HISTORY OF THE CURRENCY

During the Revolutionary War, two things almost led to the defeat of the struggle for American
independence. One was the inadequate system of constitutional government, and the other was
unsound money.

Congress issued about $240 million in “Continentals”–referring to money of the Continental

Congress. It was understood that the money would be redeemed in gold or silver by the states
after the war.

The states thought this was a great way to manufacture money so they issued vast quantities of
their own paper currency.

The British saw what was happening, so they printed up bales of counterfeit “Continentals” and
used them to buy supplies from Americans.

Before long, confidence in the Continentals had sunk so low that by 1780 they were not even
worth one cent. No further paper money was issued by the United States for over eighty years.

The American market had already accepted the Spanish dollar as its basic unit of value. It was
minted in Mexico and called a “piece of eight,” or a peso. The words Spanish peso are said to
have been abbreviated into an S and a P with one written over the other. This was further
abbreviated to a “$” sign.

The word dollar originally came from a Bohemian word thal, meaning “valley.” A silver coin
was minted in a certain Bohemian valley and became known as a “thaler,” which was
transliterated into English as a “dollar.”

In the 1700s, the Spanish came out with a silver coin of almost exactly the same size and weight
as a thaler. It represented eight Spanish gold “reals” and was therefore called a “piece of eight.”
In the marketplace merchants referred to this as the “Spanish dollar.” However, to make change,
they would cut a dollar into eight pieces or “bits.” These began to be called two bits for a quarter,
four bits for fifty cents, and six bits for seventy-five cents.

In 1785, two years before the Constitution was written, the Congress accepted the Spanish dollar
as the official unit of value for the United States and determined that all foreign coin would be
evaluated in terms of the Spanish dollar.

In 1786, the year before the Constitution was adopted, the Board of Treasury fixed the silver
weight of the adopted dollar at 375 and 64/100s grains of fine silver. The value of gold coins or
any other coins was to be calculated in terms of the silver dollar of this weight and fineness.

It will be noted that three things had been established before the Constitution was adopted:

1. That the official money of the United States would be precious metals–silver and gold.
 2. That the basic unit of value would be called a “dollar” and consist of 375 and 64/100s
grains of fine silver.
3. All other coins, both foreign and domestic, would be evaluated in terms of this official
silver dollar.

In 1792, the Coinage Act was passed. It invoked the death penalty for anyone debasing the
money. It provided for a United States mint where silver dollars were coined along with gold
coins beginning in 1794. Altogether nearly 900,000,000 silver dollars were coined from that time
until 1935 when the treasury stopped minting them.

The ratio between gold and silver which was fixed by statute at 15 to 1 was soon out of phase in
favor of gold. As a result, much of the American gold stocks began to be purchased by Europe.

In 1834, the ratio was changed to 16 to 1which favored silver, and from then until the Civil War
the nation was, for all practical purposes, on a gold standard. Europe began buying silver, with
the gold it had previously accumulated. This soon brought gold stocks back to the United States.

Paper Currency

We have already noted that there are two kinds of paper currency which are not “money” but
circulate as such: the first is debt money, which can be redeemed in silver and gold on demand,
and the other is fiat (paper) money, which is designated as legal tender but cannot be redeemed
for anything.

As indicated earlier, the original draft of the Constitution authorized Congress to “emit bills of
credit.” This had reference to debt money or currency which would be redeemed with gold or
silver. After an extensive discussion the Founders decided they couldn’t risk it. There would be
no United States debt currency or bills of credit. As for fiat money, this was so abhorrent to the
Founders they didn’t even discuss it.

As mentioned earlier, the Founders knew that people do not like to conduct business–except for
minor transactions–with precious metal. Metal money is too heavy, too bulky, and in substantial
amounts is dangerous to transport. It is much more convenient and safe to use paper currency.
The Founders realized this, but expected the banks to issue notes (redeemable in gold or silver)
which would fill this need.

Over the objections of Jefferson and Madison, Alexander Hamilton persuaded Congress to
approve a United States Bank for a period of twenty years. This was actually a private bank, but
it functioned as a depository for the United States and collected taxes. It also issued redeemable
bank notes which circulated as currency. Other private banks did the same. By 1798, Alexander
Hamilton decided that this procedure was a mistake. He felt that if currency or bank notes were
to be issued and circulated as “money,” it should have been done by Congress.

Unfortunately, no steps were taken to remedy this problem, so by the time of the Civil War there
were thousands of banks issuing thousands of different kinds of bank notes. Furthermore, many
banks were issuing far more notes than they had reserves. There was also a tremendous amount
of counterfeiting. Before long the whole system began to falter.

