“The Crime of 1873”. Our Country, Then and Now. Richard C. Cook
"A Financial Battleground Emerges," "Corruption," "Business Cycles and the Gold/Silver Crisis"
[Serialization of selections from my book Our Country, Then and Now continues with the cooperation of my publisher, Clarity Press.]
“The Crime of 1873” was a law passed by the US Congress, possibly under the influence of British bankers, to remove silver coinage from the money supply. Besides having the immediate effect of crashing the US money supply, resulting in dire hardship for everyone involved in the producing economy, this misguided legislation symbolized the struggle over the control of money creation and circulation during the latter part of the 19th century.
The struggle was actually a war between the globalist banking elite that sought to control the world economy vs. everyone else who worked for a living, even including the managerial and ownership classes who brought about the Industrial Revolution.
A single word defined the battlefield: “Gold.”
By controlling and hoarding gold, the bankers could ensure that the loans they advanced to fuel growing industrial production would not be inflationary, meaning that borrowers could not repay with a depreciated currency. Within the US, prices actually fell during this period, despite the explosion of business activity. The big loser were workers who could barely rise above starvation, leading to strikes, riots, and the growth of left-wing socialistic ideologies.
Part 2 of “The Crime of 1873” now continues with a narrative that continues to explain much about modern economic conditions, including the often misunderstood phenomenon of the “business cycle.”
The bankers finally won the war through passage of the Federal Reserve Act of 1913, with the gold standard reigning supreme for decades to come.
Our Country, Then and Now may be ordered directly from the publisher here.
***
A Financial Battleground Emerges
After the American Civil War, open social conflict broke out, fueled by the accelerating divergence between lower and higher income groups. The American working class rarely became overtly revolutionary, but violence did occur at various junctures. Both sides sought to gain political power, with the wealthy classes usually, but not always, prevailing.
The rich wanted lower taxes, banks lending to the government to service government debt, and elimination of the Greenbacks, which Lincoln had called the “peoples’ currency.” The lower income groups, growing with industrial expansion, wanted progressive taxes, with the rich paying higher proportionately in exchange for their privileges, and liberal Civil War veterans’ pensions.
Alexander Hamilton’s vision of an American empire based on an industrial society was now coming to the fore, but so was the central role of bankers and investors. President Andrew Johnson, who succeeded Lincoln, remarked:
“An aristocracy based on nearly two-and-one-half billion of national securities [i.e., government debt] has risen in the Northern states to assume that political control which was formerly given to the slave oligarchy.”[i]
This aristocracy of government creditors, earning their money from industrial growth and banking and multiplying it through lending, increasingly ruled the nation and created the foundations of the Gilded Age.
At the same time, the end of the war saw drastic cuts in federal government expenditures, slightly higher taxes in certain categories and large cuts in others, and an ongoing budget surplus that the government wanted to use to recall the Greenbacks—but could not, due to popular protest.
By the late 1870s, government expenditures had settled at four percent of national income, after having risen to 25 percent during the war. Interest on the public debt, which had reached enormous proportions, was 40 percent of all expenditures. Over time, this figure was cut in half, but the national debt would never be eliminated.
Costs for the Army and Navy dropped precipitously. The military pension system became an early form of social security. Civil service and public works expenditures were small, at least at the federal level. Infrastructure continued to be a primary function of state and local governments, as it had before the war. Post-Civil War aid to railroad construction primarily involved private bank loans—$16,000-$48,000 per mile for the Transcontinental Railroad. The federal government also granted the railroads land that had been taken from the Indians.
During this period, Congress engaged in heavy reductions to excise taxes, though without manufacturers or retailers cutting prices. So merchants enjoyed a windfall. The federal inheritance tax and the national sales tax were eliminated.
By now, Karl Marx had made his appearance. Marx’s Das Kapital was published in German in 1867, and in English some 20 years later. Socialism was well on its way to becoming universally demonized in the US, as remains the case today. From this point on, every measure of social or economic improvement was labeled by the rich as “socialism” or “communism.”
The wealthy class was finally able to lobby for complete elimination of the federal income tax, which was rescinded in 1872. Stiff taxes on liquor, tobacco, and various trade licenses remained. Protectionist tariffs favorable to manufacturers also continued. “Buy America” continued to be in vogue. This was a bulwark against cheap manufactured goods from Great Britain.
Attempts now were made to convert the Greenbacks to interest-bearing Treasury bonds. But the measure would have reduced their value as currency, so it was politically unpopular and was removed from the congressional agenda during a mild business downturn in 1868. Specie payments had been suspended during the war, with conservatives now lobbying for “resumption.”
