Friday, October 3, 2014

U.S. Note Part 2

Part 2: The U.S. Note, 1862 – 1879

Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]

    Following the War, the future of the U.S. note was hotly debated. U.S. notes presented two vexing problems: (1) a loss of purchasing power and (2) redemption in gold. These two issues lasted until 1879 when U.S. notes became redeemable in gold and thus achieved the purchasing power of gold.
    One group, the hard money people, wanted to return to the gold standard and either to retire all U.S. notes or to make them convertible in gold. The other group, the soft money people, opposed returning to the gold standard. They wanted the country to remain on the greenback standard.

        Much of the support for the greenback, especially for expanding its quantity, came from the mercantilists, who believed that expanding the money supply created prosperity.
    Industrialists, manufacturers, many businessmen, and some bankers opposed contraction and a return to the gold standard. Although a few businessmen favored increasing the supply of U.S. notes, most soft money businessmen preferred expansion through the banking system.
    Some merchants involved in the export-import business opposed returning to the gold standard. They could enhance their profit by speculating on a rising gold premium. If the price of gold in U.S. notes rose between the time that they bought their goods and sold them, they made money on change the U.S. note price of gold in addition to the profit from the selling the goods.
    Promoters especially opposed resumption of the gold standard. They needed easy money to finance their schemes.
    Careyites were in the forefront of opposing the contraction U.S. notes and return to the gold standard. Careyites were the American School of political economy that Henry Carey created in 1850. He rejected the “wage fund” theory of labor against employer and the Ricardian rent theory. He believed that producing classes (agriculturalists, wage earners, and industrialists) had a common interest. That common interest was domestic industrial growth. Protective tariffs benefitted all producing classes. His political economy made manufacturers the great benefactors of the country. His great social enemy was money lenders and the scarcity of capital. Money lenders were the enemies of productive capital instead of being the enemy of the poor. Interest rates needed to be pushed lower and the money supply expanded. Expanding the money supply would drive interest rates down. He accepted the mercantile principle that money creates prosperity; it precedes prosperity instead of accompanying or following it. An abundance of money would drive interest rates down and stimulate the economy. Cary was a nineteenth century Keynesian.
    Another important group opposing contracting U.S. notes and returning to the gold standard were the greenbackers. They were mostly intellectuals and politicians with their working class and rural followers. Some were outright inflationists. Most considered inflation unimportant. For the most part, they opposed banks issuing bank notes; only the government should issue paper money. They saw the greenback as a way to push down interest rates; to them high interest rates were a bane on the economy. Greenbackers ranged from the pragmatic to the utopian.
    In summary proponents of the greenback and opponents of contraction and resumption of the gold standard fall into three groups:
One of these, identified politically with western and Pennsylvania Republicans, drew its support from promotional business elements. . . . A second soft money force was compounded largely of political elements—Jeffersonian Agrarianism, Democratic opportunism, and Copperhead thirst for revenge. . . . A third current, which drew from the same ideological reservoir as the postwar greenback Democracy, was utopian and reformist in nature and expressed the frustrations and aspirations of labor and the extremist humanitarian reformers in the uncongenial postwar era.[1]
    Proponents of redeeming U.S. notes in gold had a common goal: resumption of the gold standard. They varied on the best way to achieve this goal.
    Some wanted to return to the gold standard immediately or at least as quickly without waiting for U.S. notes to contract. A second group supported quickly accumulating a gold reserve to raise the value of U.S. notes to that of gold. (This was the plan that was eventually adopted.) Others wanted to retire or contract U.S. notes until the value of the U.S. note and gold were equal. A fourth group proposed redeeming U.S. notes in gold below value. Another group wanted to do nothing: Just wait for production and commerce to increase the value of the U.S. note until it was at par with gold and then return to the gold standard. Because of the depreciation in the value of U.S. notes, redemption was delayed until the premium of gold over the U.S. note narrowed significantly.
    Calvinist and Reform clergy favored returning to the gold standard. They viewed the gold standard as an honest and ethical monetary system unlike the greenback monetary system, which was dishonest and unethical. Irredeemable paper money was immoral and a curse. Many Baptist and Methodist ministers also supported returning to the gold standard.
    Another group promoting returning to the gold standard was the academic economists. Most of them accepted classical economics and Ricardo’s and Mill’s anti-mercantilist capital theories.
    The reformers out of whom came the Liberal Republicans and later the Mugwumps also supported returning to the gold standard. Along with advocating hard money, they also advocated free trade and civil service reform. They were mostly from the middle and upper classes. Most came from New England or were descendants of New Englanders.
    Two important business groups supported the gold standard. One was the Republican merchant who wanted free trade and an end to governmental extortion. This group resided primarily in New England and was mostly involved in the textile business. The other was the merchant involved in the export and import business. (One important exception were the importers and exporters who speculated on the change the gold premium.) They centered around Boston, New York, and Philadelphia. Merchants not involved in the import-export or textile business were divided over returning to the gold standard although most were inclined toward returning. Being off the gold standard made foreign trade speculative and risky as the U.S. note price of gold fluctuated.
    The big eastern national banks favored returning to the gold standard. However, eastern private bankers and bankers in the Midwest generally opposed contracting U.S. notes in preparation of returning to the gold standard although they were inclined toward the gold standard.
    Until 1873, most farmers favored the gold standard. After 1873, many switched to favoring the greenback.
    In summary proponents of the gold standard “were a socially superior breed, representing an older elite of eastern merchants, commercial bankers, textile manufacturers, professional men, gentlemen reformers, and respectable literati.”[2]


1. Unger, p. 118.

2. Unger, p. 162.

Copyright © 2013 by Thomas Coley Allen. 

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