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The Inflation Period

THE INFLATION PERIOD A glance over the financial history of the United States, from the close of the Civil War to the panic of 19o7, will detect three separate periods. The first, which began in the currency depreciation era of the sixties, ended with specie resumption in 1879. The second continued up to, and a little beyond, the panic of 1893. The third had its begin ning in the striking economic phenomena of the last few years of the nineteenth century.

It is my purpose to review the history and ex amine the underlying influences of all three periods. For dramatic interest, neither of the two earlier periods ranks with the third and last; yet the events between 1897 and 1907 cannot be fully understood except by studying with them the thirty years pre ceding. It was with the close of the Civil War that financial America first became an influence of great importance in world-finance; it was as a sequel to the Civil War that many of the problems with which the country is still wrestling—economic, fiscal, and social—had their origin.

In these and other respects, the forty-year period properly calls for treatment as a whole. War which has ravaged a continent during a series of years cannot be suddenly abandoned without im mense effect on industrial conditions, and the new conditions will never duplicate those which existed before the war began. This was the lesson which Europe learned in 1815. Such was the singular combination of events after the peace of 1865, how ever, that almost at the moment when a million citi zens were turned from organized destruction to pursuit of peaceful industry, the avenues of Ameri can employment and production were widened in a degree unprecedented in the history of trade. Within eight years after Lee's surrender, the railway mileage of the United States was literally doubled. Only a fraction of this increase belonged to the trans continental lines which linked the two oceans in 1869. Quite aside from the 1800 miles of the Pacific Railways, upwards of 30,000 miles of track were laid in the United States between 1865 and 1873. Four noteworthy economic developments accompanied this extension of the transportation system. A fer tile interior domain, hitherto untouched, was opened up to industry. With the rush of population to these Western districts, not only did the disbanded army resume production without industrial over crowding such as followed the Napoleonic wars, but provision was made for three or four hundred thou sand immigrants annually. European capital in V enormous volume was drawn upon to provide the means for this development. Finally, the United States rose from the position of a second- or third class commercial state to the first rank among agri cultural producers and exporters. Each of these several phenomena had its special influence on the period. The new West, the contented or discon tented farmer, the foreign investor, and the export trade in grain, will come into very frequent view during the progress of this history.

Not less immediately connected with this opening up and settlement of our agricultural West was still another phenomenon, of peculiar interest to the study of the ensuing period. The average price of grain had advanced with great rapidity during the Civil War. In 1867, the price of wheat, even on the Chicago market, reached the remarkable level of $2.85 per bushel; nor was this price very greatly above the annual maximum of the period. In a large degree, this advance resulted from inflation of the American currency. But the upward movement was world-wide; in 1867 and 1868 the average price, even in England, was close to the equivalent of two dollars a bushel.' That any such abnormal market could be maintained in the face of the new American supplies was at least improbable. The area of wheat, corn, oats, rye, and barley in the United States rose from 64,418,518 acres in 1867 to 86,287, 3 Sauerbeck's tables of English prices.

648 in 1875, and to 100,283,160 in 1878.' The yield of these five crops increased from 1,320,236,000 bushels in 1866 to 2,290,008,000 in 1878, the annual wheat crop more than doubling in magnitude.' The increase in cereal production was twice as rapid as the country's increase in population; the United States became therefore the leading figure in the world's export markets; and this was certain to have important influence on prices.

