The Post Civil War Era, 1865 to 1879
The United States ended the war with a depreciated, inconvertible greenback currency and a heavy burden of public debt.
The first question on the monetary agenda was what to do about the greenbacks.
A powerful group of industrialists, calling for continuation of greenbacks, opposing resumption and, of course,
Of course, any contraction of money to prepare for specie resumption was headed by the Pennsylvania
Iron and Steel Manufacturers.
The Pennsylvania Iron Masters, who had been in the forefront of the organized protective
tariff movement since its beginnings in 1820, were led here and instructed by their intellectual
mentor, himself a Pennsylvania Iron Master, the elderly economist Henry C. Carey.
Carey and his fellow iron manufacturers realized that during that inflation, since the foreign
When an exchange market anticipates further inflation, domestic currency tends to depreciate
faster than domestic prices are rising.
A falling dollar and a rising price of gold, they realized, make domestic prices cheaper
and imported prices higher and hence function as a surrogate tariff.
A cheap money, inflationist policy then, could not only provide easy credit for manufacturing,
it could also function as an extra tariff because of the depreciation of the dollar
and the Rise in the Gold Premium.
Inbibers of the Kerry Gospel of High Terrace and Soft Money were a host of attendees at
the famous quote, Kerry Vespers, evenings of discussion of economics and politics.
Influential Kerry disciples included economist and Pennsylvania iron master Stephen Cowell,
Eber Ward, president of the Iron and Steel Association, John A. Williams, editor of the
Association's Journal, Iron Age, Representative Daniel Morrell, Pennsylvania iron manufacturer,
I. Smith-Homans Jr., editor of the Bankers Magazine, and powerful U.S. Representative
William D. Kelly of Pennsylvania, whose lifelong devotion to the interest of the iron masters
earned him the proud sobriquet, quote, old pig iron.
The Kerry Circle also dominated the American Industrial League, which spread the Kerry
Doctrines of Protection and Paper Money Influential allies in Congress, if not precisely
carry followers, were the radical leader, Representative Thaddeus Stevens, himself a
Pennsylvania iron master, and Representative John A. Griswold, an iron master from New
York.
Also sympathetic to greenbacks were many manufacturers who desired cheap credit, gold speculators
who were betting on higher gold prices, and railroads, which as heavy debtors to their
One of the influential carry disciples, for example, was the leading railroad promoter,
the Pennsylvanian Thomas A. Scott, leading entrepreneur of the Pennsylvania and the Texas
and Pacific railroads.
One of the most flamboyant advocates of greenback inflation in the post-war era was the Wall
Wall Street Stock Speculator, Richard Schell In 1874, Schell became a member of Congress,
where he proposed an outrageous pre-Keynesian scheme in the spirit of Keynes's later dictum
that so long as money is spent, it doesn't matter what the money is spent on, be it pyramid
building or digging holes in the ground.
Schell seriously urged the federal government to dig a canal from New York to San Francisco,
financed wholly by the issue of greenbacks.
Israel's enthusiasm was perhaps matched only by that of the notorious railroad speculator
and economic adventurer, George Francis Trane, who called repeatedly for immense issues of
greenbacks.
Trane thundered in 1867, Quote, Give us greenbacks, we say, and build cities, plant corn, open
coal mines, control railways, launch ships, grow cotton, establish factories, open gold
The Panic of 1873 was a severe blow to many overbuilt railroads, and it was railroad men
who led in calling for more greenbacks to stem the tide.
Thomas Scott, Collis P. Huntington, leader of the Central Pacific Railroad, Russell Sage,
and other railroad men joined in the call for greenbacks.
So strong was their influence that the Louisville Courier-Journal in April 1874 declared,
The strongest influence at work in Washington upon the currency proceeded from the railroads.
The great inflationists, after all, are the great trunk railroads.
The greenback problem after the Civil War was greatly complicated by the massive public
debt that lay over the heads of the American people.
A federal debt, which had tallied only $64.7 million in 1860, amounted to the huge amount
of $2.32 billion in 1866.
