The History of Money and Banking Before the Twentieth Century
excerpted from the book
A History of Money and Banking
in the United States
the Colonial Era to World War
II
by Murray N. Rothbard
Ludwig von Mises Institute, 2002,
hardcover
Introduction
Joseph T. Salerno
p27
Economic logic dictates that the king and his courtiers, or the
democratic government and its special interest groups, can never
constitute more than a small minority of the country's population
- that all States, regardless of their formal organization, must
effectively involve oligarchic rule.
p28
The small minority that excels in wielding political power will
tend to coalesce and devote an extraordinary amount of mental
energy and other resources to establishing and maintaining a permanent
and lucrative hegemonic bond over the productive majority. Accordingly,
since politics is the main source of their income, the policies
and actions of the members of this oligarchic ruling class will
be driven primarily by economic motives. The exploited producing
class, in contrast, will not expend nearly as many resources on
politics, and their actions in the political arena will not be
motivated by economic gain to the same degree, precisely because
they are absorbed in earning heir livelihoods in their own chosen
areas of specialization on the market.
p28
Murray Rothbard
The ruling class, being small and largely
specialized, is motivated to think about its economic interests
twenty-four hours a day... They are constantly at work trying
to preserve and expand their privileges.
p29
The ruling class confronts one serious and ongoing problem: how
to persuade the productive majority, whose tribute or taxes it
consumes, that its laws, regulations, and policies are beneficial;
that is, that they coincide with "the public interest"
or are designed to promote "the common good" or to optimize
"social welfare." Given its minority status, failure
to solve this problem exposes the political class to serious consequences.
Even passive resistance by a substantial part of the producers,
in the form of mass tax resistance, renders the income of the
political class and, therefore, its continued existence extremely
precarious. More ominously, attempts to suppress such resistance
may cause it to spread and intensify and eventually boil over
into an active revolution whose likely result is the forcible
ousting of the minority exploiting class from its position of
political power. Here is where the intellectuals come in.
It is the task [of the intellectuals]
to convince the public to actively submit to State rule because
it is beneficial to do so, or at least to passively endure the
State's depredations because the alternative is anarchy and chaos.
In return for fabricating an ideological cover for its exploitation
of the masses of subjects or taxpayers, these "court intellectuals"
are rewarded with the power, wealth, and prestige of a junior
partnership in the ruling elite. Whereas in pre-industrial times
these apologists for State rule were associated with the clergy,
in modern times-at least since the Progressive Era in the U.S.-they
have been drawn increasingly from the academy.
p30
Politicians, bureaucrats, and those whom they subsidize and privilege
within the economy routinely trumpet lofty ideological motives
for their actions in order to conceal from the exploited and plundered
citizenry their true motive of economic gain. In today's world,
these motives are expressed in the rhetoric of "social democracy"
in Europe and that of modern-or welfare-state-liberalism in the
United States. In the past, ruling oligarchies have appealed to
the ideologies of royal absolutism, Marxism, Progressivism, Fascism,
National Socialism, New Deal liberalism, and so on to camouflage
their economic goals in advocating a continual aggrandizement
of State power.
p30
Murray Rothbard
When [State beneficiaries] form a State,
or a centralizing Constitution, when they go to war or create
a Marshall Plan or use and increase State power in any way, their
primary motivation is economic: to increase their plunder at the
expense of the subject and taxpayer. The ideology that they profess
and that is formulated and spread through society by the Court
Intellectuals is merely an elaborate rationalization for their
venal economic interests. The ideology is the smoke screen for
their loot, the fictitious clothes spun by the intellectuals to
hide the naked plunder of the Emperor.
p40
Joseph Salerno
Rothbard's analysis of the concrete evidence
demonstrates that, beginning in the late 1890s, a full decade
before the panic of 1907, this Wall Street banking axis and allied
special interests began to surreptitiously orchestrate and finance
an intellectual and political movement agitating for the imposition
of a central bank. This movement included academic economists
who covered up its narrow and venal economic interests by appealing
to the allegedly universal economic benefits that would be forthcoming
from a central bank operating as a benevolent and disinterested
provider of an "elastic" currency and "lender of
last resort." In fact, what the banking and business elites
dearly desired was a central bank that would provide an elastic
supply of paper reserves to supplement existing gold reserves.
