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Lessons from the dollar zone
economic thought
MBA/MA - Anglo-American University International Finance
ERASMUS - International Finance
MBA - Money and Financial Markets
ERASMUS Money & Banking
M.A. Public Policy Economic Sociology
On the Origin of Facts






Hugh Rockoff

Historical Paper 124


1050 Massachusetts Avenue

Cambridge, MA 02138

April 2000

How Long Did It Take the United States to Become an Optimal

Currency Area?


I. The Troubled History of the American Monetary Union

The U.S. monetary union began with the ratification of the Constitution in

1788. It has remained intact, with the exception of the Civil War years, ever since.

And the United States has grown and prospered during that time. But it does not

follow that the United States has grown and prospered because it has had a monetary

union. The benefits of the monetary union – the relative ease with which interregional

movements of capital, labor, and final products could take place – are evident. The

costs of the monetary union, that I intend to focus upon here, are less evident, but

nonetheless important.

Throughout the first 150 years of the U.S. monetary union, at least, the United

States was wracked repeatedly by bitter regional disputes over monetary policies and

institutions. On more than one occasion, those disputes contributed to uncertainty

about the future of policies and institutions that exacerbated economic disturbances,

and contributed to mistakes in national monetary policy. Regional disputes over

monetary policy arose because of real differences in regional interests: What was

good monetary policy from the point of view of one region, was sometimes bad policy

from the point of view of another. The most bitter disputes arose when adverse

monetary reactions occurred in a region already suffering from a real shock. A decline

in the demand for agricultural products, for example, would depress incomes, leading

in turn to a round of bank failures and bank runs, and declining regional money

supplies, that reinforced the effect of the initial shock. In short, an economic historian


who is looking for illustrations of the cost of relinquishing monetary autonomy can

find them in abundance in the monetary history of the United States.

Before turning to the history, however, I want to briefly summarize the theory

of optimum currency areas to provide the necessary background for the remainder of

the paper.

II. The Theory of Optimal Currency Areas

The optimum currency area hypothesis grew out of the debate over fixed vs.

flexible exchange rates. Milton Friedman (1953), Leland Yeager (1959), and others

had argued that a country could be better off by allowing its currency to float, and

reserving domestic monetary policy for price or employment stability. The advocates

of flexible exchange rates had recognized that a country could be too small to profit

from flexible rates. But it was Robert Mundell, who first used the term “Optimum

Currency Area” in a famous paper published in 1961, who clarified the circumstances

under which a region or country would benefit from joining a monetary union.1 On

the one hand, Mundell argued, there were advantages for a region that joined a

monetary union derived from minimizing transaction costs. On the other hand there

were disadvantages derived from giving up the exchange rate, and changes in the

stock of money, as policy tools. Whether a particular region constituted an optimal

currency area or whether it would be better off as part of a larger monetary union

depended on the net sum of these costs and benefits.

1 Other important early contributions were McKinnon (1963), Kennen (1969), and Tower and Willet

(1976). Kawai (1992) provides a clear summary.


The benefits of a larger monetary union are usually fairly easy to see, although

measuring them can be difficult. People can travel to one part of the country to

another without having to convert their money; prices of products sold in distant

regions can be compared without having to search for information or perform

calculations, and interregional investments can be made without the risk of currency


The costs of joining a monetary union are less obvious, and will depend on a

number of factors. Consider first, the case in which economic activity is distributed

randomly throughout the monetary union. Then the monetary authority need pay little

attention to regions. What is optimal for one part of the country will be optimal for

another. But suppose that the monetary union is divided into two regions, say East

and West, that specialize in producing different goods, say steel and wheat. Now it is

possible for there to be significant shifts in demand between the regions. The demand

for steel might go up, while the demand for wheat is going down. To use the modern

jargon, the country might be subject to asymmetric shocks. The West will run a

balance of payments deficit with the East. Reserves will flow from West to East, and

the stock of money in the West will fall, aggravating the recession caused by the

decline in the demand for wheat. The stock of money in the East will rise, adding to

the boom caused by the increase in the demand for steel. It is no longer clear that

what is good for one region is good for all. The West might be better off with a

national monetary policy that aimed to restore full employment, while the East might

want a policy directed toward price stability.


If labor and capital are mobile across regions, then the impact of asymmetric

shocks will be limited. Labor, for example, will respond to the shift in demand by

moving from West to East, from wheat production and into steel production. The

monetary authority will be able to neglect the problem of unemployment and focus on

price stability. But now suppose that barriers to labor and capital mobility exist

among regions, and assume further that monetary policy can affect real magnitudes in

the short-run, say because certain prices or wages are sticky. Then the monetary

authority faces a real dilemma. If the monetary authority follows a policy consistent

with price stability in the East, it might aggravate the recession in the West; if it tilts

full against the recession in the West, it might produce inflation in the East.

The East and West, to put it slightly differently, would be better off with

separate currencies, and floating or at least adjustable rates between them. When

demand shifted from the West to the East, the western currency would depreciate,

mitigating the effects of the decline in demand. Meanwhile the monetary authority in

the East could follow a policy aimed at price stability.

This is essentially the theory as originally developed by Mundell. The story

depends on imperfections in capital and labor markets, and price and wage stickiness.

As we move from the world of Keynesian or classic Monetarist economics, where

monetary policy has important short-run effects, to assumptions of perfect labor and

capital mobility and ineffective monetary policy, the case for subdividing economic

regions into separate currency areas weakens. Nevertheless, as a number of writers

have argued, a case for separate currencies may remain (Willett and Wihlborg, 1999).

For example, even if all factor markets cleared, a separate currency area could be


justified if non-optimal policies were being followed outside the area. A flexible

exchange rate then would prevent the importation of non-optimal price level

movements. In any case, I believe, as I will try to show below, that American

monetary history offers important examples of regional monetary trends exacerbating

the effects of asymmetric real shocks. Before turning to those examples, however, I

want to briefly recount the origins of the American monetary union and the regional

conflicts that afflicted it during its formative years.

III. Union

Prior to the Revolution the currency of the United States varied from colony to

colony. The British pound, and other forms of hard currency such as the Spanish peso

were accepted everywhere. But individual colonies also tried to make their own paper

currencies legal tenders in order to provide revenues or to aid debtors. Under the

Articles of Confederation (during the interregnum between the end of the Revolution

and the Constitution) opinion, especially among the politically sophisticated, turned

against paper money. The constitution prohibited the states from issuing “bills of

credit” (paper money) and gave to Congress the exclusive right to “coin money” and

“establish the value thereof,” thus creating a monetary union based on specie.

Part of the opposition to paper money was based on the experience of the very

high rates of inflation under the fiat paper money regime of the Revolution. Tom

Paine, for example, went from being an advocate of paper money to an opponent

(Schweitzer 1989, p. 315) after witnessing the Revolutionary inflation. Opposition to

paper money was increased by the development of fractional reserve banking, and the


hope that bank notes would provide the convenience of government issued paper

without the risk of overissue.

