U.S Monetary System

A vital and central role has been played by monetary system of the United States, whether it is an age of debit and credit cards, or the tobacco and gold were used as some of the forms of money in the barter trade. Thus, the American experience of money has been very rich as it developed significantly in different era of human life. In the past, the thirteen colonies and the Continental Congress were responsible for the issuance of paper currencies, as well as, a variety of foreign coins that played a crucial role in the development of monetary system of the United States.

Controversies have been a major part of the U. S. monetary system, as it developed and expanded from its beginning of a decentralized system, and today, as a more centralized system can be observed in the monetary system of the United States. Moreover, general doubts related to the banking power have been another reason for the gradual development of this system. In addition, extensive legal debate was involved and responsible for the every change that occurred in this system.

In specific, the liberties of state, as well as, federal governments have always been the center of attraction of these debates. Moreover, the freedom of an individual or citizen of the United States has been given due importance during the different processes of decision-making. (Wood, pp. 19-23) On the other hand, the gold has played a vital and prominent role in the economic development, and in other words, the monetary system of the United States. However, now less importance is given to the role of gold, which was once a foundation stone of the monetary system.

In specific, the importance has reduced due to its non-utilization as a medium of exchange, as well as, regulator of supply of money, which was the responsibility of gold in the monetary system of the country in the previous decades. In this regard, the modern and complex economy is one of the reasons that changed the perception of gold in the monetary system of the country. (Chown, pp. 90-92) The considerations related to the establishment of a financial system were quite unclear and confusing in the beginning years that involved the framing of the Constitution.

At that time, it was preferred by various economists and experts that the federal system should be given the highest power and authority to run and monitor the monetary system of the country, and therefore, a centralized monetary system should be established in the country. In this regard, the concept of a national currency, as well as, the significance of a single chartered bank was considered by the framers that bestowed most of the power to the Federal government. (D’Arista, pp. 63-67)

On the other hand, other framers of the Constitution preferred of a decentralized monetary system that should provide powers to the states to run their systems individually. In this way, every state would be having different notes due to their individual chartered banks. In this regard, the concept of a single national currency and a single chartered bank was argued and rejected by these framers of the Constitution. After the long debate, the right of coining money, as well as, its regulation was given to the Federal Government by the framers.

States were not allowed to introduce their own money or make any arrangements for the issuance of paper currency. At this stage, the financial system was less involved with the federal government, as specified by the Constitution. On the other hand, Congress was given the major rights for different processes of financial system of the country, and the regulation, minting, as well as, the responsibility of circulation of money in different states was given to the Congress.

Due to the terrible experience of framers of the Constitution during the Revolutionary War, the paper money was largely opposed by majority of the framers. In the year 1775, the problem of fighting a war was confronted by the Continental Congress, as there was no means to pay the expenses for the war. During this war, trade was limited due to the blockade of British forces, and money lending became very difficult due to the reluctance of European nations. In the result, approximately two million dollars of Continental currency was issued by the Continental Congress.

In detail, a period of twelve years from the year 1775 to 1787 resulted in the printing of more than two-hundred million dollars of Continental currency in the United States. (Evans, pp. 78-82) During this process, it was assured by the Congress that gold, silver, or Spanish coins would be provided to the holders of the abovementioned Continental currency. Interestingly, there was not enough gold in the governmental assets, and there was no planning or backing for the payment to these holders.

In the result of no planning or proper mechanism of a monetary system and issuance of extra notes, the economy was affected significantly. Inflation was increased in the colonies due to the extra printing of the money. In the result, the purchasing power was destabilized, and thus, the value of Continental currency dropped abruptly and adversely. At this stage, the refusal or face value of the Continental currency was considered as a crime according to the declaration of the Congress to support the uncertain currency. (Shull, pp. 49-55)

As the concept of a paper currency was rejected by the United States government, the Coinage Act was passed in the year 1792. In the result, the U. S. Mint was established by the first Secretary of the Treasury, Alexander Hamilton. At this mint, the gold or silver were taken and coins were casted by the experts free of charge. A ratio of 15 to 1 was fixed for the silver to gold respectively. In other words, one gold coin could be acquired by producing fifteen silver coins. At this stage, first bimetallic standard was considered by the government.

