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.
WHETHER TO PULL THE GREENBACK UP OR THE GOLD DOLLAR DOWN
DURING the thirteen years from July 1, 1865, to July 1, 1878, six months before the resumption of specie payments, the net monetary stock of the country in circulation remained practically stationary, and the per capita average was reduced by the addition of thirteen millions of population from $20.57 to $15.32. It is not surprising that under the pressure of such drastic contraction, all manner of financial heresies sprouted and thrived. The amazing proposition came from President Johnson himself, in his annual message of 1868, that inasmuch as the holders of government securities had received upon their bonds a larger amount than their original investment, as measured by gold, it would be just that the six per cent. interest then paid them should be applied to the reduction of the principal of the debt, thus liquidating it in sixteen years and eight months. Thaddeus Stevens, the great congressional leader of the Civil War, made violent speeches in favor of paying the bonds in paper. In the West, the proposition was so warmly advocated by Senator Thurman of Ohio that it became known as “the Ohio idea.”
It is a question whether the soundest economic policy would not have been to take the resolute steps for resumption supported by McCulloch and the Eastern bankers, and at the same time to adopt a new monetary unit which recognized the status quo; in other words, to create a new gold dollar worth 75 or 80 per cent. of the old. This was the principle adopted by Austria-Hungary in 1892, by Russia in 1895, and by Mexico in 1905, in bringing to an end the instability of their currency and planting it upon a permanent basis of gold. The conclusive argument for such a policy lies in the fact that it recognizes and crystallizes the existing purchasing power of money, in which prices are expressed, instead of seeking violently to change it. It thus permits the transition from the old unstable basis to the new fixed basis without jar, and without radically changing the relations between the holders of money and those who are under contracts to pay money.
Monetary science was less advanced, however, in 1865 than it is in our time. In the United States the problem of the monetary unit was entangled by both parties with the very different problem—whether the bonded debt of the Government should be paid in the money in which it had been promised. While ultimately the country reached the ideal of the most pronounced hard-money men of pulling the greenback up to 100 cents in gold, it was at the cost of six years of falling prices, which spread a pall over real estate and industrial development, and ruined many men who had in good faith bought property at its valuation in paper when paper was the legal-tender money of the country.
The ink was hardly dry on the resolutions by which the House approved the proposals of Secretary McCulloch in 1865 before a counter movement set in. By the following April a bill had been enacted aimed at tying the secretary’s hands by limiting the retirement of United States notes to $10,000,000 for the next six months, and thereafter to $4,000,000 a month. In the face of two succeeding annual reports by the secretary in favor of contraction, Congress, by the act of February 4, 1868, suspended entirely his authority to make any reduction of the currency by retiring or canceling United States notes.
THE FINANCIAL BOOM
“Lay low!”