Banks' access to additional reserves would facilitate a larger
and more lucrative bank credit inflation and, more important,
would provide the means to ward off or mitigate the recurrent
financial crises that had brought past inflationary booms to an
abrupt and disastrous end in bank failures and industrial depression.
p51
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 decided in December
1690 to print £7,000 in paper notes and to use them to pay
the soldiers. Suspecting that the public would not accept irredeemable
paper, the government made a twofold 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...
... 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
in specie, led to a rapid depreciation of new money in relation
to specie. Indeed, within a year after the initial issue, the
new paper pound had depreciated on the market by 40 percent against
specie...
... Massachusetts's and her sister colonies'
issue of paper money created rather than solved any "scarcity
of money." The new paper drove out the old specie. The consequent
driving up of prices and depreciation 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.
p56
"Banking" in the sense of lending out the savings of
others only began in England with the "scriveners" of
the early seventeenth 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-seventeenth century.
Merchants had been in the habit of storing their surplus gold
in the king's mint for safekeeping. That habit proved to be unfortunate,
for when Charles I needed money in 1638, shortly before the outbreak
of the civil war, he confiscated the huge sum of £200,000
of gold, calling it a "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 goldsmiths, who, like the
mint, were accustomed to storing the valuable metal. The warehouse
receipts of the goldsmiths soon came to be used as a surrogate
for the gold itself. By the end of the civil war, in the 1660s,
the goldsmiths 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.
p68
... a central bank, the First Bank of the United States, replaced
the abortive Bank of North America experiment. Hamilton's "Report
on a National Bank" of December 1790 urged such a bank, to
be owned privately with the government owning one-fifth of the
shares... the bank notes were to be legally redeemable in specie
on demand, and its notes were to be kept at par with specie 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 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 $2 million
in specie. The Bank of the United States invested heavily in loans
to the United States government. In addition to $2 million 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 by 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.
p82
The United States emerged from the War of 1812 in a chaotic L-monetary
state, with banks multiplying and inflating ad lib, checked only
by the varying rates of depreciation of their notes. With banks
freed from redeeming their obligations in specie, the number of
incorporated banks increased during 1816, from 212 to 232. 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 in specie, and, when most of the banks
outside of New England could not, to force them to liquidate.
In that way, the mass of depreciated and inflated notes and deposits
would have been swiftly liquidated, and specie would have poured
back out of hoards 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 Federalist 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.
p88
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 specie payments. 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 its shaky branch
notes at par, and seriously enforcing the requirement that its
debtor banks redeem in specie. In addition, it purchased millions
of dollars of specie 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 "boom-bust"
cycle had arrived in the United States, impelled by rapid and
massive inflation, quickly succeeded by contraction of money and
credit.
... The result of the contraction was
a massive rash of defaults, bankruptcies of business 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.
p90
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 "Old Bullion" Benton of
Missouri, future President James K. Polk of Tennessee, and Jacksonian
economists Amos Kendall of Kentucky and Condy Raguet of Philadelphia,
were all converted to hard money and 100-percent 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.
p91
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 to 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 specie and
banks confined to 100-percent 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 the
War of 1812, in which the Democrat-Republicans had ended up adopting
the Federalist program, including the re-establishing 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 laissez-faire cause... 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.
93
Triumphantly re-elected on the bank issue in 1832, President Jackson
lost no time in 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 "pet banks") throughout the country.
p104
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 specie,
in its own Treasury vaults-or its "subtreasury" branches-and
simply take in and spend funds from there. Van Buren 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,
specie basis.
p112
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 for notes under five dollars
in 10 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.
p115
There once existed an American private bank that brought order
and convenience to a myriad of privately issued bank notes. Further,
this Suffolk Bank restrained the overissuance 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.
p117
With the Suffolk acting as a "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
specie redemption. Moreover, the certainty spread that the notes
of the Suffolk member banks would be valued at par: It spread
at first among other bankers and then to the general public.
p117
How did the inflationist country banks react to this? Not very
well, for as one could see the Suffolk system put limits on the
amount of notes they could issue. They resented par redemption
and detested systematic specie redemption 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...