Unfortunately, maintenance of the bimetallic standard system was very difficult and quite impossible for the government. Subsequently, in the year 1834, the ratio of silver to gold was altered to sixteen to one, which result in a return flow of gold in the United States, which was out flowing in the previous years. However, the gold and silver metals were unable to play the role of mediums of exchange in the country. In the subsequent years, the consideration of Bank of the United States was discussed and argued in the Congress.

Moreover, the right of Congress to authorize paper money or provide charter to a bank was argued. In the result, different experts provided their opinions regarding the chartering of banks in the country. Some of the founding members like Thomas Jefferson opposed the consideration of a chartered bank. On the other hand, Alexander Hamilton advocated the concept of a federal-maintained chartered bank for the issuance of national currency in the country. The debate ended when the constitutional status was given to the Second Bank of the United States by Supreme Court Chief, Justice John Marhsall.

(Bergsten, pp. 30-33) In the result, the Bank of the United States was established in the year 1791 that changed a number of processes and functions of monetary system in the country. In the year 1812, need of Second Bank of the United States was established was felt by the economists, as finances were required due to war with the British, and once again, the government was not having any kind of national currency to bear the expenses. In the result, the Second Bank of the United States was chartered and established in the year 1816.

A vital and crucial role was played by the Second Bank, especially in the maintenance of financial stability of the country. However, as the war ended, the Second Bank was out of business and it was terminated in the year 1836. (Wilson, pp. 56-59) Consequently, primary control of currency and banking was taken by the states due to the demise of the Second Bank of the United States. This practice of individual banking system according to laws of each state, the monetary system of the country was very much uneven and difficult to maintain by the government.

The paper money was issued by the banks that were chartered by the state governments, and redeem options of gold and silver were provided to the public, which resulted in the limitation of printing of currency by these banks. However, a number of banks in different states over-printed the paper money, which resulted in the suspicion of the public related to the face value of the paper money. This practice resulted in a number of difficulties, but still, the backing of gold was preferred by the Congress members, and the concept of a centralized, non-political, and non-inflationary system was rejected by them.

(Damanpour, pp. 42-44) In those years, one of the difficulties that were confronted by the government was the inflexibility of gold that was repeatedly affecting the monetary system of the country. When the financing was required by the government, the necessary funds could not be acquired due to the incapability of currencies that were backed by the gold. Therefore, it should not be surprising that the Civil War resulted in the termination of gold-backed currency.

In the year 1861, the government once again confronted the difficulty of unavailability of financing for the expenditures of war with the British. However, this time, the economists did not prefer the establishment of a single publicly owned bank due to the demise and terrible experience with the First and Second Banks. On the other hand, a system of private banks was established that can only be chartered and monitored by the Federal government. In addition, a national currency was also formed with the establishment of a single monetary system in the country.

In the early stages of the war, money was borrowed from other nations for the financing of war expenditures. In this regard, government bonds were sold in exchange for gold and silver metals. However, the government bonds were once again not enough to finance the unlimited expenditures of the war. In response, a variety of paper notes called greenbacks were issued by the Treasury. These greenbacks were not redeemable for gold, which resulted in the financing of war through these green paper notes that played a principal role in the war.

As more and more paper notes were printed by the government, a sharp inflation rate was experience by the economy, which resulted in the significant increment in the dollar price of gold. In the result, people started to hoard the gold and withdrawn them from the national banks. This period resulted in the utilization of the term ‘inflation’ for the first time. At this stage, the authority of federal government to charter banks and issue a national currency was questioned by many economists in light of the Constitution, as the inflation was confronted by economy of the United States.

