A History of Money and Banking Part 1: Before the 20th Century

a history of money and banking in the United States the colonial era to world war ii by marie n Rothbard part 1 a history of money and banking in the United States before the 20th century as an outpost of Great Britain colonial America of course used the British pounds pence and shillings as its money Great Britain was officially on a silver standard with the shilling defined as equal to 86 pure troy grains of silver and with silver as so defined legal tender for all debts that is creditors were compelled to accept silver at that rate however Britain also coined gold and maintained a bimetallic standard by fixing the gold Guinea weighing one hundred and twenty-nine point four grains of gold as equal in value to a certain weight of silver in that way gold became in effect legal tender as well unfortunately by establishing bimetallism Britain became perpetually subject to the evil known as Gresham's law which states that when government compulsorily over values one money and undervalues another the undervalued money will leave the country or disappear into hoards while the overvalued money will flood into circulation hence the popular catchphrase of Gresham's law bad money drives out good but the important point to note is that the triumph of quotes bad money is the result not of perverse free market competition but of government using the compulsory legal tender power to privilege one money above another in 17th and 18th century Britain the government maintained a mint ratio between gold and silver that consistently overvalued gold and undervalued silver in relation to world market prices with the resultant disappearance and outflow of full bodied silver coins and an influx of gold and the maintenance and circulation of only eroded and quotes lightweight silver coins attempts to rectify the fixed bimetallic ratios were always too little and too late in the sparsely settled American colonies money as it always does arose in the market as a useful and scarce commodity and began to serve as a general medium of exchange thus beaver fur and wampum were used as money in the north for exchanges with the Indians and fish and corn also served as money rice was used as money in South Carolina and the most widespread use of commodity money was tobacco which served as money in Virginia the pound of tobacco was the currency unit in Virginia with warehouse receipts in tobacco circulating his money back to 100% by the tobacco in the warehouse while commodity money continued to serve satisfactorily in rural areas as the colonial economy grew Americans imported gold and silver coins to serve as monetary media in urban centers and in foreign trade English coins were imported but so too were gold and silver coins from other European countries among the gold coins circulating in America with a French Guinea the Portuguese Joe the Spanish doubloon and Brazilian coins while silver coins included French crowns and livre it is important to realize that gold and silver are international commodities and that therefore when not prohibited by government decree foreign coins are perfectly capable of serving as standard money's there is no need to have a national government monopolized the coinage and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857 thus if a free market is allowed to prevail in a country foreign coins will circulate naturally silver and gold coins will tend to be valued in proportion to their respective weights and the ratio between silver and Gold will be set by the market in accordance with their relative supply and demand shilling and dollar manipulations by far the leading species circulating in America was the Spanish silver dollar defined as consisting of 387 grains of pure silver the dollar was divided into pieces of eight or bits each consisting of one-eighth of a dollar Spanish dollars came into the North American colonies through lucrative trade with the West Indies the Spanish silver dollar had been the world's outstanding coin since the early sixteenth century and was spread partially by dint of the vast silver output of the Spanish colonies in Latin America more important however was that the Spanish dollar from the 16th to the 19th century was relatively the most stable and least the base coin in the Western world since the Spanish silver dollar consisted of 387 grains and the English shilling consisted of 86 grains of silver this meant the natural free market ratio between the two coins would be four shillings six pence per dollar constant complaints both by contemporaries and by some later historians arose about an alleged scarcity of money especially if species in the colonies allegedly justifying numerous colonial paper-money schemes to remedy that shortage in reality there was no shortage it is true that England in a mercantilist attempt to hoard species kept minting for its own prerogative and outlawed minting in the colonies it also prohibited the export of English coin to America but this did not keep species from America for as we have seen Americans were able to import Spanish and other foreign coin including English from other countries indeed as we shall see it was precisely paper money issues that led by Gresham's law to outflows and disappearance of species from the colonies in their own mercantilism the colonial governments early tried to hoard their own species by debasing their shilling standards in terms of Spanish dollars whereas their natural weights dictated a ratio of four shilling sixpence to the dollar Massachusetts in 1642 began a general colonial process of competitive debasement of shillings Massachusetts arbitrarily decreed that the Spanish dollar be valued at five shillings the idea was to attract an inflow of Spanish silver dollars into that colony and to subsidize Massachusetts exports by making their prices cheaper in terms of dollars soon Connecticut and other colonies followed suit eats persistently upping the ante of debasement the result was to increase the supply of nominal units of account by debasing the shilling inflating domestic prices and thereby bringing the temporary export stimulus to a rapid end finally the English government brought a halt to this futile and inflationary practice in 1707 but the colonial governments had already found another and far more inflationary arrow for their bow the invention of government Fiat paper money government paper money apart from medieval China which invented both paper and printing centuries before the West the world had never seen government paper money until the colonial government of Massachusetts emitted a Fiat paper issue in 1690 Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony in Quebec generally the expeditions were successful and would return to Boston sell their booty and pay off the soldiers with the proceeds this time however the expedition was beaten back decisively and the soldiers returned to Boston in ill-humor grumbling for their pay discontented soldiers are ripe for mutiny so the Massachusetts government looked around in concern for a way to pay the soldiers it tried to borrow three thousand of four thousand pounds from Boston merchants but evidently the Massachusetts credit rating was not the best finally Massachusetts decided in December 1692 prints 7,000 pounds in paper notes and to use them to pay the soldiers suspecting that the public would not accept irredeemable paper the government made a two-fold pledge when it issued the notes that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued characteristically however both parts of the pledge went quickly by the board the issue limit disappeared in a few months and all the bills continued unredeemed for nearly 40 years as early as February 16 91 the Massachusetts government proclaimed that its issue had fallen far short and so it proceeded to emit forty thousand pounds of new money to repay all of its outstanding debt again pledging falsely that this would be the absolute final note issue but Massachusetts found that the increase in the supply of money coupled with a fall in the demand for paper because of growing lack of confidence in future Redemption and species led to a rapid depreciation of new money in relation to species indeed within a year after the initial issue the new paper pound had depreciated on the market by 40% against species by 1692 the government moved against this market evaluation by use of force making the paper money compulsory legal tender for all debts at par with species and by granting a premium of 5% on all payment of debts to the government made in paper notes this legal tender law had the unwanted effect of Gresham's law the disappearance of species circulation in the colony in addition the expanding paper issues drove up prices and hampered exports from the colony in this way the species or tidge became a creature rather than the cause of Fiat paper issues thus in 1690 before the orgy of paper issues began 200,000 pounds of silver money was available in New England by 1711 however with Connecticut and Rhode Island having followed suit in paper money issue 240,000 pounds of paper money had been issued in New England but the silver had almost disappeared from circulation ironically then Massachusetts and her sister colonies issue of paper money created rather than solved any scarcity of money the new paper drove out the old species the consequent driving up of prices and appreciation of paper scarcely relieved any alleged money scarcity among the public but since the paper was issued to finance government expenditures and pay public debts the government not the public benefited from the Fiat issue after Massachusetts had emitted another huge issue of 500,000 pounds in 1711 to pay for another failed expedition against Quebec not only was the remainder of the silver driven from circulation but despite the legal tender law the paper pound appreciated 30 percent against silver Massachusetts pounds officially 7 shillings to the silver ounce had now fallen on the market to 9 shillings per ounce depreciation proceeded in this and other colonies despite fierce governmental attempts to outlaw it backed by fines imprisonment and total confiscation of property for the high crime of not accepting the paper at par faced with the further shortage of money due to the money issues Massachusetts decided to press on in 1716 it formed a government land bank and issued 100,000 pounds and notes to be loaned on real estate in the various counties of province prices rose so dramatically that the tide of opinion in Massachusetts began to turn against paper as writers pointed out that the result of issues was a doubling of prices in the past 20 years depreciation of paper and the disappearance of Spanish silver through the operation of Gresham's law from then on Massachusetts pressured by the British crown tried intermittently to reduce the bills in circulation and return to a species but was hampered by its assumed obligations to honor the paper notes at par of its sister New England colonies in 1744 another losing expedition against the French led Massachusetts to issue an enormous amount of paper money over the next several years from 1740 for to 1748 paper money in circulation expanded from 300 thousand pounds to 2.5 million pounds and the depreciation in Massachusetts was such that silver had risen on the market to 60 shillings an ounce ten times the price at the beginning of an era of paper money in 1690 by 1740 every colony but Virginia had followed suit in fiat paper money issues and Virginia succumbed in late 1750s in trying to finance part of the French and Indian War against the French similar consequences traumatic inflation shortage of species massive depreciation despite compulsory poor laws ensued in each colony thus along with Massachusetts depreciation of eleven to one of its nuts against species compared to the original par Connecticut's notes had sunk to 9 to 1 and the Carolinas at 10 to 1 in 1740 and the paper of errantly inflation estrade Island to 23 to one against species even the least inflated paper that of Pennsylvania had suffered an appreciation of species to 80 percent over par a detailed study of the effects of paper money in New Jersey shows how it created a boom bust economy over the colonial period when new paper money was injected into the economy an inflationary boom would result to be followed by a deflationary depression when the paper money supply contracted at the end of King George's War with France in 1748 Parliament began to pressure the colonies to retire the mass of paper money and return to a species in 1751 Great Britain prohibited all further issues of legal tender pay in New England in order to move toward redemption of existing issues in species finally in 1764 parliament extended the prohibition of new issues to the remainder of the colonies and required the gradual retirement of outstanding notes following the lead of parliament the New England colonies apart from Rhode Island decided to resume species and retire their paper notes rapidly at the current depreciated market rate the panicky opponents of species emption and monetary contraction made the usual predictions in such a situation that the result would be a virtual absence of money in New England and the consequent ruination of all trade instead and however after a brief adjustment the resumption and retirement led to a far more prosperous trade in production the harder money and lower prices attracting an inflow of species in fact with Massachusetts on species and Rhode Island still on depreciated paper the result was that Newport which had been a flourishing Center for West Indian imports for Western Massachusetts lost this trade to Boston and languished in the doldrums in fact as one student of colonial Massachusetts has pointed out the return to speciation remarkably little dislocation recession or price deflation indeed wheat prices fell by less in Boston than in Philadelphia which saw no such return to species in the early 1750s foreign exchange rates after the resumption of species were highly stable and the restored species system operated after 1750 with remarkable stability during the Seven Years War and during the dislocation of international payments in the last years before the Revolution not being outlawed by governmental decree species and circulation throughout the colonial period even during the operation of paper money despite the inflation booms and busts and shortages of species cause by paper issues the species system worked well over all quote here was a silver standard in the absence of institutions of the central government intervening in a silver market and in the absence of either a public or private central bank adjusting domestic credit or managing the reserve of species or foreign exchange with which to stabilize exchange rates the market kept exchange rates remarkably close to the legislative par is most remarkable in this context is the continuity of the species system through the 17th and 18th centuries private banknotes in contrast the government paper private banknotes and deposits redeemable in species had begun in Western Europe in Venice in the 14th century firms granting credit to consumers and businesses had existed in the ancient world and in medieval Europe but these were quote moneylenders who loaned out their own savings quote banking in a sense of lending out the savings of others only began in England with the quote scriveners of the early 17th century the scriveners were clerks who wrote contracts and bonds and were therefore in a position to learn of mercantile transactions and engage in money lending and borrowing there were however no banks of deposit in England until the civil war in the mid 17th century merchants had been in the habit of storing their surplus gold in the Kings Mint for safekeeping that habit proved to be unfortunate for when Charles the first needed money in 1638 shortly before the outbreak of the Civil War he confiscated a huge sum of two hundred thousand pounds of gold calling it a quote loan from the owners although the merchants finally got their gold back they were understandably shaken by the experience and forsook the mint depositing their gold instead in the coffers of private Goldsmith's who like the mint were accustomed to storing the valuable metal the warehouse receipts of the Goldsmith's soon came to be used as a surrogate for the gold itself by the end of the Civil War in the 1660s the Goldsmith's fell prey to the temptation to print pseudo warehouse receipts not covered by gold and lend them out in this way fractional reserve banking came to England very few private banks existed in colonial America and they were short-lived most prominent was the Massachusetts land bank of 1740 issuing notes and lending them out on real estate the land bank was launched as an inflationary alternative to government paper which the royal governor was attempting to restrict the land bank issued irredeemable notes and fear of its unsound issue generated a competing private silver Bank which emitted notes redeemable in silver the land bank promptly issued over 49,000 pounds in irredeemable notes which depreciated very rapidly in six months time the public was almost universally refusing to accept the bank's notes and land banks sympathizers vainly accepting the notes the final blow came in 1741 when Parliament acting at the request of several Massachusetts merchants and the royal governor outlawed both the land and the silver banks one intriguing aspect of both the Massachusetts land Bank and other inflationary colonial schemes is that they were advocated and lobbied for by some of the wealthiest merchants and land speculators in the respective colonies debtors benefit from inflation and creditors loose realize in this fact older historians assumed that the debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary Nostrum but of course there are no rigid quote classes of debtors and creditors indeed wealthy merchants and land speculators are often the heaviest debtors later historians have demonstrated that members of the latter group were the major sponsors of inflationary paper-money in the colonies Revolutionary War finance - finance the Revolutionary War which broke out in 1775 the Continental Congress early hit on the device of issuing fiat paper money the leader in the drive for paper money was governor Morris the highly conservative young scion of the New York landed aristocracy there was no pledge to redeem the paper even in the future but it was supposed to be retired in seven years by taxes levied pro rata by the separate states thus a heavy future tax burden was supposed to be added to the inflation brought about by the new paper money the retirement pledge however was soon forgotten as Congress and chanted by this new seemingly costless form of Revenue escalated its emissions of fiat paper as the historian is phrased that quote such was the beginning of the federal trough one of America's most imperishable institutions the total money supply of the United States at the beginning of the revolution has been estimated at twelve million dollars Congress launched its first paper issue of two million dollars in late June 1775 and before the notes were printed it had already concluded that another 1 million dollars was needed before the end of the year a full six million dollars in paper issues was issued or authorized a dramatic increase of 50% in the money supply in one year the issue of this fiat quote continental paper rapidly escalated over the next few years Congress issued six million dollars in 1775 and nineteen million dollars in 1776 thirteen million dollars in 1777 sixty-four million dollars in 1778 and 125 million dollars in 1779 this was a total issue of over 225 million dollars in five years superimposed upon a pre existing money supply of twelve million dollars the result was as could be expected a rapid price inflation in terms of the paper notes and a corollary accelerating depreciation of the paper in terms of species thus at the end of 1776 the Continentals were worth $1 to $1 25 cents in species by the fall of the following year its value had fallen two three two one by December 1778 the value was 6.8 to 1 and by December 1779 to the negligible 42 to 1 by the spring of 1781 the Continentals were virtually worthless exchanging on the market at 168 paper dollars into one dollar in species this collapse of the continental currency gave rise to the phrase not worth a continental to top this calamity several states issued their own paper money and each depreciated at varying rates Virginia and the Carolinas led the inflationary move and by the end of the war state issues added a total of 210 million depreciated dollars to the nation's currency in an attempt to stem the inflation and depreciation various states levied maximum price controls and compulsory par laws the result was only to create shortages and impose hardships on large sections of the public thus soldiers were paid in Continentals but farmers understandably refused to accept payment in paper money despite legal coercion the Continental Army then moved to quote impress food and other supplies seizing the supplies and forcing the farmers and shopkeepers to accept depreciated paper in return by 1779 with continental paper virtually worthless the Continental Army stepped up its impressment s-- quote paying for them in newly issued paper tickets or quote certificates issued by the army quartermaster and chemistry departments the states followed suit with their own massive certificate issues it understandably took little time for these certificates a federal and state to depreciate in value to nothing by the end of the war federal certificate issues alone totaled 200 million dollars the one redeeming feature of this monetary calamity was that the federal and state governments at least allowed these paper issues to sink into worthlessness without insisting the taxpayers shoulder another grave burden by being forced to redeem these issues species at par or even to redeem them at all Continentals were not redeemed at all and state paper was only redeemed at depreciating rates some at the greatly depreciated market value by the end of the war all the wartime state paper had been withdrawn from circulation unfortunately the same policy was not applied to another important device that Congress turned to after its continental paper had become almost worthless in 1779 loan certificates technically loan certificates were public debt but they were scarcely genuine loans they were simply notes issued by the government to pay for supplies and accepted by the merchants because the government would not pay anything else hence the loan certificates became a form of currency and rapidly depreciated as early as the end of 1779 they had depreciated to 24 to one in species by the end of the war 600 million dollars of loan certificates had been issued some of the later loan certificate issues were liquidated at a depreciated rate but the bulk remained after the war to become the substantial core of the permanent peacetime federal debt the mass of federal and state debt could have depreciated and passed out of existence by the end of the war but the process was stopped and reversed by Robert Morris wealthy Philadelphia merchants and virtual economic and financial czar of the Continental Congress in the last years of the war Morris leader of the nationalist forces in American politics moved to make the depreciated federal debt ultimately redeemable in par and also agitated for federal assumption of the various state debts the reason for this was twofold a to confer a vast subsidy on speculators who had purchased the public debt at highly depreciated values by paying interest and principal at par in species and B to build up agitation for taxing power in the Congress which the Articles of Confederation refused to allow to the federal government the D centrality of the states raising taxes or issuing new paper money to pay off the pro-rata federal debt as well as their own was thwarted by the adoption of the Constitution which brought about the victory of the Nationals program led by Morris's youthful disciple and former aide Alexander Hamilton Bank of North America Robert Morris's nationalist vision was not confined to a strong central government the power of the federal government attacks and a massive public debt fastened permanently upon the taxpayers shortly after he assumed total economic power in Congress in the spring of 1781 Morse introduced a bill to create the first commercial bank as well as the first central bank in the history of the New Republic this bank headed by Morse himself the Bank of North America was not only the first fractional reserve commercial bank in the US it was to be a privately owned central bank modeled after the Bank of England the money system was to be grounded upon species but with a controlled monetary inflation pyramiding an expansion of money and credit upon a reserve of species the Bank of North America which quickly received a federal Charter and opened its doors at the beginning of 1780 to receive the privilege from the government of its notes being receivable in all duties and taxes to all governments at par with species in addition no other banks were to be permitted to operate in the country in return for its monopoly license to issue paper money the bank would graciously lent most of its newly created money to the federal government to purchase public debt and be reimbursed by the hapless taxpayer the Bank of North America was made the depository for all congressional funds the first central bank in America rapidly loaned 1.2 million dollars to the Congress headed also by Robert Morris despite Robert Morris's power and influence and the monopoly privileges conferred upon his bank it was perceived in the market that the bank's notes were being inflated compared with species despite the nominal Redeem ability of the Bank of North America's notes in species the markets lack of confidence in the inflated notes led to their depreciation outside its home base in Philadelphia the bank even tried to shore up the value of the notes by hiring people to urge Redeemers of its notes not to ruin everything by insisting upon species a move scarcely calculated to improve ultimate confidence in the bank after a year