A History of Money and Banking in the United States: The Colonial Era to World War II (23 page)

percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a
contraction
.

It should be clear, then, that the “great depression” of the 1870s is merely a myth—a myth brought about by misinterpretation of 144Klein,
Money and the Economy,
pp. 145–46.

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the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879.

Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices
must
result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.145

Indeed, recent research has discovered that the analogous

“great depression” in England in this period was also a myth, and due to a confusion between a contraction of prices and its alleged inevitable effect on a depression of prices and its alleged inevitable effect on a depression of business activity.146

It might well be that the major effect of the panic of 1873

was, not to initiate a great depression, but to cause bankruptcies in overinflated banks and in railroads riding on the tide of vast government subsidy and bank speculation. In particular, we may note Jay Cooke, one of the creators of the national banking system and paladin of the public debt. In 1866, he favored contraction of the greenbacks and early resumption 145For the bemusement of Friedman and Schwartz, see Milton Friedman and Anna Jacobson Schwartz,
A Monetary History of the
United States, 1867–1960
(New York: National Bureau of Economic Research, 1963), pp. 33–44. On totals of bank money, see
Historical
Statistics,
pp. 624–25.

146S.B. Saul,
The Myth of the Great Depression, 1873–1896
(London: Macmillan, 1969).

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The Colonial Era to World War II

because he feared that inflation would destroy the value of government bonds. By the late 1860s, however, the House of Cooke was expanding everywhere, and in particular, had gotten control of the new Northern Pacific Railroad. Northern Pacific had been the recipient of the biggest federal largesse to railroads during the 1860s: a land grant of no less than 47 million acres.

Cooke sold Northern Pacific bonds as he had learned to sell government securities: hiring pamphleteers to write propaganda about the alleged Mediterranean climate of the North-west. Many leading government officials and politicians were on the Cooke–Northern Pacific payroll, including President Grant’s private secretary, General Horace Porter.

In 1869, Cooke expressed his monetary philosophy in keeping with his enlarged sphere of activity: Why should this Grand and Glorious Country be stunted and dwarfed—its activities chilled and its very life blood curdled by these miserable “hard coin” theories—the musty theories of a by gone age—These men who are urging on premature resumption know nothing of the great growing west which would grow twice as fast if it was not cramped for the means necessary to build RailRoads and improve farms and convey the produce to market.

But in 1873, a remarkable example of poetic justice struck Jay Cooke. The overbuilt Northern Pacific was crumbling, and a Cooke government bond operation provided a failure. So the mighty House of Cooke—”stunted and dwarfed” by the market economy—crashed and went bankrupt, touching off the panic of 1873.147

After passing the Resumption Act in 1875, the Republicans finally stumbled their way into resumption in 1879, fully 14

years after the end of the Civil War. The money supply did not contract in the late 1870s because the Republicans did not have 147Unger,
Greenback Era,
pp. 47 and 221.

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the will to contract in order to pave the way for resumption.

Resumption was finally achieved after substantial sales of U.S.

bonds for gold in Europe by Secretary of the Treasury Sherman.

Return to the gold standard in 1879 was almost blocked, in the last three years before resumption, by the emergence of a tremendous agitation, heavily in the West but also throughout the country, for the free coinage of silver. The United States mint ratios had been undervaluing silver since 1834, and in 1853 de facto gold monometallism was established because silver was so far undervalued as to drive fractional silver coins out of the country. Since 1853, the United States, while de jure on a bimetallic standard at 16-to-1, with the silver dollar still technically in circulation though nonexistent, was actually on a gold monometallic standard with lightweight subsidiary silver coins for fractional use.

In 1872, it became apparent to a few knowledgeable men at the U.S. Treasury that silver, which had held at about 15.5-to-1

since the early 1860s, was about to suffer a huge decline in value. The major reason was the realization that European nations were shifting from a silver to a gold standard, thereby decreasing their demand for silver. A subsidiary reason was the discovery of silver mines in Nevada and other states in the West. Working rapidly, these Treasury men, along with Senator Sherman, slipped through Congress in February 1873 a seemingly innocuous bill which in effect discontinued the minting of any further silver dollars. This was followed by an act of June 1874, which completed the demonetization of silver by ending the legal tender quality of all silver dollars above the sum of $5. The timing was perfect, since it was in 1874 that the market value of silver fell to greater than 16-to-1 to gold for the first time. From then on, the market price of silver fell steadily, declining to nearly 18-to-1 in 1876, over 18-to-1 in 1879, and reaching the phenomenal level of 32-to-1 in 1894.

In short, after 1874, silver was no longer undervalued but overvalued, and increasingly so, in terms of gold, at 16-to-1.

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Except for the acts of 1873 and 1874, labeled by the pro-silver forces as “The Crime of 1873,” silver would have flowed into the United States, and the country would have been once again on a de facto monometallic silver standard. The champions of greenbacks, the champions of inflation, saw a “hard-money” way to increase greatly the amount of American currency: the remonetization of a flood of new overvalued silver. The agitation was to remonetize silver by “the free and unlimited coinage of silver at 16-to-1.”

