The Greenback Controversy and Panic of 1873 (HOM 27-A)

okay welcome to history of money professor barth here history professor at arizona state university wow we are moving right along lecture number 27. today for part a we're going to talk about the greenback controversy i'm even wearing my green shirt today for the lecture and we'll hit the panic of 1873 and then for part b we're going to introduce a subject that will uh carry over into lecture 28 the next the following lecture and that's this question of bimetallism and the silver question the silver question will be a big big question in american politics toward the end of the 19th century we're going to introduce it today in part b of the lecture all right there is old glory the american flag right after the civil war concluded and we spent some time on a civil war for lecture 26 we looked at the national banking system this is the banking system as well it will that will prevail in the united states all the way up through uh to the establishment of the federal reserve in 1913. however there's another issue we we have not yet touched upon and that's the uh green back currency what happens to the greenback currency after the war is over this is a very big policy question after 1865 because as you'll remember there are hundreds of millions of dollars of fiat greenback paper currency still out there in circulation even after the war is over the union government printed these notes they're legal tender in public and private payments meaning that you can use these greenbacks for tax payments you can also use them to settle a debt payment so greenbacks are still legal tender after the civil war is over what do we do about that do we retire them if we do is that going to cause deflation and but you know by ejecting to ejecting too much money from the system meanwhile the banks have resumed specie payments so bank notes are redeemable and get again in gold and silver coin after 1865 so we have a paper currency but it's redeemable but then we have this other paper currency that's not redeemable that's not convertible in gold and silver coin what do we do about it that's the big controversy monetary controversy in the late 1860s into the 1870s there are still millions and millions of dollars of this fiat paper currency in circulation what do we do about it what do we do about it and they circulate at a discount at the toward the end of the war it was a discount of about 60 percent with the war's conclusion actually that they've recovered a bit on anticipation that that perhaps they'll be redeemed at full value but they're still operating at a discount of some 15 to 20 percent and there are a whole lot of interest groups who would like to see the greenback currency continue and have a vested interest and economic interest in seeing the greenback currency continue the greenback has a lot of supporters first of all politically republicans by and large are supporters of the greenback the republican party the greenback helped the republican party win the war or help the north win the war which was controlled and run by the republican party the greenback is a symbol of the union a symbol of victory it's patriotic it was it began under abraham lincoln there are lots of reasons why republicans would really you know like this and it seems to be working okay it you know still at a discount but it does you know provide currency and and uh and it's again a symbol of of of national union of national greatness but there are some some economic interests in favor of the greenback first of all railroads the railroads by and large supported the greenback why well more currency in circulation makes credit a little easier railroads borrow a lot of money railroads benefit from a more uh cheap money policy you may call it where there's more money in circulation even if that money depreciates a little bit also most railroads were were heavily indebted to bond holders and a sort of easy money policy makes it easier to pay debts if you're a debtor you're okay with easy money railroads are one of the big debtors and they benefit from this system railroads also exercise a lot of influence corporate influence within the republican party another interest manufacturers and industrialists especially in iron and steel the steel industry why would they support the greenback well a falling dollar helps exports what do i mean by this well when when a currency is depreciating when currency is getting cheaper when the value is falling domestic prices don't increase as rapidly or at the same pace as the price for imported goods purchased from abroad and so what this does is it discourages americans from buying imported goods and encourages foreigners to buy cheap american goods so currency devaluation currency depreciation can help exports industrialists and manufacturers like this because it operated somewhat like a a a tariff a sort of tariff protecting american industry this is why today the chinese government has a policy and has long had had a policy of currency devaluation in order to protect and to encourage chinese exports and to discourage chinese imports of foreign goods and so manufacturers industrialists support the greenback and they too make a big component of the republican party and then lastly farmers farmers more and more in the mid to late 19th century are getting into debt because they have to buy you know fairly big farming equipment as agricultural technology becomes more sophisticated and you go into debt you know you're going to prefer inflation to deflation okay and many of these interests the railroads industrialists and farmers fear that an