Early American Money
Read this section about the American monetary situation before 1907.
FEDERAL RESERVE SYSTEM
Gold is money. Everything else is credit. - J.P. Morgan to United States Congress in 1912
At the turn of the twentieth century, the pound
remained the world's reserve currency but was losing
ground to the United States dollar. During the Industrial
Revolution, corporate barons Cornelius Vanderbilt, John D.
Rockefeller, Andrew Carnegie, J.P. Morgan, and Henry Ford
built companies that attracted demand for American currency.
The world needed dollars in order to purchase the goods, services, and shares of these new elite corporate institutions.
During this span, the United States did not have a central
bank. But when an enormous earthquake in San Francisco
induced a financial crisis in 1907, the United States would
shortly thereafter take a page from Walter Bagehot's book
and install a lender of last resort at the center of its financial system. The Federal Reserve System, the new American
central banking apparatus, inherited a currency already on its
way to world reserve status in 1914. It formalized a three-layered monetary system, with sanctioned private sector banks
permitted to create third-layer monetary instruments on their
balance sheets. Today, the Federal Reserve remains atop the
hierarchy of money as the dollar still holds the crown of world
reserve currency even though its position has become fragile.
Understanding the dollar's complex dichotomy of dominance
and fragility can be more easily explained with our layered terminology, a story that plays out over the next three chapters. In
this chapter, we'll break down the Federal Reserve's three-layered dollar pyramid. Next, we'll see how the Federal Reserve
and United States government decisively removed gold from
the first layer of money. And finally, we'll look at how the
international monetary system fell into disrepair starting in
2007, and why consequently the cry gets louder every year for
a global currency reboot.
Early American Money
Throughout the New World colonies, money's form varied distinctly between regions. Coins weren't numerous in
the early days because colonial mints didn't exist yet and
European coins weren't plentiful enough to be used by every-body as currency. This drove people to use more local forms
of money. In New York, sea-shell beads called wampum, used
as money by many Native American tribes, circulated as legal
tender during the seventeenth century. In Virginia, tobacco
became a first-layer monetary asset and the basis of its own
money pyramid due to the global popularity of the crop. The
pound-of-tobacco unit became an accounting standard, and
notes promising the delivery of pounds of tobacco were issued
by Virginia as second-layer money that circulated among
the public as cash. Shells and tobacco sufficed as regional
money because they each demonstrated some, but not all, of
the monetary characteristics of coinage. Neither was perfect,
but they each successfully served as money for many decades.
Both were divisible, difficult to conjure up, relatively fungible,
and modestly durable. Eventually, they would be replaced as
mediums of exchange and units of account by a historically
superior form of money: gold and silver coinage.
As time elapsed, more foreign gold and silver coins
started circulating as currency throughout the colonies. The
most popular coin amongst the people was the Spanish silver
dollar. In 1784, Thomas Jefferson published his Notes on the
Establishment of a Money Unit, and of a Coinage for the United
States, and provided the argument for the dollar as the new
American currency unit:
[The] Dollar is a known coin, and the most familiar of all to the
minds of the people. It is already adopted from South to North; has
identified our currency, and therefore happily offers itself as a Unit
A Monetary Mix
Sixteen years after the Declaration of Independence, the second Congress of the United States of America finally passed
the Coinage Act in 1792 to establish the United States dollar
as the country's official unit of account, defining one dollar as
both 1.6 grams of gold and 24 grams of silver.
For the next 108 years, the United States experimented
with a few different monetary regimes. An early adjustment
to the exchange rate between gold and silver had the opposite effect of Isaac Newton's adjustment as Master of the
Mint and drove gold out of usage for several decades.
Two separate central banks were created in 1791 and 1812,
but each ended after its twenty-year charter. Many early
Americans didn't trust central banks to administer their currency. The banks existed in antithesis to limited government
ideals and led to a great deal of political vitriol, which prevented the institutions from charter renewal. Instead of central bank second-layer money, notes issued by private sector
banks functioned as a very serviceable form of cash through-
out the nineteenth century. These notes were secured by
United States Treasuries, the name for U.S. government bonds.
Here's an example of the official language written on a currency note secured (or backed) by U.S. Treasuries from 1902:
National Currency secured by United States Bonds deposited with
the Treasurer of the United States of America
The American National Bank of San Francisco will pay to the bearer on demand Ten Dollars
In addition to private sector bank notes, U.S. government- issued gold certificates also circulated as cash. And finally, a Civil War financing tool and paper money called the green-back, which couldn't be redeemed for precious metal, circulated as cash during the latter part of the nineteenth century as well. Altogether, the United States had an amalgamation of second-layer monetary instruments circulating through-out the country. The demarcations between the second and third layers were difficult to define, especially without a central bank and a formal monetary system. Meanwhile, an international gold standard that began in England started to permeate the globe as other European nations established second-layer currencies bearing the promise of convertibility to gold coin, which influenced a resurgence of gold usage in the United States. The Gold Standard Act of 1900 ended some monetary ambiguity, eliminating silver from its monetary role and fixed one dollar at 1.5 grams of pure gold. The corresponding price of one troy ounce of gold stood at $20.67 - where it had been since 1834.10 The act was some- what of a formality as the Americans had already joined the world's gold standard in practice, but it was essential for the branding of the dollar denomination. The United States was now primed for another attempt at a central bank.
Source: Nik Bhatia: Layered Money
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