Chapter 12: The Financial System and the International Economy
Summary
This chapter traces the key developments of the U.S. financial system and U.S. participation in
international transactions during the antebellum period. Rapid growth occurred even though the period
is characterized by tremendous changes in banking and financial intermediation.
Key Terms and Concepts
Balance of payments
Banks
Bimettalism
Business cycle
Currency
Double liability
Fiat money
Forstall System
Fractional reserve banking
Free banking
Free rider problem
Gold standard
Inflation
Interdependence
Intermediation
Leverage
Money
Paper Money Safety Fund
Suffolk System
Reserve ratio
Unit banking
Teaching Tips
1. Refresh students’ memories on the four key roles of money as defined by the text (medium of
exchange, store of value, unit of account, acceptable method of deferred payment). Explain
that a stable money system supports operation on the basis of comparative advantage, and thus
generates wealth.
2. Define financial intermediation. Explain to students why it is key in impersonally bringing savers
and borrowers together in order to support investment, trade and economic progress.
3. Layout the history behind the First and Second Banks of the U.S. Explain that both failed to get
re-chartered a) out of concern that the competition between these centralized federal banks
and private and state banks and b) over fear that national banks would advance special interests
of a select group at the expense of the majority. Ask students to investigate the controversies.
If time permits, take the students to the Federal Reserve System’s website and ask them to
determine what the current functions of the Fed are and how they address some of the key
concerns over the First and Second Banks of the U.S.
4. Explain the concept of fractional banking and discuss how adjustments in the reserve ratio can
be used to expand and contract the money supply. Use the equation of exchange (M*V = P*Q)
to discuss how changes in the money supply (M) can lead to changes in prices (P) and output
(Q).
5. Discuss how the gold standard imposes fiscal discipline on a central bank and its government.
6. Define balance of payments. Explain that the U.S. gives other countries U.S. dollars when it
imports to other countries. It also helps other countries acquire income and gain wealth. All
these activities boost the demand for U.S. exports.
Websites and Additional Resources
 Federal Reserve Bank of Kansas City. FED101: The Federal Reserve Today. 2009. Retrieved
December 10, 2009 from: http://www.federalreserveeducation.org/fed101/index.htm
The FED101 website provides a range of teaching tools that may be of interest to instructors of
American economic history courses that draw students with a minimal background in
economics.

Federal Reserve Board. “Board of Governors.” The Structure of the Federal Reserve System.
2003. Federal Reserve System of the U.S. Retrieved December 10, 2009 from:
http://www.federalreserve.gov/pubs/frseries/frseri.htm.
o This website provides general information on the structure of the Fed, includes
information on credit, and discusses important developments in the mortgage industry.