But prices did not yield at once. A series of de ficient harvests, after 1870, accompanied by the suspended production of the Franco-Prussian war, abruptly checked the downward movement. After 1872, however, the new supplies made their influence positively felt. For in this increase of agricultural production, the United States was now not alone. Precisely as 1865 marked the end of war on the North American continent, so the Treaty of Paris in 1871 brought to a close the seventeen years of almost un interrupted warfare among European states. As in America, so in Europe, production received imme diate stimulus. While American capital was opening up the Mississippi Valley, European capital was similarly busy along the fertile river-basins of the Dnieper and the Danube. The Russian railway system grew during this period from something like moo miles to upwards of 13,000.' In Austro-Hun gary, the percentage of increase was almost equally large. All of these new transportation lines, like our own new Granger railways, were at once engaged in carrying to the seaboard supplies of grain which never before had reached an export market. Commercial estimates placed the total wheat crop of 1875, in the world's ten chief producing states, at 1,501,000,0o0 bushels. In 1878, the same ten states produced 1,763,000,000, and another increase, equally large, was made within the next four years.' The problem of an earlier generation had been how to feed the constantly increasing population; a wholly new problem was presently to arise, based on the question how to find a ready and profitable market for the year's output of breadstuffs. Prices, in short, which rose almost continuously throughout the world during the period of slack production from 1858 to 1873, receded almost as continuously in the ensuing generation. Nowhere was this phenomenon destined to have more immediate importance, economically, socially, and politically, than in the United States.

In my examination of the thirty years after 1865, I shall endeavor to give due attention to the in fluence of these grain markets on national politics and finance. The opinion is more or less widely held that the decline in prices, notably of grain, has resulted from legislation on the currency. Without for the present arguing that proposition, it may be affirmed with entire safety that a good share of the period's currency legislation has resulted from the decline in the price of grain. The fall in wheat has been the typical argument for arbitrary increase of the silver or paper currency in almost every Con gressional debate since 1872. What is perhaps even more significant, the division in almost every Con gressional vote upon these subjects has been, not political but geographical — the commercial East against the agricultural West.

The questions of silver coinage and of Government issues of paper currency have had as profound an influence on public finances, during the last thirty years, as the question of agricultural prices and pro duction has had on private trade. Both of these currency problems, in their later form, have arisen since the Civil War. There had indeed been silver coinage and suspension of silver coinage long before i865; but there had been neither a " silver ques tion " nor a " silver party." The legal-tender notes had been introduced and brought to their maximum issue before the return of peace, but there had never been a" greenback party," or a demand in any re sponsible quarter for a permanent currency of Gov ernment paper.

During the eighty-four years after Washington's inauguration, only a trifle over eight million silver dollars in all had been coined at the mints of the United States;' when, therefore, in the statute re vision of 1873 the silver dollar was dropped from the nation's coinage list, the action was received with indifference by the entire community. The ques tion of " free coinage " was not so much as named in any Presidential platform, even as late as 1876. The sudden appearance of the " silver problem," only one year after the 1876 election, resulted very largely from the decline in agricultural prices. It resulted also, beyond any reasonable question, from the fact that silver production in the United States, reckoned prior to 1861 at less than a million dollars annually, and in 1869 at only twelve million dollars, had risen by 1878 to no less an annual sum than $45,200,000. It will be found that even in 188o a conservative President was reciting, not without ap proval, the maxim that the United States, producing " more silver than any other country," was" directly interested in maintaining it as one of the two pre: cious metals." If silver coinage was not a political issue at the close of the Civil War, the policy of a permanent currency of Government legal-tender paper was equally unknown. Upwards of four hundred mil lion notes the United States were, it is true, in circulation at the return of peace. There were doubtless many individuals who approved the con tinuance of exactly this form of currency. But no such proposition had been advanced by any public man of influence or by any political organization. The " greenback party," like the " silver party," was distinctly a product of hard times. The Specie Resumption Act was a compromise with the extrem ists of the fiat-money school, as the compulsory Silver-Coinage Act of 1878 was a compromise with the extreme bimetallists. Each created a currency system never imagined by the statesmen of the war. The theory of the authors of the Legal-Tender Act was clearly understood. They held the issue of these notes to be simply creation of a Government floating debt, the notes being endowed with special privi!eges only in order that they might be floated.' That the resort to legal-tender powers was an evil justified only by extreme emergency, and that the circulation of Government notes in any form was a purely temporary measure, were the unanimous con victions of the statesmen who contrived the system.' The logical inference that these Government notes would be paid off and cancelled, as soon as the war deficiency had ended, was publicly accepted. This fact is clearly proved by the record. The statesmen of the day built up the national banking system on the express theory that the bank notes would pro vide the requisite currency of the future, whereas the Government notes would not.' No better wit ness could be had than the Legal-Tender Act itself, which provided, in its terms as first submitted to the Ways and Means Committee, that the notes should be issued " for temporary purposes," and should moreover be convertible at the holder's option into interest-bearing bonds.