of operation however Morris his political power slipping after the end of the war moved quickly to end his bank's role as a central bank and to shift it to the status of a private commercial bank chartered by the state of Pennsylvania by the end of 1783 all of the federal government's stock in the Bank of North America which had the previous year amounted to 5/8 of its capital had been sold by Morris into private hands and all US government debt to the bank had been repaid the first experiment with a central bank in the United States had ended at the end of the Revolutionary War the contraction of the swollen mass of paper money combined with the resumption of imports from Great Britain combined to cut prices by more than half in a few years vain attempts by seven state governments in the mid 1780s to cure the quote shortage of money Andrey inflate prices were a complete failure part of the reason for the state paper issues was a frantic attempt to pay the wartime public debt state and pro-rata federal without resorting to crippling burdens of Taxation the increased paper issues merely added to the quote shortage by stimulating the export of species and the import of commodities from abroad once again Gresham's law was at work state paper issues despite compulsory poor laws merely depreciated rapidly and aggravated the shortage of species a historian discusses what happened to the paper issues of North Carolina quote in 1787 to seventeen eighty eight the species of the paper had shrunk by more than 50 percent coin vanished and since the paper had practically no value outside the state merchants could not use it to pay debts they owed abroad hence they suffered severe losses when they had to accept it at inflated values in the settlement of local debts North Carolina's performance warned merchants anew of the Menace of depreciating paper money which they were forced to receive at par from their debtors but which they could not pass on to their creditors end quote neither was the situation helped by the expansion of banking following the launching of the Bank of North America in 1782 the Bank of New York and the Massachusetts Bank of Boston followed two years later with each institution enjoying a monopoly of banking in its region their expansion of banknotes and deposits helped to drive out species and in the following year the expansion was succeeded by a contraction of credit which aggravated the problems of recession the United States bimetallic coinage since the Spanish silver dollar was the major coin circulating in North America during the colonial and Confederation periods it was generally agreed that the quote in dollar would be the basic currency unit of the new United States of America article 1 section 8 of the new constitution gave Congress the power quote to coin money regulate the value thereof and a foreign coin the power was exclusive because the state governments were prohibited in article 1 section 10 from coining money omitting paper money or making anything but gold and silver coin legal tender in payment of debts evidently the founding fathers were mindful of the Bleak record of colonial and revolutionary paper issues and provincial juggling of the weights and denominations of coin in accordance with this power Congress passed the coinage act of 1792 on the recommendation of Secretary of Treasury Alexander Hamilton's report on the establishment of a mint of the year before the coinage act established a bimetallic dollar standard for the United States the dollar was defined as both a weight of 370 1.25 grains of pure silver and/or a weight of twenty four point seven five grains of pure gold a fixed ratio of 15 grains of silver to one grain of gold anyone could bring gold and silver bullion to the mint to be coined and silver and gold coins were both to be legal tender at this fixed ratio of 15 to 1 the basic silver coin was to be the silver dollar and the basic gold coin the $10.00 Eagle containing two hundred and forty seven point five grains of pure gold the 15 to one fixed bimetallic ratio almost precisely correspond to the market gold silver ratio of the early 1790s but of course the tragedy of any bimetallic standard is that the fixed mint ratio must always come a cropper against inevitably changing market ratios and that Gresham's law will then come inexorably into effect thus Hamilton's expressed desire to keep both metals in circulation in order to increase the supply of money was doomed to failure unfortunately for the bimetallic goal in the 1780s saw the beginning of a steady decline in the ratio of the market values of silver to gold largely due to the massive increases over the next three decades of silver production from the mines of Mexico the result was that the market ratio fell to fifteen point five to one by the 1790s and after 1805 fell to approximately fifteen point seven five to one the latter figure was enough of a gap between the market and mint ratios to set Gresham's law into operation so that by 1810 and gold coins began to disappear from the United States and silver coins began to flood in the fixed government ratio now significantly overvalued silver and undervalued gold so it paid people to bring in silver to exchange for gold melt the gold coins into bullion and ship it abroad from 1810 until 1834 only silver coin domestic and foreign circulated in the United States originally Congress provided in 1793 that all foreign coins circulating in the United States be legal tender indeed foreign coins have been estimated to form 80 percent of American domestic species circulation in 1800 most of the foreign coins were Spanish silver and while the legal tender privilege was progressively canceled for various foreign coins by 1827 Spanish silver coins continued as legal tender and to predominate in circulation Spanish dollars however soon began to be heavier in weight by one to five percent over their American equivalents even though they circulated at face value here and so the American mint ratio overvalued American more than Spanish dollars as a result the Spanish silver dollars were re exported leaving American silver dollars in circulation on the other hand fractional spanish silver coins half dollars quarter dollars dimes and half dimes were considerably overvalued in the u.s. since they circulated at face value and yet were for lighter-weight Gresham's law again came into play and the result was that American silver fractional coins were exported and disappeared leaving Spanish silver fractional coins as the major currency to make matters still more complicate American Silver Dollars the lighter weight than the Spanish circulated equally by name in the West Indies as a result American silver dollars were exported to the Caribbean thus by the complex workings of Gresham's law the United States was left especially after 1820 with no gold coins and only Spanish fractional silver coin in circulation the first bank of the United States 1791 to 1811 a linchpin of the Hamiltonian financial program was a central bank the first bank of the United States replacing the abortive Bank of North America experiment Hamilton's report on a National Bank of December 1790 such a Bank to be owned privately with a government owning one-fifth of the shares Hamilton argued that the alleged quote scarcity of species C needed to be overcome by infusions of paper and the new Bank was to issue such paper to be invested in the assumed federal debt and in subsidy to manufacturers the banknotes were to be legally redeemable in species on demand and its notes were to be kept at par with species by the federal government's accepting its notes in taxes giving it a quasi legal tender status also the federal government would confer upon the bank the prestige of being the depository for its public funds in accordance with Hamilton's wishes Congress quickly established the first bank of the United States in February 1791 the charter of the bank was for twenty years and it was assured a monopoly of the privilege of having a national charter during that period in a significant gesture of continuity with the Bank of North America the latter's longtime Bank of North America president and former partner of Robert Morris Thomas willing of Philadelphia was made president of the new bank of the United States the Bank of the United States promptly fulfilled its inflationary potential by issuing millions of dollars in paper money and demand deposits pyramiding on top of two million dollars in species the Bank of the United States invested heavily in loans to the United States government in addition to two million dollars invested in the assumption of pre-existing long-term debt assumed by the new federal government the Bank of the United States engaged in massive temporary lending to the government which reached 6.2 million dollars in 1796 the result of the outpouring of credit and paper money by the new Bank of the United States was an inflationary rise in prices thus wholesale prices rose from an index of 85 in 1791 to a peak of 146 in 1796 an increase of 72 in addition speculation boomed in government securities and real estate values were driven upward pyramiding on top of the Bank of the United States expansion and aggravating the paper money expansion and the inflation was a flood of newly created commercial banks whereas there were only three commercial banks before the founding of the United States and only four by the establishment of the Bank of the United States eight new banks were founded shortly thereafter in 1791 and 1792 and ten more by 1796 thus the Bank of the United States and its monetary expansion spurred the creation of 18 new banks in five years the establishment of the Bank of the United States precipitated a grave constitutional argument the Jeffersonians arguing that the Constitution gave the federal government no power to establish a bank Hamilton in turn paved the way for virtually unlimited expansion of federal power by maintaining that the Constitution quote implied a grant of power for carrying out vague national goals the Hamiltonian interpretation went out officially in the decision of Supreme Court Justice John Marshall in McCulloch V Maryland in 1819 despite the Jeffersonian hostility to commercial and central banks the democratic-republicans under the control of quasi Federalist moderates rather than militant old Republicans made no move to repeal the charter of the bank in the United States before it's expiration in 1811 and happily multiplied the number of state banks and bank credit in the next two decades thus in 1800 there were 28 state banks by 1811 the number had escalated to 117 a four-fold increase in 1804 there were 64 state banks of which we have data on thirteen or twenty percent of the banks these reported banks had 0.9 eight million dollars in species as against notes and demand deposits outstanding of 2.8 two million dollars a reserve ratio of 0.35 or a notes plus deposits pyramiding on top of species of 2.8 8 to 1 by 1811 26% of the 117 banks reported a total of 2.5 7 million dollars but the two-and-a-half fold increase in species was more than matched by an emission of ten point nine five million dollars of notes and deposits a nearly four-fold increase this constituted a pyramiding of four point two six to one on top of species or a reserve ratio of these banks of 0.23 as for the Bank of the United States which acted in conjunction with the federal government and with the state banks in January 18 11 it had species a sets of five point zero one million dollars and notes and deposits outstanding of twelve point eight seven million dollars a pyramid ratio of two point five seven to one or a reserve ratio of zero point three nine finally when the time for recharging the Bank of the United States came in 1811 the recharter bill was defeated by one vote each in the House and Senate recharter was fought for by the Madison administration aided by nearly all the Federalists in Congress but was narrowly defeated by the bulk of the Democratic Republicans including the hard money old Republican forces in view of the widely held misconception among historians that central banks serve and are looked upon as restraints upon state or private bank inflation it is instructive to note that the major forces in favor of recharter were merchants chambers of commerce and most of the state banks merchants found that the bank had expended credit at cheap rates and had eased the external complaint about a quote scarcity of money even more suggestive is the support of the state banks which hailed the bank is quote advantageous and worried about the contraction of credit if the bank were forced to liquidate the Bank of New York which had been founded by Alexander Hamilton in fact lauded the Bank of the United States because it had been able quote in case of any sudden pressure upon the merchants to step forward to their aid in a degree which the state institutions were unable to do the war of 1812 and it's aftermath war has generally had grave and fateful consequences for the American monetary and financial system we have seen that the Revolutionary War occasioned a mass of depreciated Fiat paper worthless Continentals a huge public debt in the beginnings of central banking in the Bank of North America the Hamiltonian financial system and even the Constitution itself was in large part shaped by the Federalists desire to fund the federal and state public debt via federal taxation and a major reason for the establishment of the first bank of the United States was to contribute to the funding of the newly assumed federal debt the constitutional prohibition against state paper money and the implicit rebuff to all Fiat paper were certainly influenced by the Revolutionary War experienced the war of 1812 to 1815 had momentous consequences for the monetary system an enormous expansion in the number of banks and in bank notes and deposits was spurred by the dictates of war finance New England banks were more conservative than in other regions and the region was strongly opposed to the war with England so little public debt was purchased in New England yet imported goods textile manufacturers and munitions had to be purchased in that region by the federal government the government therefore encouraged the formation of new and recklessly inflationary banks in the mid-atlantic southern and western states which printed huge quantities of new notes to purchase government bonds the federal government thereupon used these notes to purchase manufactured goods in New England thus from 1811 to 1815 the number of banks in the country increased from 117 to 212 in addition there had sprung up thirty-five private unincorporated banks which were illegal in most states but were allowed to function under war conditions species in the thirty reporting banks twenty-six percent of the total number of banks of 1811 amounted to two point five seven million dollars in 1811 this figure had risen to five point four million dollars in the ninety-eight reporting banks in 1815 or forty percent of the total notes and deposits on the other hand were ten point nine five million dollars in 1811 and had increased the thirty-one point six million dollars in 1815 among the reporting banks if we make the heroic assumption that we can estimate the money supply for the country by multiplying by the proportion of unreported banks and we then add in the Bank of the United States totals for 1811 species in all banks would total fourteen point nine million dollars in 1811 and thirteen point five million dollars in 1815 or a nine point four percent decrease on the other hand total bank notes and deposits aggregated to forty two point two million dollars in 1811 and seventy nine million dollars four years later so that an increase of eighty-seven point two percent permitted on top of a nine point four percent decline in species if we factor in the Bank of the United States then the Bank pyramid ratio was three point seven to one and the reserve ratio zero point two seven in 1811 while the pyramid ratio four years later was five point eight five to one and the reserve ratio zero point one seven but the aggregate scarcely tell the whole story since as we have seen the expansion took place solely outside of New England while New England banks continued on the relatively sound basis and did not inflate their credit the record expansion of the number of banks was in Pennsylvania which incorporated no less than 41 new banks in the month of March to 1814 contrasting to only four banks which had existed in that state all in Philadelphia until that date it is instructed to compare the pyramid ratios of banks in various reporting states in 1815 to only one point nine six to one in Massachusetts two point seven to one in New Hampshire and two point four two to one in Rhode Island as contrasted to nineteen point two to one in Pennsylvania eighteen point four six to one in South Carolina and eighteen point seven three to one in Virginia this monetary situation meant that the United States government was paying for New England manufactured goods with a massive inflated bank paper outside the region soon as the New England banks called upon the other banks to redeem their notes and species the mass of inflating banks faced imminent insolvency it was at this point that a fateful decision was made by the US government and concurred in by the governments of the states outside New England as the banks all faced failure the government's in August 1814 permitted all of them to suspend species payments that is to stop all redemption of notes and deposits in gold or silver and yet to continue in operation in short in one of the most flagrant violations of property rights in American history the banks were permitted to waive their contractual obligations to pay in species while they themselves could expand their loans and operations and force their own debtors to repay their loans as usual indeed the number of banks and bank credit expanded rapidly during 1815 as a result of this governmental cart blush it was precisely during 1815 when virtually all the private banks sprang up the number of banks increasing in one year from 208 to 246 reporting banks increased their pyramid ratios from three point one seven to one in 1814 to five point eight five to one the following year a drop of reserve ratios from 0.32 to 0.17 thus if we measure bank expansion by pyramiding and reserve ratios we see that a major inflationary impetus during the War of 1812 came during the year 1815 after species payments had been suspended throughout the country by government action historians dedicated to the notion that central banks restrained state or private bank inflation have placed the blame for the multiplicity of banks and bank credit inflation during the War of 1812 on the absence of a central bank but as we have seen both the number of banks and bank credit grew apace during the period of the first bank of the United States pyramiding on top of the latter's expansion and would continue to do so into the second bank and for that matter the Federal Reserve System in later years and the federal government not the state banks themselves is largely to blame for encouraging new inflated banks to monetize the war debt then in particular it allowed them to suspend species in August 1814 and to continue that suspension for two years after the war was over until February 1817 thus for two and a half years banks were permitted to operate and expand while issuing what was tantamount to Fiat paper and bank deposits another neglected responsibility of the US government for the wartime inflation was its massive issue of Treasury notes to help finance the war effort while this Treasury paper was interest-bearing and was redeemable in species in one year the cumulative amount outstanding function is money as it was used in transactions among the public and was also employed as reserves or quote high-powered money by the expanding banks the fact that the government received the Treasury notes for all debts and taxes gave the notes a quasi legal tender status most of the Treasury notes were issued in 1814 and 1815 when their outstanding total reached ten point six five million dollars and fifteen point four six million dollars respectively not only did the Treasury notes fuel the bank inflation but their quasi legal tender status brought Gresham's law and operation and species flowed out of the banks and public circulation outside of New England and into New England and out of the country the expansion of bank money and Treasury notes during the war drove up prices in the United States wholesale price increases from 1811 to 1815 average 35 percent with different cities experiencing a price inflation ranging from 28 percent to 55 percent since foreign trade was cut off by the war prices of imported commodities rose far more averaging 70 percent but more important than this inflation and at least as important as the wreckage of the monetary system during and after the war was the precedent that the two and a half year long suspension of specie payments set for the banking system for the future from then on every time there was a banking crisis brought on by inflationary expansion and demands for redemption in species state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continued to flourish it thus became clear to the banks that in a general crisis they would not be required to meet the ordinary obligations of contract law or of respect for property rights so there inflationary expansion was permanently encouraged by this massive failure of government to fulfill its obligation to enforce contracts and defend the rights of property suspensions of species informally or officially permeated the economy outside of New England during the panic of 1819 occurred everywhere outside of New England in 1837 and in all states south and west of New Jersey in 1839 a general suspension of specie payments occurred throughout the country once again in the panic of 1857 it is important to realize then in evaluating the American banking system before the Civil War that even in the later years when there was no central bank the system was not quote free in any proper economic sense free banking can only refer to a system in which banks are treated as any other business and that therefore failure to obey contractual obligations in this case prompt redemption of notes and deposits in species must incur immediate insolvency in liquidation burdened by the tradition of allowing general suspensions that arose in the United States in 1814 the pre Civil War banking system despite strong elements of competition were not saddled with a central bank must rather be turned in the phrase of one economists as quote decentralization without freedom from the 1814 to 1817 experience on the notes of state banks circulated at varying rates of depreciation depending on public expectations of how long they would be able to keep redeeming their obligations in species these expectations in turn were heavily influenced by the amount of notes and deposits issued by the bank as compared with the amount of species held in sports in that era of poor communications and high transportation costs the tendency for a bank note was to depreciate in proportion to its distance from the home office one effective if time-consuming method of enforcing redemption on nominally species was the emergence of a class of professional quote money brokers these brokers would buy up a massive depreciated notes of nominally species and then travel to the home office of the bank to demand Redemption in species merchants money brokers bankers and the general public were aided in evaluating the various state bank notes by the development of monthly journals known as quote banknote detectors these detectors were published by money brokers and periodically evaluated the market rate of various banknotes in relation to species quote Wildcat banks were so named because in that age of poor transportation banks hoping to inflate and not worry about redemption attempted to locate in wild cat country where money brokers would find it difficult to travel it should be noted that if it were not for periodic suspension there would have been no room for wild cat banks or for varying degrees of lack of confidence in the genuineness of species redemption at any given time it can be imagined that the advent of the money broker was not precisely welcomed in the town of an errant bank and it was easy for the townspeople to blame the resulting collapse of bank credit on the sinister stranger rather than on the friendly neighborhood banker during the panic of 1819 when banks collapsed after an inflationary boom lesson until 1817 obstacles and intimidation were often a lot of those who attempted to press the banks to fulfill their contractual obligation to pay in species thus Maryland and Pennsylvania during the panic of 1819 engaged in almost bizarre inconsistency in this area Maryland On February 15th 1819 enacted a law quote to compel banks to pay species for their notes or forfeit their charters yet two days after this seemingly tough action it passed another law relieving banks of any obligation to redeem notes held by money brokers quote the major force ensuring the people of this state from the evil arising from the demands made on the banks of this state for gold and silver by brokers Pennsylvania followed suit a month later in this way these states could claim to maintain the virtue of enforcing contract and property rights while moving to prevent the most effective method of insurance that's enforcement during the 1814 to 1817 general suspension note holders who sued for species a man's seldom gained satisfaction in the courts thus Isaac Bronson a prominent Connecticut banker in a species a and region sued various New York banks for payment of notes and species he failed to get satisfaction and for his pains received only abuse in the New York Press as an agent of quote misery and ruin the bank south of Virginia largely went off species the panic of 1819 and in Georgia at least general suspension continued almost continuously to the 1830s one customer complained her in 1819 that in order to collect in species from the largely state-owned Bank of Darien Georgia he was forced to swear before a justice of the peace in the bank that each and every note he presented to the bank