The post-Civil War period was a time of Republican presidents, starting with the election of Grant in 1868, and continuing through Hayes, Garfield, and Arthur until the election of Democrat Grover Cleveland in 1888. They followed the familiar Republican program, still promoted today, of cutting federal expenditures, reducing taxes on the rich, and favoring business interests.
The federal government’s main activity, which had been fighting rebels, now was fighting Indians and providing a minimal handout of financial support to those it was able to herd onto reservations. But the Army was a small fraction of what it had been during the Civil War. In 1876, 37.8 percent of the federal budget was for interest to lenders on the national debt; 20.1 percent was for the Army and Navy; and 10.7 percent was for veterans’ pensions. By contrast, 2.2 percent was for Indian welfare support.
Meanwhile, government bonds were sold to service the debt through private investment brokers who made a living from government commissions. One of the leaders in this enterprise continued to be Jay Cooke of Civil War bond fame. Another was the up-and-coming banker, J.P Morgan. Even though the government was running an ongoing surplus, the net federal deficit was slow to decline from its wartime high of $2.77 billion in 1866, only falling to $1.83 billion by 1884.
Although the role of the federal government in economic matters was negligible, the existence of the federal debt was essential, as national banks were required to purchase Treasury bonds as a reserve for making loans. Hence the system was inelastic in that an honest effort by the government to pay its debts also reduced the circulation of the currency[i.e., national bank notes]. Then, as now, federal debt was viewed as a necessary source of financial liquidity.
With the economy growing, consumers and farmers were frantic for the government to increase the money supply. This fueled the movement for “bimetallism” or the support of silver as a basis for money along with gold. It also fueled the founding of the Greenback Party, which was active between 1874 and 1889. The party ran candidates in three presidential elections, in 1876, 1880, and 1884, before it faded away.
Corruption
There have been many times in US history when financial corruption was overwhelming. Opening the doors to favoritism, profiteering, and nepotism were among the charges leveled against the First and Second Banks of the United States. But the unprecedented amounts of money hitting the streets with the prosecution of the Civil War produced many incidents of contractors cutting corners or financial agents of the government being caught with their hands in the till. The corruption accelerated during the post-war period.
Scandals erupted involving members of Congress and President Ulysses Grant’s brother and brother-in-law, including attempts to corner the gold market, ending in the “Black Friday” panic of 1869. In 1872 the Credit Mobilier scandal disclosed stock handouts involving railroad construction to members of Congress and to Vice-President Henry Wilson, and rumors of railroad company bribes also besmirched the reputation of Republican stalwart James B. Blaine.
Civil War-era tax legislation also opened the door to charges of tax fraud and evasion against political figures that have gone on until today. Later, President Garfield’s campaign officials were charged with fraud in contract awards. Corruption was pervasive at state and local government levels, including the infamous Boss Tweed ring in New York.
Business Cycles and the Gold/Silver Crisis
As with the pre-Civil War financial panics, we now return to the “business cycle.” Such cycles result in economic expansion and wealth during the upswing, but generate chasms of misery and poverty when the crash comes. These cycles have little to do with the willingness of people to work hard and prosper or with the availability of natural resources as essential components of the manufacturing process. Business cycles, instead, are “exclusively monetary phenomena,” borrowing a phrase from 20th century financial guru Milton Friedman. They are the result of by fractional reserve lending, resulting in a system of money creation rooted in debt that circulates as a medium of exchange within the producing economy. Credit expands until economic activity slows down and loans can no longer be repaid. Borrowers then go broke. Their assets are then purchased for pennies on the dollar by the encircling vultures.
Within the US financial system, credit is offered or withdrawn by bankers to whom everyone, including governments, must resort when money is needed. These bankers produce a lot of credit when economic conditions are good, but when loans can no longer be repaid by borrowers, the credit is taken away. A bank itself may fail. So, boom to bust. One way to withdraw credit, of course, is for the banking system to raise interest rates, as the Federal Reserve does today, making borrowing prohibitively expensive.
This is the system that prevails in all Western nations. Something different has developed in large state-managed economies, like those of contemporary Russia and China. Evidence suggests that such systems, while not immune to business cycles, may find it easier to control them. It’s the growing strength of these systems and their relative immunity to control by private banks and investment funds that makes the nations practicing them the enemies of the Western financial oligarchy.
Should we be using gold, silver, both, or neither as an attempt to provide backing for the currency the banks lend into circulation? This was a massive economic issue during the 19th century and into the 20th. US economist Milton Friedman discussed this situation in depth in his book Monetary Mischief, published in 1994. His discussion takes us from the time when, “The Civil War temporarily ended the reign of gold,”[ii] to what is called “The Crime of 1873,” when it was alleged that certain British figures conspired “to bribe certain members of Congress and the Comptroller of the Currency” to demonetize silver altogether.[iii]
The Coinage Act of 1873 ended the legal status of bimetallism in the US. Paper instruments could be redeemed only for gold after “resumption” took place in 1879. Silver was not mentioned in the resumption legislation. The US was now firmly on the gold standard, as were Britain and most other European nations.
