8/21/2014

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The United States Monetary System

During the colonial period, coins from different European countries were used and circulated throughout the colonies. Spanish coins were the dominate currency and because of the scarcity of coins, much of the trade and commerce was accomplished by bartering and trade, and commodities such as rice, tobacco, animal skins, and rum, were actually used as money.

Paper notes and other currencies were issued by some of the colonies with varying rates of discount which made them little more than worthless and not acceptable for most purchases or for payment of any kind.

During the American Revolution, the Continental Congress issued the first unified currency which was declared redeemable in gold and silver but after the war and independence, redemption became almost nil because of excessive printing of the notes over metal reserves and the notes lost almost all of their value.

Because of a sharp rise in population and a big increase in trade and commerce, the newly formed United States government started looking at ways to institute a strong, stable, central monetary policy.

It wasn't until 1792 that Congress was given the power to create and establish a national monetary system. At that time, Congress passed the Coinage Act and made the dollar the nations primary monetary unit.

The Coinage Act of 1792 was based on the use of gold and silver reserves but because of the scarcity of the precious metals at the time, adjustments in value occurred frequently.

Throughout U.S. history, especially after gold was discovered in California, revision of the coinage laws and the mint ratio of gold and silver coins increased or decreased as the economics of the times dictated.

In 1913, the Federal Reserve Act was passed authorizing the establishment of regional Federal Reserve Banks (Federal Reserve System) that issue money to member banks by drawing on their own deposits or by borrowing commercial paper if their deposit balances with the Federal Reserve are insufficient.

Today, the United States has a managed monetary system that is no longer based wholly on metals. The Federal Reserve initiates and carries out monetary policy that stabilizes the rate of growth in the money supply which, in turn, influences the economy and keeps the lid on inflation rates.

Without cheaper credit and a readily supply of money for home and business loans, the economy usually falls into a recession thereby creating business failures, foreclosures, unemployment, bad debt, and large numbers of bankruptcies.

The United States monetary system is designed to have the flexibility to meet the needs of the general population and to stimulate the economy when stimulation is deemed necessary.

 

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