I must thank you for this series. Although I thought I was reasonably au fait with this stuff I've learnt a lot. US banking before the Fed was a particular gap in my knowledge.
Professor Barty, if Gresham's Law states that bad money chases or good money as you've mentioned in the previous lectures, how did banknote holders of the Free Banking System not suddenly make a run on State Banks when it was clear that the Federal Government were trying to replace them? I mean if i was a banknote holder in a state bank and i knew that National Banks were the future, i would want either my specie or i would only accept national bank notes. I might even be tempted to hoard specie just to see who wins the banking system battle in case the public rejects the notion of the National Banking system due to its top heavy fractional banking flaw which you have pointed out. Thank you. I've watched all of your lectures too this point and plan to finish the rest of them.
Great question. The National Bank Act of 1865 (passed March 3) placed a ten percent tax on the amount of notes paid out by any state bank after July 1, 1866. The tax was not paid by noteholders. It was paid by the state banks themselves. The idea was to remove any incentive for state banks to issue notes. The state bank was still obliged to redeem at par any and all notes that it had issued prior to July 1, 1866. As soon as the notes returned to the state bank (either for redemption or to satisfy the payment of a loan), the bank retired the notes rather than return them to circulation. Hope that answers your question!
Jumping from Jefferson /Hamilton to the Civil War is stretching it. A lot happened in banking between 1776 to 1865. Hamilton's bank was chartered in 1781 with loan in metal backed currencies from Europe. Hamilton died in 1804, Jefferson 1826. Industrialization happened after the Civil War, early 1900's is when it gained a momentum to pull rural folks into cities.
I have seven lectures on the period after Hamilton/Jefferson and before the Civil War. Check the playlist: ua-cam.com/play/PLinliDgP9EbS0bQcoC6AUOCHIQ0bFdCQl.html
Industrialization happened before the Civil War. After the national bank acts you see the rise of monopolies because the banks were consolidating industry. JP Morgan financed US Steel from Carnegie Steel and other steel companies. Consolidated finance led to consolidated industry.
At the 10:43 Mark, the graphic shows “fractional reserve of species”. The new view names this “Fractional Deposits. That’s because loans are being accounted for as assets, which means there was no specie (aka constitutional money coined by congress) “deposited” to actually withdraw when a loan is created. Technically speaking, loans should be accounted for as a “liability-Side Debit” because then the loan would be taken out of “owner’s equity”, then it would be an actual loan. Assets should only be Congressional coined species and Congressionally created paper money and Congressionally created “Asset-Side Debits” as legal tender. Then banking becomes 100% reserve, which means the Chairman Governor couldn't flood bank accounts with "Asset-Side Debits". Our problem today isn’t too many Fed notes. The real problem is too many “Asset-Side Debts” that were not coined in the U.S Treasury and then transferred into the economy. Do you get this, in any little way? Do you see a simple solution we can use today?
Becoming a privately-owned for-profit Clearing-House banking corporation (association) was a great position to be in because other banks paid in gold as reserves. Becoming a Clearing-House in NY collected even more gold. Question: how were the Clearing-Houses chosen? The new view answer: According to Section 31 of the 1864: An Act to Provide a National Currency, Secured by a Pledge of United States Bonds, and to Provide for the Circulation and Redemption Thereof, the decision of who became a Clearing-House Corporation was based on approval from the Comptroller of Currency, which was an appointed position. The human implication is that the friends who picked him to be Comptroller of Currency would be picked as Clearing-house corporations. That is where other banks paid gold to the Clearing-House. The rule is, whoever gets the gold wins. Section 31 also stated -"That clearing-house certificates, shall be deemed to be lawful money in the possession of any association belonging to such clearing-house holding and owning such certificate, and shall be considered to be a part of the lawful money". NY clearing-Houses used Clearing-House certificates, (which cost them nothing but printing) to pay interest to country banks and other Clearing-Houses corporations on their gold deposits. The Clearing-Houses Certificate, authorized to function as Lawful-Money, was renamed Fed Funds but kept the Lawful-Money authorization. The Lawful Money Authorizations allows the Chairman Governor to buy US Treasury bonds with Fed funds.
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thanks for discussing a topic that is niche
I must thank you for this series. Although I thought I was reasonably au fait with this stuff I've learnt a lot. US banking before the Fed was a particular gap in my knowledge.
Professor Barty, if Gresham's Law states that bad money chases or good money as you've mentioned in the previous lectures, how did banknote holders of the Free Banking System not suddenly make a run on State Banks when it was clear that the Federal Government were trying to replace them?