was his own and he was not a money broker or an agent for anyone else he was forced to swear to the oath in the presence of at least five bank directors and the bank's cashier and he was forced to pay a fee of $1 36 cents on each note in order to acquire species on demand tears later when a note holder demanded $30,000 in species at the planters bank of Georgia he was told he would be paid in pennies only while another customer was forced to accept pennies handed up to him at a rate of $60 a day during the panic North Carolina and Maryland in particular moved against the money brokers in a vain attempt to prop up the depreciated notes of their state's banks in North Carolina banks were not penalized by the legislature for suspending species payments to quote brokers while maintaining them to others backed by government the three leading banks of the state met and agreed in June 1819 not to pay species a broker's or their agents their notes immediately fell to a 15% discount outside the state however the banks continued to require ignoring the inconsistency that their own debtors pay them at par and species Maryland during the same year moved to require license of $500 per year for money brokers in addition to an enormous twenty thousand dollar bond to establish the business Maryland tried to bolster the defense of banks and the attack on brokers by passing a compulsory parlor in 1819 prohibiting the exchange of species for Maryland banknotes at less than par the law was readily available t merely adding for the discount as compensation for the added risk species for more was driven out of the state by the operation of Gresham's law in Kentucky Tennessee and Missouri state laws were passed requiring creditors to accept depreciated and inconvertible bank paper in payment of debts they'll suffer a stay of execution of the debt in this way quasi legal tender status was conferred on the paper many states permitted banks to suspend species and for Western states Tennessee Kentucky Missouri and Illinois established state-owned banks to try to overcome the depression by issuing large issues of inconvertible paper money in all states trying to prop up inconvertible bank paper a quasi legal status was also conferred on the paper by agreeing to receive the notes in taxes or debts due to the state the result of all the inconvertible paper schemes was rapid and massive depreciation disappearance of species succeeded by speedy liquidation of the new state-owned banks an amusing footnote on the problem of banks being protected against their contractual obligations to pay and species occurred in the course of correspondence between one of the earliest economists of America the young Philadelphia state senator Conn Dirigo and the eminent English economist David Ricardo Ricardo had evidently been bewildered by regos statement that banks technically required to pay in species often were not called upon to do so on April 18th 1821 rego replied explaining the power of banks in the United States quote you state in your letter that you find it difficult to comprehend why persons who had a right to demand coin from the banks in payment of their notes so long for bore to exercise it this no doubt appears paradoxical to one who resides in a country where an act of Parliament was necessary to protect the bank but the difficulty is easily solved the whole of our population are either stockholders of banks or in debt to them it is not the interest of the first to press the banks and the rest are afraid this is the whole secret an independent man who was neither a stockholder or debtor who would have ventured to compel the banks to do justice would have been persecuted as an enemy of society Bank of the United States 1816 to 1833 the United States emerged from the war of 1812 in a chaotic monetary state with banks multiplying and inflating adlib checked only by the varying rates of depreciation of their notes with banks freed from redeeming their obligations in species the number of incorporated banks increased during 1816 from two hundred and twelve to two hundred and thirty-two clearly the nation could not continue indefinitely with the issue of fiat money in the hands of discordant sets of individual banks it was apparent that there were two ways out of the problem one was the hard money path which was advocated by the old Republicans and for their own purposes the Federalists the federal and state governments would have sternly compelled the rollicking banks to redeem promptly and species and when most of the banks outside of New England could not to force them to liquidate in that way the massive depreciated and inflated notes and deposits would have been swiftly liquidated and species out of hordes and into the country to supply a circulating medium the inflationary experience would have been over instead the Democratic Republican establishment in 1816 turned to the old Federalists path a new central bank a second bank of the United States modeled closely after the first Bank the second bank a private corporation with one-fifth of the shares owned by the federal government was to create a national paper currency purchase a large chunk of the public debt and receive deposits of Treasury funds the second bank of the United States notes and deposits were to be redeemable in species and they were given quasi legal tender status by the federal government's receiving them in payment of taxes that the purpose of establishing the second bank of the United States was to support the state banks in their inflationary course rather than crack down on them is seen by the shameful deal that the second bank made with the state banks as soon as it opened its doors in January and 1817 at the same time that it was establishing a new bank in April 1816 Congress passed a resolution of Daniel Webster at that time a federalist champion of hard money requiring that after 20th 1817 the United States should accept as payments for debts or taxes only species notes Bank of the United States notes or State banknotes redeemable and species on demand in short no irredeemable State banknotes would be accepted after that date instead of using the opportunity to compel the banks to redeem however the second bank of the United States in a meeting with representatives from the leading urban banks excluding Boston agreed to issue six million dollars worth of credit in New York Philadelphia Baltimore and Virginia before insisting on species from debts due to it from the state banks in return for that agreed-upon massive inflation the state banks graciously consented to resume species payments moreover the second Bank and the state banks agreed to mutually support each other in any emergency which of course meant in practice that the for stronger Bank of the United States was committed to the propping up of the weaker state banks the second bank of the United States was pushed through Congress by the Madison administration and particularly by secretary of the Treasury Alexander J Dallas whose appointment was lobbied for for that purpose Dallas a wealthy Philadelphia lawyer was a close friend council and financial associate of Philadelphia merchant and banker Stephen Girard reputedly one of the two wealthiest men in the country toward the end of its term Gerrard was the largest stockholder of the first bank of the United States and during the war of 1812 Gerrard became a very heavy investor in the war debt of the federal government both as a prospective large stockholder and as a way to unload his public debt Gerrard began to agitate for a new bank in the United States Dallas's appointment as Secretary of Treasury in 1814 was successfully engineered by Dallas and his close friend wealthy New York merchants and fur trader John Jacob Astor also a heavy investor in war dead when the second bank of the United States was established Stephen Girard purchased the three million dollars of the twenty eight million dollars that remained unsubscribed and he and Dallas managed to secure for the post of president of the new bank their good friend William Jones former Philadelphia merchant much of the opposition to the founding of the Bank of the United States seems keenly prophetic thus Senator William H Wells Federalist from Delaware in arguing against the bank bill said that it was quote ostensibly for the purpose of correcting the diseased state of our paper currency by restraining and curtailing the over issue of bank paper and yet it came prepared to inflict upon us the same evil being itself nothing more than simply a paper making machine and quote in fact the result of the deal with the state banks was that their resumption of species after 1817 was more nominal than real thereby setting the stage for the widespread suspension of the 1819 to 1821 depression as Bray Hammond writes quote species were resumed with substantial shortcomings apparently the situation was better than it had been and a pretense was maintained for its being better than it was but redemption was not certain in Universal there was still a premium on species and still a discount on banknotes with considerable variation in both from place to place three years later February 1820 secretary of the Treasury Crawford reported to Congress that during the greater part of the time that had elapsed since the resumption of species the convertibility of banknotes into species had been nominal rather than real in the largest portion of the Union and quote one problem is that the Bank of the United States lacked the courage to insist on payment of its notes from the state banks as a result state banks had large balances piled up against them at the bank of the United States totaling over 2.4 million dollars during 1817 and 18 18 remaining on the books as virtual interest-free loans as Kadir all points out quote so many influential people were interested in the state banks as stockholders that it was not advisable to give a fence by demanding payment and species and borrowers were anxious to keep the banks in the humor to lend end quote when the Bank of the United States did try to collect on state bank notes and species bank president Jones reported quote the banks are debtors plead inability require unreasonable indulgence or treat our reiterated claims and expostulations with settled indifference end quote from its inception the second bank launched a spectacular inflation of money and credit lakhs about insisting on the required payment of its capital and species the bank failed to raise the seven million dollars legally supposed to have been subscribed in species instead during 1817 and 1818 it's be she held never rose above 2.5 million dollars at the peak of its initial expansion in July 1818 the Bank of the United States P she totaled two point three six million dollars and its aggregate notes and deposits totaled twenty one point eight million dollars thus in a scant year-and-a-half of operation the second bank of the United States had added a net of nineteen point two million dollars to the nation's money supply or a pyramid ratio of nine point two four or a reserve ratio of zero point one one outright fraud abounded at the second bank of the United States especially at the Philadelphia and Baltimore branches particularly the latter it is no accident that three-fifths of all of the bank's loans were made at these two branches also the bank's attempt to provide a uniform currency throughout the nation floundered on the fact that the western and southern branches could inflate credit and bank notes and that the inflated notes would win their way to the more conservative branches in New York and Boston which would be obligated to redeem the inflated notes at par in this way the conservative branches were stripped of species while the Western branches could continue to inflate unchecked the expansionary operations of the second bank of the United States coupled with its laxity toward insisting on species by the state banks impelled a further inflationary expansion of state banks on top of the spectacular enlargement of the central bank thus the number of incorporated state banks rose from 232 and 1816 to 338 in 1818 Kentucky alone charted 40 new banks in the 1817 to 1818 legislative session the estimated total money supply in the nation rose from 60 7.3 million dollars in 1816 to 94 point seven million dollars in 1818 a rise of forty point seven percent in two years most of this increase was supplied by the Bank of the United States the huge expansion of money and credit impelled a full-scale inflationary boom throughout the country import prices had fallen in 1815 with the renewal of foreign trade after the war but domestic prices were another story thus the index of export staples in Charleston rose from 102 in 1815 to 160 in 1818 the prices of Louisiana staples at New Orleans rose from 178 to 224 in the same period other parts of the economy boomed exports rose from 81 million dollars in 1815 to a peak of 116 million dollars in 1818 prices rose greatly in real estate land farm improvement projects in slaves much of it fuelled by the use of bank credit for speculation in urban and rural real estate there was a boom in Turnpike construction furthered by vast federal expenditures on Turnpike's freight rates rose on steamboats and shipbuilding shared in the general prosperity also general boom conditions expanded stock trading so rapidly the traders who had been buying and selling stocks on the curbs on Wall Street for nearly a century found it necessary to open the first indoor stock exchange in the country the New York Stock Exchange in March 1817 also investment banking began in the United States during this boom period starting in July 1818 the government and the second bank began to see what dire straits they were in the enormous inflation of money and credit aggravated by the massive fraud had put the Bank of the United States in real danger of going under and illegally failing to sustain species over the next year the bank began a series of heroic contractions forced curtailment of loans contractions of credit in the south and west refusal to provide uniform national currency by redeeming it's shaky branch notes at par and seriously enforcing the requirement that its debtor banks redeeming species in addition it purchased millions of dollars of species from abroad these heroic actions along with the ouster of bank president William Jones managed to save the Bank of the United States but the massive contraction of money and credit swiftly brought the United States its first widespread economic and financial depression the first nationwide quote boom-bust cycle had arrived in the united states impelled by rapid and massive inflation quickly succeeded by contraction of money and credit banks failed and private banks curtailed their credits and liabilities and suspended species in most parts of the country contraction of money and credit by the Bank of the United States was almost unbelievable total notes and deposits falling from twenty one point nine million dollars in June 1818 to eleven point five million dollars only a year later the money supply contributed by the Bank of the United States was thereby contracted by no less than forty seven point two percent in one year the number of incorporated banks at first remained the same and then fell rapidly from 1819 to eighteen twenty two falling from 341 in mid 1819 to 267 three years later total notes in deposits of state banks fell from an estimated 72 million dollars in mid eighteen eighteen to sixty two point seven million dollars a year later a drop of fourteen percent in one year if we add in the fact that the u.s. treasury contracted total Treasury notes from eight point eight one million dollars to zero during this period we get the following estimated total money supply in 1818 one hundred and three point five million dollars in eighteen nineteen seventy four point two million dollars a contraction in one year twenty eight point three percent the result of the contraction was a massive rash of defaults bankruptcies of businesses and manufacturers and liquidation of unsound investments during the boom there was a vast drop in real estate values and rents and in the prices of freight rates and slaves public land sales dropped greatly as a result of the contraction declining from thirteen point six million dollars in 1818 to 1.7 million dollars in 1820 prices in general plummeted the index of export staples fell from 158 in November 1818 to 77 in June 1819 an annualized drop of 87.9% during those seven months South Carolina's export staples dropped from 160 to 96 from 1818 to 1819 and commodity prices in New Orleans dropped from 200 in 1818 to 119 two years later balling money incomes led to a precipitous drop in imports which fell from 122 million dollars in 1818 to 87 million dollars the year later imports from Great Britain fell from 43 million dollars in 1818 to 14 million dollars in 1820 and cotton and woolen imports from Britain fell from over 14 million dollars each in 1818 to about five million dollars each in 1820 the great fall in prices aggravated the burden of money debts reinforced by the contraction of credit bankruptcies abounded and one observer estimated at one hundred million dollars of mercantile debts to Europe were liquidated by bankruptcy during the crisis western areas shorn of money by the collapse of the previously swollen paper and debt often returned to border conditions and grain and whiskey were used as media of exchange in the dramatic summing up of the hard money economist and historian William Gooch by its precipitous and dramatic contraction quote the bank was saved and the people were ruined the Jacksonian movement in the bank war out of the bitter experiences of the panic of 1819 emerged the beginnings of the Jacksonian movement dedicated to hard money the eradication of fractional reserve banking in general and of the Bank of the United States in particular Andrew Jackson himself senator Thomas Hart quote old bullion Benton of Missouri future President James K pulk of Tennessee and Jacksonian economists Amos Kendall of Kentucky and condi rego of Philadelphia were all converted to hard money and 100% reserve banking by the experience of the panic of 1819 the Jacksonians adopted or in some cases pioneered in the currency school analysis which pinned the blame for boom bust cycles on inflationary expansions followed by contractions of bank credit far from being the ignorant bumpkins that most historians have depicted the Jacksonians were steeped in the knowledge of sound economics particularly of the Ricardian currency school indeed no movement in American politics has been as flagrantly misunderstood by historians as the Jacksonians they were emphatically not as historians until recently have depicted either quote ignorant anti-capitalist agrarians or quote representatives of the rising entrepreneurial class or quote tools of the inflationary state banks or embodiments of an early proletarian anti-capitalist movement or a non ideological power group or quote electoral machine the Jacksonians were libertarians plain and simple their program and ideology were libertarian they strongly favored free enterprise and free markets but they just as strongly opposed special subsidies and monopoly privileges conveyed by government to business or to any other group they favored absolutely minimal government certainly at the federal level but also at the state level they believed that government should be confined upholding the rights of private property in the monetary sphere this meant the separation of government from the banking system and a shift from inflationary paper money and fractional reserve banking to pure species and banks confined to 100% reserves in order to put this program into effect however the Jacksonians faced the grueling task of creating a new party out of what had become a one-party system after war of 1812 in which the Democrat Republicans had ended up adopting the Federalist program including the reestablishment of the Bank of the United States the new party the Democratic Party was largely forged in the mid 1820s by New York political leader Martin Van Buren newly converted by the aging Thomas Jefferson to the lays a fair cause Van Buren cemented Dunn alliance with Thomas Hart Benton of Missouri and the old Republicans of Virginia but he needed a charismatic leader to take the presidency away from Adams and what was becoming known as the National Republican Party he found that leader in Andrew Jackson who was elected president under the new democratic banner in 1828 the Jacksonians eventually managed to put into effect various parts of their free market and minimal government economic program including a drastic lowering of tariffs and for the first and probably the last time in American history paying off the federal debt but their major concentration was on the issue of money and banking here they had a coherent program which they proceeded to install in rapidly succeeding stages the first important step was to abolish central banking in the Jacksonian view the major inflationary culprit the object was not to eliminate the Bank of the United States in order to free the state banks for inflationary expansion but on the contrary to eliminate the major source of inflation before proceeding on the state level to get rid of fractional reserve banking the Bank of the United States charter was up for renewal in 1836 but Jackson denounced the bank in his first annual message in 1829 the imperious Nicholas Biddle the head of the second bank decided to precipitate a showdown with Jackson before his reelection effort so Biddle filed for renewal early in 1831 the host of national Republicans and non Jacksonian Democrats proceeded to pass the retarder bill but Jackson in a dramatic message vetoed the bill and Congress failed to pass it over his veto triumphantly reelected on the bank issue in 1832 President Jackson lost no time and disestablishing the Bank of the United States as a central bank the critical action came in 1833 when Jackson removed the public treasury deposits from the Bank of the United States and placed them in a number of state banks soon labeled as quote pet banks throughout the country the original number of pet banks was seven but the Jacksonians were not interested in creating a privileged bank oligarchy to replace the previous monopolies so the number of pet banks that increased to 91 by the end of 1836 in that year Biddle managed to secure a pennsylvania charter for his bank and the new United States Bank of Pennsylvania function is a much reduced but still influential state bank for a few years thereafter Orthodox historians have long maintained that by his reckless act of destroying the Bank of the United States and shifting government funds to the numerous pet banks Andrew Jackson freed the state banks from the restraints imposed on them by a central bank thus the banks were supposedly allowed to pyramid notes and deposits rationally on top of existing species and precipitate a wild inflation that was later succeeded by two Bank panics and a disastrous deflation recent historians however have totally reversed this conventional picture in the first place the record of bank inflation under the regime of the Bank of the United States was scarcely ideal from the depths of the post 1819 depression in January 1820 to January 1823 under the regime of the conservative Langdon chievous the Bank of the United States increased its notes and deposits at an annual rate of five point nine percent the nation's total money supply remained about the same in that period under the farm or inflation astre jeem of Nicholas Biddle however the Bank of the United States notes in deposits rose after January 1823 from twelve million dollars to forty two point 1 million dollars an annual increase of twenty seven point nine percent as a consequence of this base of the banking pyramid inflating so sharply the total money supply during this period vaulted from 81 million dollars to 155 million dollars an annual increase of 10.2 percent it is clear that the driving force for monetary expansion was the Bank of the United States which acted as an inflationary rather than a restraining force upon the state banks looking at the figures another way the 1823 data represented a pyramid ratio of money liabilities to species a 3.86 to 1 on the part of the Bank of the United States and 4 to 1 of the banking system as a whole or respective reserve ratios of 0.26 and 0.25 by 1832 in contrast the Bank of the United States reserve ratio had fallen to 0.1 7 and the country as a whole to 0.15 both sets of institutions had inflated almost precisely proportionately on top of species the fact that wholesale prices remained about the same over this period is no indication that the monetary inflation was not improper and dangerous as Austrian business cycle theory has pointed out any bank credit inflation sets up conditions for boom and bust there is no need for prices actually to rise the reason that prices did not rise was that the increased production of goods and services suffice to offset the monetary expansion during this period but similar conditions of the 1920s precipitated the great crash of 1929 an event that shocked most economists who had adopted the proto monetary position of Irving Fisher and other economists of the day that a stable wholesale price level cannot by definition be inflationary in reality the unhampered free market economy will usually increase the supply of goods and services and thereby bring about a gently falling price level as happened in most of the nineteenth century except during wartime what then of the consequences of Jackson's removal of the deposits what of the fact that wholesale prices rose from 84 in April 1834 to 131 in February 1837 a remarkable increase of 52 percent in a little less than three years was in that boom due to the abolition of central banking an excellent reversal of the Orthodox explanation of the boom of the 1830s and indeed of the ensuing panic has been provided by Professor teman first he points out that the price inflation really began earlier when wholesale prices reached a trough of 82 in July 1830 and then rose by twenty point seven percent in three years to reach 99 in the fall of 1833 the reason for the price rise is simple the total money supply had risen from 109 million