Money is any medium of exchange that is widely used for payment for goods and services and in settlement of debts. Money serves as a standard of value in measuring the relative worth of goods and services. The price of a commodity is the nmumber of monetary units it takes to buy the commodity. The monetary unit used as a measure of value need not be widely used as a medium of exchange. For example, in colonial America Spanish currency was commonly used, even though the British pound was the standard of value.

Without money there would be the direct exchange of one commodity for another, with trade being based upon barter. Among so-called primitive people barter is still used. Barter is an awkward means of conducting trade. A person wanting to trade an object must find another person who has something to offer in exchange. In a money economy, a person can easily sell something for money without the time and effort involved in bartering.

Where time-share weekly ownership of units at vacation resorts first developed, some owners did barter with other eclines and the currency would lose value.

Money of redemption, or standard money, is the money used by a country that may be converted into, and determines the value of, other forms of money. Modern standards have been generally standards based on gold or silver or fiat standards of inconbvertible paper units. The principal types of gold standard are as follows:

(1) Gold-coin standard used in the United States until 1933;

(2) Gold-bullion standard of a specified quantity of gold; and

(3) Gold-exchange standard, under which the currency is convertible into the currency of some other country under the gold standard.

The gold bullion standard was used in Great Britain from 1925 to 1931, and a number of Latin American countries have used the dollar-exchange standard. In modern times the silver standard has been primarily used in Asia.

History of Monetary Regulation in United States

First Bank of the United States Chartered in 1791

The first Bank of the United States was chartered by Congress in 1791 for 20 years, and the second Bank of the United States existed from 1816 to 1836. The Bank of the United States issued bank notes that maintained a fairly stable value. Along with the stable bank notes of the Bank of the United States, state chartered babks also issued notes that often greatly depreciated in valuew as result of lax state banking laws. After the closing of the second Bank of the Unitred States, most of the notes in circulation were those of state-charted banks and circulated in only a limited area.

First Coinage Act of 1792

Congress passed the first coinage act in 1792, which adopted a bimertalluc standard, and under hich both gold and silver coins were to be minted. The gold dollar contained 24.75 grains of pure gold, with the silver dollar containing 15 times as much silver, making the kegal mint ratio of 15 to 1. Under this ratio, gold was undervalued at the mint compared to its value as bullion, with the result that very few gold coins were minted. Silver dollars, moreover, were largely withdrawn from circulation because they were exported to the West Indies and exchanged at face vakue for slightly larger Spanish dollars. These Spanish dollars were then melted down and taken to the mint for coinage at a profit. Metallic currency was largely limited to a short supply of small silver and copper coins.

Effect of Adoption 1n 1843 of Mint Ratio of 16 to 1

In 1834 the Congress adopted a mint ratio of 16 to 1 by reducing the weight of gold coins. After 1834, silver became undervalued at the mint with the rswult that its market value was higher than its coin value. As a consequence, gold replaced silver as the montary means of exchange. To reduce a serious shortage in small coints, Congress in 1853 reduced the weightr of half-dollsars, quarters, and dimes by 7 percent. The new subsidiary coins were worth more as money than as bullion, with the rsult that they remained in circulation, Before 1853, small coins that remained in circulation were often altered to reduce their weight to bullion value.

Pressure from Silver Interests

In 1873 the mintage of silver dollars was no longer authorized, but mintage again was authorized and resumed in 1878. After the elimiation of silver dollars in 1873, the expanded production of silver in the West caused the value of silver to fall significantly in price. The silver interests vigorously campaigned for free coinage of silver, and in this campaign they were joined by political groups who favored free coinage in silver as a means of improving general economic conditions. The result of this pressure was the passage of the Bland-Allison Act in 1878 and the Sherman Act in 1890, which required the Treasury to purchase large amount of silver for coinage. The law also established the silver certificate, which remained remained as a part of U. S. currency until its retirement in 1968. The Sherman act introduced a large amount of over-valued silver into circulation, and caused a serious decline of gold reserves of the Treasury, and helped to bring on the panic of 1893, which led to its repeal by the Congress in that year. The silver forces were finally defeated and in 1900 the Gold Standard Act afformed the gold dollar as the standard unit of value. In 1913, the Federal Reserve Act was passed by the Congress, and this Act and the Federal Reserrve System are discussed later on in this article.

