Supporting standards comprise 35% of the U. S. History Test

15 (E)

The Student is expected to:(E) Describe the emergence of monetary policy in the United States, including the

Federal Reserve Act of 1913 & the shifting trend from a gold standard to fiat money

Readiness Standard (15)The student understands domestic & foreign issues related to U. S. economic growth from

the 1870s to 1920.

The Student is expected to:(E) 1 Describe the emergence of monetary policy in the United States, including the

Federal Reserve Act of 1913

Readiness Standard (15)The student understands domestic & foreign issues related to U. S. economic growth from

the 1870s to 1920.

Federal Reserve System — commonly called “the Fed” — serves as the central bank of the United

States. Congress passed the Federal Reserve Act in 1913, which President Woodrow Wilson supported

and signed into law on December 23, 1913.

It was the most comprehensive overhaul of the nation’s banking system since the Civil War and represented one of the crowning achievements of President Wilson’s New Freedom program. It

helped to safeguard America’s financial institutions, the American economy, and the supply of U.S. currency, and it created a new

system that allowed a level of governmental control of the monetary supply that was unprecedented in American history.

Federal Reserve System — commonly called “the Fed” — serves as the central bank of the United

States. Congress passed the Federal Reserve Act in 1913, which President Woodrow Wilson supported

and signed into law on December 23, 1913.

It was the most comprehensive overhaul of the nation’s banking system since the Civil War and represented one of the crowning achievements of President Wilson’s New Freedom program. It

helped to safeguard America’s financial institutions, the American economy, and the supply of U.S. currency, and it created a new

system that allowed a level of governmental control of the monetary supply that was unprecedented in American history.

Congress structured the Fed as a distinctly American version of a central bank: a “decentralized” central bank, with Reserve Banks and Branches in 12 Districts spread

across the country and coordinated by a Board of Governors in Washington, D.C. Congress also gave the Fed

System a mixture of public and private characteristics.

Congress structured the Fed as a distinctly American version of a central bank: a “decentralized” central bank, with Reserve Banks and Branches in 12 Districts spread

across the country and coordinated by a Board of Governors in Washington, D.C. Congress also gave the Fed

System a mixture of public and private characteristics.

The 12 Reserve Banks share many features with private-sector corporations, including boards of directors and

stockholders (the member banks within their Districts). The Board of Governors, though, is an independent

government agency, with oversight responsibilities for the Reserve Banks.The Federal Reserve System would then become a privately

owned banking system that was operated in the public interest. Bankers would run the twelve Banks, but those Banks would be supervised and by the Federal Reserve Board whose members included the Secretary of the Treasury, the Comptroller of the

Currency, and other officials appointed by the President to represent public interests.

Federal Reserve System is the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes, now commonly known as the U.S. Dollar, and Federal

Reserve Bank Notes as legal tender.

The Federal Reserve System would then become a privately owned banking system that was operated in the public interest. Bankers would run the twelve Banks, but those Banks would be supervised and by the Federal Reserve Board whose members included the Secretary of the Treasury, the Comptroller of the

Currency, and other officials appointed by the President to represent public interests.

Federal Reserve System is the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes, now commonly known as the U.S. Dollar, and Federal

Reserve Bank Notes as legal tender.

The “Aldrich Plan” was The “Aldrich Plan” was the predecessor to the the predecessor to the Federal Reserve Act, Federal Reserve Act,

being proposed in 1912being proposed in 1912

The Plan called for the establishment of a The Plan called for the establishment of a National Reserve Association with 15 National Reserve Association with 15

regional district branches and 46 regional district branches and 46 geographically dispersed directors primarily geographically dispersed directors primarily

from the banking profession. The Reserve from the banking profession. The Reserve Association would make emergency loans to Association would make emergency loans to member banks, print money, and act as the member banks, print money, and act as the

fiscal agent for the U.S. government.fiscal agent for the U.S. government.

