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S economy was even more spectacular by the end of the

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of the U.S. economy was even more spectacular. By the end of the century, an experiment in government by a scruffy collection of out- law farmers had become a world power comparable to Britain itself. Throughout the nineteenth century the federal government derived most of its income from tariffs, and tariff blunders clouded the first 70 years of U.S. history. President Thomas Jefferson inaugu- rated this habit with the Embargo Act of 1808, which threw the economy into recession. Exports had grown briskly, from $19 million in 1791 to $49 million in 1807. Reexports increased from $1 million to $60 million. During the Napoleonic Wars, U.S. merchants were happily exporting war-making supplies to both sides, Britain and France, which naturally raised the ire of both and resulted in threats to U.S. shipping by the French and the British. Jefferson, who wished to keep the United States from being drawn into European wars, intended the embargo to keep U.S. merchant ships at home and out of danger. The policy worked, and a collapse of trade was the result—exports dropped to $9 million in 1808, and reexports dropped to $13 million. The economic contraction was so severe that the Embargo Act was quickly modified in 1809 as the Non- Intercourse Act, which forbade trade only with England and France. Trade recovered, as did the economy as a whole, although the rate of growth dropped off from its pre-1808 levels. British interference with U.S. shipping continued and led to the War of 1812 with Britain. The outbreak of war touched off the first inflationary event of the new United States since the establishment of the gold standard in 1789. At the time, there was no national currency, and banknotes were issued by regional commercial banks. Fearing a run due to the war and sensing an opportunity to be free of their legal liabilities, GOLD: THE ONCE AND FUTURE MONEY 44
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banks in the Southern states suspended the redeemability of their banknotes, which in effect rendered them floating currencies. Sus- pension of redeemability was, of course, an illegal breach of contract, but the authorities were willing to turn a blind eye. The Bank of England itself was up to similar shenanigans at the time. The First Bank of the United States, which could conceivably have kept the Southern banks in line, had ceased operations as a result of the end of its charter in 1811. The federal government also issued Treasury notes to finance the war. These strange financial instruments paid interest and were declared legal tender in monetary transactions. Because they were usable as bank reserves, this amounted to an expansion of the monetary base, and since gold redeemability had been suspended, the result was inflation in the Southern states. The banks of the Northern states maintained the gold redeema- bility of their notes, with the result that notes from Northern banks traded at a premium to notes from Southern banks. The federal gov- ernment was soon trying to pay for Northern goods with notes from Southern banks, and Northern banks began to call for the redemp- tion of the Southern banknotes into gold. In August 1814, the gov-
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S economy was even more spectacular By the end of the...

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