Such was the theory and purpose of the public men through whom the Legal-Tender Act was con structed and applied. Nor is the general position of our statesmen, at the close of the Civil War, any more obscure than their original position. The first financial resolution adopted by Congress, in Decem ber, 1865, was an explicit promise to retire the legal tenders. The first legislation of that Congress gave discretionary powers to the Secretary of the Treasury for continuous contraction. Very few legislative victories are won without at least a temporary popu lar endorsement, and the votes of December, 1865, and of March, 1866, were no exceptions. But the popular approval of contraction in that year, excep tion as it was to all our subsequent legislation, is readily enough explained. Public opinion, when the war had ended, was governed by impatience with inflated prices; inflation far beyond the Euro pean level, and properly ascribed to the condition of the currency.' The cost of living reached during 1865 the highest point recorded in this country's history. From 186o to 1865, inclusive, the average of European prices rose only 4 to 6 per cent.; aver age prices in the United States advanced, in the same period, no less than 116 per cent.' Even in 1866, a full year after Appomatox, the general average of our staple prices was more than 30 per cent. above the average of 1863. The erratic gold market of 1865, moreover, forced as a necessary measure of precaution a large margin of safety in the retail price of goods, and this bore heavily on ordinary purchas ers. With flour at $16 a barrel, butter at 55 cents a pound, coal at $10 a ton, and wages and salaries ad vanced since 1860 hardly one third as far as prices, the demand for currency reform obtained ready endorsement from the people.

This popular sentiment was further strengthened by the Administration's attitude at the opening of Lincoln's second term. Hugh McCulloch, then Comptroller of the Currency, and a well-known ad vocate of retirement of legal-tender notes, was ap pointed Secretary of the Treasury. He held this office up to the end of President Johnson's term. Mr. McCulloch's first official Treasury report, dated December 4, 1865, took positive ground for the reduction of the legal-tender debt. Although con ceding that contraction ought to be and must be slow, he declared that " there is more danger to be apprehended from the inability of the Government to reduce its circulation rapidly enough, than from a too rapid reduction of it." He asked, therefore, authority to issue bonds in his discretion, at six per cent. or less, " for the purpose of retiring not only the compound interest notes, but the United States notes." ' The report containing this outline of policy was, like all Mr. McCulloch's public documents, a state paper of exceptional ability; it may be profitably read to-day for its broad and lucid treatment of the problem. Together with the Secretary's public speeches, it had decided influence. Two weeks after the publication of this report, on December 18, 1865, the House of Representatives resolved, by a vote of 144 to 6, " that this house cordially concurs in the view of the Secretary of the Treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the business interests of this country will permit; and we hereby pledge co-operative action to this end as speedily as practicable." This resolution of 1865, however, marked the climax of the movement. Never thereafter did the policy of retiring the legal-tender notes even ap proach success. The truth is, that the inflated prices had begun already, during the three months after the resolution of December, to recede. This was inevitable, from the very nature of the previous expansion; and it was a welcome movement to con sumers. But it necessarily caused some derange ment in the plans of trade, and politicians began to ask, when they had to face the fulfilment of their pledge through a formal act of Congress, how the contraction policy would be greeted by producers. The bill, as originally introduced, granted full powers to the Secretary of the Treasury to issue new bonds for the retirement both of interest-bearing and of non-interest-bearing debt. In the spring of 1866 this measure was defeated in the House of Representatives by a vote of 70 to 64. Reconsidered and amended so as to restrict contraction of the legal tenders to $io,000,000 in the first six months and to $4,000,00o per month thereafter, the compromise measure did indeed pass the House by 83 to 53, and the Senate by 32 to 7. But a victory thus won was ominous. Mr. McCulloch himself declared the amended act to be awkward and ineffective.' Still

