Answer:
Step-by-step explanation:
Let's discuss the development of the monetary system in the United States between the Revolutionary War and the Civil War, covering the type of commodity money used, the creation of money by the banking system, the relationship between the money supply and prices, and the role of the national banking system.
1 Commodity Money:
After the Revolutionary War, the United States faced a scarcity of money. To address this, commodity money was primarily used. Commodity money is any physical item that has intrinsic value and can be used as a medium of exchange. Common forms of commodity money during this period included gold, silver, and various types of foreign coins. Commodity money was chosen because it had inherent value and could be easily recognized and exchanged.
2 Banking System and Money Creation:
During this era, the banking system played a crucial role in creating money. Banks issued banknotes, which were promises to pay the bearer a specified amount of gold or silver upon demand. These banknotes circulated as a form of currency, effectively expanding the money supply. Banks could issue more banknotes than they had physical reserves, which led to the creation of additional money in the economy through a process known as fractional reserve banking.
3 Money Supply and Prices:
The relationship between the money supply and prices can be explained by the quantity theory of money. According to this theory, the total money supply in an economy multiplied by the velocity of money (the rate at which money changes hands) equals the overall price level multiplied by the level of goods and services produced. As the money supply increased, either through the issuance of banknotes or the discovery of new gold or silver deposits, it could lead to inflation if the supply of goods and services did not keep pace. Conversely, a decrease in the money supply could lead to deflation.
4 National Banking System:
The United States established a national banking system during the Civil War with the passage of the National Banking Act in 1863. The act aimed to create a stable and uniform banking system by establishing national banks that could issue standardized national banknotes backed by U.S. government bonds. The national banking system provided a more consistent currency and helped to regulate and supervise banks.
The functions of the national banking system included:
a. Issuing national banknotes as a standardized currency.
b. Acting as a fiscal agent for the U.S. government, handling its financial transactions.
c. Regulating and supervising banks to ensure stability and prevent fraud.
d. Providing a mechanism for banks to redeem their banknotes for government bonds, maintaining confidence in the currency.
The establishment of the national banking system brought some stability to the monetary system, but it also had limitations and led to further debates and reforms in later years.
Overall, between the Revolutionary War and the Civil War, the United States relied on commodity money, saw the banking system create money through fractional reserve banking, experienced the impact of the money supply on prices, and eventually established a national banking system to provide stability and a uniform currency.