dollars in 1830 to 159 million dollars in 1833 an increase of forty five point nine percent or an annual rise of 15.3% breaking the figures down further the total money supply had risen from 109 million dollars in 1830 to 155 million dollars a year and a half later a spectacular expansion of 35% unquestionably this monetary expansion was spurred by the still flourishing Bank of the United States which increased its notes and deposits from January 1830 to January 1832 from a total of 29 million dollars to forty two point 1 million dollars a rise of forty five point two percent thus the price and money inflation in the first few years of the 1830s were again sparked by the expansion of the still dominant central bank but what of the notable inflation after 1833 there is no doubt that the cause of the price inflation was the remarkable monetary inflation during the same period for the total money supply rose from 150 million dollars at the beginning of 1833 to 267 million dollars at the beginning of 1837 an astonishing rise of 84 percent or 21 percent per annum but as teman points out this monetary inflation was not caused by the liberated state banks expanding to a fare-thee-well if it were true that the state banks used their freedom and their new federal government deposits the pyramid wildly on top of species then their pyramid ratio whatever isn't a great deal or conversely their reserve ratio of species to notes and deposits would have fallen sharply yet the bank's reserve ratio was 0.16 at the beginning of 1837 during the intervening years the reserve ratio was never below this figure but this means that the state banks did no more pyramiding after the demise of the Bank of the United States as a central bank than they had done before conventional historians believing that the Bank of the United States must have restrained the expansion of state banks naturally assumed that they were hostile to the central bank but now gene Wilburn has discovered that the state banks overwhelmingly supported the Bank of the United States quote we have found that Nicholas Biddle was correct when he said state banks in the maine are friendly specifically only in georgia Connecticut and New York was there positive evidence of hostility a majority of state banks in some states of the south such as North Carolina and Alabama gave strong support to the bank as did both the Southwest states of Louisiana and Mississippi since the Virginia gave some support we can claim that state banks in the south and southwest for the most part supported the bank New England contrary to expectations showed the banks of Vermont and New Hampshire behind the bank but support of Massachusetts was both qualitatively and quantitatively weak the banks of the middle states all supported the second bank except for those of New York end quote what then was the cause of the enormous monetary expansion of the 1830s it was a tremendous and unusual expansion of the stockpile of species in the nation's banks the supply of species in the country had remained virtually constant at about 32 million dollars from the beginning of 1823 until the beginning of 1833 but the proportion of species to bank notes held by the public as money dropped during this period from 23% to 5% so that more species flowed from the public into the banks to fuel the relatively moderate monetary expansion of the 1820s but starting at the beginning of 1833 the total species in the country rose swiftly from 31 million dollars to 73 million dollars at the beginning of 1837 for a rise of 141 point nine percent or thirty five point five percent per annum and even though increasing distrust of banks led the public to withdraw some species from them so that the public now held 13% of its money in species instead of five percent the banks were able to increase their notes and deposits at precisely the same rate as the expansion of species flowing into their coffers thus the Jackson administration is absolved from blame for the 1833 to 1837 inflation in a sense the state banks are as well certainly they scarcely acted as if being quote freed by the demise of the Bank of the United States instead they simply increased their money issues proportionately with a huge increase of species of course the basic fractional reserve banking system is scarcely absolved from responsibility since otherwise the monetary expansion in absolute terms would not have been as great the enormous increase in species was the result of two factors first and foremost a large influx of over corn from Mexico and second the sharp cut in the usual export of silver to the Orient the latter was due to the substantial increases in China's purchase of opium instead of silver from abroad the influx of silver was the result of paper money inflation by the Mexican government which drove Mexican silver coins into the United States where they circulated as legal tender the influx of Mexican coin has been attributed to a possible increase in the productivity of the Mexican mines but this makes little sense since the inflow stopped permanently as soon as 1837 the actual cause was an inflation of the Mexican currency by the Santa Ana regime which financed its deficits during this period by minting highly de based copper coins since the debase copper grossly overvalued copper and undervalued gold and silver both the latter metals proceeded to flow rapidly out of Mexico until they virtually disappeared silver of course and not gold was flowing into the United States during this period indeed the Mexican government was forced to rescind its actions in 1837 by shifting the copper coinage to its proper ratio the influx of Mexican silver into the u.s. promptly ceased a bank credit inflation the magnitude of that of the 1830s is bound to run into shoals that caused the bank to stop the expansion and begin to contract as the banks expand and prices rise species bound to flow out of the country and into the hands of the domestic public and the pressure on the banks to redeem and species will intensify forcing secession of the boom and even monetary contraction in a sense the immediate precipitating cause is of minor importance even so the Jackson administration has been unfairly blamed for precipitating the panic of 1837 by issuing the species circular in 1836 in 1836 the Jackson administration decided to stop the enormous speculation in Western public lands that had been fuelled during the past two years by the inflation of bank credit hence Jackson decreed that public land payments would have to be made in species this had the healthy effect of stopping public land speculation but recent studies have shown that the species circular had very little impact in putting pressure on the banks to pay species from the point of view of the Jackson program however it was as important as moving toward putting the government finances on a purely species another measure advancing the Jacksonian program was also taken in 1836 Jackson embarrassed that the government having amassed a huge budget surplus during his eight years in office ordered the Treasury to distribute the surplus proportionally to the state's the distribution was made in notes presumably payable in species but again Taman is shown that the distribution had little impact on movements of species between banks and therefore in exerting contraction as pressure upon them what then was the precipitating factor in triggering the panic of 1837 FEMEN plausibly argues that the Bank of England worried about inflation in Britain in a consequent outflow of gold heighten the money supply and raised interest rates in the latter half of 1836 as a result credit contraction severely restricted the American cotton export trade in London exports the Cline cotton prices fell capital flowed into England and contraction as pressure was put upon American trade in the American banks banks throughout the United States including the Bank of the United States promptly suspended species in May 1837 their notes depreciated at varying rates an inter-regional trade within the country was crippled while banks were able to evade species and continued operations they were still obliged to contract credit in order to go back on species ventually since they could not hope to be creating fiat money indefinitely and be allowed to remain in business finally the New York banks were compelled by law to resume paying their contractual obligations and the other banks followed in the fall of 1838 during the year 1837 the money supply fell from 276 million dollars to 232 million dollars a large drop of 15.6 percent in one year total species in the country continued to increase in 1837 up to 88 million dollars but growing public distrust of the banks reflected an increase in the proportion of money held a species from 13% to 23% put enough pressure upon the banks to force the contraction the bank's reserve ratio rose from 0.16 to 0.2 in response to the monetary contraction wholesale prices fell precipitately by over thirty percent in seven months declining from 131 in February 1837 to 98 in September of that year in 1838 the economy revived Britain resumed easy credit that year cotton prices rose and a short-lived boomlet began public confidence in the banks unwisely returned as they resumed species and as a result the money supply risk slightly during the year and prices rose by 25% increasing from 98 in September 1837 to 125 in February 1839 leading the boom of 1838 were state governments who finding themselves with the unexpected windfall of a distributed surplus from the federal government proceeded to spend the money wildly and borrow even more extravagantly on public works and other uh neck anomic reforms of quote investment but the state government's engaged in rashly optimistic plans that their public works will be financed heavily from Britain and other countries and the cotton boom on which these hopes depended collapsed again in 1839 the states had to abandon their projects in mass cotton prices declined and severe contraction as pressure was put on trade furthermore the philadelphia-based Bank of the United States had invested heavily in cotton speculation and the falling price of cotton forced the Bank of the United States once again to suspend payments in October 1839 this touched off a wave of general bank suspensions in the south and west but this time the banks of New York in New England continued to redeem their obligations in species finally the Bank of the United States having for the last time played a leading role in generating a recession and monetary crisis was forced to close its doors two years later with the crisis of 1839 there ensued four years of massive monetary and price deflation unsound banks were finally eliminated unsound investments generated in the boom were liquidated the number of banks during these four years fell by 23% the money supply fell from 240 million dollars at the beginning of 1839 to 158 million dollars in 1843 a seemingly cataclysmic drop of 34 percent or 8.5 percent per annum prices fell even further from 1:25 in February 1839 267 in March 1843 a tremendous drop of 42% or 10.5% per year during the boom as we have indicated state governments went heavily into debt issuing bonds to pay for wasteful public works in 1820 the total indebtedness of American states was a modest 12 point eight million dollars by 1830 it rose to 26 point five million dollars but then it started to escalate reaching 66 point five million dollars in 1835 and skyrocketing to one hundred and seventy million dollars in 1839 the collapse of money credit banking and prices after 1839 brought these state debts into jeopardy at this point the Whigs taking a leaf from their forebears the Federalists agitated for the federal government to bail out the states and assume their debts after the crisis of 1839 arrived some of the southern and western states were clearly in danger of default their plight made worse by the fact that the bulk of the debt was held by British and Dutch capitalists and that species would have to be sent abroad to meet the heavy interest payments the Whigs pressed further for federal assumption of the debt with the federal government to issue 200 million dollars worth of bonds and payment furthermore British bankers put severe pressure on the United States to assume the state debts if it expected to float further loans abroad the American people however spurned federal aid including even the citizens of the states in difficulty and the advent of the polky administration ended any prospects for federal assumption the British noted in wonder that the average American was far more concerned about his personal debts to other individuals and banks than about the debts of his state in fact the people were quite willing to have the states repudiate their debts outright demonstrating an astute perception of the reckless course the states had taken the typical American response to the problem quote suppose foreign capitalists did not lend anymore to the state's end quote was the sharp retort quote well who cares that they don't we are now as a community heels over head in debt and can scarcely pay the interest end quote the implication was that the disappearance of foreign credit to the states would have the healthy effect of cutting off their wasteful spending as well was avoiding the imposition of a crippling tax burden to pay for the interest in principle there was in this response and awareness by the public that they and their government were separate and sometimes even hostile entities rather than one in the same organism by 1847 for western and southern states Mississippi Arkansas Michigan and Florida had repeat eiated all or part of their debts six other states Maryland Illinois Indiana Louisiana Arkansas and Pennsylvania had defaulted from three to six years before resuming payment it is evident then that the 1839 to 1843 contraction was helpful for the economy in liquidating unsound investments debts and banks including the pernicious Bank of the United States but didn't the massive deflation have catastrophic effects on production trade and employment as we have been led to believe in a fascinating analysis in comparison with the deflation of 1929 to 1933 a century later professor chemin shows that the percentage of deflation over the comparable four years 1839 to 1843 and 1929 to 1933 was almost the same yet the effects on real production of the two deflations were very different whereas in 1929 to 1933 real gross investment fail catastrophically by 91% real consumption by 19% and real GNP by 30% in 1839 to 1843 investment fell by 23% but real consumption increased by 21% and real GNP by 16% the interesting problem is to account for the enormous fall and production and consumption in the 1930s as contrasted to the rise in production and consumption in the 1840s it seems that only the initial months of the contraction worked a hardship on the American public and that most of the earlier deflation was a period of economic growth Sammon properly suggests that the reason can be found in the downward flexibility of prices in the 19th century so that the massive monetary contraction would lower prices but not particularly the world of real production or standards of living in contrast in the 1930s government play massive roadblocks on the downward fall of prices and wage rates and hence brought about severe and continuing depression of production and living standards the Jacksonians had no intention of leaving a permanent system of pet banks and so after the retirement of Jackson his successor martin van buren fought to establish the independent treasury system in which the federal government conferred no special privilege or inflationary prop on any bank instead of a central bank or pet banks the government was to keep its funds purely in species in its own Treasury vaults or its quote subtreasury branches and simply take in and spend funds from their van Buuren finally managed to establish the independent Treasury system which would last until the Civil War at long last the Jacksonians had achieved their dream of severing the federal government totally from the banking system and placing its finances on a purely hard money species the Jacksonians and the coinage legislation of 1834 we have seen that the coinage act of 1792 established a bimetallic system in which the dollar was defined as equal in both 370 1.25 grains of pure silver and 24.7 five grains of pure gold a fixed weight ratio of 15 grains of silver to one grain of gold but bimetallism founder Don Gresham's law after 1805 the world market value of silver fell to approximately fifteen point seven five to one so that the US fixed mint ratio greatly undervalued gold and overvalued silver as a result gold flowed out of the country and silver flowed in so that after 1810 only silver coin largely overvalued Spanish American fractional silver coin circulated within the United States the rest of the currency was inflated bank paper in various stages of depreciation the Jacksonians as we have seen were determined to eliminate inflationary paper money and substitute a hard money consisting of species or at the most of paper 100% backed by gold or silver on the federal level this meant abolishing the Bank of the United States and establishing the independent Treasury the rest of the fight would have to be conducted during the 1840s and later at the state level where the banks were chartered but one thing the federal government could do was readjust the species in particular the Jacksonians were anxious to eliminate small denomination banknotes $20.00 in under and substitute gold and silver coins for them they reason that the average American largely used these coins and they were the ones built by inflationary paper money for a standard to be really gold and silver it was vital that gold or silver coins circulate and be used as a medium of exchange by the average American to accomplish this goal the Jacksonian set about to establish a comprehensive program as a vital step one of the coinage acts of 1834 readjusted the old mint ratio of fifteen to one that had undervalued gold and driven it out of circulation the coinage act devalued the definition of the gold dollar from the original twenty four point seven five to 23.2 grains a debasement of gold by 6.2 6% the silver dollar was left at the old weight of 370 1.25 grains so that the mint ratio between silver and gold was now fixed at a ratio of 16 to 1 replacing the old 15 to 1 it was unfortunate that the Jacksonians did not appreciate silver to 396 grains instead of debasing gold for this set a precedent for debasement that was to plague america in 1933 and after the new ratio of 16 to 1 however now undervalued silver and overvalued gold since the world-market ratio had been approximately fifteen point seven nine to one in the years before 1834 until recently historians have assumed that the Jacksonians deliberately tried to bring in gold and expel silver and establish a mono metallic gold standard by the backdoor recent study has shown however that the Jacksonians only wanted to give gold in flow a little push through a slight undervaluation and that they anticipated a full coin circulation of both gold and silver in 1833 for example the world-market ratio was as high as fifteen point nine three to one indeed it turns out that for two decades the Jacksonians were right and that the slight one percent premium of silver over gold was not enough to drive the former coins out of circulation both silver and gold were imported from then on and silver and gold coins both circulated successfully side by side until the early 1850s lightweight spanish fractional silver remained overvalued even at the mint ratio so it flourished in circulation replacing depreciated small notes even American silver dollars were now retained in circulation since they were quote shielded and kept circulating by the presence of new heavyweight Mexican silver dollars which were exported instead in order to stimulate the circulation of both gold and silver coins instead of paper notes the Jacksonians also passed to companion coinage acts in 1834 the Jacksonians were not monetary nationalists species was species and they saw no reason that foreign gold or silver coins should circulate with the same full privileges as American minted coins hence the Jacksonians in two separate measures legalized the circulation of all foreign silver and gold coins and they flourished in circulation until the 1850s a third plank in the Jacksonian coinage program was to establish branch u.s. mints so as to coin the gold found in newly discovered mines in Georgia in North Carolina the Jackson administration finally succeeded in getting Congress to do so in 1835 when it's set up branch mints to coin gold in North Carolina and Georgia and silver and gold at New Orleans finally on the federal level the Jacksonian sought to levy a tax on small bank notes and to prevent the federal government from keeping its deposits in state banks issuing small notes or accepting small bank notes in taxes they were not successful but the independent Treasury eliminated public deposit in state banks and the species circular as we have seen stopped the receipt of bank notes for public land sales from 1840 on the hard money battle would be waged at the state level in the early 1850s Gresham's law finally caught up with a by medallist idol that the Jacksonians had forged in the 1830s replacing the earlier de facto silver mono medal ISM the sudden discovery of extensive gold mines in California Russia and Australia greatly increased gold production reaching a peak in the early 1850s from the 1720s through the 1830s annual world gold production averaged twelve point eight million dollars never straying far from that norm then world gold production increased to an annual average of 38 point two million dollars in the 1840s and spurted upward to a peak of 155 million dollars in 1853 world gold production then fell steadily from that peak to an annual average of one hundred and thirty nine point nine million dollars in the 1850s and to one hundred and fourteen point seven million dollars from 1876 to 1890 it was not to surpass this peak until the 1890s the consequence of the burst in gold production was of course a fall in the price of gold relative to silver in the world the silver gold ratio declined from fifteen point nine seven in January 18-49 to an average of fifteen point seven in 1852 fifteen point four six in 1851 and to an average of fifteen point three two to one in the eight years from 1853 to 1860 as a result the market premium of American silver dollars of her gold quickly rose above the 1% margin which was the estimated cost of shipping silver coins abroad that premium which had hovered around one percent since the mid 1830s suddenly rose to 4.5% at the beginning of 1851 and after falling back to about two percent at the turn of 1852 bounced back up and remained at the four to five percent level the result was a rapid disappearance of silver from the country the heaviest and therefore most undervalued coins vanishing first Spanish milled dollars which contained 1% to 5% more silver than American dollars commanded a premium of 7% and went first then went the full weight American silver dollars and after that American fractional silver coins which were commanding a four percent premium by the fall of 1852 the last coins left were the worn Spanish and Mexican fractions which were depreciated by ten to fifteen percent by the beginning of 1851 however even these worn foreign silver coins had gone to a 1 percent premium and were beginning to go it was clear that America was undergoing a severe small coin crisis gold coins were flowing into the country but they were too valuable to be technically usable for small denomination coins the Democratic Pierce administration saw with horror millions of dollars of unauthorized private small notes flood into circulation in early 1853 for the first time since the 1830s the Jacksonians were in grave danger of losing the fight for hard money coinage at least for the smaller and medium denominations something had to be done quickly the ultimate breakdown of bimetallism had never been clearer if bimetallism is not in the long run viable this leaves to free market hard money alternatives a silver mono medal is with $1 defined as a weight of silver only and gold circulating freely by weight at freely fluctuating market rates or be gold mono metal ism with $1 defined only as a weight of gold with silver circulating by weight each of these is an example of what has been called quote parallel standards or quote free metal ISM in which two or more metal coins are allowed to fluctuate freely within the same area and exchange at free market prices as we have seen colonial America was an example of such parallel standards since foreign gold and silver coins circulated freely and at fluctuating market prices the United States could have taken this opportunity of monetary crisis to go on either version of a parallel standard apparently however few thought of doing so another viable though inferior solution to the problem of bimetallism was to establish a mono metallic system either de facto or de jour with the other metal circulating in the form of light weight and therefore overvalued or quote token coinage silver mono metal ISM was immediately unfeasible since it was rapidly flowing out of the country and because gold being far more valuable than silver could not technically function easily as a light weight subsidiary coin the only feasible solution then within a mono metallic framework was to make gold the basic standard and let highly overvalued essentially token silver coins function as subsidiary small coinage certainly if a parallel standard was not to be adopted the latter solution would be far better than allowing depreciated paper notes to function as small currency under pressure of the crisis Congress decided in February 1853 to keep the de jure bimetallic standard but to adopt a de facto gold mono metallic standard with fractional silver coins circulating as a deliberately overvalued subsidiary coinage legal tender up to a maximum of only $5 the fractional silver coins were to base by six point nine one percent with silver commanding about four percent market premium over gold this meant that fractional silver was the base three