the Case of the 1870s
Roy Kreitner
M
oney was the hot point of American politics over the last third of the nineteenth century. the period came to a head in the 1896 presidential election, whose central issue was the nature of the American dollar. But within a short period after that election, monetary politics seemed to fade from the popular political agenda, and by the time the Federal reserve was established in 1913, the issue had become a muted matter of bank reform. thus, a fundamental question for any understanding of American capitalism is how mone-tary politics could go from center stage and fever pitch to nonpartisan technocratic reform within a generation. this chapter does not answer that question, but it sets the stage for an answer by supplying the neces-sary background for understanding the stakes of the conflict.the money system indeed changed fundamentally from a decen-tralized and somewhat chaotic mosaic on the eve of the Civil War to one that was unified and prepared—perhaps even eager—for mod-ern central banking by the eve of World War i. But for that material transformation to take place, a previous transformation in the political substrate was necessary: the politics of money had to be beaten down, tamed, as it were, placed in the context of the kind of expertise that could dampen conflict. What follows is an account of the early stages of the political transformation that led to the modernization of American
money. i concentrate here on the 1870s, highlighting the way Ameri-cans understood their monetary politics in the wake of the Civil War.
that understanding was so different from the one modern Americans have inherited, and indeed, so different from the understanding that followed in less than half a century, that reconstructing it is far from an obvious task. late nineteenth-century Americans were changing the language of conflict over money, they were changing its institutional setting, and they were changing the place of law in the conflict. they were in fact refiguring the understanding of money, and this chapter attempts to explain their starting point.
the BACKgrounD Money SituAtion
During the Civil War and its immediate aftermath, the united States un-derwent a fundamental transformation of its money system. Deeply frag-mentary after the demise of the second Bank of the united States (1836), the money system of the united States became more or less integrated during the Civil War, replacing a collection of money systems somewhat haphazardly coordinated.1 the transformation of the money system was not simply another detail in some more general historical shift but rather a key to the direction of the development of American political economy.
the general background for the establishment of a new national money system was the crisis of funding the union’s war effort. the federal government had been running deficits since the panic of 1857, and by the end of 1860 the federal debt had risen to nearly $80 million.
By 1865 and war’s end, the federal debt had reached over $2.6 billion (that is, more than thirty times the prewar debt). yearly federal expen-diture jumped from just over $63 million in 1860 to $1.3 billion in 1865.
Federal expenditure over the course of four years of the war exceeded
$3 billion.2 Additionally, because prewar revenues were based heavily on taxing international trade that suffered during the war, funding the war effort was clearly a staggering challenge. the combination of taxing, borrowing, printing, and reorganizing that would become the money system was the response to this challenge, an exercise in financing war.
Within months of the outbreak of the war, gold more or less disap-peared from internal circulation, and its monetary uses were limited to international trade and payment of customs duties.3 Congress pursued a multifaceted strategy centered on the introduction of two new types of paper money: first and most famous were the u.S. notes, or greenbacks,
originally authorized in legislation in February 1862 and eventually to-taling $450 million;4 second, newly organized national banks were au-thorized to issue up to $300 million in national banknotes.5
Soon after the end of the Civil War, the fixtures of a new money sys-tem were in place. the bulk of the money supply comprised two forms of paper money of equal value (greenbacks and national banknotes), neither of which was tied directly to gold. it was supplemented by deposits and a small amount of specie (reserved almost entirely for foreign trade).
By the end of the war, the battle over resumption of the gold standard was already under way, including a short-lived attempt by the treasury to retire the greenbacks to retract some of the wartime growth in the money supply. Financial conservatives supported quick resumption, while shifting coalitions of entrepreneurs, industrialists, farmers, and or-ganized labor favored continuation of the paper standard, while paying lip service to the goal of eventual resumption. From the end of the war until resumption in 1879, the question was not only when and whether there would be a return to gold but also which brand of paper money (greenbacks or banknotes) should be dominant. Because greenbacks and banknotes had the same relationship to gold, the conflict over their use was not primarily a conflict over a fiat standard versus a commodity standard.6 instead, it was a direct battle over who should create money and whether some (that is, note-issuing bankers) should profit from the creation of liquidity. this was the monetary situation that provided the conditions for debate in the 1870s, just as the panic of 1873 would throw the country into its worst economic depression to date.
the StAKeS oF MonetAry politiCS; or, WhAt WAS the politiCAl eConoMy oF Money in the 1870s?
every student of the 1870s agrees that money was a central organizing feature of political contention at least from the panic of 1873 until the resumption of specie payments in 1879.7 Commentators considering the extended outpouring of legislative and political energy onto the money question in the 1870s have often responded with more than a bit of puzzlement.