more significant was the character of opposition de veloped in the course of the debate. It had a dozen varying grounds of argument, most of them pretty certain to appeal to popular prejudice later on. Some Congressmen objected to the discretionary powers as revolutionary, and, while conceding Mr. McCulloch's ability and conservatism, pointed out that a very different Treasury Secretary might suc ceed him.' Some denounced the contraction policy in itself as a" double-quick march to bankruptcy " '; others, less extreme in view, nevertheless pronounced the notion of immediate resumption of specie pay ments to be " Utopian in the extreme." Much was heard of the comfortable theory that if Congress would " allow things to go on without active inter ference," the " natural development of events " would automatically bring about resumption. It was promised, indeed, by one eminent Congressman, destined later to take up McCulloch's uncompleted work, that if the Secretary would do nothing else but meet current obligations, " no power could pre vent" resumption within twelve or eighteen months.° More than one legislator could not understand, " when we have $43o,000,000 [debt] bearing no in terest, and which need bear no interest, why it is to be taken up and put into bonds." ' The excellence of a circulating medium " that rests on the property of the whole country, and has for its security the faith and patriotism of the greatest and freest country on the face of the globe," played its usual part in the discussion; so did the argument that " the amount of legal tenders now outstanding is not too much for the present condition of the country." ' In short, all the arguments which have been made familiar by the twenty subsequent years of contro versy, cut a figure in this opening discussion. Even the peculiar virtues of a high protective tariff, through which the country might by a short cut reach a situation where resumption would be easy, were recited in this debate of 1866.

As a matter of fact, even the restricted powers of note retirement granted under the law of March, 1866, were revoked within two years. Little or no progress had meantime been made towards resump tion of specie payments. The Secretary himself had officially pointed out that two commercial influences must be removed before resumption would be pos sible; the excessively high prices in the United States and the heavy balance of foreign trade against us.' But prices continued above the Euro pean level, and, as a consequence, export of mer chandise was checked and imports greatly stimulated. The entire gold product of each year in the United States was sent abroad. Some effort had indeed been made to accumulate a specie reserve in the Treasury, obtained through the required payment of customs dues in gold. But part of this fund was disbursed again for interest on the public debt; the mercantile community protested urgently against the hoarding of any excess, with gold selling at 15o '; and in the end, the Treasury was forced repeatedly to throw its own coin surplus on the market, simply in order to check the disastrous operations of the speculators.' Resumption, in short, which Mr. Sherman had predicted as a certainty within eigh teen months of March, 1866, was, if anything, further off than ever.

Contraction of the inflated currency, even if pur sued under the limitations of the Act of 1866, would in time have brought about conditions under which resumption might have been planned. But events outside of the United States now moved in such a way as to turn the entire financial community against the Secretary's policy. Hardly two months after the vote of March came a wholly unexpected crisis in the foreign money markets. The London col lapse, precipitated by the Overend-Gurney failure of May, 1866, was in some respects as complete as any in the history of England. It affected every nation with which Great Britain had commercial dealings; not least of all the United States, of whose securities it was estimated that European investors even then held $600,000,000.' During three months the Bank of England kept its minimum discount rate at the panic figure of ten per cent.; the conse quent sudden recall of foreign capital put a heavy strain on the American markets.

With the familiar disposition of the trade com munity to lay the blame for disordered markets on some move of public policy, the Treasury's opera tions to reduce outstanding notes were made the scapegoat.' Politicians with an eye to popularity were quick to catch this drift of public sentiment. Some of them honestly believed that McCulloch's action in the currency was the cause of the trade distress; others, better informed but equally politic, avoided personal declaration of opinion, but charac teristically announced that whether the theory was correct or not, the public believed it, and that in deference to the public, currency contraction ought to cease.' The usual result ensued. Under the previous question, and without debate, a measure revoking absolutely the Secretary's power of contrac tion passed the House of Representatives in Decem ber, 1867, by a vote of 127 to 32. In the Senate there was an able show of opposition, but it was plainly put on the defensive. Even its very mild amendment hinting at future return to the contrac tion policy was promptly rejected by the House, and on January 22, 1868, the resolution passed both chambers in its original and final shape.

