Going to work with the newspapers meant something more than mere persuasion for the Cooke brothers; as monopoly underwriter of government bonds, Cooke was paying the newspapers large sums for advertising, and so the Cookes thought—as it turned out correctly—that they could induce the newspapers to grant them an enormous amount of free space “in which to set forth the merits of the new national banking system.” Such space meant not only publicity and articles, but even more important, the fervent editorial support of most of the nation’s press. And so the press, implicitly bought for the occasion, kept up a drumfire of propaganda for the new national banking system. As Cooke himself related:
For six weeks or more nearly all the newspapers in the country were filled with our editorials [written by the Cooke brothers] condemning the state bank system and explaining the great benefits to be derived from the national banking system now proposed.
And every day the indefatigable Cookes put on the desks of every member of Congress the relevant editorials from newspapers in their respective districts.130
While many state bankers, especially the conservative old-line New York bankers, opposed the national banking system, Jay Cooke, once the system was in place, plunged in with a will. Not only did he sell the national banks their required bonds, he also set up new national banks which would have to buy his government securities. His agents formed national banks in the smaller towns of the south and west. Furthermore, he set up two large national banks, the First National Bank of Philadelphia and the First National Bank of Washington, D.C.
But the national banking system was in great need of a mighty bank in New York City to serve as the base of the inflationary pyramid for a host of country and reserve city banks. Shortly after the inception of the system, three national banks had been organized in New York, but none of them were large enough or prestigious enough to serve as the key fulcrum of the new banking structure. Jay Cooke, however, was happy to oblige, and he quickly established the Fourth National Bank of New York, capitalized at a huge $5 million. After the war, Jay Cooke favored resumption of specie payments, but only if greenbacks could be replaced one-to-one by new national bank notes. In his unbounded enthusiasm for national bank notes and their dependence on the federal debt, Cooke urged repeal of the $300 million legal limit on national bank note issue. In 1865, he published a pamphlet proclaiming that in less than 20 years national bank note circulation would total $1 billion.131
The title of the pamphlet Cooke published is revealing: How Our National Debt May Be A National Blessing. The Debt is Public Wealth, Political Union, Protection of Industry, Secure Basis for National Currency.132
By 1866, it was clear that the national banking system had replaced the state as the center of the monetary system of the United States. Only a year earlier, in 1865, state bank notes had totaled $142.9 million; by 1866 they had collapsed to $20 million. On the one hand, national bank notes grew from a mere $31.2 million in 1864, their first year of existence, to $276 million in 1866. And while, as we have seen, the number of state banks in existence was falling drastically from 1,466 to 297, the number of national banks grew in that same period, from 66 in 1863 to 1,634 three years later.
THE POST–CIVIL WAR ERA: 1865–1879
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, any contraction of money to prepare for specie resumption, was headed by the Pennsylvania iron and steel manufacturers. The Pennsylvania ironmasters, who had been in the forefront of the organized protective tariff movement since its beginnings in 1820,133 were led here and instructed by their intellectual mentor—himself a Pennsylvania ironmaster—the elderly economist Henry C. Carey. Carey and his fellow iron manufacturers realized that during an inflation, since the foreign 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.
Imbibers of the Carey gospel of high tariffs and soft money were a host of attendees at the famous “Carey Vespers”— evenings of discussion of economics and politics. Influential Carey disciples included economist and Pennsylvania ironmaster Stephen Colwell; 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. Kelley of Pennsylvania, whose lifelong devotion to the interest of the ironmasters earned him the proud sobriquet “Old Pig Iron.” The Carey circle also dominated the American Industrial League, which spread the Carey doctrines of protection and paper money. Influential allies in Congress, if not precisely Carey followers, were the radical leader Representative Thaddeus Stevens, himself a Pennsylvania ironmaster, and Representative John A. Griswold, an ironmaster 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 bondholders, realized that inflation benefits debtors by cheapening the dollar whereas it also tends to expropriate creditors by the same token. One of the influential Carey disciples, for example, was the leading railroad promoter, the Pennsylvanian Thomas A. Scott, leading entrepreneur of the Pennsylvania and the Texas and Pacific Railroads.134
One of the most flamboyant advocates of greenback inflation in the postwar era was the 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.135 Schell seriously urged the federal government to dig a canal from New York to San Francisco, financed wholly by the issue of greenbacks. Schell’s enthusiasm was perhaps matched only by that of the notorious railroad speculator and economic adventurer George Francis Train, who called repeatedly for immense issues of greenbacks. Train thundered in 1867:
Give us greenbacks we say, and build cities, plant corn, open coal mines, control railways, launch ships, grow cotton, establish factories, open gold and silver mines, erect rolling mills.... Carry my resolution and there is sunshine in the sky.136
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; Russel 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.”137
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 principal of federal debts contracted in greenbacks during the war.138 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.139 This program confu
sed 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 congressmen devoted to hard money and to resumption than did the Republicans. Thus, Secretary of the Treasury Hugh McCulloch’s “Loan Bill” of March 1866, which provided for contraction of greenbacks in preparation for resumption of specie payments, was passed in the House by a Republican vote of 56–52, and a Democratic vote of 27–1. And in April 1874, the “Inflation Bill,” admittedly vetoed later by President Grant, which provided for expansion of greenbacks and of national bank notes, was passed in the House by a Republican vote of 105–64, while the Democrats voted against by the narrow margin of 35–37.140
In the meantime, despite repeated resolutions for resumption of specie payments in 1865 and 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 U.S. government was supposed to buy gold with government bonds to prepare for resumption on January 1, 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 bank notes, in a provision known as “free banking.” The only hard-money compensation was an 80-percent pro rata contraction of greenbacks to partially offset any new national bank notes.141 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. Hardmoney 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 them unconstitutional.142
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 5–3, 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 Treaury as unnecessary and unconstitutional, had swung back to the Democratic Party and had actually been a candidate for the presidential nomination at the 1868 convention.
The Grant 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.143 The new 5–4 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. The number of banks, national bank notes, 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 number of state banks rose from 349 to 1,330 in the same period. Total state and national bank notes and deposits rose from $835 million in 1865 to $1.964 billion in 1873, an increase of 135.2 percent or an increase of 16.9 percent 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.144
And yet it must be pointed out that the total money supply, even merely the supply of bank money, did not decrease after the panic, but merely leveled off.
Orthodox economic historians have long complained about the “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 specie 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-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 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 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 greenba
cks 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.
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 Northwest. 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 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.
A History of Money and Banking in the United States: The Colonial Era to World War II Page 13