Economic Outlook

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After the war, the question of the constitu tionality of the legal tender laws came before the courts. It reached the U.S. Supreme Court in 1867, and in February 1870 that august body held that the irredeemable greenbacks were, indeed, unconstitutional.

This ruling upset the Grant administration as well as the railroads, whose heavy, longterm debt would — if the court's decision held — have to be repaid not in paper, but in much more valuable gold. However, there were two vacancies on the court, so Grant appointed two Republican railroad lawyers ... the new court quickly reconsidered the question ... and — in May 1871 — reversed the previous decision. From then on, paper money has been held to be consonant with the U.S. Constitution. However, in 1879 the country did finally resume the gold standard, and — during the following decade — the willingness of more foreigners to hold dollars caused gold to flow into the U.S. As a result, American exports increased ... wages and production rose ... and prices fell.

In the meantime, European nations were shifting from silver to gold standards, decreasing the demand for silver. At the same time, Nevada silver mines were in full production. This caused silver to become officially overvalued, and some politicians wanted to increase the nation's money supply by backing our currency with that plentiful metal. To help accomplish this, they pushed through the Silver Purchase Act of 1890.

Uneasiness about the shift from gold to silver caused foreigners to lose confidence in the U.S. dollar ... created a drop in capital imports ... and put contractionist pressure on the American economy. Gold exports intensified in 1892, and in April 1893 the stock market collapsed. A month later, distrust of the fractional-reserve banks led to massive bank runs and bank failures throughout the country. This panic ended with the repeal of the Silver Purchase Act in November of that same year.

THE FEDERAL RESERVE IS BORN

In March 1900 the U.S. was placed officially on a monometallic gold standard. All paper was redeemable in gold with silver as a subsidiary metal. Though discoveries in South Africa and Alaska doubled the world's gold stock from 1890 to 1914, the bulk of the increase in the supply of money during this period came from bank deposits pyramiding on top of an increase in gold. After 1900 this caused several mini-panics, arrested by infusions of Treasury money ... but the Panic of 1907 frightened banks into calling for a new central banking system, which resulted in the Federal Reserve Act of 1913.

From then until 1933, the United States was formally under a gold standard, but actually governed by an institution designed to inflate uniformly and bail out banks in trouble. Only the Federal Reserve could print currency, and all national banks were required to join this system and transfer their gold to the Federal Reserve. It, in turn, could print money by a three-to-one ratio on top of gold, and all member banks could multiply their deposits on top of the Federal Reserve deposits.

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