percent below gold at that depreciated rate fractional silver was not overvalued in relation to gold and remain in circulation by April the new subsidiary quarter dollars proved to be popular and by early 1854 the problem of the shortage of small coins in America was over in rejecting proposals either to go over completely to digital or gold mono metal ISM or to keep the existing bimetallic system Congress was choosing a gold standard temporarily but keeping its options open the fact that it continued the old full bodied solar dollar the quote dollar of our fathers demonstrates that an eventual return to de facto bimetallism was by no means being ruled out albeit Gresham's law could not then maintain the American silver dollar in circulation in 1857 an important part of the Jacksonian coinage program was repealed as congress in an exercise of monetary nationalism eliminated all legal tender power of foreign coins decentralized banking from the 1830s to the Civil War after the central bank was eliminated in the 1830s the battle for hard money largely shifted to the state governmental arena during the 1830s the major thrust was to prohibit the issue of small notes which was accomplished four notes under five dollars in ten states by 1832 and subsequently five others restricted or prohibited such notes the Democratic Party became ardently hard-money in the various states after the shock of the financial crisis of 1837 and 1839 the Democratic Drive was toward the outlawry of all fractional reserve bank paper battles were fought also in the late 1840s at constitutional conventions of many states particularly in the West in some western states the Jacksonians one temporary success but soon the Whigs would return and repeal the bank prohibition the Whigs trying to find some way to overcome the general revulsion against banks after the crisis of the late 1830s adopted the concept of quote free banking which had been enacted by New York and Michigan in the late 1830s from New York the idea spread outward to the rest of the country and triumphed in fifteen states by the early 1850s on the eve of the Civil War eighteen out of 33 states in the Union had adopted quote free banking laws it must be realized that quote free banking as it came to be known in the United States before the Civil War was unrelated to the philosophic concept of free banking analyzed by economists as we have seen earlier genuine free banking is a system where entry into banking is totally free the banks are neither subsidized nor regulated and at the first sign of failure to redeem in species a bank is forced to declare insolvency and close its doors quote free banking before the Civil War on the other hand was very different as we have pointed out the government allowed periodic general suspensions of species whenever the banks over expanded and got into trouble the latest episode was in the panic of 1857 it is true that Banking Corporation was now more liberal since any bank that met the legal regulations could become incorporated autumn matically without lobbying for special legislative charters as had been the case before but the banks were now subject to a myriad of regulations including edicts by state banking commissioners and high minimum capital requirements that greatly restricted entry into the banking business but the most pernicious aspect of quote free banking was that the expansion of bank notes and deposits was directly tied to the amount of state government securities that the bank had invested in and posted as bond with the state in effect then state government bonds became the reserve base upon which banks were allowed to pyramid a multiple expansion of bank notes and deposits not only did the system provide explicitly or implicitly for fractional reserve banking but the pyramid was tied rigidly to the amount of government bonds purchased by the banks this provision deliberately tied banks and bank credit expansion to the public debt it meant that the more public debt the banks purchased the more they could create and lend out new money banks in short were encouraged to monetize the public debt state governments were thereby encouraged to go into debt and hence government and bank inflation were intimately linked in addition to allowing periodic suspension of specie payments federal and state governments conferred upon the banks the privilege of their notes being accepted in taxes moreover the general prohibition of Interstate branch banking and often of intrastate branches as well greatly inhibited the speed by which one bank could demand payment from other banks in species in addition state usury laws pushed by the Whigs and opposed by the Democrats made credit excessively cheap for the riskiest borrowers and encouraged inflation and speculative expansion of bank lending furthermore the desire of state governments to finance internal improvements was an important factor in subsidizing and propelling expansion of bank credit as Hammond admits quote the Wildcats lent no money to farmers and served no former interests they arose to meet the credit demands not of farmers who were too economically astute to accept a wildcat money but if states engaged in public improvements end quote despite the flaws and problems the decentralized nature of the pre Civil War banking system men banks were free to experiment on their own with improving the banking system the most successful such device was the creation of the suffix system a free-market central bank it is a fact almost never recalled that there once existed an American private bank that brought order and convenience to a myriad of privately issued banknotes further this Suffolk Bank restrained the over issuance of these notes in short it was a private central bank that kept the other banks honest as such it made New England an island of monetary stability in an America contending with currency chaos gas was in fact that condition in which New England found herself just before the Suffolk Bank was established there was a myriad of banknotes circulating in the area's largest financial center Boston some were issued by Boston banks which all in Boston knew to be solvent but others were issued by state chartered banks these could be quite far away and in those days such distance impeded both general knowledge about their solvency and easy access in bringing the bank's notes in for redemption into gold or silver thus while at the beginning these country notes were accepted in Boston at par value this just encouraged some faraway banks to issue far more notes than they had gold to back them so country bank notes began to be generally traded at discounts to par of from 1% to 5% city bank's finally refused to accept country bank notes altogether this gave rise to the money brokers mentioned earlier in this chapter but it also caused hardship for Boston merchants who had to accept country notes whose real value they could not be certain of when they exchanged the notes with the brokers they ended up assuming the full cost of discounting the bills they had accepted at par a false start Mathers began to change in 1814 the New England Bank of Boston announced it to would go into the money broker business accepting country notes from holders and turning them over to the issuing bank for redemption the note holders though still had to pay the cost in 1818 a group of prominent merchants form the Suffolk Bank to do the same thing this enlarged competition brought the basic rate of country and a discount down from 3% in 1814 to 1% in 1818 and finally to a bare 1/2 of 1% in 1820 but this did not necessarily mean that country banks were behaving more responsibly in their note creation by the end of 1820 the business had become clearly unprofitable and both banks stopped competing with the private money brokers the Suffolk became just another Boston Bank operation begins during the next several years city bank's found their notes representing an ever smaller part of the total New England money supply country banks were simply issuing far more notes in proportion to their capital that is gold and silver than were the Boston banks concerned about this influx of paper money of lesser worth both Suffolk Bank and New England Bank began again in 1824 to purchase country notes but this time they did so not to make a profit on Redemption but simply to reduce the number of country notes in circulation in Boston they had the foolish hope that this would increase the use of their better notes thus increasing their own loans and profits but the more they purchased country notes the more notes of even worse quality particularly from far away main banks would replace them buying these latter involves more risk so the Suffolk proposed to six other city banks a joint fund to purchase and send these notes back to the issuing bank for redemption these seven banks known as The Associated banks raised $300,000 for this purpose with the Suffolk acting as agent and buying country nuts from the other six operations began March 24th 1824 the volume of country notes brought in this way increased greatly to two million dollars per month by the end of 1825 by then Suffolk felt strong enough to go it alone further it now had the leverage to pressure country banks into depositing gold and silver with the Suffolk to make note Redemption easier by 1838 almost all banks in New England did so and were redeeming their notes through the Suffolk Bank the Suffolk ground-rules from beginning 1825 to end 1858 were as follows each country Bank had to maintain a permanent deposit of species of at least $2,000 for the smallest Bank plus enough to redeem all its notes that Suffolk received these gold and silver deposits did not have to be at Suffolk as long as they were at some place convenient to Suffolk so that the notes would not have to be sent home for redemption but in practice nearly all reserves were at Suffolk City banks had only to deposit a fixed amount which decreased to $5,000 by 1835 no interest was paid on any of these deposits but in exchange the stuff Hulk began performing an invaluable service it agreed to accept at par all the notes that received as deposits from other New England banks in the system and credit the depositor banks accounts on the following day with the cephalic acting is a quote clearing Bank accepting sorting and crediting bank notes it was now possible for any New England Bank to accept the notes of any other Bank however far away and at face value this drastically cut down on the time and inconvenience of applying to each bank separately for species emption moreover the certainty spread that the notes of the cephalic member banks would be valued at par it spread it first among other bankers and then to the general public country banks resist how did the inflation Ascari banks react to this not very well for his one could see the cephalic system put limits on the amount of notes they could issue they resented par redemption and detested systematics beshear adem shin because that forced them to stay honest but country banks knew that any bank that did not play by the rules would be shunned by the banks that did or at least see its notes accepted only a discount and not in a very wide area at that all legal means to stop Suffolk failed the Massachusetts Supreme Court upheld in 1827 Suffolk's right to demand gold or silver for country banknotes and the state legislature refused to charter a clearing bank run by the country banks probably rightly assuming that these banks would run much less strict operations stung by these setbacks the country banks played by the rules bided their time and awaited their revenge so folks stabilizing effects even though suffix initial objective had been to increase the circulation of city banks this did not happen in fact by having their notes redeemed at par country banks gained a new respectability this came naturally at the expense of the number of notes issued by the worst former inflation estat least in Massachusetts the percentage of City banknotes in circulation fell from forty eight point five percent in 1826 the thirty five point eight percent in 1833 the biggest most powerful weapon Suffolk adds keep stability was the power to grant membership into the system it accepted only banks whose notes were sound while suffle could not prevent a bad Bank from inflating the nine-eight membership ensured that the notes would not enjoy a wide circulation and the member banks that were mismanaged could be stricken from the lists of Suffolk approved New England banks in good standing this caused an offending banks notes to trade at a discount at once even though the bank itself might be still redeeming its notes and species in another way the Suffolk exercised a stabilizing influence on the New England economy it controlled the use of overdrafts in the system when a member bank needed money it could apply for an overdraft that is a portion of excess reserves in the banking system if Suffolk decided that a member bank's loan policy was not conservative enough it could refuse to sanction the bank's application to borrow reserves at Suffolk the denial of overdrafts to profligate banks thus forced those banks to keep their assets more liquid view government central banks today have succeeded in that this is all the more remarkable when one considers that Suffolk or any central bank could have earned extra interest income by issuing overdrafts irresponsibly but dr. George Tripoli whose excellent monograph the Suffolk Bank we rely on in this study states that by providing stability to the New England banking system quote it should not be inferred that the Suffolk Bank was operating purely as public benefactor end quote Suffolk in fact made handsome profits at its peak in 1858 the last year of existence it was redeeming 400 million dollars in notes with a total annual sow cost of only $40,000 the healthy profits were derived primarily from loaning out those reserve deposits which Suffolk itself remember did not pay interest on not surprisingly Suffolk stock was the highest priced bank stock in Boston and by 1850 regular dividends were 10% the Suffolk difference that the Suffolk system was able to provide note Redemption much more cheaply than the US government was stated by a US Comptroller of the currency John J Knox compared the two systems from a vantage point of half a century quote in 1857 the redemption of notes by the Suffolk Bank was almost four hundred million dollars as against one hundred thirty seven million six hundred ninety seven thousand six hundred ninety six dollars in 1875 the highest amount ever reported under the national banking system the redemptions in 1898 were only 66 million six hundred eighty three thousand four hundred and seventy-six dollars at a cost of $1 twenty nine cents per thousand the cost of redemption under the Suffolk system was ten cents per one thousand dollars which does not appear to include transportation if this item is deducted from the cost of redeeming national bank notes it would reduce it to about ninety four cents this difference is accounted for by the relatively small amount of redemptions by the Treasury and the increased expense incident to the necessity of official checks by the government and by the higher salaries paid but allowing for these differences the fact is established that private enterprise could be entrusted with the work of redeeming the circulating notes of the banks and it could thus be done as safely and much more economically than the same service can be performed by the government end quote the volume of redemptions was much larger under Suffolk than under the national banking system during Suffolk's existence 1825 to 1857 they averaged 229 million dollars per year the average of the national system from its start in 1863 to about 1898 is put by mr. Knox at only fifty four million dollars further at its peak in 1858 four hundred million dollars was redeemed but the New England money supply was only forty million dollars this meant that astoundingly the average note was redeemed ten times per year or once every five weeks bank capital notes circulation and deposits considered together as quote banking power grew in New England on a per capita basis much faster than in any other region of the country from 1803 to 1850 and there is some evidence that New England banks were not as susceptible to disaster during the several banking panics during that time in the panic of 1837 not one Connecticut bank failed nor did any suspend species all remained in the Suffolk system and when in 1857 species was suspended in Maine all but three banks remain in business as the Bank Commission of Maine stated quote the Suffolk system though not recognized in banking law has proved to be a great safeguard to the public whatever objections may exist to the system in theory it's practical operation is to keep the circulation of our banks within the bounds of safety end quote the suffix demise the extraordinary profits and power that the cephalic had by 1858 attained spawn competitors the only one to become established was the Bank for mutual redemption in 1858 this Bank was partially a response to the somewhat arrogant behavior of the Suffolk by this time after 35 years of unprecedented success but further and more important the balance of power in the state legislature had shifted outside of Boston to the country bank areas the politicians were more amenable to the desires of the over expanding country banks still it must be said that Suffolk acted toward the Bank of mutual redemption with spite where conciliation would have helped trying to force mutual redemption out of business Suffolk starting October 8th 1858 refused to honor notes of banks having deposits in the newcomer further Suffolk in effect threatened to any bank withdrawing deposits from it but country banks rallied to the newcomer and on October 16th Suffolk announced that it would stop clearing any country bank notes thus becoming just another Bank only the bank from youtl Redemption was left and though it soon had half the New England banks as members it was much more laxed toward over issuance by country banks perhaps the Suffolk would have returned amid dissatisfaction with its successor but in 1861 just over two years after Suffolk stopped clearing the Civil War began and all species payments were stopped as a final nail in the coffin the national banking system act of 1863 forbade the issuance of any state bank notes giving a monopoly to the government that has continued ever since while it lasted though the Suffolk banking system showed that it is possible in a free market system to have private banks competing to establish themselves as efficient safe and inexpensive clearing houses limiting over issue of paper money the Civil War the Civil War exerted an even more fateful impact on the American monetary and banking system than had the war of 1812 it set the United States for the first time except for 1814 to 1817 on an irredeemable fiat currency that lasted for two decades and led to reckless inflation of prices this quote greenback currency set a momentous precedent for the post 1933 united states and even more particularly for the post 1971 experiment in fiat money perhaps an even more important consequence of the Civil War was the permanent change wrought in the American banking system the federal government in effect outlawed the issue of State banknotes and created a new quasi centralised fractional reserve national banking system which paved the way for the return of outright central banking in the Federal Reserve System the Civil War in short ended the separation of the federal government from banking and brought the two institutions together in an increasingly close and permanent symbiosis in that way the Republican Party which inherited the Whig admiration for paper money and governmental control and sponsorship of inflationary banking was able to implant the soft money tradition permanently in the American system greenback's the Civil War led to an enormous ballooning of federal expenditures which skyrocketed from 66 million dollars in 1861 to 1.3 billion dollars four years later to pay for these swollen expenditures the Treasury initially attempted in the fall of 1861 to float a massive 150 million dollar bond issue to be purchased by the nation's leading banks however secretary of the Treasury salmon P chase a former Jacksonian tried to require the banks to pay for the loan in species that they did not have this massive pressure on their species as well as an increased public demand for species due to a well deserved lack of confidence in the banks brought about a general suspension of specie payments a few months later at the end of December 1861 this suspension was followed swiftly by the Treasury itself which suspended species on its Treasury notes the US government quickly took advantage of being on an inconvertible fiat standard in the legal tender act of February 1862 Congress authorized the printing of 150 million dollars in new quote United States notes soon to be known as quote greenbacks to pay for the growing war deficits the greenbacks were made legal tender for all debts public and private except that the Treasury continued its legal obligation of paying the interest on its outstanding public debt in species the greenbacks were also made convertible at par into US bonds which remained a generally unused option for the public and was repealed a year later in creating greenbacks in February Congress resolved that this would be the first and last emergency issue but printing money is a heady wine and a second 150 million dollar issue was authorized in July and still a third 150 million dollars in early 1863 greenbacks outstanding reached a peak in 1864 of 415 point 1 million dollars greenbacks began to depreciate in terms of species almost as soon as they were issued in an attempt to drive up the price of government bonds Secretary Chase eliminated the convertibility of greenbacks in July 1863 an act that simply drove the value down further chase and the Treasury officials instead of acknowledging their own premiere responsibility for the continued depreciation of the greenbacks conveniently placed the blame on anonymous quote gold speculators in March 1863 chase began a determined campaign which would last until he was driven from office to stop the depreciation by controlling assaulting and eventually eliminating the gold market in early March he had Congress levius stamp tax on gold sales and to forbid loans on a collateral of coin above its par value this restriction on the gold market had little effect and when depreciation resumed its March at the end of the year chase decided to de facto repeal the requirement that customs duties be paid in gold in late March 1864 Chase declared that importers would be allowed to deposit greenbacks at the Treasury and receive gold in return at a premium below the market imported then use the gold to pay the customs duties this was supposed to reduce greatly the necessity for importers to buy gold coin on the market and therefore to reduce the depreciation the outcome however was that the greenback at 59 cents in gold when chase began the experiment had fallen to 57 cents by mid-april chase was then forced to repeal his customs duty scheme with the failure of this attempt to regulate the gold market chase promptly escalated his intervention in mid-april he sold the massive amount of eleven million dollars in gold in order to drive down the gold premium of greenbacks but the impact was trifling and the Treasury cannot continue this policy indefinitely because it had to keep enough gold in its vaults to pay interest on its bonds at the end of the month the greenback was lower than ever having sunk to below 56 cents in gold indefatigably Chase tried yet again in mid May 1864 he sold for an exchange in London at below market rates in order to drive down pounds in relation to dollars and more specifically to replace some of the US export demand for gold in England but this too was a failure and chase and a dis experiment before the end of the month finally secretary chase decided to take off the gloves he had failed to regulate the gold market he would therefore end the depreciation of greenbacks by destroying the gold market completely by mid-june he had driven through Congress a truly despotic measure to prohibit under pain of severe penalties all futures contracts in gold as well as all sales of gold by a broker outside his own office the result was disaster the gold market was in chaos with wide ranges of prices due to the absence of an organized market businessmen clamored for repeal of the quote in gold bill and worst of all the object of the law to lower the depreciation of the paper dollar had scarcely been achieved instead public confidence in the greenback plummeted and its depreciation in terms of gold got far worse at the beginning of June the greenback dollar was worth over 52 cents in gold apprehensions about the emerging gold bill drove the greenback down slightly to 51 cents in mid-june then after the passage of the bill the greenback plummeted hitting 40 cents at the end of the month the disastrous gold bill was hastily repealed at the end of June and perhaps not coincidentally Secretary Chase was ousted from office at the same time the war against the speculators was over as soon as greenbacks depreciated to less than 97 cents in gold fractional silver coins became undervalued and so were exported to be exchanged for gold by July 1862 in consequence no coin higher than a copper nickel penny remained in circulation the US government then leaped in to fill the gap with small tickets first issuing postage stamps for the purpose then bits of unglued paper and finally after the spring of 1863 fractional paper notes a total of 28 million dollars in postage currency and fractional notes had been issued by the middle of 1864 even the nickel copper pennies began to disappear from circulation as greenbacks depreciated and the nickel copper coins began to move toward being undervalued the expectation and finally the reality of undervaluation drove the coins into hordes and then into exports postage and fractional notes did not help matters because their lowest denominations were five cents and three cents respectively the penny shortage was finally alleviated when a debate and lighter weight penny was issued