It should be recognized that the silverites had a case. The demonetization of silver was a “crime” in the sense that it was done shiftily, deceptively, by men who knew that they wanted to demonetize silver before it was too late and have silver replace gold. The case for gold over silver was a strong one, particularly in an era of rapidly falling value of silver, but it should have been made openly and honestly. The furtive method of demonetizing silver, the “crime against silver,” was in part responsible for the vehemence of the silver agitation for the remainder of the century.148

Ultimately, the administration was able to secure the resumption of payments in gold, but at the expense of submitting to the Bland-Allison Act of 1878, which mandated that the Treasury purchase $2 million to $4 million of silver per month from then on.

It should be noted that this first silver agitation of the late 1870s, at least, cannot be considered an “agrarian” or a particularly Southern and Western movement. The silver agitation was broadly based throughout the nation, except in New England, and was, moreover, an urban movement. As Weinstein points out:

148For the best discussion of the crime against silver, see Allen Weinstein,
Prelude to Populism: Origins of the Silver Issue, 1867–1878
(New Haven, Conn.: Yale University Press, 1970), pp. 8–32. See also Paul M.

O’Leary, “The Scene of the Crime of 1873 Revisited: A Note,”
Journal of
Political Economy
68 (1960): 388–92.

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Before the Twentieth Century

Silver began as an urban movement, furthermore, not an agrarian crusade. Its original strongholds were the large towns and cities of the Midwest and middle Atlantic states, not the country’s farming communities. The first batch of bimetallist leaders were a loosely knit collection of hard money newspaper editors, businessmen, academic reformers, bankers, and commercial groups.149

With the passage of the Silver Purchase Act of 1878, silver agitation died out in America, to spring up again in the 1890s.

THE GOLD STANDARD ERA

WITH THE NATIONAL BANKING SYSTEM, 1879–1913

The record of 1879–1896 was very similar to the first stage of the alleged great depression from 1873 to 1879. Once again, we had a phenomenal expansion of American industry, production, and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, at 3.8 percent per annum. Real net national product rose at the rate of 3.7 percent per year from 1879 to 1897, while per-capita net national product increased by 1.5 percent per year.

Once again, orthodox economic historians are bewildered, for there should have been a great depression, since prices fell at a rate of over 1 percent per year in this period. Just as in the previous period, the money supply grew, but not fast enough to overcome the great increases in productivity and the supply of products. The major difference in the two periods is that money supply rose more rapidly from 1879 to 1897, by 6 percent per year, compared with the 2.7 percent per year in the earlier era.

As a result, prices fell by less, by over 1 percent per annum as contrasted to 3.8 percent. Total bank money, notes, and deposits rose from $2.45 billion to $6.06 billion in this period, a rise of 149Weinstein,
Prelude to Populism
, p. 356.

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The Colonial Era to World War II

10.45 percent per annum—surely enough to satisfy all but the most ardent inflationists.150

For those who persist in associating a gold standard with deflation, it should be pointed out that price deflation in the gold standard 1879–1897 period was considerably less than price deflation from 1873 to 1879, when the United States was still on a fiat greenback standard.

After specie resumption occurred successfully in 1879, the gold premium to greenbacks fell to par and the appreciated greenback promoted confidence in the gold-backed dollar.

More foreigners willing to hold dollars meant an inflow of gold into the United States and greater American exports. Some historians have attributed the boom of 1879–1882, culminating in a financial crisis in the latter year, to the inflow of gold coin to the U.S., which rose from $110.5 million in 1879 to $358.3 million in 1882.151 In a sense this is true, but the boom would never have taken on considerable proportions without the pyramiding of the national banking system, the deposits of which increased from $2.149 billion in 1879 to $2.777 billion in 1882, a rise of 29.2 percent, or 9.7 percent per annum. Wholesale prices were driven up from 90 in 1879 to 108 three years later, a 22.5

percent increase, before resuming their long-run downward path.

A financial panic in 1884, coming during a mild contraction after 1882, lowered the supply of bank money. Total bank notes and deposits dropped slightly, from $3.19 billion in 1883 to $3.15

billion. The panic was triggered by an overflow of gold abroad, as foreigners began to lose confidence in the willingness of the United States to remain on the gold standard. This understandable loss of confidence resulted from the inflationary sop to the pro-silver forces in the Bland-Allison Silver Purchase Act of 150Friedman and Schwartz,
Monetary History,
pp. 91–93; and
Historical
Statistics
, p. 625.

151Friedman and Schwartz,
Monetary History
, pp. 98–99.

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Before the Twentieth Century

1878. The shift in Treasury balances from gold to silver struck a disquieting note in foreign financial circles.152

Before examining the critical decade of the 1890s, it is well to point out in some detail the excellent record of the first decade after the return to gold, 1879–1889.

America went off the gold standard in 1861 and remained off after the war’s end. Arguments between hard-money advocates who wanted to eliminate unbacked greenbacks and soft-money men who wanted to increase them raged through the 1870s until the Grant administration decided in 1875 to resume redemption of paper dollars into gold at prewar value on the first day of 1879. At the time (1875) greenbacks were trading at a discount of roughly 17 percent against the prewar gold dollar. A combination of outright paper-money deflation and an increase in official gold holdings enabled a return to gold four years later, which set the scene for a decade of tremendous economic growth.

Economic recordkeeping a century ago was not nearly as well developed as today, but a clear picture comes through nonethe-less. The
Encyclopedia of American Economic History
calls the period under review “one of the most expansive in American history. Capital investment was high; . . . there was little unemployment; and the real costs of production declined rapidly.” PRICES, WAGES, AND REAL WAGES