Lesson of the Greenbacks

March 15, 1954

In this column of March 1, I pointed out what happened in Britain when it tried to go back to the gold standard at the old parity in 1925. But there are many who believe that our own resumption of gold payments on Jan. 1, 1879, at the prewar parity, after the paper-money inflation of the Civil War, was an unalloyed success. The fears of a gold drain, they argue, proved quite unfounded; on the very first day receipts of gold actually exceeded payments by $268,000. And they attribute the subsequent American recovery of 1879 largely or wholly to gold resumption.

A closer examination of the whole inflationary and deflationary period from 1862 to 1879, however, tells a different story. As soon as the government started issuing irredeemable “greenbacks” in 1862, gold went to a premium on the open market and commodity prices started to soar. In 1864 the greenbacks fell as low as 35 cents on the dollar in terms of gold. From 1860 to 1865 inclusive, though the average of European prices rose only 4 to 6 percent, average prices in the United States advanced no less than 116 percent.

But immediately after the end of the war American prices started downward. At first this was politically popular, because wages had not yet advanced as much as the cost of living. But after 1866 wages had more than caught up with prices. The continued fall in prices soon began to cause bankruptcies and unemployment. Finally came the panic of 1873 which, in the measured judgment of some economists, “left the country’s financial and commercial structure almost a ruin.” The causes of the panic were complex. But one of them was certainly the continued fall of commodity prices that accompanied the rise of the greenbacks toward parity. By 1873 the greenbacks were only about 15 percent below parity, and wholesale prices were down to about 30 percent above prewar levels.

The result of the panic of 1873 was greatly to increase inflationist sentiment. The Resumption Act was passed on Jan. 7, 1875, but by a repudiated lameduck Republican Congress that had nothing more to lose. Even more ironic, it was passed, the economist J. Laurence Laughlin tells us, “only under the delusion that it was an inflation measure,” because “on its face it looked like a bill to expand the national bank circulation.” Many commentators today think it was foolish and needless for the Resumption Act to put off the actual day of resumption to Jan. 1, 1879 four years after passage of the act. They forget, however, that time, skill, and determination were required to accumulate a gold reserve so impressive that gold would not be demanded when the day of resumption came. And they forget, too, that returning to gold at the original parity involved a still further decline (of about 30 percent) in American commodity prices to bring them into line with world gold prices. This decline took place between 1875 and 1879, and the whole period was one of liquidation. In 1878, for example, the record of insolvencies far exceeded even that of the panic year 1873. Many commentators today attribute the recovery that came in the second half of 1879 to the return to gold redemption. The facts do not support them. “With hardly an exception,” writes the economic historian, Alexander D. Noyes, “the country’s staple industries sank, during the early months of 1879, into complete stagnation.” What suddenly turned the tide was an unparalleled coincidence: Europe suffered the worst crop disaster in many years, whereas the American wheat crop reached a new high record. This meant high prices and crop exports unparalleled up to that time.

All this is not to argue that after the greenback inflation of the Civil War this country should have returned to gold at a lower parity for the dollar. It is simply to point out that we had to pay a heavy price for the course we actually took, even though our economy was far more flexible then than now, particularly as regards wage rates. We must take care that when we return to gold this time we do so at a rate that involves neither inflation nor serious deflation.