All legal means to stop Suffolk failed.
p119
The biggest, most powerful weapon Suffolk had to keep stability
was the power to grant membership into the system. It accepted
only banks whose notes were sound. While Suffolk could not prevent
a bad bank from inflating, denying it membership ensured that
the notes would not enjoy wide circulation. And the member banks
that were mismanaged could be stricken from the list of Suffolk-approved
New England banks in good standing. This caused an offending bank's
notes to trade at a discount at once, even though the bank itself
might be still redeeming its notes in specie.
p122
While it lasted, 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 clearinghouses
limiting overissue of paper money.
p122
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 1814-1817, on an
irredeemable fiat currency that lasted for two decades and led
to reckless inflation of prices. This "greenback" currency
set a momentous precedent for the post-1933 United States, and
even more particularly for the post-1971 experiment in fiat money.
p123
The Civil War led to an enormous ballooning of federal expenditures,
which skyrocketed from $66 million in 1861 to $1.30 billion four
years later. To pay for these swollen expenditures, the Treasury
initially attempted, in the fall of 1861, to float a massive $150
million 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 specie that
they did not have. This massive pressure on their specie, as well
as an increased public demand for specie 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 specie payments on its Treasury notes.
The U.S. 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 in new "United States notes" (soon to be known
as "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 specie.
The greenbacks were also made convertible at par into U.S. 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
issue was authorized in July, and still a third $150 million in
early 1863. Greenbacks outstanding reached a peak in 1864 of $415.1
million.
p132
The public debt of the Civil War brought into American financial
history the important advent of one Jay Cooke.
... Jay Cooke quickly set up his own investment
banking house of Jay Cooke and Company.
... It did not take much persuasion ...
for Cooke to induce his friend [Senator Salmon P.] Chase to take
an unprecedented step in the fall of 1862: granting the House
of Cooke a monopoly on the underwriting of the public debt. With
enormous energy, Cooke hurled himself into the task of persuading
the mass of public to buy U.S. government bonds. In doing so,
Cooke perhaps invented the art of public relations and of mass
propaganda; certainly, he did so in the realm of selling bonds.
As Kirkland writes:
With characteristic optimism, he [Cooke]
flung himself into a bond crusade. He recruited a small army of
2,500 subagents 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, duty, courage,
patriotism-all summoned "Farmers, Mechanics, and Capitalists"
to invest in loans -
loans which of course they had to purchase
from Jay Cooke.
... No sooner had Cooke secured the monopoly
of government bond underwriting than he teamed up with his associates,
Secretary of the Treasury Chase [formerly Senator Salmon P. Chase]
and Ohio's 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 Acts 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 specie payments 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.
p136
As established in the bank acts of 1863 and 1864, the national
F banking system provided for the chartering of national banks
by the Office of the Comptroller of the Currency in Washington,
D.C. The banks were "free" in that any institution meeting
the requirements could obtain a charter, but the requirements
were so high (from $50,000 for rural banks to $200,000 in the
bigger cities) that small national banks were ruled 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, others cities with over 500,000 population;
and country, which included all other national banks.
p137
Before the Civil War; every bank had to keep its own specie reserves,
and any pyramiding of notes and deposits on top of that was severely
limited by calls for redemption in specie 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, all 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 specie.
p138
... the inverted pyramid of the national banking system. New York
City banks pyramid notes and deposits on top of specie and greenbacks;
reserve city banks pyramid their notes and deposits on top of
specie, 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 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.
p141
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, banks.
p141
In June 1874, the fundamental structure of the national banking
system was changed when Congress, as part of an inflationist move
after the panic of 1873, eliminated all reserve requirements on
notes, keeping them only on deposits. This released over $20 million
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 specie and greenbacks.
p145
The Cooke-Chase connection with the new national bank 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 U.S.
government bonds for every year except one from 1862 to 1873,
Jay Cooke was even more directly interested in an assured and
expanding market for his bonds. What better method of obtaining
such a market than creating an entirely new banking system, the
expansion of which was directly tied to the banks' purchases of
government bonds from Jay Cooke?