ejection of greenbacks from circulation will lead to deflation which will hurt u.s industry hurt u.s exports and hurt anyone in who is in debt greenback also has a lot of opponents the party who represents opposition to greenbacks are primarily the democr the democrats the democrats in the 1860s and 1870s still largely support a hard money program they were also opposed to national banking system but in the 1860s they were a minority in congress and and they couldn't stop it they're a minority in congress here as well and so there's nothing that democrats can do at the moment to retire greenbacks but that's a democratic platform they mostly support a hard money program and the democratic party endorsed a program of what was called specie resumption meaning they wanted the treasury to retire the greenbacks and and redeem those greenbacks in coin redeeming greenbacks in coin and then ret thus retiring fiat paper currency from the system now the democrats don't have control of the house they don't have control of the senate and they don't have the white house but the democrats have a majority on the supreme court okay it's a holdover from the antebellum period judges appointed back when the democrats were still dominating the white house and in 1870 a supreme a case went before the supreme court a lawsuit where the legal tender status of the greenback was challenged hepburn versus griswold and the argument made before the court was that the greenback it's unconstitutional to push a depreciating currency to to force a creditor to take depreciated currency and payment of debts democrats had a 5-4 majority on the court and so the democrats rule in 1870 that legal tender greenbacks are unconstitutional this was a huge supreme court case at the time and was very very controversial the supreme court argued that legal tender greenbacks violated the fifth amendment the fifth amendment states that government cannot deprive a person of life liberty or property without due process of law and by requiring creditors to accept debts in a depreciated currency the court argued this was effectually impairing the obligation of contracts and was nullifying contracts and so based on that fifth amendment they ruled unconstitutional the opposing side said a this is necessary and proper and so it falls under a necessary and proper clause the court said no it's we didn't buy that argument did not believe that this was a reasonable necessary and proper case and then the opposing side also said well article 1 section 10 it's true that article 1 section 10 says states might may not make anything but gold and silver legal tender that's true but doesn't forbid the federal government from making anything but gold and silver legal tender the court rejected that argument and said uh that that there was there's nothing in the constitution to indicate that the federal government has the power of making anything like this fiat paper currency legal tender well as things had it in 1870 shortly after that decision there were two new vacancies on the supreme court both of the deceased judges were democrats the president at the time as a republican ulysses s grant ulysses s grant grant appoints two republicans to fill those vacancies now all of a sudden within a year republicans have a 5-4 majority on the court the case is brought again pretty much an identical case to the supreme court knox v lee and this time in 1871 the court does a complete flip and rules that oh legal tender gangbacks are constitutional after all and the court rejects the fifth amendment argument and argues that this currency fell under the necessary and proper clause they said that the necessity of the civil war is what gave these notes merit according to supreme court the greenback did quote save the government and the constitution from destruction end quote and so this is a constitutional form of currency and the court under knoxville ruled that again article yes is true article 1 section 10 says states may not make anything but but gold and silver legal tender but it doesn't speak to the federal government so the federal government has a constitutional right to make greenbacks legal tender in the united states knox v lee and to this day right uh public and private payments you don't need gold and silver right that's not seen as uh any longer uh a constitutional obligation that argument dates to this decision of knoxville well so the greenback seems to have been saved it is still controversial meanwhile between the end of the civil war in the early 1870s a bubble began to pick up again man it seems like financial history it's just one bubble after another a new bubble this time it was in railroads a big railroad bubble now we saw this stat last time in lecture 26 but look at the growth in national banks look at all that new money in circulation plus millions of dollars in greenbacks which are still in circulation so between the greenbacks and all of these national banknotes and national bank deposits based on fractional reserves an asset bubble builds behind the railroad companies this is a cartoon from 1870 the great race for the western stakes and this is cornelius vanderbilt competing against james fisk all these different railroad companies duking it out the northern pacific railroad going from minnesota to washington state epic line extremely expensive relied on heavy heavy credit bond sales this was a uh this is stock a share in the northern pacific railroad company well northern pacific railroad railroad company in 1873 which was owned by the way by the house of cook jay cooke remember jay cooke went bankrupt and and this set off a panic