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Money in America

Class Notes

NVFAQ's - Not Very Frequently Asked Questions

The advent of currency in America is very much tied to the industrial revolution and the growth of trade. It was difficult to trade commodities for the reasons we discussed yesterday. The problem with moving to currency, however, was that it was a new system with few rules and those rules that existed were often vague and untested. The new government needed to establish consistency so that the economy would remain stable. These laws and changes were made over many years. As the US moved to create a national currency there was still the question of worth and stability. The bonds issued by the government to support the new US Notes were ok but many still feared the solvency of the government could be in jeopardy. Americans were still basically simple breed.

How was the use of the dollar originated?

  • In the late 1700's the Spanish had instituted the use of specie known as pesos. The Spanish had long mined the silver in Mexico, melting and creating bullion or ingots, The treasure ships stopped in the West Indies and often fell prey to pirates who spent their stolen treasure in the Southern Colonies.
  • The Triangle Trade brought Pesos to America as well, Molasses to Rum To Slaves
  • Pesos were known as pieces of eight because they were divided up into parts of eight called bits. The pesos resembled Australian currency called Talers, which the colonists had seen because Australia was also a colony of England, the term became so popular that Franklin and Hamilton decided to name the new currency Dollars,
  • The new Dollar was divided by units of 10, not 8, because it was easier.

How was money first issued in the colonies

  • The Constitution in Article 1, section 8 gives Congress the power to deal with money.
  • Article 1 section 10 further states that no state shall have these powers but it was basically understood at that time that the government could not print paper money.

If the Federal Government could not print paper money, who could?

  • State Banks - Banks chartered by states. These banks printed paper currency , mostly backed by gold or silver. Some banks abused this and printed large amounts of currency to be spent in far away cities. These wildcat banks presented a problem.

What did the federal government do at that time to regulate money?

  • Very little. The Bank of the United States, created by Alexander Hamilton and then destroyed by Jackson, acted as a department of the treasury. It had a federal charter and collected fees, taxes and made payments on behalf of the federal government.

What problems arose as result of this lack of supervision?

  • By the civil war there were 1,600 different banks issuing over 10,000 different types of currency. Each bank was supposed to base their currency on existing gold or silver reserves but this was often no the case. As a result lists of "bad notes" were circulated and often a person went to buy something and found they had bad currency. This meant that the money they had was now essentially worthless.

When did the Federal government start printing currency?

  • When the Civil War began in 1861 the north needed currency so Congress passed a law authorizing the printing of $60 million of demand notes. These were declare legal tender even though they had no gold or silver backing. In 1862 they printed another $150 million. These United States Notes were known commonly as Greenbacks because they were printed green on the front and back.

Why weren't people afraid the money would be worthless?

  • They were

What did the government do to support the Greenback?

  • Created a National Banking System. Rigorously inspected banks were chartered by the federal government. Each bank would issue national currency or the US Notes. They were uniform in appearance and backed by US Government Bonds.
  • State banks still existed and few could afford to buy the bonds and get a charter.
  • In 1865 Congress passed a 10% tax on all privately issued currency. This killed the state banks and left only greenbacks and national currency in circulation.

What did the government do to calm fears that US Notes weren't good?

  • It issued Gold Certificates (1863) printed in yellow. These became known as Yellow backs. They were backed by gold reserves. They were originally used by banks to settle differences but in 1882 the government printed $20 bills for general use.
  • It issued Silver Certificates (1886) in part to support prices for silver miners in the west. In 1878 the government began buying huge silver reserves and mint them into dollars. Later they kept the silver in reserve and printed silver certificates (1886).
  • Treasury Coin Notes were printed from 1890 to 1913 and were redeemable for gold and silver coin.

When did Congress start to back dollars with gold?

  • (1900) - This is known as the "Gold Standard" The government didn't actually have all the gold for all the money in circulation but it was acknowledged that all wouldn't redeem at one time.

Why was this done?

  • Support the currency and provide it with inherent value.

How much was a dollar worth in gold?

  • 1/20.67 of an ounce

What are the advantages of being on the gold standard?

  • People feel more secure about their money.
  • Prevents the government from printing too much money and therefore value remains high, this can also be a disadvantage.

What are the disadvantages if the gold standard?

  • Growing economy needs a growing money supply which requires growing gold stocks. If these cannot be found then economic growth is stunted.
  • In event of financial crisis many may convert therefore depleting national reserves.

Why did the US go off the Gold Standard?

  • During the depression many began hoarding gold, banks began to fail and people began to cash in their dollars for gold. In 1933, fearing the government could not back the money supply a national emergency was decreed and we officially went off the gold standard.

What happened to those that had gold?

  • Anyone with more than $100 of gold had to file a treasury form.
  • Citizens, Banks and businesses were required to hand over their gold and gold certificates in exchange for Federal Reserve Notes and national currency. Those who did not hand it in had their gold and certificates confiscated.

What did it mean that we were no longer on the Gold Standard?

  • It meant we were on a inconvertible fiat money standard. The money supply cannot be converted to gold or silver. It is fiat, decreed, money.
  • Since 1975 Americans have again been able to own gold.
  • The government now manages the value of money by regulating the economy and the money supply.

What other types of currency exist today?

  • Silver Certificates - not redeemable
  • Travelers Checks


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