There was also an important regional dimension to the opposition to state

issued paper money. Rapid deflation after the Revolution had left farmers with heavy

debt burdens. In the western counties of many states, where agriculture predominated,

demands for debt and tax relief became insistent. States attempted to handle the

problem in various ways. Some, such as Massachusetts, followed a get-tough policy

with farmers who refused to pay. In many of these states farmers took up arms. The

most serious outbreak of violence was in Massachusetts where Shays’ Rebellion was

crushed in 1787. Other states, such as Rhode Island, tried to help farmers by issuing

legal-tender paper money and insisting that creditors accept it, even if they were

residents of other states. While such policies pacified western farmers, they increased

tensions among the states. It is conceivable that interstate tensions, such as those that

arose between Rhode Island and its neighbors, could have been resolved by a clause

in the Constitution requiring states to keep their currencies at par. But this would still

leave room for some states to increase their seignorage by expanding their currencies

and allowing them to circulate outside their own borders. Thus, a monetary union was

viewed as a necessary prerequisite for a political union (Rolnick, Smith, and Weber,


The Constitution appeared to settle the debate between those states that would

have used monetary policy to help western farmers and those that would not. But the

issue reemerged in the debates over the First and Second Banks of the United States.

The First Bank of the United States was chartered in 1791. It was part of Alexander


Hamilton’s plan for reorganizing the finances of the new government. Modeled to

some extent on the Bank of England, it was intended to be a large bank, with a

national branching system, that would help manage the new government’s finances,

and issue a paper money of uniform value (in part because it would be a legal tender)

in all parts of the country. The term of the charter was limited to twenty years. When

the charter came up for renewal in 1811 there was substantial opposition. Most of the

opposition to the Bank, at least measured by the formal arguments against it, centered

on the constitutionality of the Bank. The upshot was that the attempt to renew the

charter failed, and the Bank was forced to wind up its affairs.

The monetary disturbances associated with the War of 1812 revived interest in

a national bank. Such a bank, it was hoped, would pressure state banks into

contracting their note issues and resuming specie payments. The Second Bank of the

United States was established in 1816, again with a charter limited to twenty years.

The Second Bank was similar to the First, but its capital was larger.

Although financial historians have often written favorably about the Second

Bank, its career ended disastrously in the famous “Bank War.” The Bank War pitted

the Second Bank, led by its President, the aristocratic Philadelphian Nicholas Biddle,

against an opposition led by the first President from West of the Alleghenies, Andrew

Jackson. Not all eastern politicians sided with Biddle and the Bank. In New York, in

particular, it was hoped that the Second Bank of the United States would be replaced

by a Third Bank of the United States with headquarters in New York City rather than

Philadelphia. And not all western politicians supported Jackson. Davy Crockett, a

Congressman who represented poor farmers from western Tennessee (and King of the


Wild Frontier!), supported the Bank. (Shackford, 1986, passim).2 In general,

however, the Bank’s opponents were from the West and its supporters from the East.

The exact reasons for Jackson’s opposition to the Bank are still a matter of

dispute. Jackson was first elected in 1828. His outspoken criticism of the Bank began

soon after, and led to an attempt to renew the Bank’s charter before Jackson came up

for his second election in 1832. The bill to renew the charter passed both houses of

Congress, but was vetoed by Jackson. The veto message has been the subject of

intense scrutiny and debate by historians. Jackson cited a number of reasons for

vetoing the bill to recharter the Bank: foreigners held a considerable amount of stock

(although they could not vote, a fact he failed to notice), a competition for the charter

would produce more revenues for the Treasury, and so on.

But the interesting point from our perspective is that Jackson stressed that the

Bank was controlled by Eastern moneyed interests, and had followed policies harmful

to western farming interests. Jackson’s reasoning on this issue has been faulted.

(Temin 1969). Nevertheless, it is clear that what Jackson perceived to be a conflict

between eastern and western monetary interests inspired his opposition to the Bank,

and galvanized the country. Jackson won an overwhelming reelection, sealing the fate

of the Bank. Although there would be further battles, the war was lost. The charter of

the Bank expired in 1836 and it wound up its affairs. In the end the antagonism

toward the Bank, rooted in Western antagonism toward moneyed interests, had

produced a momentous change in the monetary institutions of the United States. The

2 It should be noted that although Crockett’s support for the Bank may have been based on general

considerations, he owed money to the bank, a debt that was partially cancelled through the personal

intervention of Nicholas Biddle.


United States would not have any institution resembling a central bank until the

Federal Reserve was established in 1913.

In 1837 the United States experienced a severe banking panic; numerous

banks failed, and the banks were forced to suspend specie payments. In 1838 specie

payments were resumed, and things began to look up. But a second panic in 1839

inaugurated a long recession marked by falling prices and a contraction in real output,

although the degree of contraction in real output has been debated. To what extent did

the Bank War contribute to the Crises of 1837 and 1839 and the subsequent

recession? Peter Temin (1969) has argued that international forces, largely

independent of the Bank War, explain the Jacksonian inflation, and the Crises of 1837

and 1839. Marie Sushka (1976), however, has argued that the Bank War did have an

impact by increasing uncertainty about the soundness of the monetary system.

Undoubtedly, independent international shocks are part of the story, perhaps the

major part. But it seems probable that the uncertainty about the future of monetary

arrangements created by the Bank War made holders of bank liabilities more fearful

about the soundness of the banking system than they otherwise would have been, at

least in some measure, and contributed through this channel to the banking crises and

the recession that followed.

IV. Disunion

The Civil War was the result, of course, of the great national division over

slavery. Nevertheless, financial factors did play a small role, influencing, perhaps, the

timing of the War. Before the War the South had a relatively well developed banking


system, and there is a good deal of evidence for capital market integration (Bodenhorn

and Rockoff, 1992). Indeed, Southerners were proud of their banking system, and

their economic system based on “King Cotton.” The Crisis of 1857 was an eye-opener

in both the South and the North. As southerners saw it, the crisis was largely of

Yankee making. It started in New York, with the failure of a branch of the Ohio Life

Insurance and Trust Company, and spread through the rest of the country. In the end

the South suffered relatively less than did the North. Many radical Southern

secessionists seized on the evidence provided by the crisis of 1857 to push their case

that the South would be better off as an independent country with its own economic

and monetary policies. In the North the newly formed Republican Party tried, with

some success, to pin the blame for the Crisis on the Democrats. Thus the Crisis had

the ironic result of strengthening the two factions least willing to compromise on the

issue of slavery. (Huston, 1987).

The war divided the nation into three monetary regions. In the East and

Middle West a fiat money standard prevailed based on the greenback. In the south,

another fiat standard held sway based on the Confederate dollar. The Pacific coast,

however, remained on gold. The southern monetary system, of course, gradually

collapsed with the Confederacy, and came to an end in 1865. Returning to gold, and

thus reuniting the two currencies of the United States took until 1879.