This was the end of the McCulloch plan. It was the end of all serious debate upon resumption, for at least six years. It was also, and very logically, the beginning of the fiat-money party and of the plan to pay the Government's bonded debt, wherever prac ticable, in notes. This second proposition was thrown into the arena of a Presidential canvass within six months of the vote of January, 1868, being formally proposed in the platform of the Democratic party. Governor Seymour, it is true, rejected this financial plank of the convention which nominated him, and rejected it as plainly as General McClellan had rejected the " peace plank " of the same party four years before. But the repudiation issue was fought out, in the canvass, nevertheless. The Republicans were forced into open defence of sound financial principles by the very recklessness of their opponents. As happened under very similar conditions twenty-eight years later, the compromis ers and waverers, who had cut so prominent a figure in the debates of 1866 and 1868, were compelled to show their colors, and the result, for the time at any rate, was salutary. Helped by the great personal prestige of its candidate, General Grant, the Repub lican party won a sweeping victory. Having won, the party's representatives hastened, while still under the excitement of the canvass, to make their public pledge for the future. President Johnson, who was then at open odds with his party, had pro duced in his Annual Message of December 7, 1868, the extraordinary suggestion that " the six per cent. interest now paid by the Government " on its debt " should be applied to the reduction of the principal in semi-annual instalments "; in other words, that the plan of repudiating interest obligations—since adopted, with no agreeable results, by Turkey and Greece—should be formally approved by the United States. This remarkable utterance was first con demned by an overwhelming vote in both House and Senate; next, by an almost equally decisive vote, on March 3, 1869, Congress adopted the Public Credit Act, promising coin redemption of both notes and bonds, and concluding with the declaration that the United States " solemnly pledges its faith to make provision, at the earliest practicable period, for the redemption of the United States notes in coin." The promise was as easily made as the similar pledge of December, 1865; it was still more easily broken. No such arrangement was made, nor any serious attempt in that direction, until the matter was forced on the party by the exigency of politics. Not only was no effort made to reduce outstanding legal tenders, but the supply in circulation was heavily increased; rising from $314,704,000 in the middle of 1869 to $346,168,000 in 1872, and two years later, as a result of the Treasury's weak ex periments in the panic, to $371,421,000.

The period was congenial to such juggling with public credit and legislative pledges. Socially, financially, and politically, it stands out quite apart from any other decade of the century. It comprised, in the United States, such a succession of episodes as the plundering reign of the Tweed cabal in New York City; the impeachment of President Johnson for purposes of political revenge; the infamous gold market conspiracy of 1869, into which the ringlead ers very nearly dragged the Federal Administration; the rise of vulgar and dishonest railway speculators to public eminence; the notorious corruption of the courts by such adventurers; scandal fixed upon Con gress by the Credit Mobilier disclosures and on the Administration by the Belknap impeachment trial. Moral sense seemed for a time to have deteriorated in the whole community; it was a sorry audience, at Washington or elsewhere, to which to address ap peals for economy, retrenchment, and rigid preser vation of the public faith. The Government's financial recklessness was readily imitated by the community at large; debt was the order of the day in the affairs of both. As the period approached its culmination, foreign trade reflected the nature of the situation. Merchandise imports in the fiscal year 1871 rose $84,000,000 over 1870; in 1872 they in creased $106,000,000 over 1871. This movement was the familiar warning of an approaching crash; but the warning fell on deaf ears, as it usually does. In 1873 the house of cards collapsed.

