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NOTE 25. The Gold Standard Era with the National Banking System, 1879-1913

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The Gold Standard Era with the National Banking System, 1879 to 1913

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The record of 1879 to 1896 was very similar to the first stage of the alleged Great Depression from 1873 to 1879.

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Once again, we had a phenomenal expansion of American industry, production and real output per head.

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Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s,

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In the 1880s, at 3.8% per annum, real net national products rose at the rate of 3.7% per year from 1879 to 1897, while per capita net national products increased by 1.5% per year.

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Once again, Orthodox economic historians are bewildered, for there should have been a Great Depression, since prices fell at a rate of over 1% per year in this period.

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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.

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The major difference in the two periods is that the money supply rose more rapidly from 1879 to 1897 by 6% per year, compared with the 2.7% per year in the earlier era.

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As a result, prices fell by less, by over 1% per annum, as contrasted to 3.8%.

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Total bank money, notes and deposits rose from $2.45 billion to $6.06 billion in this period, a rise of 10.45% per annum, surely enough to satisfy all but the most ardent inflationists.

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For those who persist in associating a gold standard with deflation, it should be pointed

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out that price deflation in the gold standard 1879-1897 period was considerably less than

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price deflation from 1873-1879, when the United States was still on a fiat greenback standard.

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After species resumption occurred successfully in 1879, the gold premium to greenbacks fell

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felt a par and the appreciated greenback promoted confidence in the gold-backed dollar.

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More foreigners willing to hold dollars meant an inflow of gold into the United States and

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greater American exports.

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Some historians have attributed the boom of 1879 to 1882, culminating in a financial crisis

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in the latter year, to the inflow of gold coin to the U.S., which rose from $110.5 million

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in 1879 to $358.3 million in 1882.

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In a sense, this is true, but the boom would never have taken on considerable proportions

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without the pyramiding of the national banking system, the deposits of which increased from

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$2.149 billion in 1879 to $2.777 billion in 1882, a rise of 29.2% or 9.7% per annum.

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The retail prices were driven up from 90 in 1879 to 108 three years later, a 22.5% increase,

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before resuming their long-run downward path.

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A financial panic in 1884, coming during a mild contraction after 1882, lowered the supply

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of bank money.

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Total banknotes and deposits dropped slightly, from $3.19 billion in 1883 to $3.15 billion.

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The panic was triggered by an overflow of gold abroad, as foreigners began to lose confidence

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in the willingness of the United States to remain on the gold standard.

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This understandable loss of confidence resulted from the inflationary sop to the pro-silver

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forces in the bland Allison Silver Purchase Act of 1878.

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The shift in treasury balances from gold to silver struck a disquieting note in foreign

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financial circles.

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Before examining the critical decade of the 1890s, it is well to point out in some detail

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America went off the gold standard in 1861 and remained off after the war's end.

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Arguments between hard-money advocates who wanted to eliminate unbacked greenbacks and

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soft-money men who wanted to increase them raged through the 1870s until the Grant Administration

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decided in 1875 to resume redemption of paper dollars into gold at pre-war value on the

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from the first day of 1879.

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At the time, in 1875, greenbacks were trading at a discount of roughly 17% against the pre-war

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gold dollar.

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A combination of outright paper money deflation and an increase in official gold holdings

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enabled a return to gold four years later, which set the scene for a decade of tremendous

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economic growth.

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Economic record-keeping a century ago was not nearly as well-developed as today, but

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a clear picture comes through nonetheless.

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The Encyclopedia of American Economic History calls the period under review, quote,

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one of the most expansive in American history.

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Capital investment was high, there was little unemployment, and the real costs of production

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declined rapidly, end quote.