Fed conducts monetary policy, supervises and regulates banking, serves as lender of last resort, maintains an effective and efficient payments system, and serves as

banker for banks and the U.S. government. Conducting the nation’s monetary policy is one of the most important

— and often the most visible — functions of the Fed.Prior to 1913, panics were common occurrences, as investors were unsure about the safety of their deposits. The Federal

Reserve Act (also known at the time as the Currency Bill, or the Owen-Glass Act.) gave the 12 Federal Reserve banks the ability to print money in order to ensure economic stability. In addition to this task, the Fed had the power to adjust the discount rate/the

fed funds rate and buy & sell U.S. treasuries

The Federal Reserve Act intended to establish a form of economic stability through the introduction of the

Central Bank, which would be in charge of monetary policy, into the United States. The Federal Reserve Act is perhaps one of the most influential laws concerning

the U.S. financial system.

Fed conducts monetary policy, supervises and regulates banking, serves as lender of last resort, maintains an effective and efficient payments system, and serves as

banker for banks and the U.S. government. Conducting the nation’s monetary policy is one of the most important

— and often the most visible — functions of the Fed.Prior to 1913, panics were common occurrences, as investors were unsure about the safety of their deposits. The Federal

Reserve Act (also known at the time as the Currency Bill, or the Owen-Glass Act.) gave the 12 Federal Reserve banks the ability to print money in order to ensure economic stability. In addition to this task, the Fed had the power to adjust the discount rate/the

fed funds rate and buy & sell U.S. treasuries

The Federal Reserve Act required national banks to join the federal system and contribute six percent of their capital to the system. State banks and trust companies could also join the system. Federal Reserve banks issued notes to member banks with

the amount of currency issued regulated by a central Federal Reserve Board in Washington, DC. This board was comprised of the secretary of the treasury, the

comptroller of currency, and six other presidential appointees. The act allowed a more flexible system of currency distribution that could respond to economic

conditions unique to a given region or that impacted the entire nation. The flexibility of the system benefited both farm and business interests.

The Federal Reserve system as it exists today is not quite the same creature that was produced in 1913. The system has

undergone rare, but substantial overhauls over the years. The two most important changes occurred in response to the

Great Depression and to the mini-crisis of the late 1970’s. Both of these reforms will be discussed later.

The Federal Reserve Act required national banks to join the federal system and contribute six percent of their capital to the system. State banks and trust companies could also join the system. Federal Reserve banks issued notes to member banks with

the amount of currency issued regulated by a central Federal Reserve Board in Washington, DC. This board was comprised of the secretary of the treasury, the

comptroller of currency, and six other presidential appointees. The act allowed a more flexible system of currency distribution that could respond to economic

conditions unique to a given region or that impacted the entire nation. The flexibility of the system benefited both farm and business interests.

Throughout the history of the United States, there has been an enduring economic and political debate regarding the costs and benefits of central banking. Since the

inception of a central bank in the United States, there were two major opposing views to this type of economic system. Opposition was based on 1) protectionist

sentiment; a 2) central bank would serve a handful of financiers at the expense of small producers, businesses, farmers and consumers, and could destabilize the economy through speculation and inflation. Proponents argued that a strong banking system could provide enough credit for a growing economy and avoid

economic depressions.

Throughout the history of the United States, there has been an enduring economic and political debate regarding the costs and benefits of central banking. Since the

inception of a central bank in the United States, there were two major opposing views to this type of economic system. Opposition was based on 1) protectionist

sentiment; a 2) central bank would serve a handful of financiers at the expense of small producers, businesses, farmers and consumers, and could destabilize the economy through speculation and inflation. Proponents argued that a strong banking system could provide enough credit for a growing economy and avoid

economic depressions.

The Student is expected to:(E) 2 Describe the emergence of monetary policy in the United States, including the shifting trend from a gold standard to fiat

money

Readiness Standard (15)The student understands domestic & foreign issues related to U. S. economic growth from

the 1870s to 1920.

Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is

derived from the relationship between supply and demand rather than the value of the material that the money is made of.

Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for “it shall be,” “let it become,” “let it be done.”