The Cooke brothers played a major role
in driving the National Banking Act of 1863 through a reluctant
Congress.
p145
Going to work with the newspapers meant something more than mere
persuasion for the Cooke brothers; as monopoly underwriter of
government bonds, Cooke was paying the newspapers large sums for
advertising, and so the Cookes thought-as it turned out correctly-that
they could induce the newspapers to grant them an enormous amount
of free space "in which to set forth the merits of the new
national banking system. Such space meant not only publicity and
articles, but even more important, the fervent editorial support
of most of the nation's press. And so the press, implicitly bought
for the occasion, kept up a drumfire of propaganda for the new
national banking system.
p147
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 bank notes had totaled $142.9
million; by 1866 they had collapsed to $20 million. On the one
hand, national bank notes grew from a mere $31.2 million in 1864,
their first year of existence, to $276 million in 1866.
p147
The United States ended the [Civil War] 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.
p149
One of the most flamboyant advocates of greenback inflation in
the postwar era was the Wall Street stock speculator Richard Schell.
In 1874, Schell became a member of Congress, where he proposed
an outrageous pre-Keynesian scheme in the spirit of Keynes's later
dictum that so long as money is spent, it doesn't matter what
the money is spent on, be it pyramid-building or digging holes
in the ground. Schell seriously urged the federal government to
dig a canal from New York to San Francisco, financed wholly by
the issue of greenbacks.
... 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 $64.7 million in 1860, amounted to the huge amount
of $2.32 billion in 1866.
p152
The greenback question reached the U.S. Supreme Court in 1867,
and was decided in February 1870, in the case of Hepburn v. Griswold.
The Court held, by a vote of 5-3, with all the Democratic judges
voting with the majority and the Republicans in the minority.
... The Grant 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 5-4 majority dutifully and quickly reconsidered
the question, and in May 1871 reversed the previous Court in the
fateful decision of Knox v. Lee. From then on, paper money would
be held consonant with the U.S. Constitution.
The national banking system was ensconced
after the Civil War. The number of banks, national bank notes,
and deposits all pyramided upward, and after 1870 state banks
began to boom as deposit-creating institutions.
p161
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 unbacked greenbacks and soft-money men who wanted
to increase them raged through the 1870s until the Grant administration
decided in 1875 to resume redemption of paper dollars into gold
at prewar value on the first day of 1879. At the time (1875) greenbacks
were trading at a discount of roughly 17 percent against the prewar
gold dollar. A combination of outright paper-money deflation and
an increase in official gold holdings enabled a return to gold
four years later, which set the scene for a decade of tremendous
economic growth.
Economic recordkeeping a century ago was
not nearly as well developed as today, but a clear picture comes
through nonetheless. The Encyclopedia of American Economic History
calls the period under review "one of the most expansive
in American history. Capital investment was high; ... there was
little unemployment; and the real costs of production declined
rapidly."
p178
The Transformation of 1896 and the death of the third party system
meant the end of America's great laissez-faire, hard money libertarian
party. The Democratic Party was no longer the party of Jefferson,
Jackson, and Cleveland. With no further political embodiment for
laissez-faire in existence, and with both parties offering "an
echo not a choice," public interest in politics steadily
declined. A power vacuum was left in American politics for the
new corporate statist ideology of progressivism, which swept both
parties (and created a short-lived Progressive Party) in America
after 1900. The Progressive Era of 1900-1918 fastened a welfare-warfare
state on America which has set the mold for the rest of the twentieth
century. Statism arrived after 1900 not because of inflation or
deflation, but because a unique set of conditions had destroyed
the Democrats as a laissez-faire party and left a power vacuum
for the triumph of the new ideology of compulsory cartelization
through a partnership of big government, business, unions, technocrats,
and intellectuals.
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