The bankers were thrilled. They would use the gold standard to rule the world’s economies for the next half-century. The race was also on to see which nation could hoard the most gold in its vaults. Until World War I, that nation was Great Britain.
Obviously, the exclusion of silver as backing for paper money would lead to a contraction in real-life spending power and would therefore crash a rapidly-expanding economy based on credit. From this point on, the restoration of silver was a major political issue in the US, leading to the presidential campaign of William Jennings Bryan in 1896 who declared, “You shall not crucify mankind on a cross of gold.”
But the deeper reason for agitation by the wealthy class for the gold standard was not just for the price stability they saw would result from the limitation of monetary growth. It was actually to make it harder for debtors, to whom the wealthy lent money, to pay off their loans with an inflated (i.e., depreciated) currency.
In fact, the last half of the 19th century saw price deflation, with farmers hurt particularly by falling prices of wholesale agricultural products. At one point, the American Banking Association even advised the banking industry to take advantage of the situation to engage in large-scale foreclosure on family farms in order to reduce American farmers to the status of European peasants.
Farmers were able to fight off foreclosure by consolidation of small family farms into larger units and the utilization of mechanized farm machinery like threshers and binders. The trend toward larger farms and industrialization of farming had begun, with greater reliance on banks for operating expenses and purchase of equipment. Distress for farmers from insufficient credit also mean trouble for the vast network of small towns throughout the nation that depended on the farm economy for sustenance.
Many town businesses reacted to the distress by chartering local banks, expanding commercial credit to farms, and by printing and issuing “scrip” as a local currency. The widespread use of scrip would reappear during the Great Depression of the 1930s. A factor that ameliorated the distress from monetary contraction was the use of paper checks which enhanced the velocity of money. Kiting of checks also became common.
Not by coincidence, and taking place along with the Coinage Act, the Panic of 1873 began when our old friend Jay Cooke, head of what was now the top US banking house, went bankrupt when the collapse of bond prices for the Northern Pacific Railroad, which Cooke was financing, caused him to close his doors. Bank runs now began, the stock market crashed, and a worldwide depression was underway.
As if to show that the world was becoming increasingly interdependent, the financial woes in the US and Britain were reflected in a collapse of real estate prices in Germany and central Europe. European banks panicked, and German investors, who had gambled heavily on US railroads, withdrew their holdings.
The US government, still in its Republican Party laissez faire mode during Grant’s second term, could do nothing, especially after Congress opted for the gold standard. So financial collapse had to run its course. It was a decade before the US economy recovered. The Panic of 1873 was so bad it was called, at the time, the “Great Depression.”
*
Click the share button below to email/forward this article. Follow us on Instagram and X and subscribe to our Telegram Channel. Feel free to repost Global Research articles with proper attribution.
This article was originally published on Three Sages.
Richard C. Cook is a retired U.S. federal analyst with extensive experience across various government agencies, including the U.S. Civil Service Commission, FDA, the Carter White House, NASA, and the U.S. Treasury. He is a graduate of the College of William and Mary. As a whistleblower at the time of the Challenger disaster, he exposed the flawed O-ring joints that destroyed the Space Shuttle, documenting his story in the book “Challenger Revealed.” After serving at Treasury, he became a vocal critic of the private finance-controlled monetary system, detailing his concerns in “We Hold These Truths: The Hope of Monetary Reform.” He served as an adviser to the American Monetary Institute and worked with Congressman Dennis Kucinich to advocate for replacing the Federal Reserve with a genuine national currency. See his new book, Our Country, Then and Now, Clarity Press, 2023. Also see his Three Sages Substack and his American Geopolitical Institute articles at https://www.vtforeignpolicy.com/category/agi/.
“Every human enterprise must serve life, must seek to enrich existence on earth, lest man become enslaved where he seeks to establish his dominion!” Bô Yin Râ (Joseph Anton Schneiderfranken, 1876-1943), translation by Posthumus Projects Amsterdam, 2014. Also download the Kober Press edition of The Book on the Living God here.
Notes
[i] Studenski and Kroos, p.161.
[ii] Milton Friedman, Monetary Mischief: Episodes in Monetary History, Mariner Books, 1994, p.57.
[iii] Ibid, p.61.
Featured image is from the public domain
Global Research is a reader-funded media. We do not accept any funding from corporations or governments. Help us stay afloat. Click the image below to make a one-time or recurring donation.
No comments:
Post a Comment