Many ex-Jacksonian Democrats, led by Senator George H. Pendleton of Ohio, began to agitate
for further issue of greenbacks solely for the purpose of redeeming the principle of
federal debts contracted in greenbacks during the war.
In a sense, then, hard money hostility to both inflation and the public debt were now
at odds. In a sense, the Pendletonians were motivated by a sense of poetic justice, of
paying inflated debts in inflated paper. But in doing so, they lost sight of the broader
hard money goal. This program confused the party struggles of the post-Civil War period.
But ultimately, it is safe to say that the Democrats had a far greater proportion of
of Congressmen devoted to hard money and to resumption, then did the Republicans.
Thus, Secretary of the Treasury Hugh McCullough's quote, Loan Bill of March 1866, which provided
for contraction of greenbacks in preparation for resumption of species payments, was passed
in the House by a Republican vote of 56 to 52 and a Democratic vote of 27 to 1.
And in April 1874, the quote, inflation bill, admittedly vetoed later by President Grant,
which provided for expansion of greenbacks and of national banknotes, was passed in the
House by a Republican vote of 105 to 64, while the Democrats voted against by the narrow
margin of 35 to 37.
In the meantime, despite repeated resolutions for resumption of specie payments in 1865
In 1869, the dominant Republican Party continued to do nothing for actual resumption.
The Pendleton Plan was adopted by the Democrats in their 1868 platform, and the Republican
victory in the presidential race that year was generally taken as a conclusive defeat
for that idea.
Finally, however, the Democratic sweep in the Congressional elections of 1874 forced
the Republicans into a semblance of unity on monetary matters, and, in the lame duck
Congressional Session led by Senator John Sherman, they came up with the Resumption
Act of January 1875.
Despite the fact that the Resumption Act ultimately resulted in specie resumption, it was not
considered a hard money victory by contemporaries.
Sherman had forged a compromise between hard and soft money forces.
It is true that the US government was supposed to buy gold with government bonds to prepare
for resumption on January 1st, 1879.
But this resumption was four years off, and Congress had expressed intent to resume several
times before.
And in the meantime, the soft money men were appeased by the fact that the bill immediately
eliminated the $300 million limit on national banknotes in a provision known as quote, free
banking.
The only hard money compensation was an 80% pro-rata contraction of greenbacks to partially
offset any new national banknotes.
The bulk of the opposition to the Resumption Act was by hard-money congressmen, who, in
addition to pointing out its biased ambiguities, charged that the contracted greenbacks could
be reissued instead of retired.
Hard-money forces throughout the country had an equally scornful view of the Resumption
Act.
In a few years, however, they rallied as resumption drew near.
That the Republicans were generally less than enthusiastic about specie resumption was revealed
by the Grant Administration's reaction to the Supreme Court's decision in the first
Legal Tender case.
After the end of the war, the question of the constitutionality of Legal Tender came
before the courts.
We have seen that the California and Oregon courts decided irredeemable paper to be unconstitutional.
In the large number of state court decisions on greenbacks before 1870, every Republican
judge but one upheld their constitutionality, whereas every Democratic judge but two declared
The Greenback Question reached the U.S. Supreme Court in 1867 and was decided in February
1870 in the case of Hepburn v. Griswold.
The court held by a vote of 5 to 3, with all the Democratic judges voting with the majority
and the Republicans in the minority.
Chief Justice Salmon P. Chase, who delivered the decision denouncing his own action as
Secretary of the Treasury as unnecessary and unconstitutional, had swung back to the Democratic
The Grand Administration was upset by Hepburn v. Griswold, as were the railroads, who had accumulated a heavy long-term debt, which would now be payable in more valuable gold.
As luck would have it, however, there were two vacancies on the court, one of which was created by the retirement of one of the majority judges.
Grant appointed not only two Republican judges, but two railroad lawyers whose views on the subject were already known.
The new 5 to 4 majority dutifully and quickly reconsidered the question and, in May 1871, reversed the previous court in the fateful decision of Knox v. Lee.
