Monetary History Glossary

The Bimetallic Standard | The Crime of 1873 | François Micheloud's Homepage

Bank runs
The process by which people who have deposited money in commercial banks all want to withdraw it at the same time. Because the banks lend the money they receive, they never have enough cash on hand to fulfill all the demand for withdrawal. A s the public knows this, as soon as rumors of a possible insolvency of a particular bank spreads, everyone tries to get its money back first, precipitating the bankruptcy of the bank.
Banking System
The sum of all the commercial banks of a country. These banks take deposits from the public, and lend the money they received, keeping only a small fraction of it (10-15%) in their vaults to satisfy withdrawal demands.
Bimetallic Standard or bimetallism
A monetary standard in which the monetary unit was defined as consisting of either a certain quantity of silver or a certain quantity of gold. Citizen could come to the Mint with one of both metals and ask for coins in exchange.
Bullion Market
The market for gold and silver as a raw metal.
Consumer Price Index, a measure designed to capture annual price changes in general goods. Few people like inflation for its own sake today, but you have to know that declining prices (deflation) is associated with recessions and unemployment.
The opposite of inflation, deflation is the process through which prices decline. It is almost always a sign of a depression.
The state of the economy when output of goods and services is slowing sharply or even declining, unemployment rises and prices decline.
Fiat money
Bank notes used as money to finance transactions (pay for things) which are not "backed" by a valuable commodity like gold or silver which could be exchanged against the note at a bank. Fiat money is the only money used in the world today, but in the 19th century it was printed mainly to finance wars, because people didn't trust the government enough to forget the immense potential for abuse that this system had. If a government wants to increase its expenditures without increasing taxes and without borrowing, it can just print money and pay with it. This invariably leads to inflation.
Gold Standard
A monetary standard which defines the monetary unit of a country as consisting of a certain amount of gold. Every citizen could come to the Mint with a bar of gold and ask for currency (for example dollars) in exchange, at the legal price.
A weight unit often used in the 19th century Anglo-Saxon world. It is equivalent to 0.065 grams.
The process by which the prices of goods and services rise in terms of money. Sometimes you will read gold or silver inflation, which means that the price of goods in terms of silver rises, due to an increase in the quantity of gold or silver used as money.
Legal ratio
In a bimetallic system, this ratio states how many pounds of silver you get for one pound of gold when you go at the Mint. For example, Before 1873 the dollar was defined as either 371 grains of silver or 22.5 grains of gold. So, the same dollar was legally worth either 371 grains of silver or 22.5 grains of gold, that means the legal ratio was 371/22.5 = 16.5 : 1
Legal tender
A legal tender is a mean of payment (gold, coin, note, etc...) which the laws forces the sellers to accept to settle debt. That is, if you're a banana wholesaler, you can refuse payment in coconuts but you have to accept dollars from a client who want to pay its debts.
Market ratio
As gold and silver had other uses beside money (jewelry, false teeth, etc...), there was also an active market for both metals, called the bullion market. Here their price changed daily, as the force of supply and demand moved it back and forth. Note that we cannot speak of a dollar market price of gold or silver, because that price was legally fixed. If gold was cheaper at the Mint, it just ceased to be used as a coin, but its nominal dollar price would not change. That why we always talk of the ratio, that is, how many pounds of silver you get for one pound of gold.
The Mint
The government agency responsible for the coinage of the monetary unit. That's the place people brought their gold and silver to get dollars. Click here for a picture of the American Mint.
Monetary Base
Sum of the currency in the hands of the public and the currency commercial banks keep as reserves
Monetary Standard
A legal system which specifies what currency a country uses, how it is defined and who runs it. For example, the UK was on a gold standard a the end of the 19th century, and the power to coin gold was granted to the Bank of England.
Money stock
There are many definitions of the money stock, but they all include the monetary base, and add bank deposits of various flavors. This is a most important magnitude for the working of the economy, because this indicates how much is available for people to buy and get paid at the going prices. If the money stock goes down, or the output of goods and services goes up more rapidly, there's a fat risk of a depression.
Monetary unit
The coins, notes, unit of account which a country uses legally. Since the end of the 19th century, most countries have a single monetary unit on their territory. For example the dollar in the USA, the French franc in France, the Deutsche Mark in Germany are all monetary units.
Ratio of reserves to deposits
This ratio is defined as banking reserves divided by deposits the public has made in the national banking system as a whole. It is often seen as an indicator of the carefulness of the banks, because careful banks will tend to keep more reserves for a given amount of deposits, increasing the ratio. After bank runs, this ratio climbs, depressing the money stock.
Ratio of deposits to currency
This ratio is defined as deposits the public has made in the national banking system as a whole divided by currency in the hands of the public. It is often seen as an indicator of the trust of the public in the banks, because it is thought that if the public keeps more dollars of deposits in the banks for each dollar he hoards at home, it means that the trust in the banking system increases. During bank runs, this ratio goes down sharply.
Undervalued, overvalued
A coin is undervalued when its official price is under the real value that the coin has if melted and sold as (part of) a metal bar. Conversely, a coin is said to be overvalued when it would be worth less as a metal than as a coin.

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