Banks and Money - REoverVIEW

• Hamilton and the Bank of the US • Jackson and the Bank War• Paper Money and the Question of

Coining Silver• The Federal Reserve • Monetary Policy v. Fiscal Policy

The Bank of the US

• Started by A Hamilton• Modeled on bank in UK• First test of “elastic clause”• Opposed by Jefferson• Protected by McCulloch case• Goal = Create stability in econ• Private corporation – not elected• Leant money to fed gov, set interest rates • 2 x 20 year charters – Despite initial controversy it was

left alone till….

Jackson and the Bank War• Jackson hated banks in general• Saw Bank of US as particularly

undemocratic / unAmerican• Bank Head = N. Biddle• Vetoes bank charter renewal• Congress passes over his veto• Kills bank by withdrawing federal deposits• Creates “pet banks” – eventual crash

(Panic of 1837) • After this there is no centralized banking

system

Greenbacks and the Civil War• “On demand” notes = first significant use of paper money printed by

federal government• Civil War expenses outpaced amount of hard currency• Previous paper money was “bank notes” issued by individual banks • Question at end of the war to keep using them or return to gold

standard• Government adopts policy to contract existing greenbacks (contract

the money supply)• This coincides with a push by westerners to expand the money supply • Question of expanding or contracting the money supply was major

political issue– Republicans + Eastern Financiers + Big Business say NO– Democrats + Westerners + Farmers say YES

• By the time they could, there was no need to and so the greenbacks stayed in circulation

• By 1907 the prevailing wisdom is that there must be some elasticity in the money supply to keep up with economic swings

• This leads to creation of the Federal Reserve, which took over responsibility for paper money

The Federal Reserve • 1913 – Sets up central banking system• First central bank since Jacksonian times• Sets monetary policy of the US government • Has authority to print money + make

emergency loans to other banks • Pushed for / passed by Woodrow Wilson• Collection of private banks presided over by

Federal Reserve Board – Appointed by Prez• Controversy – Did Fed worsen Great

Depression?• Still in place today

Monetary Policy v. Fiscal Policy

• Monetary Policy = the money supply – interest rates, inflation, printing of money, ease of borrowing etc.

• Monetary Policy = Set by Central Bank

• Fiscal Policy = revenue / spending – tax policies, budget creation, increase / reduction of programs

• Fiscal Policy – set by national government