From then on, paper money would be held consonant with the U.S. Constitution.
The national banking system was ensconced after the Civil War.
War.
The number of banks, national banknotes and deposits all pyramided upward, and after 1870
state banks began to boom as deposit-creating institutions.
With lower requirements and fewer restrictions than the national banks, they could pyramid
on top of national banks.
The number of national banks increased from 1,294 in 1865 to 1,968 in 1873, while the
The number of state banks rose from 349 to 1,330 in the same period.
Total state and national banknotes and deposits rose from $835 million in 1865 to $1.964 billion
in 1873, an increase of 135.2% or an increase of 16.9% per year.
The following year, the supply of bank money leveled off as the Panic of 1873 struck and caused numerous bankruptcies.
As a general overview of the national banking period, we can agree with Klein that,
The financial panics of 1873, 1884, 1893 and 1907 were in large part an outgrowth of reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks.
These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up," end quote.
And yet it must be pointed out that the total money supply, even merely the supply of bank money, did not increase after the panic, but merely leveled off.
Orthodox economic historians have long complained about the quote Great Depression that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years until 1879.
Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of species payments in 1879.
Yet what sort of depression is it which saw an extraordinarily large expansion of industry,
of railroads, of physical output, of net national product, or real per capita income?
As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3% per annum increase
in money national products, an outstanding real national product growth of 6.8% per year
in this period, and a phenomenal rise of 4.5% per year in real product per capita.
Even the alleged, quote, monetary contraction never took place, the money supply increasing
by 2.7% per year in this period.
From 1873 through 1878, before another spurt of monetary expansion, the total supply of
of Bank Money rose from $1.964 billion to $2.221 billion, a rise of 13.1% or 2.6% per year.
In short, a modest but definite rise, and scarcely a contraction.
It should be clear, then, that the quote Great Depression of the 1870s is merely a myth.
A myth brought about by misinterpretation of the fact that prices in general fell sharply
Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8%
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 standards
to All the Consumers. Indeed, recent research has discovered that the analogous quote 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. 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 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.
Cook sold Northern Pacific bonds as he had learned to sell government securities,
hiring pamphleteers to write propaganda about the alleged Mediterranean climate of the Northwest.
Many leading government officials and politicians were on the Cook Northern Pacific payroll,
including President Grant's private secretary, General Horace Porter.
In 1869, Cook expressed his monetary philosophy in keeping with his enlarged sphere of activity,
quote,
Why should this grand and glorious country be stunted and dwarfed?
Its activities chilled in its very lifeblood curdled by these miserable hard-coined theories,
the musty theories of a bygone 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 Cook, quote, stunted and dwarfed by the market economy, crashed
and went bankrupt, touching off the panic of 1873.
After the passing of 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
the will to contract in order to pave the way for 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
Gold Monometalism was established because silver was so far undervalued as to drive
fractional silver coins out of the country.
Since 1853, the United States, while du jour 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
In short, after 1874, silver was no longer undervalued but overvalued, and increasingly
so in terms of gold at 16 to 1.
Except for the Acts of 1873 and 1874, labeled by the pro-silver forces as, quote, 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, quote, hard money way
to increase greatly the amount of American currency, the re-monetization of a flood of
new overvalued silver.
The agitation was to re-monetize silver by quote, 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 quote 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
and Value of Silver, but it should have been made openly and honestly.
The furtive method of demonetizing silver, the quote, crime against silver, was in part
responsible for the vehemence of the silver agitation for the remainder of the century.
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
Murray purchased $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,
Silver began as an urban movement, furthermore, not an agrarian crusade.
Its original strongholds were the large towns and cities of the Midwest and the Middle Atlantic states, not the country's farming communities.
The first batch of bi-metalist leaders were a loosely-knit collection of hard-money newspaper editors, businessmen, academic reformers, bankers, and commercial groups.
With the passage of the Silver Purchase Act of 1878, silver agitation died out in America, to spring up again in the 1890s.