V. Reunion

After 1865 the South and Northeast were on the same (greenback) monetary

system. There was no central bank. The supply of high-powered money was largely


determined by the policies of congress and the secretaries of the treasury. Republicans

dominated. The goal of monetary policy was returning to the prewar price level and

gold convertibility. These long-cherished goals were achieved on January 1, 1879

when the United States returned to the gold standard at the prewar parity. Throughout

this period the policy of resumption faced determined regional opposition.

Republicans in the Northeast favored resumption; Democrats and their allies in the

Greenback Party, based in the Middle West and the South opposed resumption and

favored monetary expansion.

Southern and Western Opposition to Resumption.

In 1866 Congress passed the Contraction Act, which called for the reduction

in the amount of greenbacks in circulation, with a view to early resumption of specie

payments. When a recession ensued, considerable opposition to this policy developed.

In the 1868 election the currency was a major issue. Western democrats, following a

now familiar refrain, demanded that Civil War bonds be paid in greenbacks unless the

law specifically required payment in specie. Ulysses Grant, a financial conservative,

however, was elected president. In March 1869 Congress voted to pay the Civil War

debt in coin. Nevertheless, a more gradual approach toward resumption, referred to as

“growing up to the currency,” was adopted. Roughly speaking, the policy was to

freeze the stock of high-powered money so that economic growth would produce a

gradual decline in the price level.

Even this policy faced a severe political test. After the Panic of 1873,

Congress voted for an increase in the stock of greenbacks. Grant vetoed the measure,


triggering formation of the Greenback party – “a combination of middle western

farmers, small businessmen, and labor intellectuals.” (Merk 1978, p. 445) In 1875 a

lame duck Republican Congress adopted the Resumption Act which called for specie

payments to be resumed on January 1, 1879.

Opposition to resumption coming from Greenbackers in the South and West,

and Democrats with Greenback sympathies was fierce. In 1876 the House voted 106-

86 to repeal the Resumption Act, but repeal died in the Senate. In 1877 the House

again voted for repeal and for measures that would have expanded the stock of

money. But in the Senate in 1878 a compromise was worked out. The advocates of

soft money were persuaded to support a limited expansion of the stock of silver

money provided for in the Bland-Allison Act, and the policy of resumption was kept

on track. Resumption, as I noted above, was achieved in 1879. But it had been a near


The opponents of resumption could hardly have been expected to give up their

cause simply because it produced uncertainty about the final outcome. Nevertheless,

by repeatedly placing resumption in doubt, the soft money faction created uncertainty

about future exchange rates, that affected nominal interest rates, and that probably

created an additional hindrance to international capital flows. (Calomiris 1994).

During this period, it should be noted, the West remained on the gold

standard. Indeed, in 1873 the National Banking Act was amended to permit banks in

California to issue currency redeemable in gold (yellowbacks). Thus from 1865 to

1879, when the greenback currency became convertible into gold we have a monetary

rarity: a strong political union, untouched by war, with two currencies, greenbacks


and yellowbacks, circulating at a floating exchange rate. Interest rates on the Pacific

Coast were high, perhaps reflecting some of the exchange rate uncertainty. Rates,

however, had been high before the war and would remain high after resumption. In

any case, the “need” to reunite the currency, as contemporary observers saw it,

strengthened the case for resumption.

VII Misunion?

Middle Western opposition to the gold standard continued to smolder after

Resumption. In the late 1880s opposition burst into flame once more. The main

problem was farmer unrest aggravated by low farm prices. Table 1 shows prices for

the crops that were key in the regions where discontent was at a maximum. The real

price of wheat had fallen from 100 at the time of resumption to 86 in 1890. Farmer

Alliances were formed, and showed surprising strength in the 1890 congressional

elections. Eight Middle Western and one Southern Populists were elected.

Congress took note of the growing pressure for inflation and passed the

Sherman Silver Purchase Act in 1890 which required the Treasury to purchase 4.5

million ounces of silver per month, virtually the entire U.S. output, paying with new

legal tender currency redeemable in gold or silver at the discretion of the Treasury.

The Silver Purchase Act was a compromise, designed to appease southern and

western inflationists, and western silver interests, without going all the way to the free

coinage of silver-backed currency. Fear of silver, however, produced a reduction in

the Treasury’s stock of gold, further increasing fears that the United States might

abandon the gold standard.


Although Farm prices rose briefly in 1891, they tumbled again in 1892, and

demands for monetary expansion were renewed. In 1892 the Northern Alliances

entered the presidential race as the Populist Party. Their platform, the Omaha

platform, was a wish list of radical reforms, monetary reforms prominent among


The stage was now set for the Great Depression of the 1890s, and the

accompanying “Battle of the Standards” (gold vs. silver), the famous debate over

monetary policy fought along regional lines. Before describing those events, however,

I want to digress briefly and consider the extent to which those regions matched the

criteria for optimal currency areas.

A Digression on the Optimal Currency Area Criteria

Were the regions that opposed resumption in the 1870s, and that supported

greenbacks and bimetallism in subsequent decades, separately optimal currency


Optimal-currency-area theorists have described several factors that identify an

area as a candidate for its own currency: (1) it must be a large area, (2) it must be

specialized in the production of certain goods and subject to asymmetric shocks, (3)

labor mobility between the candidate region and other regions is limited, (4) capital

mobility between the candidate region and other regions is limited, and (5) fiscal

transfers between the candidate region and other regions are limited. If the regional

economies of the United States were relatively small, then the case for viewing them

as candidates for separate currencies would be off to a bad start. It would be hard to


make a case, for example, for a single state as an optimal currency area. The costs of

currency conversion mount for a small open economy. But, in fact, the major census

divisions of the United States were, by world standards, large economies. By 1900,

for example, U.S. national income was about twice that of Britain. (Friedman and

Schwartz, 1982, pp. 122, 130). Estimates of the distribution of personal incomes in

the United States place the share of the Middle Atlantic region (economically the

largest) at about 31 percent. So a back-of-the-envelope calculation might put the

income of this region at 62 percent of Britain’s.

These regions were subject, moreover, to asymmetric shocks. Regional

agricultural specialization had begun in the colonial era. The famous “North Thesis”

(North 1961) maintains that the specialization of the South in plantation agriculture,

especially cotton, was the driving force behind American economic growth before the

Civil War. After the Civil War the South remained a land specialized in the

production of cash crops: sugar, tobacco, rice, and cotton. Indeed, because of the

changes in the structure of Southern agriculture, the South produced more cotton after

the Civil War, and devoted a larger share of its resources to the production of cotton,

than it had before the war. The prices of cash crops rose and fell with the business

cycle, but seemed to be especially hard hit in certain periods.

