A History of Money and Banking in the United States: The Colonial Era to World War II (22 page)

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 133The leader of the protectionists in Congress in 1820 was Representative Henry Baldwin, a leading iron manufacturer from Pittsburgh. Rothbard,
Panic of 1819,
pp. 164 ff.

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Before the Twentieth Century

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:

134On the Carey circle and its influence, see Irwin Unger,
The
Greenback Era: A Social and Political History of American Finance, 1865–1879

(Princeton, N.J.: Princeton University Press, 1964), pp. 53–59; and Joseph Dorfman,
The Economic Mind in American Civilization,
vol. 3,
1864–1918

(New York: Viking Press, 1949), pp. 7–8. Dorfman notes that Congressman Kelley dedicated his collected
Speeches, Addresses, and Letters on Industrial
and Financial Questions
of 1872 to “The Great Master of Economic Science, The Profound Thinker, and the Careful Observer of Social Phenomena, My Venerable Friend and Teacher, Henry C. Carey.” Ibid., p. 8. On the link between high tariffs and greenbacks for the Pennsylvania ironmasters, see Sharkey,
Money, Class, and Party,
chap. 4.

135Thus, Keynes wrote: “‘To dig holes in the ground,’ paid for out of savings will increase, not only employment, but the real national dividend of useful goods and services.” John Maynard Keynes,
The General
Theory of Employment, Interest and Money
(New York: Harcourt, Brace, 1936), p. 220. On pyramid-building, see ibid., pp. 131, 220.

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

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 confused the party struggles 136Unger,
Greenback Era
, p. 46.

137Ibid., p. 222.

138The federal government had contracted to redeem the
interest
on the wartime public debt in gold, but nothing was contracted about the repayment of the principal.

139Similar motivations had impelled many hard-money anti-Federalists during the 1780s to advocate the issue of state paper money for the
sole
purpose of redeeming swollen wartime public debts.

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Before the Twentieth Century

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 140On the McCulloch Loan Bill, see Sharkey,
Money, Class, and Party,
p. 75; on the Inflation Bill, see Unger,
Greenback Era
, p. 410.

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

$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. 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 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.

141This political and compromise interpretation of the Resumption Act successfully revises the previous hard-money view of this measure.

See Unger,
Greenback Era
, pp. 249–63.

142See Charles Fairman, “Mr. Justice Bradley’s Appointment to the Supreme Court and the Legal Tender Cases,”
Harvard Law Review
(May 1941): 1131; cited in Unger,
Greenback Era
, p. 174.

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Before the Twentieth Century

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 vacan-cies 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 duti-fully 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.

143The first new justice, William Strong of Pennsylvania, had been a top attorney for the Philadelphia and Reading Railroad, and a director of the Lebanon Valley Railroad. The second jurist, Joseph P. Bradley, was a director of the Camden and Amboy Railroad and of the Morris and Essex Railroad, in New Jersey. On the railroad ties of Strong and Bradley, see Philip H. Burch, Jr.,
Elites in American History,
vol. 2,
The Civil War to the
New Deal
(New York: Holmes and Meier, 1981), pp. 44–45. On the reaction of the Grant administration, see Unger,
Greenback Era,
pp. 172–78.

For a legal analysis of the decisions, see Hepburn,
History of Currency
, pp. 254–64; and
Government’s Money Monopoly,
Henry Mark Holzer, ed. (New York: Books in Focus, 1981), pp. 99–168.

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

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-per-annum 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