While a number of problems were solved by the establishment of a federally chartered bank and a national currency, the American people were provided with another kind of notes, in addition to the notes that were issued by their state-chartered banks. In response, a ten percent tax on state bank notes was issued by the Congress in the year 1865, in order to eliminate these other notes in the country. In the result, people started to use the national paper notes of federally chartered bank, as it became too expensive to use the paper currencies of state chartered banks.

Consequently, the role of a dominant medium of exchange was played by the United States notes of the federally chartered bank. After the establishment of a dominant medium of exchange, several economists argued over the fact that the federal government or Congress had no right to impose such tax on the state notes. The people witnessed a long debate over this issue, and in the end, the Supreme Court ruled out that Congress had all the rights to restrict the circulation of other notes than its authorized notes, and thus, the Federal government had the right to impose such tax on the notes.

As a long debate was observed regarding the legitimacy of national notes, the gold standard was once again declared by the government, in order to stabilize the prices after the Civil War that resulted in the high rate of inflation in the country. In response, greenbacks were removed from the circulation by the Congress, which resulted in the initiation of a recession. In the result, this period is considered as one of the most severe and struggling period of the history of the American monetary system. (Rothbard, pp. 98-99) During this period, a division was observed in the American public.

On one hand, the gold standard was favored by the business and banking groups that advocated the concept of hard money. On the other hand, small businesses and farming groups advocated the practice of easier money and credit, and the gold standard was questioned and rejected by this division. In the result, the Greenback Party was formed that supported the practice of easy money in the country. This party involved in the politics and their candidates fought for the presidential elections. However, the gold was favored by majority of the nation, which resulted in their lack of success.

In the year 1870, the Bland-Allison Act was passed by Congress. In the result, purchasing of silver, as well as, issuance of silver certificates was authorized for the first time. In the year 1890, the Sherman Silver Purchase Act was passed by Congress that provided victory to community that advocated easy money in the country. After the passing of this Act, hoarding of gold once again started in the country, which resulted in a number of economical confrontations of the government. In the result, the Sherman Silver Purchase Act was cancelled by the government, in order to stabilize the economy of the country.

In response to a number of problems in the monetary system, the Federal Reserve System was created by the Congress in the year 1913. In this regard, the central bank monitors a number of regional reserve banks in different states of the United States, and Washington D. C. is chosen for its head office. In the result, provision of an elastic currency was commenced by the Federal Reserve. One of the reasons of calling it an elastic currency is its flexibility that can be decreased or increased according to the economic circumstances in the country.

In the year 1914, the breaking out of World War I resulted in the accumulation of gold and gold certificates in great amounts, which resulted in the reduction of value of gold. Still, gold was preferred and used as a backing for the smooth international transactions. (Timbelake, pp. 56-58) Nowadays, a healthy and growing economy has been encouraged by breaking from gold. Since the foundation and framing of the Constitution, a centralized monetary system has been implemented in the country that passed through many decades of decentralization and confrontation that has been discussed in this paper.

In the past, role of chief medium of exchange was played by gold and silver, which were advocated with state and colonial notes and currencies. In the end, the United States has a uniform national currency that has a legal status around the world. It is hoped that the paper has discussed and analyzed the historical evolution of monetary system of the United States effectively.

References

Jane W. D’Arista. (1994). the Evolution of U. S. Finance. M. E. Sharpe. Faramarz Damanpour. (1990). the Evolution of Foreign Banking Institutions in the United States. Greenwood Publishing Group. C. Fred Bergsten. (1996). Dilemmas of the Dollar.

M. E. Sharpe. Murray Newton Rothbard. (2002). A History of Money and Banking in the United States. Ludwig von Mises Institute. Richard H. Timbelake. (1993). Monetary Policy in the United States. University of Chicago Press. Thomas Frederick Wilson. (1992). the Power to Coin Money. M. E. Sharpe. David S. Evans. (2005). Paying with Plastic. MIT Press. Bernard Shull. (2001). Bank Mergers in a Deregulated Environment. Greenwood Publishing Group. John Harold Wood. (2005). A History of Central Banking in Great Britain and the United States. Cambridge University Press. John F. Chown. (1994). A History of Money. Routledge.