In terms of labor mobility the South was clearly a world apart until World War

II. Gavin Wright (1996) in Old South, New South, has shown that while considerable

integration was achieved across labor markets within the South (wages for unskilled

white and black workers were almost the same) the southern labor market remained a

separate low-wage market. Racism limited mobility. Black southerners, of course,


suffered the most; but even white southerners had to overcome stereotypes and ill

will, especially after the Civil War. Once migration patterns were established,

moreover, it was hard to change them in response to changing economic conditions,

because earlier migrants provided information and support for later migrants.

Mobility among other regions was much higher. But moving in response to regional

shocks was even into the 1930s a process accomplished with considerable difficulties.

The Joads were doing the right thing from an economic point of view – moving from

a depressed region to an expanding region during the 1930s – but the Grapes of Wrath

is an appropriate title.

The extent of capital mobility is more debatable. The standard view is that

integration of regional capital markets was not achieved until the turn of the century

because of a simple reluctance of capital to migrate, or because of institutional factors

such as differences in banking and usury laws. Indeed, Bodenhorn’s (1995) data

shows that substantial interregional interest rate differentials persisted through the

1930s, although Bodenhorn attributes these differences to risk. One can say that after

1900, if not before, capital market integration served to ameliorate the affects of

regional shocks.

In the United States today fiscal transfers tend to offset asymmetric shocks.

Unemployment benefits, for example, will rise in regions suffering from high

unemployment. In the nineteenth century, however, the federal government was

simply too small a share of GDP to offset regional shocks through fiscal transfers.

The largest federal transfer program by far was the Civil War pension program. And

this program was somewhat responsive to economic conditions. The depression of the


1890s contributed in some measure to the expansion of benefits under the program

that occurred at that time. But southerners, immigrants, men who were too old or too

young to have served, or who hired substitutes were not eligible. Women had to marry

to become eligible. It was not until the adoption of programs such as unemployment

compensation and agricultural price supports in the 1930s that one can point to fiscal

transfers as a legitimate mechanism for overcoming asymmetric shocks.

The apriori case for believing that prices and wages in the separate regions

were relatively sticky (thus strengthening the case for an independent monetary

policy) appears to be relatively weak. The labor unions or oligopolistic industries that

economists often point to as sources of stickiness were unimportant. There was

considerable political agitation about the danger of the Trusts, but how much they

contributed to price rigidity is debatable. In the South, even a significant portion of

agricultural rental contracts was indexed: the famous sharecropping contracts.

Nevertheless, there were elements of institutional rigidity: taxes, mortgages,

cash rentals, and so on. And beyond purely institutional sources of rigidity, there were

the usual coordination problems. Adjusting to lower world prices for agricultural

products meant a coordinated fall in wages, prices, and rents. Along most dimensions

(labor and capital mobility, and fiscal transfers) the monetary union was strengthened

during the 1930s. But along this dimension, the union was weakened.

Certain regions of the United States clearly exhibited many of the signs of

good candidates for separate currencies, at least until the 1930s. But can one identify

episodes in which substantial costs were imposed on these regions because they were

part of a monetary union? Classic cases of optimal-currency-area dilemmas, a boom


in one region combined with a recession in other regions, were probably rare. More

common were differences among regions in the magnitude of cyclical fluctuations,

and in the timing of contractions and recoveries.

The Great Depression of the 1890s

The Great Depression of the 1890s, like the Depression of the 1930s, involved

two severe recessions in close order. The economy declined for 17 months from

January of 1893 to June 1894, and then after a comparatively weak recovery, declined

again for 18 months from December 1895 to June 1897. Unemployment figures are

necessarily somewhat problematic, but the figures we do have show the rate of

unemployment at double-digit levels from 1893 through 1898, with a peak of 18.4

percent in 1894. (U.S. Bureau of the Census 1975, p. 135)

As we noted above, the early 1890s were characterized by concern over the

maintenance of the gold standard stemming from the Sherman Silver Purchase Act,

the decline in the stock of Treasury gold, and the rise of the Populists. In May 1893 a

banking panic was touched off by commercial failures in New York. In June 1893, the

administration revealed that it would press for the repeal of the Sherman Silver

Purchase Act, and this seemed to ease pressures in financial markets. In July,

however, further commercial and bank failures, led to a renewal of the panic. Bank

runs and failures occurred in all regions. Starting in New York, banks throughout the

country restricted the convertibility of notes and deposits into gold. The restriction on

convertibility somewhat eased the situation. High interest rates drew gold into the

United States and specie payments were resumed in September.


But the next three years were characterized by continued difficulties. Populists

in the West and South continued to agitate for free and unlimited coinage of silver at a

bimetallic ratio of 16:1. It was widely believed that adoption of bimetallism at that

rate would have created substantial inflation and driven the United States off the gold

standard. Uncertainty about the standard was reflected in higher interest rates. The

Republicans favored continued commitment to the gold standard, although some

Republicans, typically from the western states, called for an international conference

aimed at restoring bimetallism, but at a bimetallic ratio that would permit continued

circulation of both metals, and that would not produce inflation. The Democrats were

badly split. The eastern wing of the party, led by former President Grover Cleveland,

favored maintaining the commitment to gold; the western and southern wings favored

bimetallism at 16:1. At the Democratic National Convention held in Chicago in 1896,

the Westerners overthrew the Easterners. William Jennings Bryan, a Democratic

Congressman from Nebraska with strong Populist sympathies, was nominated after a

stirring speech, one of the most famous in American history, in which he declared that

the Republicans would not be allowed to “Crucify Mankind upon a Cross of Gold.”

Despite his oratorical skills, Bryan lost the election to William McKinley, who

favored the Republican brand of international bimetallism. Bryan carried states only

in the West and South. Ironically, new flows of gold soon began to reverse the

deflation that had persisted since the end of the Civil War. Demands for inflation

through bimetallism or fiat paper became superfluous. The United States formalized

its commitment to the gold standard with the Gold Standard Act of 1900.


Why was the United States so badly split along regional lines over monetary

policy? Historians, traditionally, have seen the issue as one of creditors (eastern

bankers) against debtor (western farmers). One problem with this view, as was

recognized by Bryan and others at the time, is that any help from inflation would

likely be partial and temporary, because interest rates would rise to reflect expected

inflation. Frieden’s (1997) recent argument that the support for 16:1 came primarily

from exporters who looked to devaluation to improve earnings seems more


As we saw above, however, the regions at odds with each other were, in many

ways, separable currency areas. It makes sense to look at regional stocks of money, or

what in fact are available, regional deposits. Figure 1 shows deposits by region from

1875 through 1896. Deposits in each region were set to 100 in 1875 to make it easier

to compare regional trends.3 Granted, regional deposits reflected as well as caused

changes in regional economic activity. Nevertheless, to the extent that these deposit

movements reflected interregional transfers of reserves (balance of payments

problems) or bank failures that might have been prevented by lender of last resort

operations, they represent an independent influence on economic activity.

