Chapter_19_Supplemen - Supplements Spring 2011 Reunification Era Money Banking after the Civil War(Ch 19 I Introduction 2 Key Issues 1 Deflation in

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Supplements Spring 2011
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Reunification Era: Money & Banking after the Civil War (Ch. 19) I. Introduction: 2 Key Issues 1. Deflation – in the late 1800s. Deflation (changes in the price level) is always connected to changes in the money supply! 2. * A bank run is when all depositors want to pull out their money in a bank. Bank runs trigger bank panics. Bank panics are when multiple banks experience bank runs. *Remember that in a fractional banking system, commercial banks only hold a portion of deposits as reserves. A. Money and the Price-Level Impact of late-19th century deflation: Unanticipated deflation can benefit lenders and harm *Recall farmers’ complaints/concerns in the late 1800s. borrowers. *Deflation means the purchasing power of money increases. Bimetallic standard o Coinage Act of 1792 (existed officially Under the bimetallic standard gold & silver had different market values. until 1900, when gold standard was adopted by Congress): Established both gold and silver as official monetary units of the US. Thus, the Federal government mint issued both gold and silver coins of equal monetary value. * This act was the brainchild of Alexander Hamilton However, the weight of the coins was based on the relative values of gold & silver in bullion market. Original mint value (which equaled the market value in 1792) 15s: 1g means that it took 15 ounces of silver to equal 1 ounce of gold. o Mint (monetary) value v. Market (bullion) value By 1834, Market value was 16s:1g (silver:gold) silver was “over-valued” at the mint & gold was “under-valued” at the mint. Thus, people would hoard gold & only use silver as money. Problem with bimetallic standard: whenever the market (bullion) value deviates from the mint (monetary) value, only the metal that is over-valued at the mint will circulate as money. Thus, the bimetallic standard was typically a mono-metallic standard in practice. The term “de facto” means “in fact” in reference to the silver standard.
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B. Banking (briefly) In 1912, Congress appointed National Monetary Commission. NMC's report o denounced entire US banking system o listed 17 points of “gross deficiency” *17 problems noted o called for establishment of a central bank Ultimately, this leads to the creation of the Federal Reserve System in 1914. *Important question to consider as we finish the lecture: “Why did the NMC think the US banking system was so bad?”* II. The Dual Banking System A. Recall Econ 2105: In a fractional reserve banking system, commercial banks create money Fractional reserve system- banks only hold a percentage (fraction) of their deposits as reserves. [Now, this is a mandated think!] The portion of deposits they don’t hold as reserves are loaned out. . Money multiplier- spiral of lending, spending, depositing, lending, spending, depositing.
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This note was uploaded on 09/21/2011 for the course ECON 2200 taught by Professor Moore during the Spring '07 term at University of Georgia Athens.

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Chapter_19_Supplemen - Supplements Spring 2011 Reunification Era Money Banking after the Civil War(Ch 19 I Introduction 2 Key Issues 1 Deflation in

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