As we saw in the
previous posting on this subject, had he not been assassinated, there is
evidence suggesting that Abraham Lincoln would have used the 1862 Homestead Act
as the first step on a total social reformation, putting the financial system
on a sound basis and opening up opportunities for everyone to own capital other
than land.
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| Henry Clay Warmoth |
Compared to what
prevailed in Europe, however, the situation in the United States was sometimes
idyllic, especially for ordinary people.
Still, following the Civil War, America began experiencing the results
of flaws inherent in the system as applied, or that had been introduced into
the system contrary to the founding principles of the country.
Slavery had been
abolished, but at a terrible cost, both in lives and in the often-unnoticed
fundamental change in the philosophy of law and government. The Fourteenth Amendment overturned the Dred
Scott decision, but had not been tested.
That soon came,
however, as a direct result of the greed of the carpetbaggers who swarmed into
the former Confederacy to grab as much as they could. Of these, one of the worst was Louisiana
governor Henry Clay Warmoth (1842-1931), “a shrewd, avaricious and unscrupulous
man.” (“The Louisiana Thieves,” New
Orleans Commercial Bulletin, Monday, August 8, 1870.) At his direction, the
state legislature established the “Crescent City Live-Stock Landing and
Slaughter-House Company.” This was a
monopoly over the
entire slaughtering business in and around New Orleans to be owned by
friends of Warmoth.
The butchers,
mostly former Confederate soldiers, sued, and “the Slaughterhouse Cases” of
1873 went all the way up to the United States Supreme Court. In what William Crosskey called a
contradictory and “most craftily written decision” (Crosskey, Politics and the Constitution, op. cit.,
1130), the 5-4 judgment completely nullified the Fourteenth Amendment and
reinstituted the Dred Scott decision that took sovereignty away from human
beings and vested it in the collective.
The majority
opinion in Slaughterhouse gave the
Court the power (as Crosskey put it) “to jump either way: to observe the
intended meaning of the Privileges and Immunities Clause [of the Fourteenth
Amendment] if that seemed unavoidable, or, in the alternative, to destroy the
clause utterly if this seemed safe.” (Ibid.) Thus, although Congress had
passed a Constitutional Amendment specifically intended to restore the
sovereignty and dignity of every human person, the Supreme Court was able to take
back the power it had usurped from the people a little over a decade and a half
before.
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| Birth of a Monetary Myth |
Where the Slaughterhouse Cases are given much less
importance than they deserve, however, another event that coincidentally
happened in 1873 is given much more attention than it ought to have. This was the Panic of 1873 and the Great
Depression of 1873-1878.
Twenty years
later the Coinage Act of 1873 (17 Stat. 424) that presumably caused the Panic
was enshrined in populist myth as “the Crime of ’73.” To this was added the demonetization of
silver, the program to restore the paper currency to parity with gold, and the
attempt to establish an international gold standard. (Nugent, The Money Question During Reconstruction,
op. cit., 17-18, 33-38, 46.)
The real cause of
the Panic was building railroads faster than demand for them was growing
combined with speculation on European stock exchanges. Railroads received government subsidies and
could also finance out of future savings by the expansion of bank credit, while
customers received no subsidies and had to finance out of a limited supply of
past savings.
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| Jay Cooke |
Causing a domino
effect, Jay Cooke and Company, a major investment banking firm, failed after
being unable to place bonds issued to finance the building of the Northern
Pacific Railway. This caused a chain
reaction of bank and business failures and the panic spread rapidly throughout
the United States and Europe.
Even given the
restriction of credit in the private sector and the reduction of government
debt due to induced deflation to restore the value of the paper currency,
however, the country made a relatively quick recovery. Fueled by rapid expansion into the West, economic
development was again in full swing by 1880.
Without an ethical means of spreading out ownership of non-land capital,
however, ownership of industry, commerce and, especially, the financial sector
became increasingly concentrated.
