Inflation and the Gold Standard

When the government increases the amount of money out there, it causes inflation. Everyone starts to realize that the money is not worth as much anymore because the government is printing more of it. So inflation increased during the Civil War. What cost $100 when the War started in 1861 cost about $170 after it was over. That's 70% inflation in just a few years, which is terrible if you have money in the bank. Your savings are then worth only a little more than half what it was before the war. Guess how much that $100 cost in 1861 would be worth today. (About $2,282!). You can compare inflation between any two years with this website: http://www.westegg.com/inflation/

Recall our ongoing struggle between debtors (farmers) and creditors (bankers). Which side likes inflation? (The farmers.) Their income increases because eggs, meat, milk, etc., are all increasing in prices when there is inflation. Meanwhile, the money the farmers owe the bank does not increase; it is still the same loan as when they initially borrowed the money from the bank to set up their farm. So farmers love inflation, while bankers dislike it because the real value of the loan decreases during inflation due to the decrease in the value of the paper money used to pay off the loan.

Whether to have more inflation, or less inflation, became the single biggest issue between the Civil War and 1900. This conflict manifested itself in many different ways.

The first issue arose just after the Civil War: what should the government do about all the greenbacks? The farmers loved them, but the bankers did not. The bankers, who were powerful within the Republican Party (and, before that, in the Whig Party), demanded that the government stop issuing money unless it is backed by gold. Many people still feel the same way today, but for a different reason: preventing the government from printing more money helps limit government power. The less the government can print and spend, the less power it has.

Then the financial Panic of 1873 hit. Like the Panic of 1837, this financial panic caused many railroads to shut down. Unemployment increased. Just as the power of a political party goes in cycles, the economy goes in cycles also. Prosperity alternates with recessions or depressions. Good times alternate with bad times. Republicans blamed the financial panic on too much speculation in railroads, and passed a law limiting the availability of money for everyone, including speculators. Republicans did this by making gold (and not silver) the only monetary standard of United States currency, which opponents called the "Crime of 1873" (a new coinage law that halted the mining of silver and made gold the sole standard for currency). This ended Alexander Hamilton's policy of "bimetallism", which set both gold and silver as standards of currency in a 15:1 ratio of silver to gold.

Recall that President Jackson had issued the "Specie Circular" in 1836 in response to inflation and land speculation resultant from the increase in paper money at that time. Jackson's Specie Circular provided that only gold and silver (and sometimes Virginia land scrip) would be accepted by the government for payment for public lands. After the Panic of 1837, Jackson's Specie Circular was repealed in 1838.

Money then became scarcer when Grant converted to the gold ("hard money") standard, and inflation ended. Farmers were outraged, calling this the "Crime of 1873." What cost $100 in 1872 cost only $77.82 by 1880. Deflation, not inflation, was occurring! Deflation is devastating to farmers. The prices for the goods they are selling decreases, while the real value of their loans that they have to pay back grows larger.

So the farmers formed a new political party in reaction to the deflation and "Crime of 1873": the Greenback Party. The so-called "Greenbackers" opposed the gold standard and opposed allowing people to turn in Greenback currency for gold. They were farmers and debtors who wanted inflation, and who wanted silver coins to cause inflation. In 1878 and 1880 the Greenback Party won two dozen seats in Congress. But that was not enough to change the country, and the government went ahead with redeeming greenbacks in gold. The Greenback Party peaked in 1878 and disappeared by 1884 as the political issues changed.