I mean if i was a banknote holder in a state bank and i knew that National Banks were the future, i would want either my specie or i would only accept national bank notes. I might even be tempted to hoard specie just to see who wins the banking system battle in case the public rejects the notion of the National Banking system due to its top heavy fractional banking flaw which you have pointed out.
Thank you. I've watched all of your lectures too this point and plan to finish the rest of them.
Great question. The National Bank Act of 1865 (passed March 3) placed a ten percent tax on the amount of notes paid out by any state bank after July 1, 1866. The tax was not paid by noteholders. It was paid by the state banks themselves. The idea was to remove any incentive for state banks to issue notes. The state bank was still obliged to redeem at par any and all notes that it had issued prior to July 1, 1866. As soon as the notes returned to the state bank (either for redemption or to satisfy the payment of a loan), the bank retired the notes rather than return them to circulation. Hope that answers your question!
Jumping from Jefferson /Hamilton to the Civil War is stretching it. A lot happened in banking between 1776 to 1865. Hamilton's bank was chartered in 1781 with loan in metal backed currencies from Europe. Hamilton died in 1804, Jefferson 1826. Industrialization happened after the Civil War, early 1900's is when it gained a momentum to pull rural folks into cities.
I have seven lectures on the period after Hamilton/Jefferson and before the Civil War. Check the playlist: ua-cam.com/play/PLinliDgP9EbS0bQcoC6AUOCHIQ0bFdCQl.html
Industrialization happened before the Civil War. After the national bank acts you see the rise of monopolies because the banks were consolidating industry. JP Morgan financed US Steel from Carnegie Steel and other steel companies. Consolidated finance led to consolidated industry.
My understanding is there was also Wildcat Banks. Wildcat Banks were not required to register with the state comptroller. Can you comment on this.
So in this context do the New York City Banks start to act like the Fed (in that they can dictate interest rates throughout the rest of the economy)?
At the 10:43 Mark, the graphic shows “fractional reserve of species”. The new view names this “Fractional Deposits. That’s because loans are being accounted for as assets, which means there was no specie (aka constitutional money coined by congress) “deposited” to actually withdraw when a loan is created. Technically speaking, loans should be accounted for as a “liability-Side Debit” because then the loan would be taken out of “owner’s equity”, then it would be an actual loan. Assets should only be Congressional coined species and Congressionally created paper money and Congressionally created “Asset-Side Debits” as legal tender. Then banking becomes 100% reserve, which means the Chairman Governor couldn't flood bank accounts with "Asset-Side Debits".
Our problem today isn’t too many Fed notes. The real problem is too many “Asset-Side Debts” that were not coined in the U.S Treasury and then transferred into the economy.
Do you get this, in any little way? Do you see a simple solution we can use today?
What did banks provide the treasury for in exchange for the bonds?
I'm guessing the gov/treasury only accepted specie in exchange for any bonds it issued? It paid the interest on the bonds in specie only?
None of this was constitutional. The south resisted this. The Federal Government was limited to article 1 Section 8 of the constitution.
Becoming a privately-owned for-profit Clearing-House banking corporation (association) was a great position to be in because other banks paid in gold as reserves. Becoming a Clearing-House in NY collected even more gold. Question: how were the Clearing-Houses chosen?
The new view answer: According to Section 31 of the 1864: An Act to Provide a National Currency, Secured by a Pledge of United States Bonds, and to Provide for the Circulation and Redemption Thereof, the decision of who became a Clearing-House Corporation was based on approval from the Comptroller of Currency, which was an appointed position. The human implication is that the friends who picked him to be Comptroller of Currency would be picked as Clearing-house corporations. That is where other banks paid gold to the Clearing-House. The rule is, whoever gets the gold wins.
Section 31 also stated -"That clearing-house certificates, shall be deemed to be lawful money in the possession of any association belonging to such clearing-house holding and owning such certificate, and shall be considered to be a part of the lawful money".
NY clearing-Houses used Clearing-House certificates, (which cost them nothing but printing) to pay interest to country banks and other Clearing-Houses corporations on their gold deposits.
The Clearing-Houses Certificate, authorized to function as Lawful-Money, was renamed Fed Funds but kept the Lawful-Money authorization. The Lawful Money Authorizations allows the Chairman Governor to buy US Treasury bonds with Fed funds.
It is no wonder why bank runs collapsed the banking system 😂
I have 50 dollar gold 24 karate gold note of cleveland can you tell me if is real?
No idea, you'd have to take it to a coin dealer or collector.
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History of Money playlist:
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Is sicurete bank note of cleveland can you get me u Mail so I can send you a pic of it please?
I have 50 dollar gold cleveland
Lucky!