In any case, the picture is rather dramatic. The Great Depression of the 1890s

left only a small imprint on deposits in New England or the Middle Atlantic region

(dominated by New York and Pennsylvania). In New England deposits fell 2.4

percent from 1892 to 1893, but then more than regained their loss, rising 7.2 percent

from 1893 to 1894. In the Middle Atlantic region, deposits fell 4.7 percent, and then


rose 7.7 percent. On the other hand, the impact on deposits in the West and South,

the centers of the Populist revolt, were dramatic. Deposits in the South fell 18.6

percent from 1892 to 1893 and regained only 8.2 percent between 1893 and 1894; in

the West deposits fell 16.4 percent, and only recovered .4 percent. Deposits in both

regions were lower in 1896 than they had been in 1892. Is it any wonder that

politicians in the West and South were calling for measures to increase the stock of

money (remonetization of silver, or more radically, agricultural price supports

financed by issues of fiat money) and that politicians in New England and the Middle

Atlantic States called for a stand pat policy?

Data for all banks (both national and non-national) is available during this

period only for four regions. The Middle Western and Pacific regions were aggregated

in the source for non-national banks. This is worrisome because the Pacific Coast

(which is dominated by California) was growing rapidly. Deposits in this region

might have followed a somewhat different path than in other western states. In

addition, the figures on non-national banks may be subject to reporting errors that

vary in magnitude across regions and over time, despite the painstaking work

undertaken by David Fand (1954) in putting these figures together. I have, however,

computed National Bank deposits, which are likely to be more accurate, for five

regions, separating the Middle West and the Far West.

These estimates are plotted in Figure 2. Again, the deposits in each region

have been set to 100 in 1875. As expected, national bank deposits grew extremely

rapidly on the Pacific Coast, rising by a factor of 18 between 1875 and 1900. The

3 The appendix describes how these numbers were computed.


most important point, however, is that the crisis of the 1893 is most evident in three

regions: the Pacific Coast and Territories, the West, and the South. Again, the Middle

Atlantic region and New England record only small impacts from the Crisis of 1893.

Who was right, the East or the West? I find it hard not to believe that the

falling stocks of deposits and bank credit in the South and West did not contribute in

some measure to the economic distress those regions were suffering, and would not

have been relieved by monetary expansion. Taking a longer-term view, Milton

Friedman (Fall 1990, and December 1990) has argued that adoption of bimetallism

earlier in the postbellum period would have produced a more satisfactory behavior of

the price level. He concludes, however, that by 1896 the time for adopting

bimetallism had passed.

In any case, one thing seems clear. An unequivocal commitment to either gold

or bimetallism would have avoided the uncertainty which itself was part of the

problem. Milton Friedman and Anna J. Schwartz put it this way, in A Monetary

History (1963, p. 134)

In retrospect, it seems clear that either acceptance of a silver standard

at an early stage, or an early commitment to gold would have been

preferable to the uneasy compromise that was maintained, with the

uncertainty about the final outcome and the consequent wide

fluctuations to which the currency was subjected.

Politicians, as Figures 1 and 2 show, were advocating the real interests of their

own regions. Deposit growth in the East, although affected by the panic of 1893, was

sufficiently close to trend to justify sticking with the current monetary policy; deposit

growth in the South and West was depressed and justified a change in policy.


The optimal solution, were it politically feasible, might have been separate

currencies, say for the East, the West, the South, and the Pacific Coast. The West and

the South would have adopted a silver standard in the 1890s, while the East and the

Pacific Coast, given its historical attachments, would have stayed on gold. Money

stocks would not have fallen in the West and the South as much as they did. Their

currencies, moreover, would have depreciated against gold, making it easier to

dispose of wheat, cotton, and other agricultural products on domestic and word

markets. The debate over monetary policy, and the resulting uncertainty, which

affected banks in all regions would not have happened.

The Panic of 1903 (the Rich Man’s Panic) and the Panic of 1907

Figure 3 plots deposits by region for the period 1900 to 1914.4 Deposits in

each region have been set equal to 100 in 1900. The major events during this period

were the panic of 1903 (the Rich Man’s Panic) and the Panic of 1907. Here the

regional pattern is different from the 1890s.

New York financial markets came under severe stress in late 1902. Shortterm

interest rates shot up, the stock market crashed, and a number of financial houses

went bankrupt. The associated cyclical contraction was relatively long (23 months),

from September 1902 to August 1904. In the Rich Man’s panic the biggest impact

was on the Middle Atlantic (New York) region, although even in this region the panic

shows up as a period of relatively slow growth in deposits, rather than as an actual

4 All types of deposits in both national and non-national banks are summed.


decline. Deposits in the other regions, by way of contrast, were not affected much at


Although a severe jolt, the Rich Man’s panic did not produce a banking panic

or a severe economic contraction. The Panic of 1907, however, produced a much

broader and deeper reaction in the banking system. Pressure began to build in the

New York money market in the summer and fall of 1907. A major shock occurred in

October 1907 when a run on the Knickerbocker Trust Company forced it to suspend

payments.5 Other Trust companies soon were in difficulty as well. A banking panic

soon gripped the nation, and the banks were forced to restrict the convertibility of

bank notes and deposits into gold.

Nearly all regions of the country were affected. Only the plot of deposits for

New England fails to show a dramatic imprint from the crisis. But as in 1903, the

interesting feature of the data is the impact on the Middle Atlantic States, and the

contrast between those states and the Middle West. Deposits in the Middle Atlantic

States fell 2.38 percent between 1907 and 1908. Deposits in the South and on the

Pacific coast fell by even larger amounts. But deposits in the Middle West fell by only

1.99 percent. The regional impact of the panic of 1907 was clearly very different from

the impact of the panic of 1893.

As might be expected the political response to the crises in 1903 and 1907 was

also very different than it was in the 1890s. During the 1890s, the eastern

establishment was convinced that monetary reform was a foolish idea pushed by


dangerous Mid-western radicals such as Bryan; now the East was convinced that

monetary reform was a wise idea advocated by the best scientific minds. In the wake

of the Panic of 1907 the Aldrich-Vreeland Act (May 1908) was passed which created

an emergency currency that could be issued during panics; and created the National

Monetary Commission to investigate the monetary system, and recommend reforms.

Senator Nelson W. Aldrich of Rhode Island, a long time Republican leader, and

determined opponent of the Populists, headed the Commission. The main

recommendation was the creation of a type of central bank. The United States would

be divided into districts, and the banks in each district would keep their reserves in a

district bank that was owned and controlled by the member banks. There would be a

central board, controlled by the district banks, with the power to issue a gold-backed

currency. Aldrich introduced a bill in Congress embodying this plan.

