8 points a As a general rule, state bank notes usually had a face value that exc
ID: 424065 • Letter: 8
Question
8 points a As a general rule, state bank notes usually had a face value that exceeded their market value. Why was this and how did merchants and other bankers know how to value various state bank notes? b. As a general rule, notes of the First and Second Banks of the United States had a face value that equaled their market value. What feature of the two Banks was the primary reason for the lack of discounting and why did it work as it did? In the figure below, what role, if any, did the First and Second Banks of the United States have in influencing the growth in the mumber of private commercial banks? C. FIGURE 4.3 The Growth of Commercial Banking 1790-1861 1800 1600 1400 1200 1000 800 Free banking Second Bank ol the United Sates First Bank of the United States 600 100 200 17901800 1810 120 8301810 850 1860 7 points Total factor productivity is often thought of as technology." However, economic growth theory teaches us that productivity is the combination of technology" and "efficiency where the latter captures how effectively the factors of production (such as physical capital and labor) and technology are combined to produce output. We discussed several sources of productivity growth in steamboats and railroads during the antebellum period. To what extent were these sources improvements in technology and to what extent were they improvements in efficiency?"Explanation / Answer
Answer(a): First of all the state bank notes were issued as paper money and the bank notes were backed by US bonds and redemption fund equivalent to 5% of the outstanding note balance had to be mandatorily maintaind by the issuing banks in the form of gold or other assets.
the valuation of the state bank notes was basis the worth of the collateral used to back the bank notes. For bank ntes issued by provate banks only nminal backing as required.Often worthless bank notes were issued by fraudulent institutes.
The banks could issue bank notes upto 90% of the value of the high quality collaterals. Hence the demand for bond as collaterals also increased .
Answer(b):The basic premise behind the establishment of first and second bank was to establish a charter to issue paper money deemed as legitimate and legal by all and sundry. The basic purpose was to pay back the war debts, lower inflation and restore currency value.The first and second back was supposed to act as a safe deposit place for the public, facililator of commercial transactions and act as fiscal agent. The establish of central banks would help in borrowing money to pay back the debts.Hence the face value of the notes issued by first and second banks were equal to market value and not discounted as they were backed by public deposits rather than collaterals in the form of government bonds and the sole purpose was to increase the deposits from public to pay back the huge debts and also ensure social good by regulating the financial and payment system.
Answer (c): The objective of setting by first and second banks failed somehow and became victims of the centralised system.It also raised serious doubts on the viability of central banks and failure of the central ban could trigger widespread economic disruptions and there might be conflicts of interests due to red tapism,vested political interests etc. Hence the concept of decentralized central banking system was promoted and paved the way for establishing a strong network of independentl operating banks with regional branches.
Answer : The sources of improments in steam boats and railroads paved the way for huge productivity improvements:
- It helped in efficient settlement pattern of the population by enabling access to remote and uninhabitated /scantily inhabited geographies
-It helped in better and efficient utilization of the scattered natural resources
-It helped in adding convenience to transportation and helped in saving costs,time and labour
-It helped in achieving energy efficiency
The technology improvements enabled increase in productivity with minimum wasted efforts.
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