Not by
coincidence, it was in 1893 that Frederick Jackson Turner delivered his paper
on “The Significance of the Frontier in American History” at the Columbian
Exposition in Chicago. His “Frontier
Thesis” was that the American spirit and success was a direct result of the
existence of the frontier and the country’s westward expansion.
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| Frederick Jackson Turner |
Turner’s analysis
was that the unique American character so lauded by Leo XIII and previous popes
was formed by the tension between civilization and wilderness. This created a new type of independent
citizen, one with strength and individuality who is capable of developing new
solutions to new problems created by a new environment.
As American life
got further from European institutions and ideas that enforced dependency and
subservience to authority, the more independent and democratic it became. It was, of course, the direct ownership of
capital that the frontier made possible, not the mere existence of the frontier
itself, that developed the American character, and that Leo XIII and other
popes thought worthy of emulation. When
the frontier disappeared, and ownership of other capital became more
concentrated, America began falling into the European pattern.
That, however,
was still decades in the future. In
1893, optimism was still strong, if sometimes misplaced. Change, however, was in the wind.
Speculation in
railroad shares once again led to construction in excess of existing market
capacity, fueling a market frenzy as people confused speculative gains with
productive growth. At the same time, due
in large measure to the shift from small ownership to the wage system in the
East, and a series of droughts in the West, consumer demand — which drives the
demand for new capital — fell relative to increased productive capacity.
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| William Jennings Bryan |
Thanks to the
deflationary measures instituted to restore parity with gold and a debt-backed,
“inelastic” paper reserve currency with the amount legally fixed, there was now
a scarcity of money, and the price level dropped. (An “inelastic currency” is one in fixed
amount, ensuring that the money supply cannot adjust to the needs of the
economy and prevent inflation and deflation.) Debtors, especially farmers, were
unable to produce enough to generate sufficient income at the lower prices to
meet debts they had incurred when the currency was inflated.
Under “the Great
Commoner,” William Jennings Bryan (1860-1925), populists agitated for unlimited
coinage of silver — “free silver” — to inflate the currency. This, it was believed, would provide more
money for loans, raise the price level for farm produce, and make it easier to
repay debts.
The Sherman
Silver Purchase Act of 1890 poured millions of dollars into the economy. This was in the form of debt-backed “Treasury
Notes of 1890” used to purchase the silver, which was then minted into silver
dollars. These were deposited into the
Treasury and used to back silver certificates that circulated alongside of the
Treasury Notes.
Clearly, the Act
did not address the real issue, which was lack of capital credit for farms and
small businesses. With Say’s Law not
functioning, productive capacity continued to exceed consumer demand.
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| Jacob Sechler Coxey |
In February 1893,
the bankruptcy of the Philadelphia and Reading Railroad started a financial
panic. Runs on banks caused a further
constriction of credit, and foreign investors began liquidating American
holdings, demanding payment in gold.
People redeemed silver certificates for gold until convertibility was
suspended in response to the drain of gold reserves.
Because the
National Bank Note and United States Note reserve currencies were both fixed in
amount and debt-backed, banks were unable to replace their depleted gold
reserves with the paper reserve currency, nor were people likely to accept
debt-backed paper to redeem asset-backed paper.
Having insufficient reserves, banks were forced to call loans, driving
companies that only a few weeks before had been blue chip investments into
receivership. Three major railroads,
five hundred banks, and more than 15,000 companies went bankrupt. Unemployment during this second Great
Depression reached an estimated 20%.
People began
demanding that the government do something.
In 1893/94, “Coxey’s Army,” a march of the unemployed on Washington, DC, anticipated
the New Deal by demanding job creation on public works financed with increased
government debt. Serious calls for
reform of the financial system and the establishment of a true central bank
were drowned out by renewed agitation in support of free silver and cheap
money.
What brought the
Great Depression of 1893-1898 to an end, however, was not increased government
debt or job creation. It was the
fortuitous circumstance of bumper crops of wheat in 1897 and 1898 in the U.S.
combined with crop failures in Europe.
#30#