[B]oth sides were deluded. Both became hypnotized by money and their own rhetoric about it. Both believed a “proper” solution to the money question would bring “proper” solutions to the outstanding social and economic problems of the country and
fasten upon the country a happy and moral future. Both made money the surrogate of social concern—not just once, but twice, in the final third of the nineteenth century. For the great debate of the nineties was in a large sense only the second act of a comic opera that had begun just after the Civil War and had reached its first-act intermission at the close of the seventies.8
For this historian, then, Americans were “hypnotized” into playing out a
“comic opera” about whose meaning they were in the dark. But to claim that the entire political spectrum could be “deluded” for so long seems like defeatism or at least evidence of a weak historical imagination. A more ambitious view is that the shift in perspective that followed this period and yielded our own assumptions about money has made it dif-ficult to appreciate the stakes for 1870s America. By looking at the 1870s as one moment in a progression through which our assumptions were constructed, we can understand the debates as something other than a decade or more of mass delusion.
the first step toward gaining a better grasp of the stakes of the debates of the 1870s is a reevaluation of what served as common ground for the participants and what actually divided them. over the course of the coming decades, three central elements constituting this peri-od’s politics of money would lose their status as common ground: first, the proper locale for decision making on monetary policy; second, the connection between monetary policy ideals and the role of government vis-à-vis the market; and third, the relationship between politics and science. together, these three issues do more than situate monetary pol-icy. in essence, they combine to define a political economy of money, and they set off the 1870s in fairly stark terms from the ensuing periods that would revisit the money question: the 1890s and the 1910s.
the inStitu tionAl loCAle oF MonetAry poliCy
to the twenty-first-century eye, perhaps the most remarkable feature of the intense engagement with monetary policy and the level of the money supply over the course of the 1870s is the absolute centrality of congressional debate and legislation. the most striking aspect of 1870s monetary policy for us was completely taken for granted by 1870s Americans: the institutional locale for monetary policy and manage-ment of the money supply was Congress. this is likely the starkest distinction between their understanding of money and the view that
would take hold by early in the twentieth century and become a given in our time. that taken-for-granted sense of the institutional locale for monetary policy is not trivial, because if something is indeed taken for granted or forms the background understanding for debate, then no one is called upon to make the argument that it is in fact the case. uncon-tested (or nearly unconuncon-tested)9 truths often remain unspoken.
the strongest positive indication that Congress was assumed as the locale for monetary policy is the intensity of congressional activity. For five years after the onset of the panic of 1873,10 Congress almost never rested from debate and action on the monetary front. the opening shots of this half decade of incessant activity were the debates leading to what was characterized in and out of Congress as “the inflation Bill” of 1874.
John Sherman, who chaired the Senate Finance Committee at the time, recalled that “[m]ore than sixty bills, resolutions, and propositions were introduced in the Senate in respect to the currency, the public debt and national banks, all bearing upon the financial condition of the country, expressing every variety of opinion, from immediate coin payments to the wildest inflation of irredeemable paper money.”11 Months of debate yielded a bill that was utterly transformed from the moment of intro-duction until its passage: while the bill was initially intended to relieve momentary monetary stringency within the context of an attempt to resume specie payments, eventually both its name and its character were changed, and it came to be understood primarily as a means of inflating the money supply. What the monetary effects of the bill would have been in the long run are not absolutely clear: it contained both expan-sionary and contractionary elements. the bill raised the overall level of authorized paper money, but at the same time it did not mandate issuing all the money authorized. Sherman had introduced one version of the bill in committee but could not support it in its final version.12 it passed both houses of Congress but drew a dramatic veto from presi-dent ulysses S. grant, whom most observers had expected to acquiesce and sign the bill.13
neither side in the initial debate over what to do about the money supply in the wake of the panic believed that grant’s veto was the last word. the attempt to override was unsuccessful, but by June Congress had passed another monetary bill with much less fanfare than the first.
on the overt question of total circulation of paper money, the bill was less expansionary than April’s “inflation” bill. But because June’s bill in effect eliminated the reserve requirement against notes of the national
banks, it was potentially expansionary legislation. the act was under-stood primarily as a measure dealing with the lifting of restrictions on free banking and less as a money supply bill, though the fact that its money supply effects were significant would eventually become clear.14 grant signed the bill and added encouragement to Congress regarding the move toward resumption.
republicans got routed in the midterm elections in 1874, but Sher-man and his party mates had no intention of relinquishing their majority without making use of its final days. During the lame duck session in December 1874, republican senators caucused without their Democratic counterparts and formulated a straightforward bill whose primary goal was to set a firm date for the resumption of specie payments. they reached an agreement, and by leaving some of the crucial questions openly undecided and even refusing to clarify their intentions, they managed to push the bill through the Senate and then the house in January 1875. grant signed the bill, but again few observers expected that it was indeed the last word on resumption, scheduled in the act for four years down the road. this was one of the few moments during the 1870s that the monetary issue divided Congress relatively neatly be-tween republicans and Democrats. Before the resumption Act and after 1875, the parties showed internal tensions on the money issue, with republicans leaning more toward resumption and Democrats leaning more toward various devices associated with soft money.