The Great Depression

Devaluation of the Gold Dollar

As a result of the economic depression and the epidemic of bank failures in the early 1930s, major reforms in the nation`s monetary structure took place. Prresident Roosevelt issued executive proclamations in March and April 1933 that prohibited gold exports execpt under government license and called in all gold and gold certificates from general circulation, thereby ending the gold standard. The Gold Standard Act of January 30, 1934 returned the country to a modified gold standard with a devalued dollar. The act gave the president authority to lower the weight of the gold dollar to between 50 and 60 percent of its former gold content. The day after the passage of the act the president issued a proclamation reducing the gold content of the dollar to 59 percent of that established by the Gold Standard Act of 1900, or fromn 23.22 to 13.71` grains of fine gold.

Unlimited Coinage of Silver

The Thomas Amendment to the Emergency Farm Relief Act of May 12, 1933, commonly known as the Inflation Act, gave the president the authority to restore unlimited coinage of silver under a bimetallic system. Thereafter, the Silver Purchase Act, signed on June 19, 1934, authorized the nationalization of silver and declared that it was the policy of the United Ststes to have silver holdings of the Treasury to make up a maximum of one-quarter the value of the nation`s combined monetary gold and silver stock.

Executive Order of August 9, 1934

An executive order of August 9, 1934 required all silver in the United States, except for categories such as silver coins, fabricated silver, and silver owned by foreign governments, to be delivered to the mint to be coined or held as bullion for later coinage. Thereafter, under the Silver Purchase Act previously enacted, and subsequent legislation, the Treasury purchased large quantities of silver abroad and from domestic producers. These purchases raised the price of silver and limited the use of silver abroad, especially in China and India.

Recent Developments

As a result of diminishing gold reserve the United States in 1968 eliminated the gold-cover requirements for Federal Reserve Notes, silver certificates, and Treasury notes of 1890. This allowed the gold stock of the United States to be used for international payments until, in August 1971, the exchange of gold for foreign-held dollars was suspended indefinitely. In 1975, U.S. citizens were given the right to buy, sell, or own gold, but could not use it as a medium of exchange. Startimg in 1963, the price of silver rose above its monetary value. The United States Treasury by 1969 sold the last of its silver supply and discontinued redeeming silver certificates for the metal.

Money Need Not Be Based on a Precious Metal

Currency of a nation need not be based upon or redeemable by a precious metal. Under a well-regulated monetary system the money of a nation may be fiat currency issued pursuant to sound and reasonable standards. The value of coins need not be based upon their intransic metallic value, and paper currency need only to be treated as legal tender. There is also no reason, as will be discussed later in this article, for the Federal Reserve System to require government securities to back the creation of money under the reserve ratio. The government securities themselves are only back by the credit rating of the United States.

General Remarks

Bimetallism and Gresham`s law

A bimetallic standard has been used by some countries under which either gold or silver coins set the standard monetary value. These systemsa were usually not successful as a result of Gresham`s law, which states the tendency for the cheaper money to drive the more valuable money out of circulation.

Modern Systems`s Use of Fiat Money

Under most modern systems, the free convertibility of the currency into a metallic standard is not allowed. The value of money is set by government fiat rather than by its nominal gold or silver content. Modern currencies are managed currencies with valuation mostly dependent upon government policy and management. The monetary system of the United States is one of managed currency, with valuation primazrily set by the governors of the Federal Reserve System, and subject much to the special interests of the American and international banking industry. It is unclear whether the value of inconvertible-credit currency, where policies are based upon special interests and not upon sound monetary policies, can lead to currency at a fairly stable level.

Importance of Credit Instruments

Credit instruments are used in most business tranactions in the United States. Bank deposits are generally treated as a part of the monetary structure of a country, with the term money supply refering to currency in circulation and bank deposits. The amount of bank deposits and credit instruments are many times the amount of currency actually in circulation. According to the quantity theory of money, prices are largely determined by the volume of money outstanding. The volume and speed of turnover, however, of both money and bank deposits has been shown to be of great importsance in determining price level.

Concluding Remarks

To understand the American economy, a person not only should have a sound understanding of economics as a social scoence but also a detailed understanding of the American monetary system and the American Federal Reserve System. With such an understanding, a person would probably realize that the United States could issue fiat money without the need of becoming indebted to the banking industry and the unnecessary accumulation of a large national debt. The ortant thing is that fiat money is created pursuant to rational and highly controlled regulatory procedures. A person also needs to understand the difference between budgeted and non-budgeted revenues and expenditures of the government and of government agencies. He needs to become adapt at analyzing the Comprehensive Annual Financial Reports of government entities for the reason that these CAFRs are usually completely ignored by even the financial press.

©Wilson Ogg