Postbellum specie resumption arguments

[shirohniichan]

I found a few books and pamphlets regarding repayment of the public debt and specie resumption after the Civil War.

 

One I found particularly prescient was Public Debt of the United States by James Sloan Gibbons (published in 1867). The author argues against government sequester of gold in the Treasury and says it only leads to government sponsored speculation. That turned out to be the case when Jay Gould et al caused the Black Friday market crash on September 24, 1869. They tried to get the Grant Administration to keep gold off the market so the price would rise, and the crash occurred when Grant found out about the manipulation and ordered the sale of $4 million on government gold holdings.

 

In the end, specie resumption was enabled by the balance of gold payments favoring the US in trade with Europe and not by government intervention. The US enjoyed a few years of bumpercrops while Europe experienced crop failures.

 

Although the reading can be a bit dry, I find it fascinating to read various author's presumptions and see how well their arguments worked in real time.

[cpm9ball]

Does the book discuss how the face value of silver coinage to the paper dollar fell during the mid-1870's, and was the Specie Resumption Act partly responsible for this?

 

Chris

[DaveG]

shirohniichan,

 

I'm not sure why you think Jay Gould's attempt to corner the gold market was "government sponsored speculation"?

 

Unless you think that JS Gibbons is arguing that simply because the government sequestered gold that speculation would result and therefore, the speculation was "government sponsored"?

 

edited to add:

 

cpm9ball,

 

I think you mean the bullion value of the silver in US coins fell during this period.

 

If so, I'd point to the huge amount of silver flowing out of the Comstock Lode and the subsequent demonetization of silver by France and Germany as a cause of the drop in the price of silver.

[shirohniichan]

Gould and his cohorts who wanted to corner the gold market were doing all they could to prevent the sale of gold held by the treasury to keep supply low (until they could sell their own holdings).

 

Basically it amounted to cronyism with government officials for personal profit. Fortunately Grant did not comply.

 

As this was written in 1867 before this took place, I thought it rather far-sighted.

[cpm9ball]

cpm9ball,

 

I think you mean the bullion value of the silver in US coins fell during this period.

 

If so, I'd point to the huge amount of silver flowing out of the Comstock Lode and the subsequent demonetization of silver by France and Germany as a cause of the drop in the price of silver.

 

Thanks, Dave!

 

It was my understanding that there was a substantial increase in the coining of dimes, quarters and halves to (partially) reduce the amount of circulating fractionals by about $51 million as part of the Specie Resumption Act of 1875(?). The result of the circumstances that you mentioned plus the fact that the trade dollars were being rejected in China caused these coins to fluctuate (in face value) beginning in mid-1876.

 

I'm just trying to get a better understanding of the cause and effect relationship.

 

Chris

[DaveG]

cpm9ball,

 

I highly recommend "Fractional Money" by Neil Carothers, which is all about how coins (in "fractions of a dollar") were used in commerce during the 18th and 19th centuries.

 

If I recall correctly, he discusses things like the channels of commerce becoming clogged with quarters and dimes until banks would only accept them for deposit at a discount and how employers would take advantage of workers by paying them with Trade Dollars at par, only for the employees to find that no merchant would accept them at par, but only at their silver bullion value.

[DaveG]

shirohniichan,

 

I would think that the Gould speculation would only have been cronysim if the government officials had been involved in the plot from the beginning and stood to profit if the Gould ring was successful.

 

I don't remember enough about it to know if government officials were involved from the beginning.

[shirohniichan]

shirohniichan,

 

I would think that the Gould speculation would only have been cronysim if the government officials had been involved in the plot from the beginning and stood to profit if the Gould ring was successful.

 

I don't remember enough about it to know if government officials were involved from the beginning.

 

They didn't necessarily need to have complicity from the beginning. As long as they could keep the government from selling any large volume of gold as they got close to cornering the market, they could cash in and reap huge profits. Once Grant figured out what they were up to he authorized the sale of $4 million in gold, and their house of cards collapsed. Had Grant tipped off the Gould group before the sale it would have proved complicity, but it turned out he was an unwitting ally to their scheme for profit from government action.

[RWB]

For those not familiar with the gold standard, there were multiple prices for gold with $20.67676 being the "floor" or official price. Most merchants and traders paid more than this for gold at the "gold exchange rate" or "gold forward rate" or "London call rate," etc.

[DaveG]

shirohniichan,

 

Once Grant figured out what they were up to he authorized the sale of $4 million in gold, and their house of cards collapsed.

 

 

I guess I didn't make my point clear. If Grant intervened and Gould's house of cards collapsed, then who were Gould's cronies? Certainly not Grant.

 

Gould's speculation would only have been Government cronyism if Gould had been the crony of someone in the government who stood to profit from his scheme.

[DaveG]

Roger,

 

I would argue that when the Gold Standard is working properly, there is only one price for gold (as gold) and that is the price the Government pays for gold bullion delivered at the Mint (or some other designated point).

 

Certainly, even under the Gold Standard, merchants will pay a variety of prices to borrow money and, as gold is money, it would seem that the merchants are paying various prices for gold, but they're really paying various prices for money.

 

For example, if interest rates are higher in New York than in London (and sufficiently high to pay for the expense of shipping gold from London to New York), then London merchants will ship gold to New York from London.

 

However, they're not shipping gold (as gold), they're shipping gold (as money).

[RWB]

Dave,

I agree with you - the system was operating as it normally did. I was just reminding some that the price was not as rigid as some supposed.

 

[shirohniichan]

shirohniichan,

 

Once Grant figured out what they were up to he authorized the sale of $4 million in gold, and their house of cards collapsed.

 

 

I guess I didn't make my point clear. If Grant intervened and Gould's house of cards collapsed, then who were Gould's cronies? Certainly not Grant.

 

Gould's speculation would only have been Government cronyism if Gould had been the crony of someone in the government who stood to profit from his scheme.

 

Gould used Grant's brother-in-law (his sister's husband) to get access to Grant. His cadre convinced Grant that holding government gold from public sale would profit American farmers exporting their produce to Europe. Grant went along with their arguments at first, thus unwittingly cooperating with their scheme. Once he discovered their true aims he changed course.

 

So Gould's group benefitted from unwitting government cooperation in the beginning but were foiled in the end. That Grant was duped does not mean he did not help their plans, only that he did so with no ill intent on his own part.

[DaveG]

shirohniichan,

 

Thanks for the elaboration.

 

I think you've thoroughly refuted any assertion of "government cronyism".

[shirohniichan]

shirohniichan,

 

Thanks for the elaboration.

 

I think you've thoroughly refuted any assertion of "government cronyism".

 

It was awfully close, though.

 

If you have malafactors using their inside access to elected officials to change government policy to their financial favor, you have a problem of government intervention hurting the financial system. It isn't the invisible hand at the wheel-- it is hamfisted policy steering the economic ship. The officials in question may not know that they are hurting some to favor others, but the outcome is the same.