A History of Money and Banking in the United States: The Colonial Era to World War II (24 page)

This is shown most graphically with a look at wages and prices during the decade before and after convertibility.

While prices fell during the 1870s and 1880s, wages only fell during the greenback period, and rose from 1879 to 1889.

The figures tell a remarkable story. Both consumer prices and nominal wages fell by about 30 percent during the last decade of greenbacks. But from 1879–1889, while prices kept falling, wages rose 23 percent. So real wages, after taking inflation—or the lack of it—into effect, soared.

152See Rendigs Fels,
American Business Cycle, 1865–1897
(Chapel Hill: University of North Carolina Press, 1959), pp. 130–31.

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

WHOLESALE PRICE INDEX

(1910–1914 = 100)

Year

Index

% Change

1869 151

—

1879

90

-40.4%

1889

81

-10.0%

CONSUMER PRICE INDEX

1869

138

—

1879

97

-28.8%

1889

93

-4.2%

WAGES

(1900–1914 = 100)

Urban Labor

Farm Labor

Combined

1869 77 96 87

1879 61 61 61

1889 72 78 75

No decade before or since produced such a sustainable rise in real wages. Two possible exceptions are the periods 1909–1919 (when the index rose from 99 to 140) and 1929–1939

(134 to 194). But during the first decade real wages plummeted the next year—to 129 in 1920, and did not reach 1919’s level until 1934. And during the 1930s real wages also soared, for those fortunate enough to have jobs.

In any event, the contrast to this past decade is astonishing.

And while there are many reasons why real wages increase, three necessary conditions must be present. Foremost, an absence of sustained inflation. This contributes to the second condition, a rise in savings and capital formation.

People will not save if they believe their money will be worth less in the future. Finally, technological advancement is obviously important. But it is not enough. The 1970s saw this third factor present, but the absence of the first two caused real wages to fall.

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Before the Twentieth Century

INTEREST RATES

Sidney Homer writes in his monumental
History of Interest
Rates, 2000 B.C. to the Present
that “during the last two decades of the nineteenth century (1880–1900), long-term bond yields in the United States declined almost steadily. The nation entered its first period of low long-term interest rates,” finally experiencing the 3- to 3.5-percent long-term rates which had characterized Holland in the seventeenth century and Britain in the eighteenth and nineteenth: in short, the economic giants of their day.

To gauge long-term rates of the day, it is best not to use the long-term government bonds we would use today as a measure. The National Banking Acts of 1863–1864 stipulated that these bonds had to be used to secure bank notes. This created such a demand for them that, as Homer says, “by the mid 1870s

[it] put government bond prices up to levels where their yields were far below acceptable rates of long-term interest.” But the Commerce Department tracks the unadjusted index of yields of American railroad bonds. We list the yields for 1878, the year before gold, and for 1879, and 1889.

RAILROAD BOND YIELDS

1878

6.45%

1879

5.98%

1889

4.43%

We stress that with consumer prices about 7 percent lower in 1889 than they had been the decade before, the
real
rate of return by decade’s end was well into double-digit range, a bonanza for savers and lenders.

Short-term rates during the last century were considerably more skittish than long-term rates. But even here the decen-nial averages of annual averages of both three- to six-month commercial paper rates and (overnight) call money during the 1880s declined from what it had been the previous decades:
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A History of Money and Banking in the United States:
The Colonial Era to World War II

COMMERCIAL PAPER

CALL MONEY

1870–1879 6.46%

5.73%

1880–1889 5.14%

3.98%

A BURST IN PRODUCTIVITY

By some measures the 1880s was the most productive decade in our history. In their
A Monetary History of the United
States
,
1867–1960
, Professors Friedman and Schwartz quote R.W. Goldsmith on the subject:

The highest decadal rate [of growth of real reproducible, tangible wealth per head from 1805 to 1950] for periods of about ten years was apparently reached in the eighties with approximately 3.8 percent.

The statistics give proof to this outpouring of new wealth.

GROSS NATIONAL PRODUCT

(1958 prices)

Total

Per capita

(billions of dollars)

(in dollars)

Decade average 1869–78 $23.1 $531

Decade average 1879–88 $42.4 $774

Decade average 1889–98 $49.1 $795

This dollar growth was occurring, remember, in the face of general price declines.

GROSS DOMESTIC PRODUCT

(1929 prices in billions of dollars)

1869–1878 $11.6 (average per year) 1879–1888 $21.2 (average per year) Gross domestic product almost doubled from the decade before, a far larger percentage jump decade-on-decade than any time since.

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165

Before the Twentieth Century

LABOR PRODUCTIVITY

MANUFACTURING OUTPUT PER MAN-HOUR

(1958 = 100)

1869 14.7

1879 16.2

1889 20.5

The 26.5-percent increase here ranks among the best in our history. Labor productivity reflects increased capital investment.

CAPITAL FORMATION

From 1869 to 1879 the total number of business establish-ments barely rose, but the next decade saw a 39.4-percent increase. Nor surprisingly, a decade of falling prices, rising real income, and lucrative interest returns made for tremendous capital investment, ensuring future gains in productivity.

PURCHASE OF STRUCTURES AND EQUIPMENT

(total, in 1958 prices, in billions of dollars) 1870 $0.4

1880 $0.4

1890 $2.0

This massive 500-percent decade-on-decade increase has never since been even closely rivaled. It stands in particular contrast to the virtual stagnation witnessed by the 1970s.

