TheFinancialSystem

TheFinancialSystem - THE FINANCIAL SYSTEM PART 1 1781-1863...

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THE FINANCIAL SYSTEM PART 1 1781-1863
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POST-REVOLUTION FINANCES Congress did not have the authority to levy taxes during the Revolution, nor was there any systematic way to raise financial support from the states. Congress paid bills by printing more paper money. (The direct result of this practice was hyperinflation.) Too much was printed relative to specie reserves and, as a result, it depreciated badly. In addition, states had borrowed and issued paper money of their own. Financial intermediation was necessary. In an effort to address this necessity, Congress chartered the Bank of North America. (1781) This financial entity can be considered a proto-central bank. It did the usual chores of a standard central bank ( monetary regulation and government finances, mostly) and was later chartered as a Pennsylvania state bank. The institution of a [quasi-] monetary authority did help very little. Between 1783 and 1787, the finances of the new central government deteriorated badly.
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THE NEW GOVERNMENT, CONSTITUTION AND ALEXANDER HAMILTON The new Constitution established the government on a powerful financial basis: power to levy taxes, to borrow, to issue money and to regulate its value. Individual states gave up their right to issue money. Given the disastrous consequences of the exchange rate variability experienced before the Revolution, the states had come to prefer a monetary union. Alexander Hamilton devised the following policies to achieve financial stability: a) establishment of tariffs and taxes for federal revenue; b) complete refunding of wartime debts; c) the assumption by the federal government of the states wartime debts; d) the establishment of a new central bank; e) the creation of national currency. There was no national paper money. A bimetallic system was established in 1792. (15:1 ratio) While the states had no power to issue their own paper money, states banks could do so.
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THE CENTRAL BANK EXPERIENCE Between the Revolution and the Civil War, the US chartered two Central Banks: The First and Second Banks of United States (1791, 1816). The First Bank was an amalgam of public and private ownership. It did an excellent job in regulating the money supply and handling government prices, but lost its recharter in 1811. The Second Bank was also a successful institution but was vetoed
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TheFinancialSystem - THE FINANCIAL SYSTEM PART 1 1781-1863...

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