Most modern paper currencies are fiat currencies, have no intrinsic value and are used solely as a means of payment. Historically, governments

would mint coins out of a physical commodity such as gold or silver, or would print paper money that could be redeemed for a set amount of

physical commodity. Fiat money is inconvertible and cannot be redeemed. Fiat money rose to prominence in the 20th century, specifically after the collapse of the Bretton Woods system in 1971, when the United States

ceased to allow the conversion of the dollar into gold.

Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is

derived from the relationship between supply and demand rather than the value of the material that the money is made of.

Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is

the Latin word for “it shall be,” “let it become,” “let it be done.”

Most modern paper currencies are fiat currencies, have no intrinsic value and are used solely as a means of payment. Historically, governments

would mint coins out of a physical commodity such as gold or silver, or would print paper money that could be redeemed for a set amount of

physical commodity. Fiat money is inconvertible and cannot be redeemed. Fiat money rose to prominence in the 20th century, specifically after the collapse of the Bretton Woods system in 1971, when the United States

ceased to allow the conversion of the dollar into gold.

Silverite Movement of the Late 19th Century—a mechanism of controlling

the value of money • Free, independent silver

coinage at a ratio of 16 ounces of silver to every one ounce of gold

• Free coinage meant U.S. mints would coin all silver given to them

• Inflation—higher prices and lower purchasing power due to rising costs

The Silver Controversy—A Quick Fix for Economic Troubles?

• People wanted quick solutions to the economic problems of the day

• Americans in the South and West—particularly those in the Democratic Party—favored a silver policy

• Why Did Farmers Favor Unlimited Coinage of Silver?

Who supported silver and why?

Farmers Who Supported Silver

• They believed that the coinage of silver would cause inflation and help them repay their debts with less valuable money than they had borrowed

• They believed it would raise wages and crop prices

• They believed it would challenge the hated power of the gold-oriented Northeast

Two Free Silver Cartoons of the 1890s. At left,

William Jennings Bryan advertises free silver as an elixir to heal what ails you. See Election of 1896 below. To right, an ex-Confederate

soldier—now a farmer—argues his case for free

silver as a panacea that will restore favorable economic conditions across the United

States of America

Who Supported the “Gold Standard”?

• Bankers and established business people, especially in the East

• Workers who feared inflation would lessen the purchase power of their wages

Gold Standard—currency based solely on gold; it held down the money supply and

kept prices from rising

Sherman Silver Purchase Act, 1890

• U.S. Treasury directed to purchase 4.5 million ounces of sliver a month

• Treasury to issue legal tender—Treasury notes—in payment for this silver

• Both sides—silver and gold—were satisfied with this compromise

Repeal of Silver Purchase Act, 1893

• President Cleveland repealed the bill

• This reduced the flight of gold out of the U.S. but did not solve the Treasury’s gold problem

• It boosted business confidence

• It contracted currency when inflation was needed

Continued. . .• It failed to revive business or the stock

market, reduce unemployment, or prevent a fall in farm prices

• The repeal discredited President Cleveland

• It confined the Democrats to the South

• It propelled the Republicans into the majority party by 1894

Trouble of the Farm—Demanding a “Fairer Share” of Economic and

Social Benefits• Plentiful supplies on foreign market drove

down crop prices

• Credit was difficult to obtain

• Deflation

• Rising freight charges imposed by railroads (although rates actually fell during this period)

Continued. . .• Drought

• Mortgages that were burdensome (although not crippling)

• Crisis of Self-Esteem

“Farm discontent was a worldwide phenomenon between 1870 and 1900. With the new means of

transportation and communication, farmers everywhere were caught up in a complex

international market they neither controlled nor entirely understood.”