PRIVATE AND PUBLIC CAPITAL FORMATION

(total gross, in billions, 1929 prices)

Average

1872–1876 $2.6

Average

1877–1881 $3.7

Average

1882–1886 $4.5

Average

1887–1891 $5.9

These five-year averages are not as “clean” as some other figures, but still show a rough doubling of total capital formation from the ‘70s to the ‘80s.

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

It has repeatedly been alleged that the late nineteenth century, the “golden age of the gold standard” in the United States, was a period especially harmful to farmers. The facts, however, tell a different story. While manufacturing in the 1880s grew more rapidly than did agriculture (“The Census of 1890,” report Friedman and Schwartz, “was the first in which the net value added by manufacturing exceeded the value of agricultural output”), farmers had an excellent decade.

NUMBER OF FARMS

(in thousands)

1880 4,009

1890 4,565

FARM LAND

(in millions of acres)

1880 536,182

1890 623,219

FARM PRODUCTIVITY

(persons supplied by farm worker)

1880 5.1

1890 5.6

VALUE OF FARM GROSS OUTPUT AND PRODUCT

(1910-1914 dollars, in millions)

1880 $4,129

1890 $4,990

So farms, farmland, productivity, and production all increased in the 1880s, even while commodity prices were falling. And as we see below, farm wage rates, even in nominal terms, rose during this time.

FARM WAGE RATES

(per month, with board and room, in 1879, 1889 dollars) 1879 or 1880 $11.50

1889 or 1890 $13.50

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Before the Twentieth Century

This phenomenal economic growth during the decade immediately after the return to gold convertibility cannot be attributed solely to the gold standard. Indeed all during this time there was never a completely free-market monetary system. The National Banking Acts of 1863–1864 had semi-cartelized the banking system.

Only certain banks could issue money, but all other banks had to have accounts at these. The financial panics throughout the late nineteenth century were a result of the arbitrary credit-creation powers of the banking system. While not as harmful as today’s inflation mechanism, it was still a storm in an otherwise fairly healthy economic climate.

The fateful decade of the 1890s saw the return of the agitation for free silver, which had lain dormant for a decade. The Republican Party intensified its longtime flirtation with inflation by passing the Sherman Silver Purchase Act of 1890, which roughly doubled the Treasury purchase requirement of silver. The Treasury was now mandated to buy 4.5 million ounces of silver per month. Furthermore, payment was to be made in a new issue of redeemable greenback currency, Treasury notes of 1890, which were to be a full legal tender, redeemable in either gold or silver at the discretion of the Treasury. Not only was this an increased commitment to silver, it was a significant step on the road to bimetallism which—at the depreciated market rates—would mean inflationary silver monometallism. In the same year, the Republicans passed the high McKinley Tariff Act of 1890, which reaffirmed their commitment to high tariffs and soft money.

Another unsettling inflationary move made in the same year was that the New York Subtreasury altered its longstanding practice of settling its clearinghouse balances in gold coin. Instead, in August 1890, it began using the old greenbacks and the new Treasury notes of 1890. As a result, these paper currencies largely replaced gold paid in customs receipts in New York.153

153See Friedman and Schwartz,
Monetary History,
pp. 106, n. 25.

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

Uneasiness about the shift from gold to silver and the continuing free-silver agitation caused foreigners to lose further confidence in the U.S. gold standard, and to cause a drop in capital imports and severe gold outflows from the country. This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.

Fears about the American gold standard were intensified in March 1891, when the Treasury suddenly imposed a stiff fee on the export of gold bars taken from its vaults so that most gold exported from then on was American gold coin rather than bars. A shock went through the financial community, in the U.S. and abroad, when the United States Senate passed a free-silver coinage bill in July 1892; the fact that the bill went no further was not enough to restore confidence in the gold standard.

Banks began to insert clauses in loans and mortgages requiring payment in gold coin; clearly the dollar was no longer trusted.

Gold exports intensified in 1892, the Treasury’s gold reserve declined, and a run ensued on the U.S. Treasury. In February 1893, the Treasury persuaded New York banks, which had drawn down $6 million on gold from the Treasury by presenting Treasury notes for redemption, to return the gold and reac-quire the paper. This act of desperation was scarcely calculated to restore confidence in the paper dollar. The Treasury was paying the price for specie resumption without bothering to contract the paper notes in circulation. The gold standard was therefore inherently shaky, resting only on public confidence, and that was giving way under the silver agitation and under desperate acts by the Treasury.

Poor Grover Cleveland, a hard-money Democrat, assumed the presidency in the middle of this monetary crisis. Two months later, the stock market collapsed, and a month afterward, in June 1893, distrust of the fractional reserve banks led to massive bank runs and bank failures throughout the country.

Once again, however, many banks, national and state, especially in the West and South, were allowed to suspend specie payments. The panic of 1893 was on. In a few months, Eastern
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Before the Twentieth Century

bank suspension occurred, beginning with New York City. The total money supply—gold coin, Treasury paper, national bank notes, and national and state bank deposits—fell by 6.3 percent in one year, from June 1892 to June 1893. Suspension of specie payments resulted in deposits—which were no longer immediately redeemable in cash—going to a discount in relation to currency during the month of August. As a result, deposits became less useful, and the public tried its best to intensify its exchange of deposits for currency.

By the end of 1893, the panic was over as foreign confidence rose with the Cleveland administration’s successful repeal of the Sherman Silver Purchase Act in November of that year. Further silver agitation of 1895 endangered the Treasury’s gold reserve, but heroic acts of the Treasury, including buying gold from a syndicate of bankers headed by J.P. Morgan and August Belmont, restored confidence in the continuance of the gold standard.154