fis200_week1_reading3 (1)

The congressional power to coin money primarily meant

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all coins in circulation in the United States were of foreign origin. The congressional power to coin money primarily meant the power Money in America 41
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to issue a standardized full-weight metallic coinage, as England had successfully done a century earlier. The restriction of money to gold and silver did not imply a wholly metallic currency. A redeemable banknote was not consid- ered money in itself, but a contract redeemable in money, much like a bank check today. A bank check, a slip of paper with a scrawled sig- nature and amount, can also be used in transactions because it is ulti- mately redeemable in the fundamental money of today, paper bills. A debate also raged about whether to default on the federal debt. Hamilton resolved the issue with a proposal to repay the entire debt, which had traded around 4 cents to the dollar, at face value, in gold bullion—even though the government held almost no gold at all. By honoring its agreements, Hamilton understood that the new govern- ment would create public confidence in both the government’s bonds and the government itself and would create a large and influ- ential group of people, bondholders, with a direct interest in the sup- port of the new government and its policies of sound money. By 1800, U.S. debt was trading at a yield of 6 percent. This is low GOLD: THE ONCE AND FUTURE MONEY 0 10 20 30 40 50 60 1800 1820 1840 1860 1880 1900 1920 1940 1960 USD per gold ounce United States: Dollars per Gold Ounce, 1800–1965 42 See Figure 3.1. FIGURE 3.1
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by emerging-market standards of today, but as high-risk emerging- market debt it actually included a large premium over the 3 percent At the same time, Hamilton recommended the creation of a national bank, the First Bank of the United States. Hamilton saw the need for an institution of a sufficient scale, like the Bank of England, to address the financial needs of the new federal government. (The Bank of England itself had been founded to finance a war.) At the time there were only four chartered banks in the United States, all of them regional in scale. They each operated like an independent monetary system, their banknotes circulating in the immediate vicin- ity of the bank itself. The plan met strong resistance from James Madison and others, who saw it as an intrusion of the federal government into the private sector and also into the affairs of the individual states (some states prohibited banking). The bill passed in 1791, and the First Bank of the United States began operations with a 20-year charter. People who had crossed an ocean and fought a revolution to Money in America 0 2 4 6 8 10 12 14 16 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Percent United States: Annual Average Yield on 10-Year Treasury Bond, 1800–2005 43 paid by longer-established governments. See Figure 3.2. FIGURE 3.2
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escape European taxation would gladly move a hundred miles farther west to escape the local tax collector. As a result, the new country remained largely free of taxes, and economic growth was at a maxi- mum. Though the expansion of the British economy between 1815 and 1875 was one of history’s great economic booms, the expansion of the U.S. economy was even more spectacular. By the end of the
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