What if the U.S. pursued an inflationary fiscal policy in the 1870’s?

[The Angry Observer]

During the Civil War, the U.S. government printed a lot of “Greenbacks”, federal promissory notes that weren’t backed by gold at all (fiat money). After the War, they weren’t able to immediately phase them out.

Then, in 1873, the economy crashed, triggering the so-called “Long Depression”. As it turns out, in 1874 the Republican Congress, desperate to find a solution, passed a bill that authorized $100 million more Greenbacks.

President Grant vetoed the bill, and in later months reached a compromise bill (Specie Resumption Act) that put the U.S. back on gold. My question is what if he didn’t?

 

[Arnold d.c]

The honest answer is that we don't know. I have not seen any serious attempts by economists to analyze the impact of the Inflation Bill. The prosed addition to the greenback supply was considerable. The main benefactors to this policy would probably be debtors, most notably farmers - whose debts were becoming more burdensome as deflation occurred. A major downside is the reaction of the financial community - the inflation bill was considered contrary to economic orthodoxy of the time and it could have hurt the U.S. credit reputation. Moreover, without the Federal Reserve, there's a danger that there's no counterbalance to inflation and printing money could have become Congress' solution to all economic problems. On a political level, the failure to pass the Inflation Bill did hurt the Republicans, resulting in a lame duck session of the 43rd Congress.

 

[The Angry Observer]

The honest answer is that we don't know. I have not seen any serious attempts by economists to analyze the impact of the Inflation Bill. The prosed addition to the greenback supply was considerable. The main benefactors to this policy would probably be debtors, most notably farmers - whose debts were becoming more burdensome as deflation occurred. A major downside is the reaction of the financial community - the inflation bill was considered contrary to economic orthodoxy of the time and it could have hurt the U.S. credit reputation. Moreover, without the Federal Reserve, there's a danger that there's no counterbalance to inflation and printing money could have become Congress' solution to all economic problems. On a political level, the failure to pass the Inflation Bill did hurt the Republicans, resulting in a lame duck session of the 43rd Congress.

I remember at least one historian said the 1874 midterms were so brutal because Grant and the Republicans just hadn't done anything about it. Perhaps, in the short term at least, more Greenbacks could take the pressure off of them.

I'd imagine, though, that this is a nasty precedent to set, like you said.

 

[Belisarius II]

It's my understanding that the depression of 1873 was part of a global phenomenon. It was partly caused by the reparations imposed on France to end the German occupation. The main cause seems to have been the fall in the value of silver from a global over supply. U.S. policy was going on the gold standard and shrink the money supply. The economy was growing but capital investment was drying up. If the U.S. had continued to mint silver coins for domestic use as well as trade the credit crunch might have been much less severe. The issue was still hot more than 20 years later when William Jennings Bryant gave his, "Man will not be crucified on a cross of gold" speech at the Democratic National Convention in 1896. By backing silver, he was standing up for the millions of Americans being driven into ruinous debt.

 

[Arnold d.c]

If the U.S. had continued to mint silver coins for domestic use as well as trade the credit crunch might have been much less severe.

You raise a good point that I really had not thought of. Analyzing the impact is a bit tricky as the way their monetary system functioned is so very different from ours. Still, IIRC some of the bigger cities that relied on silver such as San Francisco got hit particularly hard by the removal of the silver dollar. So I do see the crisis still unfolding but with less pain in some states.

I should note dropping bimetallism was regarded as the smart thing to do. In 1867, Napoleon III held an international monetary conference in Paris, which major powers (UK, US, Prussia, France) all attended. The recommendation coming out of the conference was for a global currency system based on gold, away from bimetallism. One of the participants was John Sherman, Sherman's foster brother and one of the main figures of the 'Crime of 1873'. There was a big concern for France & the U.S. that if they stayed bimetallic while the rest of the world was going to gold that they would be drowned in silver coins utterly worthless for world trade. I have seen some economists (such as Milton Friedman) argue that these fears were a bit overblown - other parts of the world that did not join the gold standard were able to trade just fine - but the fears were there.

