THE FIRST MOVE FOR A CONTRACTION OF THE CURRENCY
THE disorder and discouragement caused by the panic did not make easy the return to a sound monetary system. Already, prior to 1873, the people had expressed themselves against the policy of acute contraction so vigorously urged by Secretary McCulloch. The return of the Southern States to the Union naturally opened a new field for the circulation of greenbacks and national bank-notes. Influenced by this wider area of circulation for the employment of money, and by the improvement of public credit, the greenbacks rose from a gold value of $49.50 in 1865 to $71.20 in 1866, for $100 in paper. There was little further change in average value until 1870, when there was a gain of about $10 per $100 and a further advance the next year to $88.70, which remained substantially the average during the years of depression that followed. The average value of these years, however, is no measure of the fluctuations, which arose naturally from differences in the demand for currency and were made erratic from time to time by speculation.
Up to 1875 no one knew what steps were to be taken, or whether any were to be taken, to restore specie payments. Half a dozen different schools argued crudely, with imperfect economic knowledge and narrow horizons, as to the proper policy to be pursued. For a moment the sturdy Scotchman, McCulloch, at the head of the Treasury from 1865 to 1869, carried Congress with him in his policy of sharply contracting the volume of government notes by an issue of bonds. A resolution passed the House of Representatives on December 18, 1865, by a vote of 144 to 6, that the House cordially concurred in the view of the Secretary of the Treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the interests of the country would permit, and that “We hereby pledge coöperative action to this end as speedily as practicable.”
The problem was not, however, so simple as it seemed. The greenbacks formed considerably more than one half of the currency circulation of the country. Unless gold or some other form of currency could be brought in, their retirement would mean violent contraction at the very moment when the new field of the South had been opened to the national money. While such a contraction would undoubtedly have tended to bring the greenbacks up with a jerk to their old parity of 100 cents in gold, such a sudden enhancement in the value of the monetary unit would have caused a fall in prices which would have spelled wide-spread ruin. Only vaguely, apparently, was this danger apprehended by advanced economists; but the danger was real enough to arouse among the masses, especially in the debtor States, stubborn opposition to immediate resumption or to the reduction of the volume of paper currency. Mortgages on farms, running for three, five, or even ten years, which had been incurred in paper, if required to be paid back in gold would have absorbed more than the total value of the farms. Other conditions are thus summed up by Senator Theodore E. Burton of Ohio in his “Life of John Sherman” (1906):
Prices were high in 1865; great investments were made in numerous enterprises at the existing high prices; agricultural areas of the West were rapidly developed, and the production of cereals vastly increased. With the returning soldiers of the disbanding armies, and increased immigration from abroad, new fields were settled. The change of so great a multitude of soldiers from consumers to producers, changed the relation between demand and supply in many classes of products.