CHAPTER THEME
The 50-year span between the Civil War and World War I was one of continuous, intense public controversy over the American monetary system. Two issues—deflation and banking panics—overshadowed all others and produced repeated attempts to reform the monetary system.
Deflation began after the Civil War and persisted with brief interruptions for three decades. Debtors suffered from the protracted deflation, and farmers were particularly hard hit. As one popular folksong from the 1880s put it: “The farmer is the man, lives on credit till the fall, with interest rates so high, it’s a wonder he don’t die, for the mortgage man’s the one who gets it all” (Seeger 1961, 57). Farmers and other debtors were vocal in their opposition to deflation and supported a number of inflationary schemes. Many Americans had learned lessons, however, from the high inflations of Revolutionary War and the Civil War that they would not soon forget.
Many leaders in politics and finance, moreover, insisted on “sound money.” This was the era of the classical gold standard. It was an article of faith, in certain circles, that a nation’s currency should be convertible into a fixed weight of gold. The leading industrial nations, the United States included, followed this policy. The benefits were clear: fixed exchange rates and confidence in the long-run value of money. But there were also costs: It was difficult to adjust the money supply in response to adverse trends in prices or income.
The deflation and rise in standards of living for most Americans were punctuated by financial crises in which banks closed, factories and railroads went bankrupt, and hundreds of thousands lost their jobs. The depression of the mid-1870s, following the panic of 1873, and depression of the 1890s, following panics in 1890 and 1893 were especially severe. In April 1894, “Coxey’s Army” of the unemployed arrived in Washington to demand federal relief. It portended a different future for the nation, one in which the government provided direct aid to the unemployed. Prices began rising after the depression of the 1890s, but another bank panic occurred in 1907.
Although the problems in the financial system were easy to identify, reaching agreement on solutions was far harder. Special interests used every means at hand to forestall change or force it in directions favorable to themselves. Silver producers, for example, jumped on the antideflation bandwagon and helped direct its course. Lobbying by country bankers, to take another example, shielded a system of thousands of isolated local banks, perpetuating a system that was vulnerable to banking panics.
The legal restrictions on banking had an important impact on the growth of industrial firms hungry for financial capital. Investment bankers who specialized in buying and trading industrial securities took positions of dominance in the U. S. financial system. This situation was quite different from the one in Britain, where large banking conglomerates were allowed and grew large enough to meet most of the financial needs of an industrializing nation.
Despite the conflicts among interest groups, the United States once again had a central bank by the end of 1913, when President Woodrow Wilson signed the Federal Reserve Act. The Federal Reserve was the result of the recommendations of the National Monetary Commission which sought to avoid the structural problems in the First and Second Banks of the United States, and to copy the best foreign examples. As the Great Depression of the 1930s proved, however, the Federal Reserve System was not a foolproof answer to the nation’s problems with deflation and financial panics.
World History
