Part 3: The U.S. Note, 1862 – 1879
[Editor’s note: Footnotes in the original are omitted.]
Below are tables showing some monetary statistics from 1862 to 1879. Table 1 shows the quantity of legal tender and credit money. The numbers in the table are annual averages. Table 1 does not include money from demand deposits, i.e., checking accounts. When demand deposits are included, the per capital money stock grew from $45 to $72 between 1869 and 1879.
Table 3 shows the price of gold in U.S. notes and the price of U.S. notes in gold. The price of gold is the average for each year.
The six most important factors, politically and economically, causing the fluctuation of gold in terms of U.S. notes shown in Table 3 were:
First, the increase in the amount of greenbacks as, for example, reflected in the rapid rise of premium after July 11, 1862, the date of the second legal-tender act; secondly, the condition of the treasury as disclosed from time to time by the secretary’s reports; thirdly, the credit of the government from week to week as shown in the quotations of its bonds; fourthly, changes in the personnel of the government, either in the treasury department or in Congress through political elections; fifthly, state of the foreign relations of the country; sixthly, the war news and the fluctuation between hope and discouragement consequent upon military success or defeat.Speculation was another contributor to the fluctuation in the gold premium. Basically, the cause of the difference between gold and the U.S. note was opinion and sentiment.
Table 4 shows the change in purchasing power of the U.S. note and gold based on the Falkner Index. Between 1862 and 1879, the Falkner Index was in terms of the U.S. Note. Falkner converted the index to gold by proportionating it to the depreciation of the U.S. note as indicated by the premium on gold. The Falkner Index is an index comprised of 223 articles important to the average workingman and weighted in estimated importance. The base year is 1860. The index is that of January 1 of each year. It is an arithmetic mean and uses both weighted and unweighted prices.
The fluctuations in Table 4 result mostly from the change in value, purchasing power, of the U.S. note. The change in its value results mostly from changes in the opinion of the people about its future purchasing power. Gold’s value, i.e., purchasing power, trends upward over time because of increased productivity. Thus, under the gold standard, prices trend downward.
How much of the price changes in Table 4 reflect changes in demand for money or changes in supply of money cannot be conclusively determined. During war, the demand for money declines as hundreds of thousands of men are sent off to die. A decline in the demand for money pushes its value down and prices up. After the war, as soldiers return to productive activities, the demand for money increases. An increase in the demand pushes its value up and prices down.
Also, how much of the price decline during this era resulted from changes in the supply of and demand for products cannot be satisfactorily ascertained. This was an era of economic growth and growing output.
Johnson contributes the decline in value, purchasing power of the U.S. note between 1862 and 1865 to three causes: “(1) their increasing quantity; (2) the lessening demand for money on account of the war and on account of the fact that the South had a money of its own; (3) the fluctuating acceptability of the greenback, its future being uncertain as long as the war was undecided.”
Like all good fiat money people, the promoters and supporters of the greenback blamed the loss of its purchasing power of the U.S. note on gold speculators. Obvious to them the decline did not result from over issuing irredeemable legal-tender U.S. notes.
After the U.S. government began contracting the quantity of U.S. notes, prices began to fall. However, wages continued to rise until the Panic of 1873. From then until 1879, wages fell, but not as much as prices.
A decreasing supply of legal tender money and increasing demand for money accounts for the decline in prices between 1865 and 1875. The retirement of interest-bearing legal tender notes accounted for most of the decrease in the money supply (as shown in Table 1). Probably the biggest factor causing the decline in price was revolutionary development in production technology and intense competition.
Several things contributed to the decline in prices between 1875 and 1879. With the enactment of the Resumption Act in 1875, certainty was given to the future purchasing power of the U.S. note. Also, the Panic of 1873 led to a contraction in credit. Moreover, production increased as the money supply declined, which pushed prices lower.
After reviewing several price and other economic indices and indicators, Friedman and Schwarz concluded that the annual rate of decline in prices from January 1869 to February 1879 was around 3.5 percent. Between 1867 and 1879, output rose at an average rate of 3.6 percent per year or 54 percent for the 12 years. Per capita output averaged 1.3 percent per year during these 12 years.
Between 1869 and 1879, the net national product rose an average of 3.0 percent per year in current prices, or 6.8 percent per year in constant prices. During these 10 years, real per capita income grew at an average rate of 4.5 percent per year. (Using a different methodology, Friedman and Schwartz lowered these averages to 0.5, 4.3, and 2.0 percent per year, respectively.)
Capital investment in iron and steel grew from $76 million to $231 million between 1860 and 1880 in spite of the price of iron and steel falling most of these years. However, the wages of workers in the metal trade remained relatively high.
The ten years between 1869 and 1879 were years of economic growth in spite of the Panic of 1873 and the business contraction that lasted until the middle of 1879. Robust economic activity accompanied by a lack of growth in legal tender money caused most of the decline in prices.
The decade of the 1870s, as does the era from 1865 to 1900, shows that economic growth can occur under deflation. During much of this period output and real wages grew while prices fell.
About falling prices accompanying economic growth and increasing output in the 1870s, Rothbard remarks:
when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.
Endnotes - Continued1.Unger, p. 36.
2. Dewey, p. 295.
3. Johnson, p. 109.
4. Johnson, p. 282.
5. White, p. 164.
6. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), p. 33.
7. Friedman and Schwartz, p. 34-35.
8. Friedman and Schwartz, p. 36.
9. Friedman and Schwartz, p. 37.
10. Friedman and Schwartz, p. 38-40.
11. Ungar, p. 48.
12. Unger, p. 49.
13. Friedman and Schwartz, pp. 34-37 and 41-42.
14. Rothbard, p. 155.
Copyright © 2013 by Thomas Coley Allen.
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