By the time that the bill came up for debate, however, the Democrats

controlled the Congress and the Presidency. Goaded by the populists among them, the

Democrats insisted on changes in the bill. Indeed, William Jennings Bryan, who

carried Populist hopes for free silver in 1896, was then Secretary of State, and is said

to have played an important role in the negotiations. The final result was legislation

that differed from the Republican model in two ways, one that would remain

important, and one that would not. First, the new institution was to be run by people

appointed by the Federal Government, and not by the banks. Second, the right to issue

currency would be the responsibility of the district banks, rather than the central

5 The Trust companies were banks that had grown up as ways of getting around the

strict asset regulations imposed by the Comptroller of the Currency and the New York


board. The ability of the District banks to issue their own currencies would not prove

to be a major feature of the system, it reflected a Populist hankering for a monetary

system that would respond to the differing needs of differing regions.

The Great Depression of the 1930s

The Great Depression of the 1930s was the most severe in American

economic history. Ever since the publication of A Monetary History of the United

States, Friedman and Schwartz (1963), changes in the stock of money, and mistakes

in monetary policy, have been granted an important role in the economic historian’s

account of the Depression. The extraordinary impact of the Depression can be seen in

Figure 4, which plots all bank deposits by Federal Reserve District from 1922 to

1941. I have switched from broader regions to Federal Reserve districts, primarily

because data for the Federal Reserve districts is readily available. Nevertheless, the

Federal Reserve districts correspond, roughly, to economic regions, so little is lost in

switching from broader regions to Federal Reserve districts. To make the figure easier

to read, deposits in each region have been set to 100 in 1929.6

No region was immune to the crisis, but there were significant regional

differences. Within the whole period I have highlighted two subperiods, 1929-1931

and 1934 to 1936, when there were marked regional differences in the rate of change

of deposits, and when important mistakes were made in monetary policy.

The most famous, and probably the most important, error in American

monetary history was the failure of the Federal Reserve to act as lender of last resort

banking authority.


for the banking system during the contraction from 1929 to 1933. A great deal has

been written about the reasons for the failure of the Federal Reserve to take

appropriate actions during this period. The personal and institutional rivalries stressed

by Milton Friedman and Anna J. Schwartz (1963); the adherence to misleading

doctrines about how policy actions worked, Calomiris and Wheelock (1998), Meltzer

(1998); and the weight placed on adherence to the gold standard, Eichengreen (1992)

undoubtedly were important in producing the lack of response to the crisis exhibited

by the Federal Reserve. Regional loyalties had declined, in part because World War I

had boosted nationalism over sectionalism.

Nevertheless, Figure 5, which focuses on 1929 to 1931, suggests that regional

differences need to be woven into the traditional story.7 The deviations among regions

are striking. In June 1931, almost two years into the Great Depression, the stocks of

deposits in the San Francisco, Boston, and Philadelphia districts, and in the weighty

New York district, were still above the June 1929 levels.

Economists and policymakers from those regions, who tended to look toward

events in their own region, whether consciously or not, would have been less likely to

stress the need for drastic countermeasures. As evidence that the need for action was

recognized by some observers, Friedman and Schwartz (1963, p. 409) cite

representative Sabbath of Illinois writing to Federal Reserve Board chairman Eugene

Meyer in January 1931: “Does the board maintain there is no emergency at this time?

To my mind if ever there was an emergency it is now, and this I feel, no one can

successfully deny.” Can it be entirely irrelevant that at the time Sabbath was writing

6 All figures are for June dates, usually close to June 30.


deposits had already fallen drastically in the Chicago district and the St. Louis district

(which covers southern Illinois)?

Residence in a district hard hit by deposit losses, it must be admitted, was no

guaranty of sensitivity to the crisis. James McDougal, President of the Federal

Reserve Bank of Chicago, consistently opposed open market security purchases in

part because he thought it would be useless for the Federal Reserve to try to offset a

natural market process: liquidating bad loans. Marriner Eccles, who became chairman

of the Federal Reserve Board in 1935, might have been expected to be a consistent

advocate of monetary expansion. He was a banker from the West (Utah), a region

with a long tradition of monetary radicalism, and one that had been hard hit by the

Depression as shown in Figure 4. He had been appointed, moreover, because of his

sympathy for the New Deal. But his own study of the Depression, and his reading of

the heretical under-consumptionist William T. Foster, had pushed him toward the

view that monetary policy was a relatively impotent tool for controlling the economy.

The real action was on the side of fiscal policy

Roy A. Young, President of the Boston Bank, however, at one point based his

opposition to open market purchases on a regional argument: open market purchases

would lead to a piling up of reserves in the money centers, with little effect on the

regions of the country that really needed reserves. Thus, although policy positions in

the 1930s do not divide as neatly along regional lines as they did in the 1890s, there is

some evidence that differences in regional perspectives contributed, at least in a small

measure, to the paralysis that gripped monetary policy making in the early 1930s.

7 The figures are for June 1929, June 1930, and June 1931; the cyclical peak was in August 1929.


The second major policy error during the Depression was the decision by the

Federal Reserve to raise bank reserve ratios in three steps -- in August 1936, March

1937, and May 1937. Friedman and Schwartz (1963), and more recently Meltzer

(1998), have explored many of the intellectual and personal currents that produced the

decision. Nevertheless, the diversity in regional experiences shown in Figure 6 is

suggestive. By June of 1935 the stocks of deposits in the New York, Richmond, and

San Francisco districts, had all recovered their June 1929 levels. Rapid expansion in

the ensuing year carried the stocks of deposits in these districts to levels between 20

and 30 percent above the levels of June 1929. Moreover, employment in these regions

had also recovered well.8 A Federal Reserve President in one of these districts, who

based his conclusions solely on conditions in his own district, might well conclude

that it was time to adopt a more restrictive monetary policy before things got out of

hand and inflation threatened.

In the “heartland” districts, however, conditions were very different. In the

Cleveland district deposits in June 1935 were little more than 80 percent of what they

had been in June 1929, and although growth was rapid, deposits were still below the

June 1929 level in 1936. Unemployment was still high. The president of a district

bank in the heartland might well conclude that further monetary expansion was

required. To put it differently, the Federal Reserve, at least to judge by deposit

grwoth, faced an optimal-currency-area dilemma in 1936. Some regions needed

stimulation; others needed restraint.

8 It may seem surprising that the Richmond region followed the path of New York and San Francisco.

In fact, however, as is now well understood, the South did relatively well during the depression.


It is interesting to ask what would have happened had the United States been

divided into separate currency areas – separate currencies for, say, the East, the South,

the Middle West, and the Pacific – during the 1930s. Separate currencies, of course,

were ruled out by political considerations. A currency is a symbol of sovereignty, like

the flag, and it is as hard to imagine any country deliberately choosing to divide its

currency. But thinking about separate currencies can throw light on the economics of

the Depression. Even with separate currencies, monetary policies might well have

been similar in the East, the South and on the Pacific coast to what they actually were.

