test3 - IV The Monetary System A Following the Civil War...

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IV. The Monetary System A. Following the Civil War, money included (=M) SB notes NB notes Greenbacks o A fiat currency issued by the Federal government during the Civil War; it was legal tender (meaning it had to be accepted legally). Demand deposits Coins (bimetallic std) o Gold o Silver o Recall , under a bimetallic standard, only the metal that is overvalued at the mint will circulate as money. o In the 1870s, silver was worth approximately 3% more on the bullion market that at the mint. Thus, it was a de facto gold standard. B. Dominant issue of late 1800s: What kind of monetary system should U.S. have? As we consider this issue, remember: Quantity Theory of Money (Econ Insight 19.1) o Recall , MV = PY 1. In book, k = 1/V. So… M = kPY o o Estimates of M – 19.1 (1860-1915) 1. Different Types of M US notes = Greenbacks Gold National-bank notes Subsidiary and minor coin Silver 2. Why did gold take off around 1895? 3. Why was gold falling around 1862-1868? 4. Why was silver not circulating? o Estimates of P – 19.2 (1860-1915) 1. Why did wholesale prices skyrocket around 1860-1865? Wartime inflation (Civil War) 2. Why did wholesale prices take a tumble around 1870? Questions to consider as you read: Rockoff, Hugh, “The ‘Wizard of Oz’ as a Monetary Allegory,” The Journal of Political Economy , Vol. 98, No. 4, (Aug., 1990), pp. 739-760.
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1. In order to understand the Oz allegory, you must understand the economic events that preceded the 1896 presidential election. Using the data provided in Table 1 and the following questions, describe these events. a. Describe the trend in prices from 1869 to 1879. We see general deflation across the board. Unfortunately for farmers, the deflation that they experienced was far more severe than the average. b. Rockoff writes, “It is a fair criticism of the Populists, to which Bryan is not immune, that they did not adequately distinguish between general price level trends. ..and relative price trends that would be impervious to monetary remedies.” (p. 741) Explain this statement. (Hint: See columns 1 and 2 of Table 1.) Bryan was pushing toward reflation, but did not comprehend that reflation would still leave farmers with increasing supply and decreasing demand (bad terms of trade). In his (Rockoff’s I guess) view, he (meaning Bryan I guess) was too obsessed with the big picture and did not pay enough attention to the small picture. c. What is “high-powered money”? Describe the trend in the supply of high-powered money from 1869 to 1879. High-powered money – can be used as bank reserves. In late 19 th century, this would have included gold, silver, National bank notes, greenbacks (after 1879) and silver certificates (after 1890). This influences the over— money supply. M=R (decrease in P) (increase in Y)
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test3 - IV The Monetary System A Following the Civil War...

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