in the spring of 1864 consisting of bronze instead of nickel in copper as soon as the nation's banks and the Treasury itself suspended species payments at the end of 1861 Gresham's law went into operation and gold coin virtually disappeared from circulation except for the government's interest payments and importers customs duties the swift issuance of legal tender greenbacks which the government forced creditors to accept at par ensured the continued disappearance of gold from then on the fascinating exception was California there were very few banks during this period west of Nebraska and in California the absence of banks was ensured by the fact that note-issuing banks at least were prohibited by the California Constitution of 1849 the California gold discoveries of the late 1840s ensured a plentiful supply for coinage used to a currency of gold coin only with no intrusion of banknotes California businessmen took steps to maintain gold circulation and avoid coarse payment in greenbacks at first the merchants of San Francisco in November 1862 jointly agreed to refrain from accepting or paying out greenbacks at any but the depreciated market value and to keep gold as the monetary standard any firms that refused to abide by the agreement would be blacklisted and required to pay gold in cash for any goods which they might purchase in the future voluntary efforts did not suffice to overthrow the federal power standing behind legal tender however and so California merchants obtained the passage in California legislature of a quote specific contracts act at the end of April 1863 the specific contracts act provided that contracts for the payment of specific kinds of money would be enforceable in the courts after passage of that law California businessmen were able to protect themselves against tenders of greenbacks by inserting gold coin payment clauses in all their contracts would that the other states and even the federal government had done the same furthermore the private banks of deposit in California refused to accept greenbacks on deposit newspapers use their influence to warn citizens about the dangers of greenbacks and the state government refused to accept greenbacks in payment of taxes in that way all the major institutions in California joined in refusing to accept or give their imprimatur to federal inconvertible paper judicial institutions also helped maintain the gold standard and repeal the depreciated US paper not only did the California courts uphold the constitutionality of the specific contracts Act but the California Supreme Court ruled in 1862 that greenbacks could not be accepted in state or county taxes since the state constitution prohibited any acceptance of paper money for taxes the state of Oregon was quick to follow California's lead Oregon's Constitution had also outlawed banks of issue and gold had for years than the exclusive currency two weeks after the agreement of the San Francisco merchants the merchants of Salem Oregon unanimously backed gold as the monetary standard and refused to accept greenbacks at par two months later the leading merchants of Portland agreed to accept greenbacks only at rates current in San Francisco the merchants and the rest of the state were quick to follow suit the Portland merchants issued a circular warning of a blacklist of all customers who insisted on settling their debts in greenbacks and they would be quickly boycotted and dealings with them would only be in cash Oregon deposit banks also refused to accept greenbacks and the Oregon Legislature followed California a year and a half later in passing a specific performance law Oregon too refused to accept greenbacks in taxes and strengthen the law in 1864 by requiring that quote all taxes levied by state counties or municipal corporations therein shall be collected and paid in gold and silver coin of the United States and not otherwise end quote in the same year the Oregon Supreme Court followed California in ruling that greenbacks could not constitutionally be received in payment of taxes the banking story during the Civil War is greatly complicated by the advent of the national banking system in the latter part of the war but it is clear that the state banks being able to suspend species and to pyramid money and credit on top of the federal greenbacks profited greatly by being able to expand during this period thus total state bank notes and deposits were 510 million dollars in 1860 and by 1863 rose to 743 million dollars an increase in state bank demand liabilities in those three years of 15.2% per year it is no wonder then that contrary to older historical opinion many state banks were enthusiastic about the greenbacks which provided them with legal tender that could function as a reserve base upon which they could expand as Hammond puts it quote instead of being curbed as some people supposed later the powers of the banks were augmented by the legal tender issues as the issues increased the deposits of the banks would increase end quote indeed senator Sherman Republican Ohio noted that the state banks favored greenbacks and the principal author of the greenback legislation representative Elbridge jeast balding republican new york the chairman of the House Ways and Means Subcommittee that introduced the bill was himself a buffalo banker the total money supply of the country including gold coin State banknotes subsidiary silver and US currency including fractional and greenbacks amounted to seven hundred forty five point four million dollars in 1860 by 1863 the money supply had skyrocketed to one point four three five billion an increase of ninety two point five percent in three years or thirty point eight percent per annum by the end of the war the money supply which now included national bank notes and deposits totaled one point seven seven three billion dollars an increase in two years of 23.6% or eleven point eight percent per year over the entire war the money supply rose from forty five point four million dollars to one point seven seven three billion dollars an increase of 137 point nine percent or twenty seven point six nine percent per annum the response to this severe monetary inflation was a massive inflation of prices it is no wonder that the greenbacks depreciating rapidly in terms of gold depreciated in terms of goods as well wholesale prices rose 100 in 1862 200 10.9 at the end of the war a rise of 110 point nine percent or 22.2 percent per year the Republican administration argued that its issue of greenbacks was required by stern wartime quote necessity the spurious nests of this argument is seen by the fact that greenbacks were virtually not issued after the middle of 1863 there were three alternatives to the issue of legal tender fiat money one the government could have issued paper money but not made it legal tender it would have depreciated even more rapidly at any rate they would have had quasi legal tender status by being receivable in federal dues and taxes too it could have increased taxes to pay for the war expenditures 3 it could have issued bonds and other securities and sold the debt to banks and non-bank institutions in fact the government employed both the latter alternatives and after 1863 stopped issuing greenbacks and relied on them exclusively especially arise in the public debt the accumulated deficit piled up during the war was two point six one four billion dollars of which the printing of greenbacks only financed four hundred and thirty 1.7 million dollars of the federal deficits during the war greenbacks financed 22.8% in fiscal 1862 48.5% in 1863 six point three percent in 1864 and none in 1865 this is particularly striking if we consider that the peak deficit came in 1865 totaling 960 3.8 million dollars all the rest was financed by increased debt taxes also increased greatly revenues rising from 52 million dollars in 1862 to three hundred thirty three point seven million dollars in 1865 tax revenues as a percentage of the budget rose from a minuscule ten point seven percent in fiscal 1862 to over twenty six percent in 1864 and 1865 it is clear then that the argument of quote necessity in the printing of greenbacks was specious and indeed the greenback advocates conceded that it was perfectly possible to issue public debt provided that the administration was willing to see the prices of its bonds rise and its interest payments rise considerably at least for most of the war they were not willing to take their chances in the competitive bond market the public debt and the national banking system the public debt of the Civil War brought into American financial history the important advent of one Jay Cooke the Ohio born cook had joined the moderately successful Philadelphia investment banking firm of Clarke and Dodge as a clerk at the age of 18 in a few years Cooke worked himself up to the status of junior partner and in 1857 he left the firm to branch out on his own in Canal and railroad promotion and other business ventures there he doubtless would have remained except for the lucky fact that he and his brother Henry editor of the leading Republican newspaper in Ohio the Ohio State Journal were close friends of u.s. senator salmon P chase chase a veteran leader of the anti-slavery movement fought for and lost the Republican presidential nomination in 1862 Abraham Lincoln at that point the Kochs determined to feather their nest by lobbying to make salmon chase Secretary of the Treasury after heavy lobbying by the Kochs the chase appointment was secured so Jay Cooke quickly set up his own investment banking house of jaqen Company everything was in place it now remained to seize the opportunity as the cooks father wrote of Henry quote I took up my pen principally to say that HS is Henry's plan in getting chase into the cabinet and John Sherman into the Senate is accomplished and that now is the time for making money by honest contracts out of the government end quote now indeed was their time for making money and Cooke lost no time in doing so it did not take much persuasion including wining and dining for Cooke to induce his friend chase to take an unprecedented step in the fall of 1862 granting the house of cook a monopoly on the underwriting of the public debt with enormous energy Cooke hurled himself into the task of persuading the massive public to buy US government bonds in doing so Cooke perhaps invented the art of public relations and mass propaganda certainly he did so in the realm of selling bonds as Kirkland writes quote with characteristic optimism he cook flung himself into a bon Crusade he recruited a small army of 2,500 sub agents among bankers insurance men and community leaders and kept them inspired and informed by mail and telegraph he taught the American people to buy bonds using lavish advertising in newspapers broadsides and posters God Destiny's duty courage patriotism all summoned farmers mechanics and capitalists to invest in loans unquote loans which of course they had to purchase from Jay Cooke and purchased the loans they did for cooks bond sales soon reached the enormous figure of 1 million to 2 million dollars a day perhaps two billion dollars in bonds were bought and underwritten by Jay Cooke during the war Cooke lost his monopoly in 1864 under pressure of rival bankers but a year later he was reappointed to keep that highly lucrative post until the house of cook crashed in the panic of 1873 in the Civil War Jay Cooke began as a moderately successful promoter he emerged at war's end and millionaire a man who had spawned the popular motto quote as rich as Jay Cooke surely he must have counted the $100,000 he had poured into salmon chases political fortunes by 1864 as one of the most lucrative investments he had ever made it is not surprising that Jay Cooke acquired enormous political influence in the Republican administration of the Civil War and after hew McCulloch secretary of the Treasury from 1865 to 1869 was a close friend of cooks and when McCulloch left office he assumed the post as head of cooks London office the cook brothers were also good friends of General Ulysses Grant so they wielded great influence during the grant administration no sooner had cooked secured the monopoly of government bond underwriting than he teamed up with his associates secretary of the Treasury chase an Ohio Senator John Sherman to drive through a measure which was destined to have far more fateful effects than greenbacks on the American monetary system the national banking system the National Banking destroyed the previously decentralized and fairly successful state banking system and substituted a new centralized and far more inflationary banking system under the aegis of Washington and a handful of Wall Street banks whereas the effects of the greenbacks were finally eliminated by the resumption of species in 1879 the effects of the national banking system are still with us not only was this system in place until 1913 but it paved the way for the federal reserve system by instituting a quasi central banking type of monetary system the quote inner contradictions of the national banking system were such that the nation was driven either to go onward to a frankly central bank or else to scrap centralized banking altogether and go back to decentralized state banking given the inner dynamic of state intervention to keep intensifying coupled with the almost universal adoption of statist ideology after the turn of the 20th century which course the nation would take was unfortunately inevitable chase and Sherman drove the new system through under the cover of war necessity but it was designed to alter the banking system permanently the wartime ground was to set up national banks which were so structured as to necessarily purchase large amounts of US government bonds patterned after the quote free banking systems this tied the nation's banks with the federal government and the public debt in a close symbiotic relationship the Jacksonian embarrassment of the independent Treasury was de facto swept away and the Treasury would now keep its deposits in a new series of quote pets the national banks chartered directly by the federal government in this way the Republican Party was able to use the wartime emergency to fulfill the Whig Republican dream of a federally controlled centralized banking system able to inflate the supply of money and credit in a uniform manner meshing with this was a profound political goal as Sherman expressly pointed out a vital object of the national banking system was to eradicate the embarrassing doctrine of states rights and to nationalize American politics as established in the bank acts of 1863 and 1864 the national banking system provided for the chartering of national banks by the Office of the Comptroller of the currency in Washington DC the banks were quote free in that any institution meeting the requirements could obtain a charter but the requirements were so high from fifty thousand dollars for rural banks to two hundred thousand dollars in the bigger cities that small national banks were rolled out particularly in the large cities the national banking system created three sets of national banks central reserve city which was only New York Reserve City other cities with over five hundred thousand population and country which included all other national banks Central Reserve City banks were required to keep 25% of their notes and deposits in reserve of vault cash or quote lawful money which included gold silver and greenbacks this provision incorporated the quote reserve requirement concepts that had been a feature of the quote free banking system Reserve City banks on the other hand were allowed to keep one half of their required reserves in vault cash while the other half could be kept as demand deposits checking deposits in central reserve city banks finally country banks only had to keep a minimum ratio of fifteen percent of their notes and deposits and only 40 percent of these reserves had to be in the form of vault cash the other sixty percent could be in the form of demand deposits either at Reserve City or Central Reserve City banks the upshot of this system was to replace the individualized structure of the pre Civil War state banking system by an inverted pyramid of country banks expanding on top of reserve city banks which in turn expanded on top of New York City banks before the Civil War every bank had to keep its own species Irv's and any pyramiding of notes and deposits on top of that was severely limited by calls for redemption in species by other competing banks as well as by the general public but now Reserve City banks could keep half of their reserves as deposits in New York City banks and country banks could keep most of theirs in one or the other so that as a result Oh the national banks in the country could pyramid in two layers on top of the relatively small base of reserves in the New York banks and furthermore those reserves could consist of inflated greenbacks as well as species before the Civil War every bank must stand or fall on its bottom it can pyramid notes and deposits on top of species but it's room for such inflationary expansion is limited because any banks expansion will cause increased spending by its clients on the goods or services of other banks notes or checks on the expanding bank will go into the coffers of other banks which will call on the expanding bank for redemption this will put severe pressure on the expanding bank which cannot redeem all of its liabilities as it is and whose reserve ratio has declined so it will be forced to either contract its loans and liabilities or else go under under the national banking system New York City banks pyramid notes and deposits on top of species and greenbacks reserve city banks pyramid their notes and deposits on top of species greenbacks and deposits at new york city and country banks pyramid on top of both this means that for example if new york city banks inflate and expand their notes and deposits they will not be checked by other banks calling upon them for redemption instead reserve city banks will be able to expand their own loans and liabilities by pyramiding on top of their own increased deposits at new york city banks in turn the country banks will be able to inflate their credit by pyramiding on top of their increased deposits at both reserve City and New York banks the whole nation is able to inflate uniformly and relatively unchecked by pyramiding on top of a few New York City banks the national banks were not compelled to keep part of their reserves as deposits in larger banks but they tended to do so in the long run so that they could expand uniformly on top of the larger banks and in the short run because of the advantages of having a line of credit with a larger quote correspondent Bank as well as earning interest on demand deposits at that Bank let us illustrate in another way how the national banking system pyramid by centralizing reserves let us consider the hypothetic balance sheet of the various banks suppose that the country banks begin with $1,000,000 in vault cash as their reserves with the national banking system in place the country banks can now deposit three-fifths or $600,000 of their cash in reserve city banks in return for interest pain demand deposits at those banks total reserves for the two sets of banks have not changed but now because the country banks can use as their reserves deposits in reserve city banks the same total reserves can be used by the banks to expand far more of their credit for now $400,000 in cash supports the same total of notes and deposits that the country banks had previously backed by 1 million dollars and the Reserve City banks can now expand 2.4 million dollars on top of the new $600,000 in cash or rather 1.8 million dollars in addition to the $600,000 due to the city banks in short country bank reserves have remained the same but Reserve City bank reserves have increased by six hundred thousand dollars and they can engage in four to one pyramiding of credit on top of that but that is not all the Reserve City banks can deposit half of their reserves at the New York banks when they do that since the Reserve City banks are allowed to keep half of their reserves in the central reserve city banks the former can still pyramid 2.4 million dollars on top of their new $600,000 and yet deposit three hundred thousand dollars in cash at the New York banks the latter then can expand another 4 to one on top of the new cash of $300,000 or increase their total notes and deposits to 1.2 million dollars in short not only did the national banking system allow pyramiding of the entire banking structure on top of a few large Wall Street banks but the very initiating of the system allowed a multiple expansion of all bank liabilities by centralizing a large part of the nation's cash reserves from the individual state banks into the hands of the larger and especially the New York thanks for the expansion of 1.2 million dollars on top of the new 300 dollars at New York banks serve to expand the liabilities going to the smaller banks which in turn could pyramid on top of their increased deposits but even without that further expansion 1 million dollars of which we will assume originally supported six million dollars in notes and deposits will now support in addition to that 6 million dollars 2.4 million dollars issued by the Reserve City banks and 1.2 million dollars by the New York banks to say nothing of further expansion by the latter two sets of banks which will allow country banks to pyramid more liabilities in June 1874 the fundamental structure of the national banking system was changed when Congress as part of an inflation astir the panic of 1873 eliminated all reserve requirements on notes keeping them only on deposits this released over 20 million dollars of lawful money from bank reserves and allowed a further pyramiding of demand liabilities in the long run it severed the treatment of notes from deposits with notes tied rigidly to bank holdings of government debt and demand deposits pyramiding on top of reserve ratios in species in greenbacks but this centralized inverse pyramiding of bank credit was not all for in a way modeled by the quote free banking system every National Bank's expansion of notes was tied intimately to its ownership of US government bonds every bank could only issue notes if it deposited an equivalent of US securities as collateral at the US Treasury so that national banks could only expand their notes to the extent that they purchase US government bonds this provision tied the national banking system intimately to the federal government and more particularly to its expansion of public debt the federal government had an assured built-in market for its debt and the more the banks purchased that debt the more the banking system could inflate monetizing the public debt was not only inflationary per se it provided the basis when done by the larger city banks of other banks pyramiding on top of their own monetary expansion the tie in and the pyramiding process were cemented by several other provisions every National Bank was obliged redeem the obligations of every other national bank at par thus the severe market limitation on the circulation of inflated notes and deposits depreciation as the distance from the bank increases was abolished and while the federal government could not exactly make the notes of a private bank legal tender it conferred quasi legal tender status on every National Bank by agreeing to receive all its notes and deposits at par for dues and taxes it is interesting and even heartening to discover that despite these enormous advantages conferred by the federal government national bank notes fell below par with greenbacks in the financial crisis of 1867 and a number of national banks failed the next year genuine redeem ability furthermore was made very difficult under the national banking system laxity was ensured by the fact that national banks were required to redeem the notes and deposits of every other national bank at par and yet it was made difficult for them to actually redeem those liabilities in species for one of the problems with the pre-civil war state banking system was that interstate or even intrastate branches were illegal thereby hobbling the clearing system for swiftly redeeming another banks notes and deposits one might think that a national banking system would at least eliminate this problem but on the contrary branch banking continued to be prohibited an interstate branch banking is illegal to this day editor's note Congress eliminated federal restrictions on interstate banking and branching in September 1994 with the passage of the riegle-neal interstate banking and branching efficiency Act a bank would only have to redeem its notes at its own counter in its home office furthermore the redemption of notes was crippled by the fact that the federal government imposed the maximum limit of 3 million dollars a month by which national bank notes could be contracted reserve requirements are now considered a sound and precise way to limit bank credit expansion but the precision can work two ways just as government safety codes can decrease safety by setting a lower limit for safety measures and inducing private firms to reduce safety downward to that common level so reserve requirements can an ordinarily do serve as lowest common denominators for bank reserve ratios free competition can and generally will result in banks voluntarily keeping higher reserve ratios but a uniform legal requirement will tend to push all the banks down to that minimum ratio and indeed we can see this now in the universal propensity of all banks to be quote fully loaned up that is to expand as much as is legally possible up to the limits imposed by the legal reserve ratio reserve requirements of less than 100% are more an inflationary than a restrictive monetary device the national banking system was intended to replace the state banks but many state banks continued aloof and refused to join despite the special privileges accorded to the national banks the reserve and capital requirements were more onerous and at that period national banks were prohibited from making loans on real estate with the state banks refusing to come to heel voluntarily Congress in March 1865 completed the Civil War revolution of the banking system by placing a prohibitive 