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.
|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.
|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.
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.
|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.
|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.
|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.