Jay Cooke was an influential Wall Street banker who played a vital role in brokering federal bonds during the Civil War (providing credit for the Union and earning millions for Cooke). on the path to a complete gold-standard currency.Īs with the Great Depression, the private investment banks felt the change first. Congress passed the Specie Resumption Act in 1875, placing the U.S.
Treasury, access to currency and credit contracted sharply, interest rates skyrocketed, and investors were forced to pay off their high stakes gambles (made with cheap paper dollars) with hard-earned gold. Now limited by the amount of gold held in the U.S. While the Treasury also released an additional $26 million in greenbacks, the economic effect was a decrease in the amount of capital available to all investors-akin to choking off the oxygen supply to a fire. In America, Congress passed the 1873 Coinage Act to gradually retire silver currency and to bolster the relative value of the U.S. As a result, other nations felt strong economic pressures to follow Germany's lead. If one could exchange cheap silver for precious gold in countries, like the U.S., that still used both to back their currency, the global value of that currency would rapidly fall. While complicated in theory, the practical problem was obvious. The "deflation" of silver-backed currencies cascaded throughout the world. In a classic case of supply-and-demand, more silver meant less value per ounce and less value for those currencies that still allowed an exchange between silver and gold (as in the United States). Unlike "sound money," backed by specie, the greenbacks' value reflected only the relative optimism of individual investors. While, on any given day, the New York Stock Exchange might rank a railroad stock or corporate bond based on the estimated value at that time, no one knew for certain the value of their land holdings or federal contracts. These cheerful market assumptions also made it easy for corrupt politicians and their local benefactors to artificially inflate the value of their particular interests. government) would continue to have easy access to the capital needed to purchase these modern goods and services. The good times were predicated on an assumption that consumers (and, during the war, this included the U.S. Northern investment bankers like Jay Cooke & Company (who managed the transfer of these funds) made millions (see Primary Source Great Northern Railway Route Map ). Mass manufacturers, financial institutions, and especially railroad investors soaked up these funds, producing more goods and employing more people over a broader geographic market. Civil War, the federal government printed over $356 million in paper greenbacks, essentially promissory notes which paid for military procurements, soldiers' salaries, building a transcontinental railroad, and developing interiors land for commerce and higher education. This was the case in the United States when, in 1861, the Civil War began.ĭuring the U.S. They supplied "easy money" not tied to the value of gold. In times of national emergency, however, governments often went "off" the precious metal standard. dollars and another 100 English pounds, ultimately the ability to convert those currencies to silver and gold led to an "apples to apples" comparison. Countries backed their currencies using precious metals (both silver and gold, also called specie), making it possible for investors to compare the success of their investment choices in objective terms. Capitalists could invest their money in international currencies, ownership of individual firms (stock), or as lenders (bonds and loans). By 1873, most developed nations in Europe and North America had experienced the transition to industrial capitalism. As a result, the Panic of 1873 led to the longest recorded economic downturn in modern history, spanning from October 1873 to March 1879, according to the National Bureau of Economic Research. But in 1873 these adjustments were unknown and the ability of national authorities to control the money supply was immature. In today's market, currency and stock regulation try to limit rapid swings in value of our nation's currency. In a sense, the money supply acts like oxygen for a fire: too little and the flame dwindles, too much and it rages uncontrolled. In a sense, the money supply acts like oxygen for a fire.
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