25. The Gold Standard Era with the National Banking System, 1879-1913

0:00The Gold Standard Era with the National Banking System, 1879 to 1913 The record of 1879 to 1896 was very similar to the first stage of the alleged Great Depression from 1873 to 1879. Once again, we had a phenomenal expansion of American industry, production and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, In the 1880s, at 3.8% per annum, real net national products rose at the rate of 3.7% per year from 1879 to 1897, while per capita net national products increased by 1.5% per year. Once again, Orthodox economic historians are bewildered, for there should have been a Great Depression, since prices fell at a rate of over 1% per year in this period.

0:55Just as in the previous period, the money supply grew, but not fast enough to overcome the great increases in productivity and the supply of products. The major difference in the two periods is that the money supply rose more rapidly from 1879 to 1897 by 6% per year, compared with the 2.7% per year in the earlier era. As a result, prices fell by less, by over 1% per annum, as contrasted to 3.8%. Total bank money, notes and deposits rose from $2.45 billion to $6.06 billion in this period, a rise of 10.45% per annum, surely enough to satisfy all but the most ardent inflationists. For those who persist in associating a gold standard with deflation, it should be pointed out that price deflation in the gold standard 1879-1897 period was considerably less than price deflation from 1873-1879, when the United States was still on a fiat greenback standard.

1:58After species resumption occurred successfully in 1879, the gold premium to greenbacks fell felt a par and the appreciated greenback promoted confidence in the gold-backed dollar. More foreigners willing to hold dollars meant an inflow of gold into the United States and greater American exports. Some historians have attributed the boom of 1879 to 1882, culminating in a financial crisis in the latter year, to the inflow of gold coin to the U.S., which rose from $110.5 million in 1879 to $358.3 million in 1882. In a sense, this is true, but the boom would never have taken on considerable proportions without the pyramiding of the national banking system, the deposits of which increased from $2.149 billion in 1879 to $2.777 billion in 1882, a rise of 29.2% or 9.7% per annum.

2:57The retail prices were driven up from 90 in 1879 to 108 three years later, a 22.5% increase, before resuming their long-run downward path. A financial panic in 1884, coming during a mild contraction after 1882, lowered the supply of bank money. Total banknotes and deposits dropped slightly, from $3.19 billion in 1883 to $3.15 billion. The panic was triggered by an overflow of gold abroad, as foreigners began to lose confidence in the willingness of the United States to remain on the gold standard. This understandable loss of confidence resulted from the inflationary sop to the pro-silver forces in the bland Allison Silver Purchase Act of 1878.

3:42The shift in treasury balances from gold to silver struck a disquieting note in foreign financial circles. Before examining the critical decade of the 1890s, it is well to point out in some detail America went off the gold standard in 1861 and remained off after the war's end. Arguments between hard-money advocates who wanted to eliminate unbacked greenbacks and soft-money men who wanted to increase them raged through the 1870s until the Grant Administration decided in 1875 to resume redemption of paper dollars into gold at pre-war value on the from the first day of 1879. At the time, in 1875, greenbacks were trading at a discount of roughly 17% against the pre-war gold dollar.

4:32A combination of outright paper money deflation and an increase in official gold holdings enabled a return to gold four years later, which set the scene for a decade of tremendous economic growth. Economic record-keeping a century ago was not nearly as well-developed as today, but a clear picture comes through nonetheless. The Encyclopedia of American Economic History calls the period under review, quote, one of the most expansive in American history. Capital investment was high, there was little unemployment, and the real costs of production declined rapidly, end quote.