Chapter 19: Financial Developments 1863-1914

Summary This chapter explores the various types of monetary institutions and financial intermediation that carried the U.S. through a period of rapid industrialization and notable economic growth between 1863 and 1914. These institutions and forms of intermediation brought together millions of borrowers and savers, increased overall investment, advanced technology, gave rise to great enterprises, supported growth in trade, and helped millions accumulate wealth. During this period of dramatic change, the U.S. functioned without a central bank. Nevertheless, Congress established the Federal Reserve System in 1913 after some called for the federal government to be held responsible for the country’s economic welfare. This chapter explains why economic instability and the uneven distribution of the fruits of prosperity led to the Fed opening its doors in 1914.

Key Terms and Concepts Currency and coins Financial instruments Gold standard Demand deposits Financial intermediation Investment banking Department of Treasury Free silver Transfer society Federal Reserve System

Teaching Tips 1. Discuss the role of financial intermediation in economic prosperity. 2. Ask students to research the history of monetary institutions leading up to the establishment of the Federal Reserve System. In order, these institutions include: the constitutional gold standard, the First and Second Banks of the United States, the U.S. Treasury, the National Banking System, and the National Reserve Association. 3. Building on students’ familiarity with fractional banking, explain why random, surprising and systemic shocks in an economy can place undue stress on banks’ ability to provide “emergency” liquidity when there is no lender of last resort. Discuss the economic ramifications. 4. Explain why the Fed was considered a bankers’ bank, deliberating prevented from competing for banking profits in the private sector. 5. Explain the financial discipline imposed on a federal government if its economy is based on a monetary system defined by the gold standard. Discuss the history behind the struggles associated with the passing of the Gold Standard Act of 1900. Describe the events leading up to the U.S. abandoning the Gold Standard during the Great Depression era. 6. Identify the variety of financial instruments traded by investment bankers. Discuss the positive and negative roles of investment bankers in the rapid industrialization of the U.S. between 1863 and 1914. 7. Explain why the financial roller coaster of this period fueled some groups to organize and hold the federal government responsible for the country’s economic welfare. Draw comparisons between this historical period and the Financial Crisis of 2007.

Websites and Additional Resources  Bordo, Michael D. "Gold Standard." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 10, 2009 from: http://www.econlib.org/library/Enc/GoldStandard.html  Federal Reserve Bank of Kansas City. “The History of the Fed.” FED101: The Federal Reserve Today. 2009. Retrieved December 10, 2009 from: http://www.federalreserveeducation.org/fed101/History/index.cfm  Library of Congress. American Memory. 2009. Retrieved December 10, 2009 from: http://memory.loc.gov/ammem/index.html  Timberlake, Richard H. "Federal Reserve System." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 10, 2009 from: http://www.econlib.org/library/Enc/FederalReserveSystem.html  U.S. Department of the Treasury. The History of the U.S. Department of Treasury. 2006. Retrieved December 10, 2009 from: http://www.ustreas.gov/education/history/brochure/brochure.pdf