Economic History of the US
Revolution to Civil War,1776-1860
Lecture #5
Peter Allen
Econ 120
Financial Issues, 1776-1860
 Revolutionary War, 1775-81
 Articles of Confederation, 1781-89
 Practical aim, victory and independence, but..
 Financial disaster
 Federal gov. and some states defaulted
 Worthless Continental currency
 hyperinflation
 Banks suspended payment in specie
 1790, Need to build a real financial system
 Public finance
 Money
 Banking
 Three financial crises 1793-1860 (1819, 1837, 1857)
Hamilton
Treasury Secretary,
1789-1795
Financial Base for US
1. Tariff Act, 1789
2. Public Credit Act,
1790 - Fed. gov
assumes all Rev. War
debt of fed./states
3. Coinage Act, 1792
•
US Mint
4. First Bank of the US,
1791-1811
Part 1: Income Stream
 Tariff Act of 1789
 Established base tax revenue to fund
new debt and other spending
 New constitution… fed. gov. control
international and interstate commerce…
 …and power to tax
 99% of all revenue Import Tariffs
 5-15% of dutiable products
Part 2: Pay all Rev. War Debt
 Hamilton (“Report on Public Credit,” 1790) wrote
to Congress…
 “US needs to be able to borrow…and…
 …have a good credit rating
 US must pay all federal/state Rev. War debts…
 …at par!!!
 „Properly funded‟ Fed. gov. bonds could help
solve problem of shortage of liquid capital…
 …by enabling banks to issue currency backed by
it”
Revolutionary War Financing
1. Continentals = est. $400 million
o
o
o
o
½ fed. and ½ state
Denominated in “spanish milled dollars”
“Fiat” currency, not backing by specie
Depreciated in value to $1000 to $1
2. US Gov. debt = est. $54 million
o
o
o
$11 million foreign, Dutch and French
$43 million domestic (actually only $29 million)
defaulted
3. States’ debt = est. $25 million
o
Some defaulted and some paid
Assumption
 Rejected 4X in Congress
 “helping speculators…
veterans sold at 25¢…”
 Some states paid off debt
(e.g. Virginia)
 “Hamilton trying to take
over state finances”
 “Deal” Jefferson &
Madison support, Hamilton
agreed new capital in DC
 $77.1 million ≈ 40% of
1791 GDP ($193 million)
 US gov. has not defaulted
on Hamiltonian system
Hamilton’s numbers, 1790….
Public Credit Act, passed
by Congress in 1790
U.S. Government Debt
as a Percentage of GDP, 1790-2007
120%
WW2
100%
80%
60%
40%
Revolutionary
War
Civil
War
WW1
20%
0%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
8
Part 3: Coinage Act of 1792
 Bi-metallic specie standard, gold and silver
 US Dollar unit = one spanish milled dollar or peso
 Specie weight of 1 US dollar – 371.25 grains silver
 …and or 24.75 grains of gold
 Mint ratio of 15 to 1 (prevailing market prices)
 Form of price control
 Foreign coins ≈ 80% of all specie in 1800 (MB)
 US Mint…anyone can bring bullion to be coined
 No fiat paper!
 States prohibited from issuing currency





1787 gold Brasher doubloon
was sold for $7.4 million in
Dec. 2011
Minted by Ephraim Brasher,
Virginia goldsmith and neighbor
of George Washington
26.66 grams of gold — slightly
less than an ounce. Worth
about $15 when it was minted,
the gold value today would be
more than $1,500.
First American-made gold coin
denominated in dollars
the U.S. Mint in Philadelphia
didn't begin striking coins until
the 1790s.
Gresham’s Law






Problem with any Bi-metallic standard
Fixed exchange price for 2 precious metals each with a
market price…
determined by Supply and Demand, and
…therefore fluctuate in price relative to each other
People always take metal which is relatively underpriced at
the official mint ratio out of circulation
 “Bad money drives out good”
 Why?....arbitrage profits
1792-1834, gold was underpriced and only silver coins
circulated
1792
1799
1808
← Market prices
Gold
1
1
1
Silver

15
15.5
16
Bimetallism: usually just one metal circulates at a time
Effect of a Below-market Price Control
Gold price,
In terms of
Silver (oz.)
P
S
16
Market
price
15
Mint
ratio
shortage
D
250
400
Q
Gresham’s Law
 Several adjustments to mint ratio until 1860
 Problem of price controls “chasing” market price
 1834: official mint ratio changed to 16 to 1



Now gold was overpriced, silver underpriced
gold discovery in California made it worse
1834-60…Gold replaces silver in circulation
 Theoretical benefit of bimetallism…




Market-based money supply
…and twice as much “monetary base” i.e.
So, other metal can be used to maintain stock of money
Never worked in this way
Banking System, 1793-1860









After 1793, rise in # of banks
1790
3
1815
212
1800
20
1860
160
1811
117
all State-chartered
Issued own paper “notes” (i.e. currency) backed by
specie
Demand for bank loans, farmers & manufacturers
“Fractional reserve banking”
“Strictly business,” laissez faire, regulated by
market forces only
Early problem…over-issue of bank notes
Periodic depositor “runs” to redeem notes for specie
Lack of knowledge of “far away” banks, discounting
Part 4: First Bank of the U.S.,
1791-1811
 In 1790, Hamilton proposed a central bank…
 …modeled on the Bank of England (1694)
 Functions






Issue notes backed by specie
“Regulate” bank note issues by periodically presenting them for
conversion to specie
Fiscal agent of fed. gov. (deposits)
Collect taxes
Lend money to Treasury
Lender of last resort
 Opposition: unconstitutional, against states rights, for. owned
 Chartered by Congress for 20 years
First Bank of the U.S., 1791-1811
 Successful
 Stable monetary conditions
 Prevented banks from over-expanding note issuance & credit
 no banking crises…but…
 …Congress terminated it 1811
 First major banking crisis straight away
 War of 1812 (1812-15),
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

War financing
1814-17, banks allowed to suspend specie payments on notes
Over-issue (fiat), inflation
“Panic of 1819,” depression of 1819-21
Sentiment: “No paper currency, no fractional reserve”
Bank Holdings ($ million)
Specie
Bank notes
Reserve Ratio
1811
14.9
42.2
0.35
US Treasury Bonds
Reserve Ratio
1815
13.5
79
0.17
1818
20
94.7
15
0.36
▲
Jan.1811
end of
First Bank
▲
Jan.1817
start of
Second Bank
1819
25
74.2