637 to 1661
legal tender
- Used to settle debts and pay taxes
- This gives a government (through the court system) to legitimize certain monies.
Debasement
where the face value is greater that the value of the metal it contains
what is coin “sweating”
coins were placed in a bag and shaken. The bits of metal that had worn off the coins were recovered from the bottom of the bag
What is coin “shaving”
shaving off a small portion of a precious metal coin for profit. Over time, the precious metal clippings could be saved up and melted
When and where was gold first used for coins?
probably in Africa, but the Lydians (modern day Turkey) are commonly credited with the first denominated coins, sometime around 640 BC
What are the benefits and drawbacks of using gold as currency?
- Due to its intrinsic usefulness, and long-standing, worldwide use for currency, gold is seen as an excellent store of value
- it is scare, and isn’t the best medium of exchange
- its value is too high for small transactions
Subsidiary coins
-made of other metals, silver, bronze, copper, etc., (or paper certificates or bank deposits) are needed for most transactions.
- Under a gold standard, these are just “tokens” that represent an amount of gold.
Bimetallism
- This standard uses two metals, typically gold and silver
-The US was officially “bimetallic” from 1837 until the Civil War - it makes sense to only have the less valuable metal coined.
-The mint won’t exchange gold for silver, but markets wil
Function of banks
-financial intermediaries- making loans and accepting deposit
Card Money
- Early Money in Canada
- signed promised by colonial and military officials redeemable at some future date when specie arrived. This stayed in the colony
Army Bills
- Early Money in Canada
- Used by the British
-These were paper issues by early official and eventually redeemed
Why wasnt the british pound used in the colonies?
- The British Pound was bi-metallic on gold and silver, which was expensive to ship
As soon as money arrived, what was it used to pay for?
imports
What was lacking in early Canadian Specie?
- quality rather than quantity
If Canada is growing, but money is short, what will happen to prices?
- they will be lower
- exports fall relative to imports
- specie will accumulate until prices rise
Gresham’s Law
The “good” money disappears and the “bad” remains in circulation
The Coinage Act of 1792
- Alexander Hamilton’s bill
- Was a regulation passed by Congress on April 2, 1792, that established the United States Mint in Philadelphia
-Gold was currently valued (as a commodity) at 15 times silver, and the law allowed both metals to be minted into dollar. Meanwhile, any foreign coins could continue to circulate as legal tender (with appropriate scaling)
What ended bimatalism in the US?
- in 1834 when President Jackson moved the mint ratio to 16 to 1, undervaluing silver and moving to an effective gold standard
Who proposed the first Bank of the United Sates?
- Alexander Hamilton
- Chartered in 1791 for 20 yrs
- A federal commercial bank, this was the government’s banker and partner, a 20% shareholder
- It bought Federal bonds for its notes,
conducted banking services, and operated in all states
When was the second bank of the US chartered?
-Congress chartered the Second Bank ofthe United States in 1816
- After the war of 1812
- lead by Nicholas Biddle, had the economic power to regulate state banks and occasionally added liquidity to the system as a whole
- On the whole, the “inelastic currency” based on specie limited the scope for action
What was the Second Bank War?
- Between Biddle and AJ who became president in 1828
- AJ ran on the promise in 1832 that he would veto a re-charter
- The Second bank lost its charter, was re-chartered inPennsylvania and then disappeared in the banking panic of 1837
What affect did the termination of the second Bank of the US have on the state banks?
state bank grew in numbers rapidly
What caused the bank panic of 1937
- Second Bank discipline removed, and excess bank money was created (but reserve ratios rose)
- Jackson issued “The Specie Circular” which required land sales to be in gold (but gold didn’t move west)
- COTTON PRICES FELL
- Gold and silver flowed into the US. Gold from Britain responding to interest rates, and France paying for shipping losses; Silver from Mexico, responding to political unrest
- Silver that formerly went to China was replaced by British Bills of Exchange after the “opium wars
How did cotton prices falling cause the 1837 bank panic?
- Cotton prices were high and many farmers and land speculators in the south took on large debts based on the expectation that cotton prices would continue to rise.
- in the late 1830s cotton prices had fallen sharply, causing many farmers and land speculators to default on their loans.
- This led to a wave of bank failures
How did an inflow gold and silver into the US contribute to the bank panic of 1837?
In the early 1830s, the Bank of England lowered interest rates, which led to a flow of gold from Britain to the United States as investors sought higher returns. This influx of gold helped to fuel a speculative boom in the United Then the Bank of England raised interest rates in 1836, and the flow of gold reversed, leading to a contraction of credit.
Mexico was experiencing political instability and economic turmoil in the aftermath of its independence from Spain, which led to a devaluation of its currency and a flow of silver into the United States.
The influx of silver did not directly cause the banking panic of 1837. Rather, it contributed to the speculative boom that led up to the crisis, as investors and banks borrowed heavily to invest in land and other ventures.
Free banking
-Between the panic of 1837 and the Civil War about half of the states passed laws allowing anyone to set up a bank
- These “free (entry) banks”
were regulated, but worked unevenly. Much depended on the kind of assets allowed as capital (mortgages on land worked poorly
The bank Act 1871
After confederation a unified bank act was proclaimed.
* New banks chartered by Parliament
* Charters last 10 years
* $500,000 in capital required
* Notes must be greater than $4, limited to paid up capital.
* At least 1/3 cash reserved in Dominion notes
* Shareholders double liability
* No lending on real estate (or own shares)
* Could still lend against warehouse receipts
What was the ciime of 1873
an ex post verdict on the dropping of ‘free silver,” and made that term into a powerful political slogan
When and why was the federal reserve system created?
-1913
- Designed to be a lender of last resort and rediscount commercial paper, this US central bank issues the only notes that are legal tender in the US
- In 1907, things came to a head with a panic with stock price drops and
bank runs. Various factors are attributed, the San Francisco
earthquake, the Russian-Japanese War, British policy to retain gold.
New York clearinghouses advanced credit to reduce the damage, but
Trust Companies started to fail.
**But the gold standard remained.**
Five features of the Gold Standard
- Gold can flow freely between individuals and countries
- Currencies are pegged to a price of gold (thus linked to each other)
- No coordinating body for coordinating currencies
- Create asymmetry: can have zero gold, but never “too much”. Overvalued currencies lose gold, and must adjust; undervalued currencies accumulate gold
- Deflate rather than devalue to preserve international credit rating
Why did the Gold Standard end?
- Gold Standard The gold standard was suspended in the First World War, attempted again in the 1920s and
then largely abandoned in the 1930s. - First Britain, then the US
Specie refers to
precious metals used in coinage
Bimetallism is
the use of more than one metal as legal tender
Gresham’s Law states that
bad money drives out good mone
Greenbacks refer to
fiat currency issued during the Civil War
When French officials in Canada issued card money
they distributed marked playing cards as placeholder for future wages
