How the United States Conquered Inflation Following the Civil War

Americans today are once again the victims of price inflation brought on by runaway government spending and printing of unbacked paper money.

According to the most recent polling data, the American public’s approval of Congress stands at a dismal 21 percent. Almost four times as many people disapprove of the job it’s doing.

That’s par for the course in recent decades. It’s the major reason the Washington sausage grinder earns so little praise. To be fair, though, let’s review an occasion when lawmakers got something right. I’m prompted to share this story now because its lessons are especially relevant considering today’s concerns about rising price inflation. The year was 1875.

The Civil War (1861-65) produced disastrous hyperinflation in the Confederacy and considerable currency depreciation of paper greenbacks in the North as well. A decade after Appomattox, Congress still had not made good on its promise to make its paper money redeemable in gold. But in January 1875, alarmed by the rise of pro-inflation agitators (the “Greenbackers,” later to become “silverites”), Congress passed the Specie Payment Resumption Act, which President Ulysses S. Grant later signed into law.

Politicians often break their promises, and this was yet another opportunity to do so. Congress could have declared, “We don’t have the gold necessary to honor our pledge, so we’ll pay gold for greenbacks at 50 cents on the dollar.” But lawmakers chose to be honest for once, and to meet their obligations fully. The Act provided that all paper greenbacks would be redeemable on demand “at par” (100 percent of the earlier promise), beginning on January 1, 1879.

When Rutherford B. Hayes succeeded Grant as President in March 1877, he knew his administration had less than two years to prepare the Treasury and the nation’s banks for redemption. He and his Treasury officials believed the best way to avoid a run on the banks in January 1879 was to shore up the country’s gold reserves. They did so largely by selling bonds to Europeans in exchange for gold.

Redemption Day came amid rumors that people would flood the banks with their paper greenbacks and demand the promised gold, but just the opposite happened. Hardly anybody showed up at bank teller windows asking for the yellow metal. Why? Because the Treasury had accumulated more than enough gold to take care of convertibility, and the public knew it. The lesson? When people have good reason to believe their paper money is “as good as gold,” they prefer the convenience of paper.

Former United States Circuit Judge Randall R. Rader writes,

The year 1879 brought the resumption of the redeemable currency. The consumer price index stabilized at 28 in that year. For more than three decades thereafter (World War I interrupted the price tranquility), the index never rose above 29 or dipped below 25. The index remained at 27 for a decade. Never did it rise or fall more than a single point in a year. The gold standard worked throughout that entire period to keep prices remarkably stable.

Americans today are once again the victims of price inflation brought on by runaway government spending and the printing of unbacked paper money. Does the Specie Payment Resumption Act of 1875 offer a model that could solve the problem? Yes and No.

Certainly, tying the dollar to a precious metal would exert a discipline desperately needed in monetary policy. Putting the Federal Reserve out of business would be a meaningful and positive reform as well; since its inception in 1913, it has given us one Great Depression, a bunch of recessions and a currency worth maybe 1/20th of its 1913 value. The Fed is an inflation factory, stumbling and fumbling from one self-inflicted crisis after another. Gold convertibility, as the 1875 act provided, would signify a restoration of integrity and monetary sanity that we haven’t seen in a hundred years.

But two big, fat elephants ensure that an 1875-like reform would immediately collapse unless they are summarily escorted out of the room. One is dishonest politicians. Washington is overrun with them—people who are interested first and foremost in short-term power and re-election and least of all in the long-term economic health of the country. Many are (pardon my bluntness) economic morons, oblivious to the red ink even as they drown in it.

The other elephant—the presence of which is a confirmation and consequence of the first—is a massive, annual budget deficit.

In other words, monetary discipline goes hand in hand with fiscal discipline. A return to sound money is impossible without a simultaneous return to sound budget management. In the face of a monstrous budget deficit and an even more frightening $30 trillion national debt, Congress just voted to ship $40 billion to Ukraine without cutting so much as a penny from anything else.

We have neither a Congress nor a President, and perhaps no public consensus either, that would permit anything remotely resembling the 1875 Specie Payment Resumption Act.

And until we do, the dollar is destined for further depreciation. Just as elections have consequences, so do destructive monetary and fiscal policies.

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This article was published by FEE, Foundation for Economic Education and is reproduced with permission.