10% tax on all banknotes which had the desired effect of virtually outlawing all note issues by the state banks from 1865 on the national banks had a legal monopoly on the issue of banknotes at first the state banks contracted and disappeared under the shock and it looked as if the United States would only have national banks the number of state banks fell from 1466 in 1863 to 297 in 1866 and total notes and deposits in state banks fell from 733 million dollars in 1863 to only 101 million dollars in 1866 after several years however the state banks readily took their place as an expanding element in the banking system albeit subordinated to the national banks in order to survive the state banks had to keep deposit accounts at national banks from whom they could quote by national bank notes in order to redeem their deposits in short the state banks now became the fourth layer of the national pyramid of money and credit on top of the country and other banks for the reserves of the state banks became in addition to vault the man deposits at national banks which they could redeem in cash the multi-layered structure of bank inflation under the national banking system was intensified in this new structure the state banks began to flourish by 1873 the total number of state banks had increased the 1330 and their total deposits were 789 million dollars the Cooke chase connection with the new national banking system was simple as secretary of the Treasury Chase wanted an assured market for the government bonds that were being issued so heavily during the Civil War and as the monopoly underwriter of US government bonds for every year except a one from 1862 to 1873 Jay Cooke was even more directly interested in an assured and expanding market for his bonds what better method for obtaining such a market than creating an entirely new banking system the expansion of which was directly tied to the bank's purchases of government bonds from Jay Cooke the Koch brothers played a major role in driving the National Banking Act of 1863 through a reluctant Congress the Democrats devoted too hard money opposed the legislation almost to a man only a majority of Republicans could be induced to agree on the bill after John Sherman's decisive speech in the Senate for the measure and REE cook now head of the Washington office of the house of cook wrote jubilantly to his brother quote it will be a great triumph Jay and one to which we have contributed more than any other living man the bank had been repudiated by the house and was without a sponsor in the Senate and was thus virtually dead and buried when I induced Sherman to take hold of it and we went to work with the newspapers end quote going to work with the newspapers meant something more than mere persuasion for the Koch brothers as monopoly underwriter of government bonds Cooke was paying the newspapers large sums for advertising and so the cooks thought as it turned out correctly that they could induce the newspapers to grant them an enormous amount of free space quote in which to set forth the merits of the new national banking system end quote such space and not only publicity and articles but even more important the of an editorial support of most of the nation's press and so the press implicitly bought for the occasion kept up a drum fire of propaganda for the new national banking system as cook himself related quote for six weeks or more nearly all the newspapers in the country were filled with our editorials written by the Koch brothers condemning the state bank system and explaining the great benefits to be derived from the national banking system now proposed end quote and every day the indefatigable cooks put on the desks of every member of Congress the relevant editorials from newspapers in their respective districts 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 that required bonds he also set up new national banks which would have to buy his government securities his agents form 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 DC 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 that a huge five million dollars after the war Jay Cooke favored resumption of species 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 dollar legal limit on national banknote issue in 1865 he published a pamphlet proclaiming that in less than twenty years national banknote circulation would total one billion dollars the title of the pamphlet kook published is revealing our national debt may be a national blessed the debt is public wealth political union protection of industry secure basis for national currency 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 banknotes had totaled one hundred forty two point nine million dollars by 1866 they had collapsed to twenty million dollars on the one hand national bank notes grew from a mere thirty one point two million dollars in 1864 their first year of existence to two hundred seventy six million dollars in 1866 and while as we have seen the number of state banks in existence was falling drastically from 1466 to 297 the number of national banks grew in that same period from 66 in 1863 to 1634 three years later Civil War era 1865 to 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 species emption was headed by the Pennsylvania iron in steel manufacturers the Pennsylvania iron masters who had been in the forefront of the organized protective tariff movement since its beginnings in 1820 were led here and instructed by their intellectual mentor himself a Pennsylvania iron master the elderly economist Henry C Kerry Kerry 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 in a rising price of gold they realized make domestic prices cheaper an imported prices higher and hence function as a surrogate tariff a cheap money inflation is 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 in by burs of the Kerry gospel of high tariffs and soft money were a host of attendees at the famous quote Kerry Vespers evenings of discussion of economics and politics influential Kerry disciples included economist and pennsylvania iron master Stephen Cole Eber Award president of the iron and steel Association John a Williams editor of the association's Journal iron age representative Daniel Morel Pennsylvania iron manufacturer I Smith Homans junior editor of the bankers magazine and powerful US Representative William D Kelly of Pennsylvania whose lifelong devotion to the interest of the ironmasters earned him the proud sobriquet quote old pig iron the Kerry Circle also dominated the American industrial league which spread the Kerry doctrines of protection and paper money influential allies in Congress if not precisely Kerry followers where the radical leader representative Thaddeus Stevens himself a Pennsylvania iron master and Representative John a Griswold an iron master 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 is 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 carry disciples for example was the leading railroad promoter the Pennsylvanian Thomas a Scott leading Entrepreneur of the Pennsylvania and the Texas and Pacific Railroad's one of the most flamboyant advocates of greenback inflation in the post-war era was the Wall Street Stocks speculator Richard shell in 1874 shell became a member of Congress where he proposed an outrageous pre Keynesian scheme in the spirit of Keynes is later dictum that so long as money is spent it doesn't matter what the money is spent on the it pyramid building or digging holes in the ground shell seriously urged the federal government to dig a canal from New York to San Francisco financed wholly by the issue of greenbacks Shell's enthusiasm was perhaps matched only by that of the notorious railroad speculator an economic adventurer George Francis train who called repeatedly for immense issues of greenbacks train thundered in 1867 quote give us greenbacks we say and build cities plant corn open coal mines control railways launch ships grow cotton established factories open gold and silver mines erector rolling mills carry my resolution and there is sunshine in the sky end quote the panic of 1873 was a severe blow to many over built 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 Russell Sage and other railroad men joined in a call for greenbacks so strong was their influence that the Louisville courier-journal in April 1874 declared quote the strongest influence at work in Washington upon the currency proceeded from the railroads the Great Inflation astir all are the great trunk railroads end quote 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 sixty four point seven million dollars in 1860 amounted to the huge amount of two point three two billion dollars 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 principle of federal debts contracted in greenbacks during the war in a sense then hard money hostility to both inflation and a public debt we're now at odds in a sense the Pendleton Ian's were motivated by a sense of poetic justice of pain inflated debts and inflated paper but in doing so they lost sight of the broader hard money goal this program confused 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 into resumption then did the Republicans thus secretary of the Treasury Hugh McCullough's quote loan bill of march 1866 which provided for contraction of greenbacks in preparation for resumption of species was passed in the House by Republican vote of 56 to 52 and a democratic vote of 27 to 1 and in April 1874 the quote inflation bill admittedly vetoed later by President Grant which provided for expansion of greenbacks and of national banknotes was passed in the House by a Republican vote of 105 to 64 while the Democrats voted against by the narrow margin of 35 to 37 in the meantime despite repeated resolutions for resumption of species in 18 65 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 species unction 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 1st 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 dollar limit on national banknotes in a provision known as quote free banking the only hard money compensation was an 80% pro rata contraction of greenbacks to partially offset any new national bank notes the bulk of the opposition to the resumption Act was by hard-money congressmen who in addition to pointing out it's 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 a resumption drew near that the Republicans were generally less than enthusiastic about species unction 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 at the california and oregon courts decided irredeemable paper to be unconstitutional in the large number of state court decisions on greenbacks before 8 seventy every Republican judge but one upheld their constitutionality whereas every democratic judge but two declared them unconstitutional the greenback question reached the US Supreme Court in 1867 and was decided in February 1870 in the case of Hepburn V Griswold the court held by a vote of five to three 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 Treasury 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 grand 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 the new five-to-four majority dutifully and quickly reconsidered the question and in May 1871 reversed the previous court in the fateful decision of Knox viele from then on paper money would be held consonant with the US Constitution the national banking system was ensconced after the Civil War the number of banks national bank notes and deposits all pyramid 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 1294 in 1865 to 1968 in 1873 while the number of state banks rose from 349 to 1330 in the same period total state and national bank notes and deposits rose from eight hundred thirty-five million dollars in 1865 to 1.96 four billion dollars in 1873 an increase of 135 point two percent or an increase of sixteen point nine 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 Kline that quote the financial panics of 1873 1884 1893 and 1907 were in large part an outgrowth of reserve pyramiding an 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 end quote and yet it must be pointed out that the total money supply even merely the supply of bank money did not increase after the panic but merely leveled off Orthodox economic historians have long complained about the quote 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 species 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 products 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 products per capita even the alleged quote 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 1.96 4 billion dollars to 2.2 to 1 billion dollars a rise of 13.1% or 2.6 percent per year in short a modest but definite rise and scarcely a contraction it should be clear then that the quote 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 or 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 to economic growth and the spread of the increased living standards to all the consumers indeed recent research has discovered that the analogous quote 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 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 in banks speculation in particular we may know Jay Cooke one of the creators of the national banking system in paladin of the public debt in 1866 he favored contraction of the greenbacks and early resumption because he feared that inflation would destroy the value of government bonds by the late 1860's however the house of cook 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 largess 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 cooked Northern Pacific payroll including President grants private secretary general horace porter in 1869 Cooke expressed his monetary philosophy in keeping with his enlarged sphere of activity quote why should this grand and glorious country be stunted and dwarfed its activities chilled and its very lifeblood curdled by these miserable hard coin theories the musty theories of a bygone 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 end quote but in 1873 a remarkable example of poetic justice struck Jay Cooke the overbuilt Northern Pacific was crumbling and a cook government bond operation provided a failure so the mighty House of Cook quote stunted and dwarfed by the market economy crashed and went bankrupt touching off the panic of 1873 after the passing of 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 that's their substantial sales of US bonds for gold in Europe by secretary of the Treasury Sherman returned to the gold standard in 1879 was almost blocked in the last three years before resumption by the emergence of a tremendous agitation heavily in the West but also throughout the country for the free coinage a silver the United States Mint ratios had been undervaluing silver since 1834 and in 1853 de facto gold mono medal ism was established because silver was so far undervalued as to drive fractional silver coins out of the country since 1853 the United States while dujour on a bimetallic standard at sixteen to one with the silver dollar still technically in circulation though non-existent was actually on a gold mono metallic standard with lightweight subsidiary silver coins for fractional use in 1872 it became apparent to a few knowledgeable men at the US Treasury that's silver which had held at about fifteen point five to one since the early 1860s was about to suffer a huge decline in value the major reason was the realization that European nations were shifting from a silver to a gold standard thereby decreasing their demand for silver a subsidiary reason was the discovery of silver mines in Nevada and other states in the West working rapidly these Treasury men along with Senator Sherman slipped through Congress in February 1873 a seemingly innocuous bill which in effect discontinued the minting of any further silver dollars this was followed by an act of June 1874 which completed the D monetization of silver by ending the legal tender quality of all silver dollars above the sum of five dollars the timing was perfect since it was in 1874 that the market value of silver fell to greater than 16 to 1/2 gold for the first time from then on the market price of silver fell steadily declining to nearly 18 to 1 in 1876 over 18 to 1 in 1879 and reaching a phenomenal level of 32 to 1 in 1894 in short after 1874 silver was no longer undervalued but overvalued and increasingly so in terms of gold at 16 to 1 except for the acts of 1873 in 1874 labeled by the pro silver forces as quote the crime of 1873 silver would have flowed into the United States and a country would have been once again on a de facto mono metallic silver standard the champions of greenbacks the champions of inflation saw a quote hard money way to increase greatly the amount of American currency the romana ties ation of a flood of new overvalued silver the agitation was to romana ties silver by quote the free and unlimited coinage of silver at 16 to one it should be recognized that the silver rights had a case the D monetization of silver was a quote crime in the sense that it was done Shifta ly deceptively by men who knew that they wanted to demonetised silver before it was too late and have silver replaced gold the case for gold over silver was a strong one particularly in an era of rapidly falling value of silver but it should have been made openly and honestly the furtive method of D monetizing silver the quote crime against silver was in part responsible for the vehemence of the silver agitation for the remainder of the century ultimately the administration was able to secure the resumption of payments in gold but at the expense of submitting to the bland Allisyn Act of 1878 which mandated that the Treasury purchased two million dollars to four million dollars of silver per month from then on it should be noted that this first silver agitation of the late 1870s at least cannot be considered an agrarian or a particularly southern and western movement the silver agitation was broadly based throughout the nation except in New England and was moreover an urban movement as weinstein points out quote silver began as an urban movement furthermore not an agrarian crusade its original strongholds were the large towns and cities of the Midwest and the Middle Atlantic states not the countries farming communities the first batch of by medalists leaders were a loosely knit collection of hard money newspaper editors businessman academic reformers bankers and commercial groups end quote with the passage of the Silver Purchase Act of 1878 silver agitation died out in America just bring up again in the 1890s the gold-standard era with the national banking system 1879 to 1913 the record of 1879 to 1896 was very similar to the first stage of the alleged Great Depression from 1873 to 1879 once again we had a phenomenal expansion of American industry production and real output 4head real reproducible tangible wealth per capita rose at the decadal peak in American history in the 1880s at 3.8 percent per annum real net national products arose at the rate of three point seven percent per year from 1879 to 1897 while per capita net national product increased by one point five percent per year once again Orthodox economic historians are bewildered for there should have been a great depression since prices fell at a rate of over one percent per year in this period just as in the previous period the money supply grew but not fast enough to overcome the great increases in productivity in the supply of products 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 percent per year in the earlier era as a result prices fell by less by over one percent per annum as contrasted to 3.8 percent total bank money notes and deposits rose from two point four five billion dollars to six point zero six billion dollars in this period a rise of ten point four five percent per annum surely enough to satisfy all but the most ardent inflation assist in associating a gold standard with deflation it should be pointed out that price deflation in the gold standard 1879 to 1897 period was considerably less than price deflation from 1873 to 1879 when the United States was still on a fiat greenback standard after specie resumption occurred successfully in 1879 the gold premium to greenbacks fell to par and the appreciated greenback promoted confidence in the gold back dollar more foreigners willing to hold dollars meant an inflow of gold to the United States and greater American exports some historians have attributed the boom of 1879 to 1882 culminating in a financial crisis in the latter year to the inflow of gold coin to the US which rose from 110 point 5 million dollars in 1879 to 358 point 3 million dollars in 1882 in a sense this is true but the boom would never have taken on considerable proportions without the pyramiding of the national banking system the deposits of which increased from two point one four nine billion dollars in 1879 to two point seven seven seven billion dollars in 1882 a rise of twenty nine point two percent or nine point seven percent per annum wholesale prices were driven up from ninety in 1879 to 108 three years later a twenty two point five percent increase before resuming their long-run downward path a financial panic in 1884 coming during a mild contraction after 1882 lowered the supply of thanked money total bank notes and deposits dropped slightly from three point one nine billion dollars in 1883 to three point one five billion dollars the panic was triggered by an overflow of gold abroad as foreigners began to lose confidence in the willingness of the United States to remain on the gold standard this understandable loss of confidence resulted from the inflationary soft to the pro silver forces in the bland Allison Silver Purchase Act of 1878 the shift in treasury balances from gold to silver struck a disquieting note in foreign financial circles before examining the critical decade of the 1890s it is well to point out in some detail the excellent record of the first decade after the return to gold 1879 to 1889 America went off the gold standard in 1861 and remained off after the war's end arguments between hard money advocates who wanted to eliminate unbag greenbacks and soft money men who wanted to increase them rage to the 1870s until the grand administration decided in 1875 to resume redemption of paper dollars into gold at pre-war value on the first day of 1879 at the time in 1870 if greenbacks were trading at a discount of roughly 17% against the pre-war gold dollar a combination of outright paper money deflation and an increase in official gold holdings and able to return to gold four years later which set the scene for a decade of tremendous economic growth economic record-keeping a century ago was not nearly as well developed as today but a clearer picture comes through nonetheless the encyclopedia of American economic history calls the period under review quote one of the most expansive in American history capital investment was high there was little unemployment and the real cost of production declined rapidly end quote prices wages and real wages this is shown most graphically with a look at wages and prices during the decade before and after convertibility while prices fell during the 1870s and 1880s wages only fell during the greenback period and rose from 1879 to 1889 the figures tell a remarkable story both consumer prices and nominal wages fell by about 30 percent during the last decade of greenbacks but from 1879 to 1889 while prices kept falling wages rose 23% so real wages after taking inflation or the lack of it into effect soared no decade before or since produce such a sustainable rise in real wages two possible exceptions of the periods 1909 to 1919 when the index rose from 99 to 140 in 1929 to 1939 when the index rose from 134 to 194 but during the first decade real wages plummeted the next year to 129 in 1920 and did not reach 1919 s level until 1934 and during the 1930s real wages also soared for those fortunate enough to have jobs in any event the contrast to this past decade is astonishing and while there are many reasons why real wages increase three necessary conditions must be present for most an absence of sustained inflation this contributes to the second condition a rise in savings and capital formation people will not save if they believe their money will be worth less in the future finally technological advancement is obviously important but it is not enough the 1970s saw this third factor present but the absence of the first to cause real wages to fall interest rates sidney homer writes in his monumental history of interest rates 2,000 BC to the present that quote during the last two decades of the 19th century 1880 to 1900 long-term bond yields in the United States declined almost steadily the nation entered its first period of low long-term interest rates end quote finally experiencing the 3 to 3.5 percent long-term rates which had characterized Holland in the 17th century and Britain in the 18th and 19th in short the economic Giants of their day to gauge long-term rates of the day it is best not to use the long-term government bonds we would use today as a measure the national banking acts of 1863 to 1864 stipulated that these bonds had to be used to secure banknotes this created such a demand for them that as Homer says quote by the mid 1870s it put government bond prices up to levels where their yields were far below acceptable rates of long-term interest end quote but the Commerce Department tracks the unadjusted index of yields of American railroad bonds for 1878 the year before gold the yield was six point four five percent for 1879 five point nine eight percent in 1889 four point four three percent we stress that with consumer prices about seven percent lower in 1889 than they had been the decade before the real rate of return by decades end was well into double digit range a bonanza for savers and lenders short-term rates during the last century were considerably more skittish than long-term rates but even here the decennial averages of annual averages of both three to six-month commercial paper rates and overnight coal money during the 1880s decline from what it had been the previous decades average commercial paper rates fell from six point four six percent for the decade of 1870 to 1879 to five point one four percent for the decade of 1880 to 1889 