Moreover, the 'Crime of 1873' was done in a really sneaky way - by omitting any mention of a silver dollar, it removed the silver dollar quietly while even big players did not realize that the silver dollar was gone for years.

 

[The Angry Observer]

You raise a good point that I really had not thought of. Analyzing the impact is a bit tricky as the way their monetary system functioned is so very different from ours. Still, IIRC some of the bigger cities that relied on silver such as San Francisco got hit particularly hard by the removal of the silver dollar. So I do see the crisis still unfolding but with less pain in some states.

I should note dropping bimetallism was regarded as the smart thing to do. In 1867, Napoleon III held an international monetary conference in Paris, which major powers (UK, US, Prussia, France) all attended. The recommendation coming out of the conference was for a global currency system based on gold, away from bimetallism. One of the participants was John Sherman, Sherman's foster brother and one of the main figures of the 'Crime of 1873'. There was a big concern for France & the U.S. that if they stayed bimetallic while the rest of the world was going to gold that they would be drowned in silver coins utterly worthless for world trade. I have seen some economists (such as Milton Friedman) argue that these fears were a bit overblown - other parts of the world that did not join the gold standard were able to trade just fine - but the fears were there.

Moreover, the 'Crime of 1873' was done in a really sneaky way - by omitting any mention of a silver dollar, it removed the silver dollar quietly while even big players did not realize that the silver dollar was gone for years.

John Sherman, interestingly, was the name behind the Sherman Silver Purchase Act, which to my knowledge is faulted with accentuating the Panic of 1893. If I recall, the consensus is that the Act ginned up the amount of silver in circulation, depressing the value of gold and leading to a rush on the reserves. Sherman didn’t care either way and his name was mostly just there to shuttle it to President Harrison’s desk.

Based off of my very amateurish understanding of Greenbacks and fiat money, I don’t think the inflation bill would be that destructive. It might devalue U.S. currency, but it would also alleviate a lot of suffering in the short term. From what I’ve read, governments had a little bit of wiggle room in regards to fiat currency.

Of course, it’s the U.S. Congress, so if given the power there’s always the chance/inevitability that they simply solve every problem with more Greenbacks.

 

[Arnold d.c]

John Sherman, interestingly, was the name behind the Sherman Silver Purchase Act, which to my knowledge is faulted with accentuating the Panic of 1893. If I recall, the consensus is that the Act ginned up the amount of silver in circulation, depressing the value of gold and leading to a rush on the reserves.

As I understand it, it was more than just that. The act basically implied that the U.S. was dropping the gold standard for bimetallism and that by Gresham's Law (bad money will displace good money), the cheaper & overvalued (by the U.S. gov't) silver would become the U.S.' main currency in a world that had gone to the gold standard. Foreign investors understandably panicked and pulled out, with the gold leaving for Europe. Combine this with low specie reserve in New York banks, unfavourable balance of trade and an impending Treasury deficit, it's not surprising that there was a panic.

Based off of my very amateurish understanding of Greenbacks and fiat money, I don’t think the inflation bill would be that destructive. It might devalue U.S. currency, but it would also alleviate a lot of suffering in the short term. From what I’ve read, governments had a little bit of wiggle room in regards to fiat currency.

Checking it again, the Inflation Bill entailed an increase of $46 million in national bank notes and brought the greenbacks up to their wartime levels. The precedent set by the Inflation Bill would have been quite powerful - by extending the use of greenbacks from the wartime context into the first large financial emergency of the postbellum era, Congress signaled their willingness to intervene in the new national economy with an expansion of the system created during the war. It is true that injecting liquidity could work in this time of emergency - but the damage is already done. Congress was too slow to use inflation (& the Executive was unwilling) and there was no lender of last resort (the Federal Reserve) which could have moved more quickly to resolve the credit freeze.