The Panic of 1873 - President Ulysses Grant’s Crisis (Part 2)

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Ulysses_S._Grant_1870-1880.jpg

President Ulysses Grant
(Public Domain)

When General Grant assumed the Office of President in 1869 he was aware of a looming problem and addressed it in his First Inaugural Address when he argues for the return to a sound fiscal policy:

“A great debt has been contracted in securing to us and our posterity the Union. The payment of this, principal and interest, as well as the return to a specie [coined money, usually gold or silver, used to back paper money] as soon as it can be accomplished without material detriment to the debtor class or to the country at large, must be provided for. To protect the national honor, every dollar of Government indebtedness should be paid in gold, unless otherwise expressly stipulated in the contract. Let it be understood that no repudiator of one farthing of our public debt will be trusted in public place, and it will go far toward strengthening a credit which ought to be the best in the world, and will ultimately enable us to replace the debt with bonds bearing less interest than we now pay.” {1}

Most historians date the Panic of 1873 with the Federal government’s monetary policy during the civil war. Approximately $356 million (greenbacks) were printed throughout the war to pay for such things as military supplies, soldiers salaries and additional purchases to build the nation’s railways including the Transcontinental Railroad which wasn’t completed until 1869. However these greenbacks were not backed with gold and silver. {4} This may be profitable for a while but will eventually catch up with the economy when the IOU’s are due. The Panic of 1873 is here and the IOU’s are due. This is what President Grant is facing within months of his second term.

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The unemployed take to the streets
Frank Leslie’s
(Public Domain)

Due to the fact that Germany no longer used silver as a form of specie the United States was forced to follow their lead as the price of silver plummeted due to a glut on the markets. The 1873 Coinage Act outlawed silver as legal specie and the United States was on a path to a gold standard.

Despite the Coinage Act the ball had started rolling and could not be stopped. By September of 1873 it all fell apart. What began as one bankruptcy the inevitable “domino effect” reared its ugly head as other banking firms began to collapse and then industries followed. 80 of the country’s 364 railroads crashed. In a two year period 18,000 businesses failed and by 1876 unemployment was 14%.

In 1874 Senate Bill 617 made its way to the president’s desk for signature on April 14, 1874. It called for the infusion of $400 million greenbacks into circulation along with an addition of $100 million into the nation’s money supply. After consideration he vetoed the bill of April 22. In his veto message he wrote:

“Practically it is a question whether the measure under discussion would give an additional dollar to the irredeemable paper currency of the country or not, and whether by requiring three-fourths of the reserve to be retained by the banks and prohibiting interest to be received on the balance it might not prove a contraction.

But the fact can not be concealed that theoretically the bill increases the paper circulation $100,000,000, less only the amount of reserves restrained from circulation by the provision of the second section. The measure has been supported on the theory that it would give increased circulation. It is a fair inference, therefore, that if in practice the measure should fail to create the abundance of circulation expected of it the friends of the measure, particularly those out of Congress, would clamor for such inflation as would give the expected relief.

The theory, in my belief, is a departure from true principles of finance, national interest, national obligations to creditors, Congressional promises, party pledges (on the part of both political parties), and of personal views and promises made by me in every annual message sent to Congress and in each inaugural address.” {2}

and then he reiterates what he stated in his 1869 address (*above)

“As a measure preparatory to free banking, and for placing the Government in a condition to redeem its notes in coin "at the earliest practicable period," the revenues of the country should be increased so as to pay current expenses, provide for the sinking fund required by law, and also a surplus to be retained in the Treasury in gold.

I am not a believer in any artificial method of making paper money equal to coin when the coin is not owned or held ready to redeem the promises to pay, for paper money is nothing more than promises to pay, and is valuable exactly in proportion to the amount of coin that it can be converted into. While coin is not used as a circulating medium, or the currency of the country is not convertible into it at par, it becomes an article of commerce as much as any other product. The surplus will seek a foreign market as will any other surplus. The balance of trade has nothing to do with the question. Duties on imports being required in coin creates a limited demand for gold. About enough to satisfy that demand remains in the country. To increase this supply I see no way open but by the Government hoarding through the means above given, and possibly by requiring the national banks to aid.”
{2}

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President Grant Vetoes the “Inflation Bill
Thomas Nast Cartoon
(Public Domain)

The depression following the Panic of 1873 lasted until 1879. However the nation’s taxes and national debt were reduced by $300 million and $435 million (respectively) and one-fifth of the nation’s debt was eliminated. The resumption of the gold standard when in 1879, "Congress freezes the amount of paper money in circulation at $347 million, where it remains for about a century”, {6} led to a stronger financial America and allowed for the business growth that produced the Gilded Age. Some historians claim that President Grant’s fiscal policy during the Panic Years was a success and a high point in his presidential service. It’s still debated to this date.

Although Jay Cooke lost all his money during this panic {*} in the late 1870’s he invested a small amount of money into a silver mine and hit the “mother lode” and sold his holdings for $1 million. He died on February 16, 1905 at eighty-three years old.


* * *​




Sources
1. https://pastexplore.wordpress.com/2014/09/17/president-ulysses-s-grant-and-the-panic-of-1873/
2.
https://millercenter.org/the-presidency/presidential-speeches/april-22-1874-veto-message-monetary-legislation
3. https://www.pbs.org/wgbh/americanexperience/features/grant-panic/
4.
http://www.socialstudieshelp.com/Eco_MoneyOutline.htm
5. https://www.laphamsquarterly.org/politics/tales-brave-ulysses
6. https://www.businessinsider.com/history-of-us-gold-standard-2015-12
{*} https://civilwartalk.com/threads/the-panic-of-1873-meet-jay-cooke-part-1.177511/
 
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