The panic of 1873 left the country's financial and commercial structure almost a ruin. It had, how ever, several ulterior results so valuable that it is not wholly unreasonable to describe the wreck of credit as a blessing in disguise. American prices, long out of joint with the markets of the world,and thoroughly artificial in themselves, were certain to be eventually brought down. They would have been lowered, necessarily, under the McCulloch contraction plan, but the fall would have been gradual. This means of readjustment Congress and the people rejected; there was left, therefore, only the severe alternative of sudden and violent liquidation. But this very liquidating process served a useful double purpose; it disclosed the nation's true resources, and it placed the United States on equal footing with the com mercial world at large. With the bursting of the bubble of inflated debt and inflated prices, the ex cessive importations ceased. Simultaneously the export trade, which had halted during 1872, in spite of the continued agricultural expansion, rose to pro portions never before approached in our commercial history. In 1874, the balance of foreign trade, which during the twenty-five preceding years, with only four exceptions, had been running heavily against the United States, turned permanently in our favor. In the fiscal year 1872, imported mer chandise exceeded exports by $182,417,000; in 18.78, the export excess reached the unprecedented sum of $257,814,000. By 1876, even the continuous out flow of gold was checked. In short, the two condi tions fixed by Hugh McCulloch, ten years before, as indispensable to resumption of specie payments, had now been realized.

Congress was not by any means disposed, however, to seize the opportunity. The first result of the money market crisis in 1873, as in all similar years, was Urgent public clamor for more currency. The Supreme Court had decided finally, in 1871, for the constitutionality of the legal tenders; the Secretary of the Treasury, in 1873, had so far yielded to the prevalent excitement as to reissue legal-tender notes . already formally retired.' The first response of Con gress, therefore, was an inflation measure. By a vote of 140 to 102 in the House of Representatives, and of 29 to 24 in the Senate, a law was passed for the permanent increase of the legal-tender currency by $18,000,000. The Republican party controlled Congress by unusually large majorities; but sixty per cent. of the party's vote in each chamber was cast in favor of the bill. Only the interposition of Grant's Presidential veto prevented this first positive backward step in the direction of fiat money.

It is reasonable to suppose that this curious vote of the Administration party, which occurred in April, 1874, measured the party's political despera. tion. They were about to receive, in the Congres sional-elections, the usual chastisement experienced by a dominant party when the people vote in a ,period of hard times; the inflation act was an anchor thrown desperately to windward. The experiment was in all respects a failure. Even the party's own State conventions failed to say a good word for the inflation bill, and it gained no mitigation of sentence in the November vote. In the Forty-third Congress, the House of Representatives had been Republican by the unusual plurality of I ro; in the Forty-fourth, chosen in 1874, the Democrats controlled the House by 74 plurality.

The Forty-third Congress had three months of existence left to it after the vote of November, 874. Already defeated overwhelmingly at the polls, it had nothing to risk by a move in sound-money legis lation, and possibly much to gain. It used this three-months' period to enact a law of the first im portance, not only to the nation, but to the Repub lican party's future history—a law which must fairly be described, however, under the circumstances of the time, as an expression of death-bed repentance. This was the Specie-Resumption Act, drawn up by a party committee, and submitted to Congress, in December, 1874, by Senator John Sherman.' It fixed the date for resumption of specie payments at January I, 1879, provided for the reduction of legal tender notes from $382,000,000 to $300,000,000, but made no provision for any further retirement of the notes. It conferred, for redemption purposes, the discretionary bond-issue power, afterwards employed by Secretary Sherman in 1878 and 1879, and by Sec retary Carlisle in 1894 and 1895. It went through Congress on January 7, 1875, and with its enactment this chapter may properly be closed. Unlike most subsequent financial measures, the Resumption Act won its majorities in both Houses by the strictest kind of party vote. Not one Democratic Congress man supported it in either chamber; but the large Republican majorities of the 1872 election were still available. The bill passed the Senate by a vote of 32 to 14, and the House by 136 to 98. When it passed, it was generally declared by financial critics that specie resumption under the measure was im possible, and it was openly promised by the opposi tion party, about to come into control of Congress by a large majority, that they would make short work of the Act of 1875 on their return to power.

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