Fading of Populism and Rise of William Jennings Bryan

Bryan was a powerful leader who was able to unite the “Silver Faction” One reporter aptly

prophesied, “All the Silverites need is a Moses,” and in Bryan, they certainly found one

Bryan’s Qualities

• Dramatic public speaker—“The Voice”

• Used gestures dramatically

• Called the “Great Commoner” in reference to his identification with the common man

• Religious upbringing

Bryan’s father, a Baptist deacon and his mother, devout Methodist. He learned in both

denominational environments, eventually becoming an expert on the Bible and a spokesman for

Fundamentalist views

• Barely 36 years old in 1896

• Little political experience

• His “Cross of Gold” speech at the 1896 Democratic Convention

• Spoke as in defense of a righteous, holy cause

• Captivated delegates at the Convention

Bryan the Man

Bryan’s “Public Event”

Bryan’s rousing conclusion: “Having behind us the

producing masses of this nation and the world. . . we will

answer their demand for a gold standard by saying to them:

‘You shall not press down upon the brow of labor this crown of

thorns, you shall not crucify mankind upon a cross of gold.”

During the American Civil War, the Federal Government issued United States Notes, a form of paper fiat currency popularly known as “greenbacks.” Their issue was limited by Congress just slightly over $340 million. During the 1870s, withdrawal of the

notes from circulation was opposed by the U. S Greenback Party. The term “fiat money” was used in the resolutions of an 1878 party

convention.

By World War I most nations had a legalized government monopoly on bank notes and the legal tender status thereof. In theory, governments still promised to redeem notes in specie on demand. However, the costs of the

war and the massive expansion afterward made governments suspend redemption in specie. Since there was no direct penalty for doing so,

governments were not immediately responsible for the economic consequences of printing more money, which led to hyperinflation – for

example in Weimar Germany.

By World War I most nations had a legalized government monopoly on bank notes and the legal tender status thereof. In theory, governments still promised to redeem notes in specie on demand. However, the costs of the

war and the massive expansion afterward made governments suspend redemption in specie. Since there was no direct penalty for doing so,

governments were not immediately responsible for the economic consequences of printing more money, which led to hyperinflation – for

example in Weimar Germany.

1920s 1920s Germany: Germany:

buying buying vegetables vegetables

with with baskets of baskets of

notes notes (Photo: (Photo: Roger-Roger-Viollet)Viollet)

From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States

dollars to one troy ounce of gold.

Other currencies were pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central

banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund.

This system collapsed when the United States government ended the convertibility of the US dollar for gold in 1971, in

what became known as the Nixon Shock.

From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States

dollars to one troy ounce of gold.

Other currencies were pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central

banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund.

This system collapsed when the United States government ended the convertibility of the US dollar for gold in 1971, in

what became known as the Nixon Shock.

Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If

people lose faith in a nation’s paper currency, like the dollar bill, the money will no longer hold any value.

While gold- or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed

weights of gold or silver, fiat money’s value is unrelated to the value of any physical quantity. Even a coin containing valuable

metal may be considered fiat currency if its face value is defined by law as different from its market value as metal.

The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to

gold. Since then, all reserve currencies have been fiat currencies, including the U.S. dollar

and the Euro.

Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If

people lose faith in a nation’s paper currency, like the dollar bill, the money will no longer hold any value.

The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to

gold. Since then, all reserve currencies have been fiat currencies, including the U.S. dollar

and the Euro.

When a country goes off the gold standard and onto the fiat standard, it adds to the number of “moneys” in existence. In

addition to the commodity moneys, gold and silver, there now flourish independent moneys directed by each government

imposing its fiat rule. And just as gold and silver will have an exchange rate on the free market, so the market will establish

exchange rates for all the various moneys.

When a currency changes its character from gold-receipt to fiat paper, confidence in its stability and

quality is shaken, and demand for it declines. Furthermore, now that it is cut off from gold, its far greater quantity relative to its former gold backing

now becomes evident.

When a country goes off the gold standard and onto the fiat standard, it adds to the number of “moneys” in existence. In

addition to the commodity moneys, gold and silver, there now flourish independent moneys directed by each government

imposing its fiat rule. And just as gold and silver will have an exchange rate on the free market, so the market will establish

exchange rates for all the various moneys.

When a currency changes its character from gold-receipt to fiat paper, confidence in its stability and

quality is shaken, and demand for it declines. Furthermore, now that it is cut off from gold, its far greater quantity relative to its former gold backing

now becomes evident.

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