The central bank of the East, for example, would not have acted a lender of last resort

in the early 1930s, but there would have been no need for it to do so. It would have

slowed monetary expansion in the mid-1930s, but it would have been logical for it to

do so.

The central bank in the Middle West, however, might have acted differently.

With hundreds of banks failing in the region, with politicians calling for action, a

central bank that had full responsibility for the region might well have acted as lender

of last resort in the early 1930s. Moreover, a Middle Western central bank, under

intense pressure from local interests, might well have followed a more inflationary

policy. Silver interests were potent in the Middle West and might well have

demanded additional purchases of silver financed through an increase in the monetary

base. The Middle Western currency might well have depreciated relative to other

regional currencies. But this would have helped employment in the manufacturing

sectors of the Middle West, which were among the hardest hit in the nation, because


they suffered from increasing labor costs due to unionization, as well as from the

decrease in demand for consumer durables.

To be sure, if someone like James McDougal, who advocated deflationary

measures as President of the Chicago district bank during the 1930s, had been

president of the Midwestern Central bank that I am imagining, he might have

succeeded in imposing deflationary policies despite political pressures to do

otherwise. But not necessarily; the argument that open market purchases were actions

taken by bankers in faraway places that influenced banks in faraway places would no

longer apply. Long experience with the conduct of monetary policy might have made

central bankers in the Midwest more adroit than central bank board members. In

short, the monetary union, which in more stable times was a source of strength for the

United States, appears to have been a liability during the 1930s.

VII. Communion?

It is generally assumed that the United States became a smoothly functioning

monetary union, at least for the purpose of comparison with the European Monetary

Union, in the postwar era. (For example, Feldstein 1997; Wyplosz 1997). The

comparison may tend to exaggerate how well the U.S. monetary union functions.

There have been asymmetric real shocks, such as the oil price fluctuations that hit

Texas particularly hard, or the changes in manufacturing that hit the “rust belt.”

Perhaps there were regional banking problems that exacerbated these disturbances

that we have not paid sufficient attention to because we are accustomed to think in

aggregate terms.


But it is true that several institutional changes took place during the

Depression and World War II that weakened older divisions. One was the

development of federally funded transfer programs, such as unemployment insurance,

social security, and agricultural price supports, which cushioned regional shocks, and

redistributed reserves lost through interregional payments deficits. Penelope Hartland

(1949), using data from the Federal Reserve’s Interdistrict Settlement Fund showed

that the regions that had been hit by terms of trade shocks during the 1930s lost

reserves to other regions through trade deficits, but that government transfers

materially offset these losses. Between 1929 and 1933, for example, the Minneapolis

Federal Reserve district lost $247 million in reserves on private transactions. This

was offset, however, by a gain of $229 million on federal government transactions.

On the other hand, the Boston Federal Reserve district gained $644 million in

reserves on private transactions, while losing $575 million on federal government

transactions. (Hartland, 1949, p. 397). Seymour Harris (1957, pp.174-192) noted the

regional payments problems during the 1930s, and argued that separate currency areas

would have ameliorated these problems. Harris also noted similar regional payment

problems in the early post-Second-World-War era.

A second institutional change was the breakdown of long-term isolation of the

southern labor market. During the war a strong northern labor market and the absence

of immigrants pulled workers, white as well as black, from the South, and established

networks that provided information and support for later migrants. In addition, federal

labor legislation in the form of minimum wages and regulation of hours and


conditions of work, and federal incentives to mechanize agriculture, established

during the 1930s added to the postwar flow of migrants from the South.9

A third factor that improved the functioning of the U.S. monetary union after

the war was the absence of major banking and financial crises emanating from

regional shocks. Deposit insurance, and monetary policies that reacted quickly to

economic downturns, tended to minimize the regional banking problems that

characterized recessions in the prewar era.

VIII. Lessons from the Troubled History of the U.S. Monetary Union

Weighing the costs and benefits of monetary unification is a difficult task. On

the one hand, monetary unification means reduced transaction costs, easier

comparison of prices in different regions, long-term investment without fears of

devaluation, and so on. On the other hand, unification means relinquishing the

capacity to use exchange rate changes and monetary policy to prevent monetary

problems from magnifying distress originating in other sectors. Frequently, the

experience of the United States is cited as evidence that in fact the benefits of a

monetary union greatly outweigh the costs. After all, the monetary union of the

United States has survived (with a temporary break during the Civil War era) since

the adoption of the Constitution in 1788. But the survival of the U.S. monetary union

is at best weak evidence that the net effects have been positive. There are many

government policies, tariffs for example, which have survived for decades for

9 Fiscal federalism and the improvements in the functioning of the labor market are discussed in

Eichengreen (1998), chapters 2 and 3. Wright (1996) discusses the breakdown of barriers to labor

migration. Libecap (1998) discusses the origins of agricultural price supports.


political reasons, often the support of special interests, even though the claim that

these policies contributed positively to the general welfare is dubious.

In truth, the U.S. experience shows that fears about the loss of monetary

autonomy are far from baseless. American monetary history provides numerous

examples of regional shocks that were magnified by monetary reactions. Typically, a

region-specific shock to financial or agricultural markets produced a loss of regional

bank reserves through an internal drain, caused by fears about the solvency of the

regional banking system, and an external drain, caused by a regional balance of

payments deficit. The result would be a regional contraction of bank money and credit

that would cause headaches even for businesses not effected by the initial shock. A

political battle would often follow. The regions that had experienced the contraction

would demand a reform of the whole monetary system. The resulting uncertainty

about the future of existing monetary institutions would further aggravate the initial

contraction in economic activity.

During these episodes the United States might well have been better off, from

a purely economic point of view, had it been divided into separate currency areas.

Regions hit by severe asymmetric shocks would have been able to devalue their

currencies, which would have reduced interregional losses of reserves. Within the

region, expansionary monetary policies would have shored up the banking system,

preventing runs or severe contractions of credit. Other regions would have been free

to follow more conservative monetary policies, eliminating political battles over

monetary institutions. Separate currencies for separate regions were not ruled out by

any logical inconsistency. During and after the Civil War (1861-1879) the Pacific


coast had its own currency, the yellowback. But separate currencies for separate

regions were ruled out eventually by political considerations. In the course of the

nineteenth century currencies came to be seen as symbols of sovereignty, and separate

regional currencies became as unthinkable as separate armies.