and before you know it uh panic financial panic sweeps the nation the bubble burst a bunch of railroad companies either went under or just faced crippling debt things bounced back pretty quickly like it wasn't like a long lasting depression but afterwards for next several years the economy was kind of on a shaky ground and things were a bit stagnant and so you know pretty severe crash and then a a recovery upward but followed by kind of a malaise in the economy through the rest of the 1870s the 1870s were not the most prosperous decade in the 19th century us well the railroads in response to 1873 said we need more greenbacks not only should we not retire the greenbacks the railroad said we need to issue more greenbacks and so there were interests trying to get convince the republican party to to emit more greenbacks however there was an election that that year in 1874 not a presidential election but a congressional election and in 1874 the public reacted against the republican party blamed the republican party essentially for the panic blame the railroads and bought into the argument that the democrats were making of hey there all these greenbacks in circulation are financial system is a bit of a mess we need to calm down let's retire the greenbacks that's what the democrats campaigned on and in 1874 they swept the election and for the first time since 1850s the democrats controlled the house of representatives and again they campaigned on specie resumption retiring the greenbacks was what the democrats campaigned on and sure enough in january 18 january 1875 congress passed a law called the resumption act the resumption act resumption act of 1875 and this act stipulated that in four years in four years the treasury will retire all the greenbacks from circulation and redeem them at face value with for gold right so here's a gold coin from 1878 1878 gold coin there's a greenback four years now why four years why not just do it you know in a few months well the treasury had to purchase the gold you know that's a lot of gold that's going to have to be used to purchase or to redeem these greenbacks and so over the next four years the treasury sold us bonds primarily in europe for gold and collected all the gold that it needed and the intention was with this gold bought in europe with the by the sale of yo spawn so increasing the national debt the national debt went up because of this selling the us bonds for gold collecting that gold for for specie resumption in 1879 well so that's the plan congress passes this bill in january of 1875 there was immense pressure on president grant a republican remember president grant to veto this legislation the railroads in the steel industrialists all these different manufacturing groups were urging grant to veto the law he has that power grant ended up signing the bill into law made a lot of enemies because of it here's a cartoon all the industrialists and railroad executives furious with grant for signing this into law it's going to take four years to take it to take effect and so during that four year period momentum began to build around you know you know repealing this law before it goes into the effect and actually a third party emerged called the greenback party and it won some national support in 1876 they ran a presidential candidate peter cooper uh look at what what a guy over here on the left he was the first nominee for the party got only one percent of the national vote but in 1880 they ran a gentleman named james weaver ended up getting three percent of the national vote ran another candidate in 1884 only got one percent and then it it disappeared but for a brief period he had this new third party called the greenback party actually the 1880s was a booming decade actually the 1880s might be the most phenomenal decade of economic and and industrial expansion in the 19th century if not the entire history of the united states very very very productive decade wealth per capita in 1880s rose about four percent per annum gross national product rose every year wages real wages increased all across the board in the 1880s there was a 40 percent increase in the number of business establishments very very prosperous decade um after you know through most of 1870s only barely increasing mostly stagnation in the in the 1870s um that being said prices did fall there was deflation some deflation in in the 1880s actually the money supply itself increased by about six percent because you had all these national bank notes in circulation national the my supply went up but prices went down mostly because of increased productivity goods became cheaper as as productivity and production increased offsetting the increase in money supply so there was a general fall in prices nevertheless real wages increased and um you know so the greenback agitation disappeared greenback agitation disappeared all right next time for part b we're going to look like at another issue a third and final issue for the 19th century and then when we're done with that we'll move on to the 20th century but bimetallism bimedalism bi-mentalism becomes a major major major political issue toward the end of 19th century we're going to introduce that subject for part b see you there

Channel: Professor Barth

Views: 8,999

Keywords: Ulysses S. Grant, President Grant, Abraham Lincoln, Jay Cooke, railroads, railroad bubble, Northern Pacific Railroad, Greenback Party, James Weaver, Peter Cooper, Supreme Court, fiat currency, fiat money, Article I, Section 10, Knox v. Lee, Hepburn v. Griswold, devaluation, bubble

Id: yrw8hqQTTtA

Length: 21min 40sec (1300 seconds)

Published: Mon Nov 02 2020