Congress revisited the money issue in 1876, 1877, and 1878, and there were numerous attempts to repeal the resumption Act before it took effect, including a repeal bill that passed the house and was de-feated in the Senate by a single vote. the 1876 election saw the slow rise of a national greenback party, which in 1878 would capture twenty seats in Congress and garner about 10 percent of the vote overall.15 And cru-cially, the decline in the market value of silver presented a specie-based inflationary option for those interested in expanding the money sup-ply but not interested in perpetuating a fiat money system. Congress created a commission to study the money question, and it was over-whelmingly sympathetic to reinstating bimetallism. Although unsuc-cessful in repeated attempts to repeal the resumption Act, Congress did enact a law establishing a partial monetization for silver (without providing, however, for free coinage) and providing for treasury pur-chases of large quantities of silver, as well as overriding a presidential veto to make the bill law.16
thus, in the space of five years Congress passed several laws whose primary goal was to affect the money supply; several laws dealing with coinage and touching on the question of monetization and demonetiza-tion of silver, thus also affecting the money supply; several laws on bank-ing and especially on reserve requirements of banks, thus affectbank-ing the money supply yet again; and perhaps most centrally, a law mandating the return to specie backing for the currency, as well as several attempts to repeal the law. Money-focused legislative activity was incessant.
the assumption of legislative responsibility for the money supply can be seen in president grant’s addresses to Congress and his messages ac-companying returned legislation, whether signed or vetoed. grant’s ad-dress at the height of the panic of 1873, for example, tellingly focuses much energy on monetary issues. the president detailed an impressive array of financial developments, ranging from banking regulation to modes of funding the federal debt and to direct components of the money supply.
in the context of assuring an elastic money supply, grant suggested a range of concrete measures and begged Congress’s consideration, finally closing this section of the message with a general exhortation:
these suggestions are thrown out for your consideration, without any recommendation that they shall be adopted literally, but hoping that the best method may be arrived at to secure such an elasticity of the currency as will keep employed all the industries of the country and prevent such an inflation as will put off indefinitely the resumption of specie payments, an object so devoutly to be wished for by all, and by none more earnestly than the class of people most directly interested—those who “earn their bread by the sweat of their brow.” the decisions of Congress on this subject will have the hearty support of the executive.17 grant’s language shows the extent to which he believes that congres-sional business as usual is to consider the elements of monetary policy and measures that will contribute to the elasticity of the currency. grant sees monetary policy even in its intimate relations with the treasury Department as a legislative, as much as or more than an executive, mat-ter. the self-evidence of Congress as the primary agent responsible for monetary issues runs as a consistent thread through grant’s correspon-dence as well as his communication with Congress itself.18
this point bears special emphasis, as it illuminates the nature of Congress’s activity throughout the period leading up to resumption.
this was not activity directed toward establishing, for the long term, an institutional structure or mechanism through which somebody else would conduct monetary policy. instead, Congress understood itself as and acted as the initiator, formulator, and primary mover in monetary policy, including directing the level of the money supply. From our cur-rent perspective in which the independence of monetary authorities is sacrosanct and even oversight by the legislature is looked at askance, a view that held Congress to be responsible not only for structure but also for monetary policy decisions is striking indeed.19
in addition to the actual activity of Congress and the attitude ex-hibited toward that activity by the executive branch, a brief glance at the way diverse constituencies organized themselves to influence congres-sional action is instructive for understanding the widespread assump-tion of the centrality of legislative acassump-tion. outside government, the most obvious example of this kind of organizing is the establishment of the greenback-labor party in 1874. third-party organization could take on many forms and was motivated by issues that extended well beyond monetary policy. however, the fact that one of the major avenues for organizing a third-party movement was through a focus on decisions about the form of money is a strong indication that people understood money and monetary policy as a central aspect of popular politics to be conducted in the legislative sphere. And even when they were not join-ing or organizjoin-ing a political party on the basis of a position on money, people were quite busy petitioning their legislators for direct relief on monetary questions.20 hard money advocates, too, were every bit as in-sistent in organizing and lobbying their representatives for appropriate legislation. they were much more focused on making sure that their po-sitions would hold in the two major parties, especially (for the 1870s) the republican party. importantly, both hard and soft money advocates were convinced, as a matter of course, that the proper way to make monetary policy was through the people’s representatives in Congress.21
the Money Supply, the goVernMent, AnD the MArKet
there was a broad consensus across the political spectrum that Con-gress should make monetary policy, and as a result, there was an intense clash over the policy that Congress should carry out. yet a close look at the proposals Congress debated reveals concrete measures far less
there was a broad consensus across the political spectrum that Con-gress should make monetary policy, and as a result, there was an intense clash over the policy that Congress should carry out. yet a close look at the proposals Congress debated reveals concrete measures far less