“Keeping the Money Where It Will Do the Most Good”

October 11, 1873

Thomas Nast

“Keeping the Money Where It Will Do the Most Good”

Business, Stock Market; New York City, Business; Symbols, Uncle Sam; U.S. Economic Panics and Depressions; U.S. Economic Policy, Money Question;

Grant, Ulysses S.; Johnson, Reverdy; Vanderbilt, Cornelius;

New York City;

Uncle Sam. "Look out, boys, they say he's a Caesar (seiz-er)."

Published in the midst of the Panic of 1873, this cartoon portrays President Ulysses S. Grant as a watchdog guarding the U.S. Treasury from Wall Street speculators who are seeking a bailout from the federal government.  Lawyer Reverdy Johnson (left) presents a brief for financier Cornelius Vanderbilt (right), as Uncle Sam warns the two men not to provoke the Grant bulldog.

The Panic of 1873 and the subsequent depression had several underlying causes, of which economic historians debate the relative importance.  Post-war inflation, rampant speculative investments (overwhelmingly in railroads), a large trade deficit, ripples from economic dislocation in Europe resulting from the Franco-Prussian War (1870-1871), significant property losses in Chicago (1871) and Boston (1872) fires, and other factors put a massive strain on bank reserves, which plummeted in New York City during September and October 1873 from $50 million to $17 million.  

Unable to meet payment demands, many banks and other financial institutions suspended their operations.  The first sign of trouble occurred on September 8 when the New York Warehouse and Securities Company closed its doors, and a week later, financier Daniel Drew's firm of Kenyon, Cox, and Company followed suit.  It was the failure of Jay Cooke and Company on September 18 that sent Wall Street into a panic.  Jay Cooke, who had been instrumental in marketing government bonds during the Civil War, had a reputation for making substantial profits honestly and cautiously.  However, Cooke had also caught the railroad fever, and the failure of his Northern Pacific Railroad caused his financial house to collapse.  Two other prominent firms closed the same day, and 37 more on September 19.  

On a trip to Philadelphia to enroll his son, Jesse, in a private academy, President Grant was a guest at Cooke's mansion on the night of September 17.  When Cooke learned of his personal financial disaster the next day, he did not inform the president, who returned to Washington none the wiser.  Once back in the nation's capital, Grant learned of the events, and politicians began pressuring him to increase the money supply with government-printed "greenbacks" (paper currency backed by government authority, not gold or silver).  On September 20, the New York Stock Exchange announced it was suspending transactions for ten days.  Grant quickly set off for Manhattan, where he met the next day with a group of business and financial leaders.

The businessmen and brokers enthusiastically favored inflating the currency with more greenbacks, while the bankers were as adamantly opposed to it.  As a "hard-money" man who advocated a return to the gold standard, Grant decided against printing more greenbacks.  Instead, the Treasury Department put more greenbacks into circulation by redeeming several outstanding bonds, and thereby avoided undermining the value of the dollar with inflated currency.  Banks also announced that they would use short-term certificates as cash until their reserves were replenished.  The reaction of the national press was, like this cartoon, largely favorable to the president's tight money policy.  The New York Stock Exchange reopened on September 30, and while stock prices continued to be low, the panic was over.

At first, many thought the problem affected only Wall Street, but the panic actually marked the beginning of a long economic depression for the entire nation.  Over the next five years, tens of thousands of businesses failed, hundreds of thousands of people were left unemployed, private relief programs had difficulty meeting the needs of the destitute, and numerous labor strikes erupted, most notably a violent railroad strike during the summer of 1877.

In his annual message to Congress in December 1873, President Grant proposed a national monetary clearinghouse to monitor currency movements throughout the country (similar to the Federal Reserve Board established in 1913).  Congressmen, though, looking to expand the money supply with more greenbacks, introduced 60 "inflation" bills within weeks after the president's message.  On April 14, 1874, Congress passed an inflation bill that would increase the nation's money supply by $100 million.  President Grant had previously endured poverty and been adversely affected by the Panic of 1857, so he genuinely sympathized with the motivations behind the bill and those it was trying to help.  

However, on April 21, Grant vetoed the bill, arguing that any short-term benefit would be far outweighed by the long-term damage done to the national economy by the inflation it would generate.  The financial community and major newspapers, such as Harper's Weekly and The New York Times, applauded the courageous decision.  Grant's veto was also important because it swung the pendulum back toward the "hard-money" politicians, who in 1875 passed the Specie Resumption Act.  The law scheduled the United States to return to the gold standard (with silver as a subsidiary currency) on January 1, 1879.  The economic depression continued through 1878 with more bankruptcies and high unemployment, but the overall economy, in fact, grew during those years.  In 1879, with the country back on the gold standard, the United States experienced several years of unprecedented economic expansion.

Robert C. Kennedy

“Keeping the Money Where It Will Do the Most Good”
July 14, 2024

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