When the Civil War required vast new expenditures, the banks wanted extremely high rates of
interest on any loans to the Union (15 to 36 percent), and so Congress felt compelled to
issue fiat money. These “greenbacks” could not be redeemed in gold or silver and were limited
somewhat in the things for which they could be spent. Their value soon dropped to around 35
cents.

Finally, in 1878, Congress promised to redeem the greenbacks in gold. This changed the
greenbacks from cheap fiat money to debt money, redeemable at face value. At first there was a
run on gold as people traded in their greenbacks, but when they found they really could get the
gold, then people didn’t want it. They returned the gold to the bank and took back paper money
instead. This left the United States on the gold standard until 1933.

Meanwhile, Congress phased out the bank notes issued by state banks by putting a tax on them,
thereby discouraging their use. In 1863-64, Congress passed a series of national bank acts which
set up a system of privately owned banks chartered by the federal government. These national
banks issued notes backed by the U.S. government bonds, and these national bank notes became
the country’s chief currency. When the greenbacks received gold backing in 1878, they also
moved up to a par value with the national bank notes.

In 1913 the Federal Reserve replaced the national bank system, and Federal Reserve notes were
issued with a promise to redeem them in gold on demand.

On January 30, 1934, the Gold Reserve Act was passed, giving the Federal Reserve title to all the
gold which had been collected. This act also changed the price of gold from $20.67 per ounce to
$35 per ounce, which meant that all of the silver certificates the people had recently received for
their gold now lost 40 percent of their value.

The next day the President proclaimed (48 Stat. 1730) that the dollar was to be fixed at 15 and
5/21 grains of standard gold and was to be maintained at this level “in perpetuity.” This is still
the definition of the “dollar” in the United States code. Russia and the central banks of Europe
began buying up gold in huge quantities. Thus there came into being a dual monetary system: a
gold standard for foreigners and Federal Reserve notes (redeemable in silver) for Americans.

Today, the American economy operates under a monetary system which is completely outside
the Constitution. Its fiat money is continually manipulated both in value and quantity. This has
had a devastating impact on its purchasing power, which is now down to about 8 percent of its
1933 value. It has eroded the value of savings, insurance policies, retirement funds, and the fixed
incomes of the elderly.
2008 Development

Lehman and Washington Mutual Fail

The situation reached a fever-pitch crisis point in 2007. Fears about the financial health of other
firms led to massive disruptions in the wholesale bank lending market, which caused rates on
short-term loans to rise sharply relative to the overnight federal funds rate.

Then, in the fall of 2008, two large financial institutions failed: the investment bank Lehman
Brothers and the savings and loan Washington Mutual. Since major financial institutions were
extensively intertwined with each other, the failure of one could mean a domino effect of losses
through the financial system, threatening many other institutions.

Needless to say, everyone completely lost confidence in the financial sector, and the stock prices
of financial institutions around the world plummeted. No one wanted anything to do with them.
Banks couldn’t sell loans to investors because securitization markets had stopped working, so
banks and investors tightened standards and demanded higher interest rates.

This credit crunch dealt a huge blow to household wealth, and people started cutting back on
spending as they wondered what the hell they were going to do about their depleted savings. The
snowballing continued as businesses canceled expansion plans and laid off workers, and the
economy entered a recession in December 2007. In reality, the recession was pretty mild until
the fall of 2008 hit and financial panic intensified, causing job losses to soar through the roof.

The Fed’s Response to the Economic Crisis

By December of 2008, the FOMC slashed its target for the federal funds rate over the course of
more than a year, bringing it nearly to zero – the lowest level for federal funds in over 50 years.
This helped lower the cost of borrowing for households and businesses alike on mortgages and
other loans.

The Fed wanted to stimulate the economy and lower borrowing costs even further, so they turned
to some pretty unconventional policy tools.

The Fed purchased $300 billion in longer-term Treasury securities, which are used as
benchmarks for a variety of longer-term interest rates like corporate bonds and fixed-rate
mortgages. In an effort to support the housing market, the Fed authorized the purchase of $1.25
trillion in mortgage-backed securities guaranteed by agencies like Freddie Mac and Fannie Mae,
and about $175 billion of mortgage agency longer-term debt.

Euro trades above the key psychological $1.50 barrier, after Fed Chairman Ben Bernanke
signalled the central bank was ready to cut rates again in the face of mounting risks to economic
growth.
Lehman Brothers files for bankruptcy, while the government bails out insurer AIG. Investors
flock to safe-haven status of dollar and yen. Euro to a low of $1.2328 on Oct 28 from $1.4825 on
Sept 22.

SOURCES

 https://www.google.com.ph/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=16&cad=rja&uact=8&ved=0ahUKEwitqK-
omuHWAhUGvLwKHZqxBscQFgh2MA8&url=https%3A%2F%2F
 https://www.cmi-gold-silver.com/history-american-money/