Nevertheless, speculating about this counterfactual helps us to understand the

U.S. business cycle and may suggest some lessons for countries contemplating joining

or remaining within a monetary union. For a country that is debating whether to join a

monetary union the lesson is that the facile argument that the United States has had a

monetary union, and therefore monetary unions must be good things, doesn’t stand

close scrutiny. Second thoughts are in order. For countries already firmly committed

to a monetary union, the lesson is that it is extremely important to adopt the

institutions adopted by the United States in the 1930s -- a system of inter-regional

fiscal transfers and some form of deposit insurance, or regionally sensitive lender-oflast-

resort facilities -- so that asymmetric real shocks are not aggravated by banking


Although the Eastern financial centers, and industrial Middle West had been

integrated by the turn of the century, it was not until the 1930s that all regions, including the

South, could be said to be parts of a single optimal currency area. How long did it take the

United States to become an Optimal Currency Area? A reasonable minimum might be one

hundred and fifty years! Hopefully, it will not take the European Monetary Union quite so


10 Capie (1998) has drawn a similar lesson from a variety of historical examples.



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Table 1. Agricultural Prices and the NNP Deflator, 1879-1900

(1879 = 100)

Net National



Real Price of


Real Price of


1879 100 100 100

1880 110 93 105

1881 108 103 100

1882 112 104 105

1883 110 91 92

1884 105 85 97

1885 98 86 103

1886 96 80 94

1887 97 77 102

1888 99 87 100

1889 100 87 103

1890 98 86 113

1891 97 93 89

1892 93 80 83

1893 95 67 87

1894 89 59 78

1895 88 64 83

1896 85 70 92

1897 86 87 84

1898 88 94 68

1899 91 74 73

1900 95 69 100

Sources: NNP deflator: (Friedman and Schwartz, 1982), pp. 122-123.

Table 4.8, col. 4. Price of wheat and price of cotton: (U.S. Bureau of

the Census, 1975): pp. 208-209, series E123 and E126.


A Chronology of the U.S. Monetary Union

1788 The Constitution is ratified. States are prohibited from issuing paper

money. The U.S. monetary union is launched.

1791 The First Bank of the United States is chartered.

1811 The First Bank of the United States comes to an end.

1816 The Second Bank of the United States is chartered.

1832 President Andrew Jackson vetoes the bill to recharter the Second Bank,

stressing the oppression of the West in his veto message.

1836 The Second Bank of the United States comes to an end.

1837 The nation is hit by a severe banking panic, inaugurating a period of

hard times.

1857 The nation is hit by a severe banking panic. Southern firebrands and

Northern Republicans both make political capital from the crisis.

1861 The Civil War begins. The United States is divided into three currency

areas: Greenbacks in the Northeast, Confederate dollars in the South,

and Gold in California.

1865 Lee surrenders. The Confederate dollar ceases to function.

1866 Congress passes the Contraction Act looking to a rapid return to the

gold standard.

1873 The silver dollar is omitted from the list of official coins (The Crime of

1873). National Banks in California are permitted to issue notes backed

by gold (yellowbacks.)

1879 Resumption of specie payments. The yellowback and greenback are


1896 William Jennings Bryan, an advocate of free silver, is nominated by the

Populists and Democrats; William McKinley, an advocate of

international bimetallism, is nominated by the Republicans. Bryan

carries only a few states in the West and South

1900 The Gold Standard Act firmly commits the United States to the Gold

Standard and symbolizes the end of the “Battle of the Standards.”

1907 A Banking Panic leads to the establishment of the National Monetary


1913 The Federal Reserve System is established. Republican proposals for a

currency issued by a privately controlled central bank are defeated.

Instead a federation of regional banks, each issuing their own currency,

is created. William Jennings Bryan, now secretary of State, plays an

active role in fashioning the legislation.



Beginning of The Great Contraction. The Stock market crashes and a

severe monetary contraction begins in the nation’s heartland.



The Federal Reserve raises required reserve ratios contributing to a

sharp recession that prolongs the depression.


Figure 1

All Bank Deposits by Region 1875-1896

1875 = 100










1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896


New England Middle Atlantic South West


Figure 2

National Banks Deposits by Region, 1875-1900

1875 = 100












1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900

New England Middle Atlantic West South Pacific


Figure 3

All Bank Deposits By Region, 1900 - 1914

(1900 = 100)










1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914

New England Middle Atlantic South Middle West Pacific


Figure 4

Deposits by Federal Reserve District 1922-1941

1929 = 100












192 192 192 192 192 192 192 192 193 193 193 193 193 193 193 193 193 193 194 194

Bosto New Philadelph Clevela Richmon Atlant

Chicag St. Minneapol Kansas Dalla San


Figure 5

Deposits by Federal Reserve District

The First Two Years of the Depression: 1929-31

1929 = 100






1929 1930 1931

Boston New York Philadelphia Cleveland Richmond Atlanta

Chicago St. Louis Minneapolis Kansas City Dallas San Francisco


Figure 6

Deposits by Federal Reserve District

Before the Doubling of Reserve Ratios: 1934-36

1929 = 100










1934 1935 1936

Boston New York Philadelphia Cleveland Richmond Atlanta

Chicago St. Louis Minneapolis Kansas City Dallas San Francisco


Appendix: Sources of Data

Deposits: 1875-1914.

Exact figures on the stock of money by region are not available. The amount of coins

within the United States, for example, can be estimated from figures on minting and

imports and exports, but the amount within any one region cannot be estimated

accurately. But figures on deposits, and in some periods bank notes, by place of issue

(although not by where they are held) are available. Fand (1954, pp. 72-76) estimated

deposits in Non-national banks in four regions: New England, Middle States,

Southern States, and Western states for the years 1875-1896. These regions do not

correspond exactly to economic regions. Perhaps the main problem from this

perspective is the combination of the Pacific Coast with the other western states. It

would be, however, extremely time consuming to build up separate estimates for the

non-national banks for this region, so I have relied on the national bank data to

provide a picture of the Pacific Coast. To Fand’s estimates of deposits in non-national

banks, I added deposits of national banks. The source is a table by state that appeared

regularly in the Annual Report of the Comptroller of the Currency. U.S. Comptroller

of the Currency (1920, pp. 307-343).

(1) New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode

Island, and Vermont.

(2) Middle Atlantic: Delaware, District of Columbia, Maryland, New Jersey, New

York, and Pennsylvania.

(3) South: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi,

North Carolina, South Carolina, Tennessee, Texas, Virginia, and West Virginia.

(4) Middle West: Illinois, Indiana, Indian Territory, Iowa, Kansas, Michigan,

Minnesota, Missouri, Nebraska, Ohio, Oklahoma, and Wisconsin.

(5) Pacific Coast, Western states, and Territories: Alaska, Arizona, California,

Colorado, Dakota Territory, Hawaii, Idaho, Montana, Nevada, New Mexico,

North Dakota, Oregon, Puerto Rico, South Dakota, Utah, Washington, and


Deposits: 1896-1914. For this period All Bank Statistics (U.S. Board of Governors,

1959) gives data for all types of deposits in all classes of banks by states. The data

shown in the figure are a sum of demand and time deposits. The regions are defined


Deposits: 1914-1941. For this period I have switched to Deposits by Federal Reserve

District because the data is readily available; U.S. Board of Governors of the Federal

Reserve System (1943, pp. 688-927).

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