The Gold Standard

Causes

Epic Fail

Problems?

Prior to the gold standard, there were many different state banks that each had their own individual currency. This was a huge problem because this system was just inherently incohesive so a new national currency was created, which helped stabilize the country’s money supply. In order to make people feel more confident in this new monetary system, the government decided to make all notes backed with gold, and thus, the gold standard was born.

Otto, Augustus’ brother, decided to proceed with the plan anyway, but he misjudged the market. Instead of the stock price going up, the market for United Copper started to collapse. This caused the State Savings Bank of Butte Montana, which was owned by his brother Augustus, to go bankrupt. The Mercantile National Bank in New York City was associated with Augustus and as word spread about the situation with United Copper, Mercantile fell next. And the rest was history; like dominoes, banks collapsed, the stock market dropped, and panic ensued. Ultimately, J.P. Morgan stepped in to help, providing financial support to stop and start to reverse the impact of the Panic.

During the gold standard era, the government could not issue currency unless it had gold in the treasury to back up the notes. There was of course, a limited supply of gold, so therefore, the government was prevented from printing unlimited amounts of paper money. Overall, the gold standard created a stable currency that made the public confident in their nation’s banking system, and it truly worked, at least for a little while.

Effects

The Hepburn Act

The San Francisco Earthquake

The Basics:

- Wednesday, April 18, 1906 at 5:12 am

- Magnitude 7.8

- After the earthquake, devastating fires broke out all across San Francisco and proceeded to last for days

- As a result, about 80% of San Francisco was destroyed and thousands of people lost their lives

Causes

What Panic?

There were several causes of this panic.

First off, the San Francisco Earthquake in the previous year caused the treasury to become depleted. Secondly, the Hepburn Act, which later became a law, made it so that Interstate Commerce Commission had the power to set maximum railroad rates. In turn, this made it so that the railroad security values decreased. All of these events led to the decrease of the stock market, and the bank rush ensued.

Effects

All of these events led to the decrease of the stock market, and the bank rush ensued.

For a while, the gold standard gave American citizens confidence in their banks and ultimately their money.

Today

What is the Gold Standard?

In 1836, when the charter of the Second Bank of the United States expired, there was no central bank, creating potential for instability. There were a number of panic driven crises, but the severity of the Panic of 1907 led Americans to work toward reform. In 1908, Congress passed the Aldrich-Vreeland Act creating the National Monetary Commission to look into the issues leading to the panic situations. The United States decided to study banking in Europe, which led us back to the need for a central bank. In 1910, we had plans for the National Reserve Bank, and finally, in December 1913, we created the Federal Reserve System.

The Panic of 1907 was a bank rush similar to the Panic of 1893, however, it was on a much larger scale. In October of 1907, there was an attempt to gain control of the F. Augustus Heinze’s United Copper Company by purchasing blocks of their stock. The plan was to start buying the shares of stock to drive up the price. To do this, Augustus and his brother Otto tried to borrow money from Knickerbocker Trust Company, but they were denied funding.

Many reforms were made to our nation’s banking system during the Civil War, but nonetheless, America was still plagued by many monetary issues. In the 1870s, the gold standard was put into place and this was a system in which paper money and coins were made equal to the value of a certain amount of gold.

Why?

Today

One advantage of the gold standard was that it set a definitive value for the dollar and that way, people were able to redeem the value of their paper money at any time. (Note - During the era of the gold standard, one ounce of gold equaled about $20.) The gold standard system endowed people with a sense of confidence and allowed them to feel safe carrying around the lighter and more convenient paper money.

The gold standard did end up failing and the United States no longer uses this monetary system. For the most part, the gold standard is no longer present in the world, however, there still are very few countries that use the gold standard. The gold standard influenced how we do banking today by showing us a method that did not work and driving us to come up with a better system of banking.

The Gold Standard

The Panic of 1907

by Olivia Blair, Kenna Beauregard, and Makayla Denniston