The New Nation

by Frederic L. Paxson

Other improprieties of the first Administration of Grant came to light in his second term. His Secretary of War, Belknap, confessed to the sale of offices. In the Treasury Department were uncovered the whiskey frauds which tainted even Grant's private secretary. And the Speaker of the House, Blaine, was shown to have urged a railroad company to recognize his official aid, promising not to be a "deadhead in the enterprise" in its future service.

There is no better illustration of the commercial ethics of the sixties than may be found in the letters of Jay Cooke, philanthropist and financier. With a lively and sincere piety, and an unrestrained generosity, he at once extended hospitalities to the political leaders of the day, carried their private speculations on his books, and performed official services to the Government. It was impossible to tell where his public service ended and his private emolument began, but there was nothing in his life of which he was ashamed. A friend of General Grant, and liberal patron of his children, Cooke was actually entertaining the President at his country home just outside of Philadelphia when the failure of his banking house precipitated the panic of 1873.

There had been financial uneasiness abroad and in the United States for several months, but few had anticipated the collapse of credit that followed the suspension of Jay Cooke and Company, September 18, 1873. If this house failed, none could be regarded as safe. Jay Cooke had established his reputation during the Civil War through his ability to find a market for United States bonds. After the war he had carried his activity and prestige into railways. In 1869 he had become the financial agent of the Northern Pacific, and customers, encouraged by their good bargains in the past, continued to invest through him as he directed. His personal followers, numerous and confident, had been taught to believe his credit as sound as that of the Government whose bonds he had handled. When he collapsed, overloaded with Northern Pacific securities, in which his confidence was enthusiastic, the panic was so acute that the New York Stock Exchange closed its doors for ten days, to prevent the ruinous prices that forced sales might have created. Thirty or more banking houses were drawn down by the crash within forty-eight hours. Others followed in all the business centers, while trade stood still through the paralysis of its banking agents.

The distribution of the panic throughout the United States followed the usual course. In the first crisis, banking houses broke down, unable to meet the runs of their depositors or their original obligations. The depositors next, unable to secure their own funds or to obtain their usual loans, were driven to insolvency. After the failure of banks came that of railroads, the wholesale houses, and the factories. As these last defaulted, the loss was spread over their employees, their contractors, and their creditors. Confidence was everywhere destroyed. Investments were lost, or lessened, or put off indefinitely in their payments. After a few days the acute crisis was over, but the resulting depression brought stagnation to business. Industries marked time, at best; expansions were out of the question; new enterprises were not heard of. From 1873 until 1879 the United States was engaged in recovery from the injury which the panic had done and from the weakness which it had revealed.

The panic, followed by five years of economic prostration, was only occasioned by the failure of Cooke. Its real causes lie throughout the period of Civil War expansion. Never had the daily necessities of the United States equaled its production, and the resulting surplus, available for permanent improvements, was larger than ever in the sixties because of the growing use of machinery. Funds for investment, produced at home and increased through the strong foreign credit of the United States, tempted and aided the speculative development of the North and West. Yearly greater sums were sunk in municipal improvements that brought in no return, or in railroads that were slow in paying, or in errors that were a dead loss. The loss from the Civil War was an added charge upon the surplus. Great fires in Boston and Chicago consumed more of it. By 1870 the United States was using surplus at a rate that threatened soon to exhaust it. When the limit should be reached, new enterprises must necessarily cease, and all that were not wisely planned must fall, dragging down others in their ruins. For months before the failure of Jay Cooke, business had been dangerously near this margin. His failure, caused by his inability to find a market for Northern Pacific, merely precipitated the inevitable crash.

The faulty currency, outstanding since the war, and adding to the business uncertainty, now aggravated the panic when it broke. The greenbacks were slowly rising in value. They profited by the growing credit of the United States, and received a special increase because of the development of business. After 1865 business transactions grew in number and volume more rapidly than the amount of available money, and this, driven to greater activity in circulation, rose in value from the increased demand. As the purchasing value of the dollar increased, prices, measured by the greenbacks, necessarily fell, while the equivalent of every debt that had to be paid in a specified number of dollars as steadily rose. Indeed, so great was the increase of production from the new farms, reached by the new railroads, and supplying raw materials for the new factory processes, that prices fell, even when stated in terms of gold. In a period of falling prices and appreciating currency, the gap between the poor and the rich was widened. The debtor carried a growing burden while the creditor harvested an unearned increase. Persons who lived on fixed salary or income profited by the fluctuations, but commercial transactions were made more difficult for the debtor.

The organized Greenback movement had figured in politics during the campaign of 1868, and made a special appeal to the debtor section during the hard times after 1873. The Republican Congress had, in 1869, sealed the professions of the party's platform by passing a resolution "to strengthen the public credit," in which it declared "that the faith of the United States is solemnly pledged to the payment in coin or its equivalent," of the greenbacks, and that the United States would not take advantage of its creditors by paying off its "lawful-money" bonds in depreciated paper. All debts created before the war or during its early years had lost through depreciation, just as the later debts had gained through the reverse.

Despite this pledge, advocates of greenback inflation, with Butler among their leaders, became more numerous in both parties after the panic, and an attempt was made to have Congress reverse itself. Grant's Secretary of the Treasury gave a new construction to the law by reissuing during the critical days of the panic some $26,000,000 of greenbacks that had been called in by McCulloch. He raised the total outstanding to $382,000,000, and Congress in 1874 passed a law increasing the amount to $400,000,000, in an act named by its opponents the "Inflation Bill." To the surprise of many, Grant sharply vetoed the act, adhering to his views of 1869 on the evils of an irredeemable paper currency. During the next winter John Sherman, Senator from Ohio, induced Congress to take a step in fulfillment of the guaranty which Grant had saved. On January 14, 1875, it was provided that the Treasury should resume the payment of specie on demand on January 1, 1879.

Ultimately Congress was saved from the act of repudiation which the Greenbackers urged upon it, but while the movement flourished it added another to the catalogue of troubles with which men like Godkin and Lowell were distressed. Easterners, in general, had as little understanding of the West as they had had of the race problem in the South. They were disposed to attribute to inherent dishonesty the inflation movement, and to ignore the real economic grievance upon which it was founded. The suspicions directed against the ethical standards of the West were increased by the Granger movement, to which the panic gave volume and importance.

Among the social phenomena of 1873-74 was the sudden emergence in the Northwest of a semi-secret, ritualistic society, calling itself the "Patrons of Husbandry," but popularly known as the "Grange." It was founded locally upon the soil, in farmers' clubs, or granges, at whose meetings the men talked politics, while their wives prepared a picnic supper and the children played outdoors. It had had a nominal existence since 1867, but during the panic it unexpectedly met a new need and grew rapidly, creating 1000 or more local granges a month, until at its maximum in 1874 it embraced perhaps 20,000 granges and 1,600,000 persons. In theory the granges were grouped by States, which latter were consolidated in the National Grange; in fact, the movement was almost entirely confined to the region north of the Ohio River, and even to the district northwest of Chicago.