average coal money rates fell from five point seven three percent for the decade of 1870 to 1879 to three point nine eight cent for the decade of 1882 1889 a burst in productivity by some measures the 1880s was the most productive decade in our history in there a monetary history of the United States 1867 to 1960 professors Friedman and Schwartz quote RW Goldsmith on the subject quote the highest decadal rate of growth of real reproducible tangible wealth per head from 1805 to 1954 periods of about ten years was apparently reached in the 80s with approximately 3.8 percent end quote the statistics give proof to this outpouring of new wealth the average gross national product per capita in 1958 prices rose from 531 dollars for the decade of 1869 to 1878 to 774 dollars for the decade of 1879 to 1888 to seven hundred ninety-five dollars for the decade of 1889 to 1890 eight this dollar growth was occurring remember in the face of general price declines the average gross domestic product in 1929 prices rose from eleven point six billion dollars per year for the decade of 1869 to 1878 the twenty-one point two billion dollars per year for the decade of 1879 to 1888 gross domestic product almost doubled from the decade before a far larger percentage jump decade on decade than any time since labor productivity increased as manufacturing output per man-hour rose from fourteen point seven in 1869 to sixteen point two in 1879 the 20.5 in 1889 the 26.5% increase here ranks among the best in our history labor productivity reflects increased capital investment capital formation from 1869 to 1879 the total number of business establishments barely rose but the next decade saw a thirty nine point four percent increase nor surprisingly a decade of falling prices rising real income and lucrative interest returns made for tremendous capital investment ensuring future gains in productivity there was a massive 500% decade on decade increase in the purchase of structures and equipment from 1880 to 1890 and this has never since been even closely rivaled it stands in particular contrast to the virtual stagnation witnessed by the 1970s total private and public capital formation roughly doubled between the 1870s and 1880s it has repeatedly been alleged that the late 19th century the Golden Age of the gold standard in the United States was a period especially harmful to farmers the facts however tell a different story while manufacturing in the 1880s grew more rapidly than it agriculture the census of 1890 report Friedman and Schwartz quote was the first in which the net value added by manufacturing exceeded the value of agricultural output end quote farmers had an excellent decade the number of farms increased from approximately 4 million in 1880 to 4.5 million in 1890 farmland increased from 536 billion acres in 1880 to 623 billion acres in 1890 farm productivity increased from five point one person supplied by a farm worker in 1880 to five point six in 1890 the value of farm gross output and product increased in terms of 1910 to 1914 dollars from 4.1 billion dollars in 1880 to four point nine nine billion dollars in 1890 so farms farm land productivity and production all increased in the 1880s even while commodity prices were falling and farm wage rates even in nominal terms rose during this time in 1879 or 1880 the wage per month with room and board was $11.50 in 1889 or 1890 the wage per month with room and board was $13.50 this phenomenal economic growth during the decade immediately after the return to gold convertibility cannot be attributed solely to the gold standard indeed all during this time there was never a completely free market monetary system the national banking acts of 1863 to 1864 had semi cart alized the banking system only certain banks could issue money but all other banks had to have accounts at these the financial panics throughout the late 19th century were a result of the arbitrary credit creation powers of the banking system while not as harmful as today's inflation mechanism it was still a storm in an otherwise fairly healthy economic climate the fateful decade of the 1890s saw the return of the agitation for free silver which had lain dormant for a decade the Republican Party intensified its longtime flirtation with inflation by passing the Sherman Silver Purchase Act of 1890 which roughly doubled the Treasury purchase requirement of silver the Treasury was now mandated so by 4.5 million ounces of silver per month furthermore payment was to be made in a new issue of redeemable greenback currency Treasury notes of 1890 which were to be a full legal tender redeemable in either gold or silver at the discretion of the Treasury not only was this an increased commitment to silver it was a significant step on the road to bimetallism which at the depreciated market rates would mean inflationary silver mono metal ism in the same year the Republicans passed the high McKinley tariff Act of 1890 which reaffirmed their commitment to high tariffs and soft money another unsettling inflationary move made in the same year was that the New York subtreasury altered its long-standing practice of settling its Clearinghouse balances in gold coin instead in August 1890 it began using the old greenbacks and the new Treasury notes of 1890 as a result these paper currencies largely replace gold paid in customs receipts in New York uneasiness about the shift from gold to silver and the continuing free silver agitation caused foreigners to lose for the confidence in the u.s. gold standard and to cause a drop in capital imports and severe gold outflows from the country this loss of confidence exerted contraction is pressure on the American economy and reduce potential economic growth during the early 1890s fears about the American gold standard were intensified in March 1891 when the Treasury suddenly imposed the stiff fee on the export of gold bars taken from its vaults so that most gold exported from then on was American gold coin rather than bars a shock went through the financial community in the US and abroad when the United States Senate passed a free silver coinage bill in July 1892 the fact that the bill went no further was not enough to restore confidence in the gold standard banks began to insert clauses in loans and mortgages requiring payment in gold coin clearly the dollar was no longer trusted gold exports intensified in 1892 the Treasury's gold reserve declined and a run ensued on the US Treasury in February 1893 the Treasury persuaded New York banks which had drawn down six million dollars on gold from the Treasury by presenting Treasury notes for redemption to return the gold and reacquire the paper this act of desperation was scarcely calculated to restore confidence in the paper dollar the Treasury was paying the price for species resumption without bothering to contract the paper notes in circulation the gold standard was therefore inherently shaky resting only on public confidence and that was giving way under the silver agitation and under desperate acts by the Treasury for Grover Cleveland a hard money Democrat assumed the presidency in the middle of this monetary crisis two months later the stock market collapsed in a month afterward in June 1893 distrust that the fractional reserve banks led to massive bank runs and bank failures throughout the country once again however many banks national and state especially in the west and south were allowed to suspend species the panic of 1893 was on in a few months Eastern Bank suspension occurred beginning with New York City the total money supply gold coin Treasury paper national bank notes and national and state bank deposits fell by six point three percent in one year from June 1892 to June 1893 suspension of specie payments resulted in deposits which were no longer immediately redeemable in cash going to a discount in relation to currency during the month of August as a result deposits became less useful and the public tried it's best to intensify its exchange of deposits for currency by the end of 1893 the panic was over as foreign confidence rose with the Cleveland administration's successful repeal of the Sherman Silver Purchase Act in November of that year further silver agitation of 1895 endangered the Treasury's gold reserve but heroic acts of the Treasury including buying gold from a syndicate of bankers headed by JP Morgan and August Belmont restored confidence in the continuance of the gold standard the victory of the free silver Brian eyed forces at the 1896 Democratic convention caused further problems for gold but the victory of the Pro Gold Republicans put an end to the problem of domestic and foreign confidence in the gold standard 1896 the transformation of the American party system Orthodox economic historians attribute the triumph of William Jennings Bryan in the Democratic convention of 1896 and his later Annamma Nations for president to a righteous rising up of the people demanding inflation over the interests holding out for gold Friedman and Schwartz attribute the rise of Bryan ISM to a price contraction of the last three decades of the 19th century and the triumph of gold and disappearance of the quote money issue - the price rise after 1896 this conventional analysis overlooks several problems first if Bryan represented the people versus the interests why did Bryan lose and lose soundly not once but three times why did gold triumph long before any price inflation became obvious in fact at the depth of price contraction in 1896 but the main neglect of the conventional analysis is the disregard of the highly illuminating insights provided in the past 15 years by the quote new political history of 19th century American politics and its political culture the new political history began by going beyond national political issues largely economic and investigating state and local political contests it also dug into the actual voting records of individual parishes wards and counties and discovered how people voted and why they voted the way they did the work of the new political history is truly interdisciplinary for its methods range from sophisticated techniques for voting analysis to illuminating insights into American ethnic religious history in the following pages we shall present a summary of the findings of the new political history on the American party structure of the late 19th century and after and on the transformation of 1896 in particular first the history of American political parties is one of successive quote party systems each party system last several decades with each particular party having a certain central character in many cases the name of the party can remain the same but it's essential character can drastically change in the so called quote critical elections in the 19th century the nation's second party system the Whigs versus Democrats lasting from about 1832 to 1854 was succeeded by the third system the Republicans versus Democrats lasting from 1854 to 1896 characteristic of both party systems was that each party was committed to a distinctive ideology clashing with the other and these conflicting worldviews made for fierce and close contests elections were particularly hard-fought interest was high since the parties offered a quote choice not an echo and so the turnout rate was remarkably high often reaching 80 to 90 percent of eligible voters more remarkably candidates did not as we are used to in the 20th century buzzed their ideology during campaigns in order to appeal to a floating ideologically different independent voter there were very few independent voters the way to win elections therefore was to bring out your vote and the way to do that was to intensify and strengthen your ideology during campaigns any fuzzing over would lead the Republican or Democratic constituents to stay home and discussed and the election would be lost very rarely would there be a crossover to the other hated party one problem that strikes anyone interested in nineteenth-century political history is how come the average person exhibited such great and intense interest in such arcane economic topics as banking gold and silver and tariffs thousands of half literate people wrote embattled tracts on these topics and voters were intensely interested attributing the answer to inflation or depression to seemingly economic interests as do Marxists and other economic determinists simply won't do the far greater depressions and inflation's of the 20th century have not adduced nearly as much mass interest in economics as did the milder economic crises of the past century only the findings of the new political historians have cleared up this puzzle it turns out that the mass of the public was not necessarily interested in what the elites or national politicians were talking about the most intense and direct interest of the voters was applied to local and state issues and on these local levels the two parties waged an intense and furious political struggle that lasted from the 1830s to the 1890s the beginning of the century long struggle began with the profound transformation of American Protestantism in the 1830s this transformation swept like wildfire across the northern states particularly Yankee territory during the 1830s leaving the South virtually untouched the transformation found particular root among Yankee culture with its aggressive and domineering spirit this new Protestantism called pietism was born in the fires of Charles Finney and the great revival movement of the 1830s its credo was roughly as follows each individual is responsible for his own salvation and it must come in an emotional moment of being quote born again each person can achieve salvation each person must do his best to save everyone else this compulsion to save others was more than simple missionary work it meant that one would go to hell unless he did his best to save others but since each person is alone and facing the temptation to sin this role can only be done by the use of the state the role of the state was to stamp out sin and create a new Jerusalem on earth the pie assist the fine send very broadly in particular the most important politically was quote demon rum which clouded men's minds and therefore robbed them of their theological free will in the 1830s the evangelical PI assists launch a determined and indefatigable prohibitionist crusade on the state and local level that lasted a century second was any activity on Sunday except going to church which led to a drive for sabbatarian blue laws drinking on Sunday was of course a double sin and hence was particularly heinous another vital thrust of the new Yankee Pietism was to try to extirpate Roman Catholicism which Rob's communicants of their theological free will by subjecting them to the dictates of priests who are agents of the Vatican if Roman Catholics could not be prohibited per se their emigration could be slowed down or stopped and since their adults were irrevocably steeped in sin it became vital for crusading scientists to try to establish public schools as compulsory forces for Protestants tizen society or as the Pyatt just like to put it to quote Christianized the catholics if the adults are hopeless the children must be saved by the public school and compulsory attendance laws such was the political program of Yankee pietism not all immigrants were scorned british norwegian or other immigrants who belonged to Piatt distr choose whether nominally Calvinists or Lutheran or not were welcomed as quote true Americans the northern Pyatt just found their home almost to a man first in the Whig party and then in the Republican Party and they did so too among the greenback in populist parties as we shall see further below there came to this country during the century an increasing number of Catholic and Lutheran immigrants especially from Ireland in Germany the Catholics and high Lutheran's who have been called quote ritualists or liturgical x' had a very different kind of religious culture each person is not responsible for his own salvation directly if he is to be saved he joins the church and obeys its liturgy and sacraments in a profound sense then the church is responsible for one's salvation and there was no need for the state to stamp out temptation these churches then especially the Lutheran had a lazy fair attitude toward the state and morality furthermore their definitions of sin were not nearly as broad as the pi assists liquor is fine in moderation and drinking beer with the family and beer parlors on Sunday after church was a cherished German tradition Catholic and Lutheran and parochial schools were vital in transmitting religious values to their children in a country where they were in a minority virtually to a man Catholics and high Lutheran's found their home during the 19th century in the Democratic Party it is no wonder that the Republicans glory din calling themselves throughout the period quote the party of great moral ideas while the Democrats declared themselves to be quote the party of personal liberty for nearly a century the bemused liturgical Democrats fought a defensive struggle against people whom they considered Hyatt aesthetics constantly swooping down trying to outlaw their liquor their sunday beer parlors and their parochial schools how did all this relate to the economic issues of the day simply that the leaders of each part went to their voting constituents and raised their consciousness to get them vitally interested in national economic questions thus the Republican leaders would go to their rank and file and say just as we need big paternalistic government on the local and state level to stamp out sin and compel morality so we need big government on the national level to increase everyone's purchasing power through inflation keeping out cheap foreign goods through tariffs or keeping out cheap foreign labor through immigration restrictions and for their part the Democratic leaders would go to their constituents and say just as the Republican fanatics are trying to take away your liquor your beer parlors and your parochial schools so the same people are trying to keep out cheap foreign goods through tariffs and trying to destroy the value of your savings through inflation paternalistic government on the federal level is just as evil as it is at home so statism and libertarianism were expanded to other issues and other levels each side infused its economic issues with a moral fervor and passion stemming from deeply held religious values the mystery of the passionate interest of Americans and economic issues in the epic is solved both in the second and third party systems however the Whigs and then the Republicans had a grave problem partly because of demographics greater immigration and higher birth rates the Democratic liturgical --zz were slowly but surely becoming the majority party in the country the Democrats were split asunder by the slavery question in the 1840s and 1850s but now by 1890 the Republicans saw the handwriting on the wall the Democratic victory in the congressional races in 1890 followed by the unprecedented landslide victory of Grover Cleveland carrying both houses of Congress in 1892 indicated to the Republicans that they were becoming doomed to be a permanent minority to remedy the problem the Republicans in the early 1890s led by Ohio Republicans William McKinley and Mark Hannah launched a shrewd campaign of reconstruction in particular in state after state they ditched the prohibitionists who were becoming an embarrassment and losing the Republicans large numbers of German Lutheran votes also they modified their hostility to immigration by the mid eighteen nice the Republicans had moved rapidly toward the center toward fuzzing over their political Pietism in the meanwhile an upheaval was beginning to occur in the Democratic Party the south by now at one party Democratic region was having its own Pietism transformed by the 1890s quiet pi assists were now becoming evangelical and southern protestant organizations began to call for prohibition then the new sparsely settled Mountain States many of them with silver mines were largely pi assist moreover a power vacuum which would ordinarily have been temporary had been created in the National Democratic Party for Grover Cleveland a hard money lays a fair Democrat was blamed for the panic of 1893 and many leading Cleveland Democrats lost their gubernatorial and senatorial posts in the 1894 elections the Cleveland Democrats were temporarily weak and a southern mountain coalition was ready to hand seeing this opportunity William Jennings Bryan and his pietistic o Alishan seize control of the Democratic Party at the momentous convention of 1896 the Democratic Party was never to be the same again the Catholics Lutheran's and leis a fair Cleveland Democrats were in mortal shock the quote party of Our Fathers was lost the Republicans who had been moderating their stance anyway saw the opportunity of a lifetime at the Republican convention representative Henry Cabot Lodge representing the Morgans and the pro gold standard Boston financial interests told McKinley and Hana pledged yourself to the gold standard the basic Cleveland economic issue and drop your silver right in greenback tendencies and we will all back you refuse and we will support Brian or a third party McKinley struck the deal and from then on the Republicans in nineteenth-century terms were a centrist party their principles were now high tariffs and the gold standard and prohibition was quietly forgotten what would the poor liturgical --zz do many of them stayed home in droves and indeed the election of 1896 marks the beginning of the great slide downward and voter turnout rates that continues to the present day some of them in anguish that the tightest inflation estándares Brian i'ts actually conquered their angry and voted Republican for the first time in their lives the Republicans after all had dropped the hated prohibitionists and adopted gold the election of 1896 inaugurated the fourth party system in America from the third party system of closely fought see-sawing races between a pious status Republican Party versus a liturgical libertarian Democratic Party the fourth party system consisted of a majority centrist Republican party against the minority Pi assist Democratic Party after a few years the Democrats lost their pious estates and they too became a centrist they usually minority party with a moderately statist ideology scarcely distinguishable from the Republicans so went the 4th party system until 1932 a charming anecdote told to us by Richard Jensen sums up much of the 1896 election the heavily German city of Milwaukee had been mainly Democratic for years the German Lutheran's and Catholics in America were devoted in particular to the gold standard and were bitter enemies of inflation the Democratic nomination for Congress in Milwaukee had been obtained by a populist Democrat Richard shilling sounding for all the world like modern monetarists or Keynesian showing tried to explain to the assembled Germans of Milwaukee in a campaign speech that it didn't really matter what commodity was chosen his money that quote gold silver copper paper sauerkraut or sausages would do equally well as money at that point the German masses of Milwaukee laughed shilling off the stage and the shrewdly opportunistic Republicans adopted as their campaign slogan shilling and sauerkraut and swept Milwaukee the green backers and later the pro silver inflation astride populist party were not quote agrarian parties there were collections of Pi assists aiming to stamp out personal and political sin thus as kleppner points out quote the greenback party was less than a mulga nation of economic pressure groups than an ad-hoc coalition of true believers ideologues who launched their party as a quasi religious movement that bore the indelible hallmark of a transfiguring faith end quote the green backers perceive their movement as the quote the master in motion among men end quote and the populace described their 1890 free silver contest in Kansas not as a political campaign but as quote a religious revival a crusade a Pentecost of politics in which a tongue of flame set upon every man and each spake as the spirit gave him utterance end quote the people had quote heard the word and could preach the gospel of populism it was no accident we see now that the green backers almost invariably endorsed prohibition compulsory public schooling and crushing of parochial schools or that populace in many states quote declared unequivocally for prohibition or entered various forms of fusion with the prohibition party the transformation of 1896 and the death of the third party system meant the end of America's grape Lay's a fair hard money Libertarian Party the Democratic Party was no longer the party of Jefferson Jackson and Cleveland with no further political embodiment for lazy fare in existence and with both parties offering quote an echo not a choice public interest in politics steadily declined a power vacuum was left in American politics for the new corporate status the ideology of progressivism which swept both parties and created a short-lived progressive party in America after 1900 the Progressive Era of 1900 to 1918 fastened a welfare warfare state on America which has set the mold for the rest of the 20th century statism arrived after 1900 not because of inflation or deflation but because a unique set of conditions had destroyed the Democrats as a lazy fair party and left a power vacuum for the triumph of the new ideology of compulsory Kartal is a ssin the report nur ship of big government business unions technocrats and intellectuals [Music] [Applause] [Music]

Channel: Beckton Peddy

Views: 126,085

Rating: 4.8515348 out of 5

Keywords: Murray Rothbard, History of Money and Banking, 20th century, Economics, Money and Credit, Banking, Mises Institute, Mises, Austrian Economics

Id: vbiZSUAFcrQ

Length: 232min 50sec (13970 seconds)

Published: Sat Apr 30 2016

Reddit Comments

[u/SolidSilverSnake]

Its a bit of a long story but after listening to it over the last couple days I have learned so much valuable information on how banks have continually debased our money and robbed us of our purchasing power throughout history.

[u/Key_Negotiation6893]

Thanks for sharing this is good knowledge, and great history that likely that will never be taught in a government classroom.