Before the first Congress of Grant's second administration met, in December, 1873, an economic crisis of unusual severity had overtaken the country. As far back as the autumn of 1865 Secretary McCulloch had warned his fellow citizens against mistaking the fever of speculative extravagance for the healthy glow of industrial prosperity. Still the signs of the evil day were slow in appearing. Year after year the mileage of new railroad tracks increased.1 The demand for iron and steel exceeded all the capacities of our multiplying foundries and mills. Stimulation in other industries followed the rising barometer of the iron trade. The carriage of coal, ore, lumber, and grain on the Great Lakes and over the consolidating railroad systems increased rapidly. Workers were everywhere in demand. Wages were high. Capital poured in from Europe. Great banking houses, like Jay Cooke and Company and Fisk and Hatch, financed the new railroads until enough track had been built for the issue of bonds, and the public rushed to purchase the bonds, furnishing further capital for the extension of the roads. General optimism prevailed; the investors dreamed of golden profits. Suddenly, in the spring of 1873, a panic on the stock exchange of Vienna stopped the flow of European capital to America and threw upon the financiers of Wall Street the task of carrying the enormous burden of oversanguine pledges. Money grew tight. Optimism changed to sober calculation, and calculation to anxiety as men began to realize that far too much capital had been converted into fixed and as yet unremunerative forms.

Jay Cooke was the Morgan of his day. His name was a synonym for financial stability. For his great services in floating Secretary Chase's bond issues he had earned the title of "financier of the Civil War." as Robert Morris had been the financier of the Revolution. When, therefore, on September 18, 1873, the house of Jay Cooke and Company, which was marketing the Northern Pacific Railroad bonds, closed its doors, the failure came like a bolt from the blue. Nineteen firms on the stock

1The figures, taken from Poor's Manual, are 4953 for 1869; 5690 for 1870; 7670 for 1871; 6167 for 1872-a total of nearly 25,000 in the four years of Grant's first term, as against 47,961 miles built in all the years previous to 1869.

exchange followed Jay Cooke into bankruptcy the next day. Banks and trust companies failed; gilt-edge securities dropped 25 or 35 points; great industrial concerns went down with a crash. The stock exchange was closed for eight days. The Clearing House Association issued an emergency currency in the form of certificates, and the Secretary of the Treasury brought some relief to the situation by purchasing $13,000,000 of bonds in the market and reissuing $26,000,000 of the canceled greenbacks. The financial panic was checked; but a long period of industrial depression, the inevitable nemesis of reckless overtrading, set in. "No genuine revival of business," says Rhodes (Vol. VII, p. 52), "took place until 1878. The mercantile failures for 1873 and the three years following were $775,000,000; the railway defaults up to January 1, 1876, $779,000,000, of which $226,000,000 of such defaults had occurred before the September panic began. These five years (1873–1878) are a long dismal tale of declining markets, exhaustion of capital, a lowering in the value of all kinds of property, including real estate, constant bankruptcies, close economy in business and grinding frugality in living, idle mills, furnaces, and factories, former profit-earning iron mills reduced to the value of a scrap heap, laborers out of employment, reductions of wages, strikes and lockouts, the great railroad riots of 1877, suffering of the unemployed, depression and despair."

To what extent, if any, the condition of our currency was responsible for the panic of 1873 is a question on which the experts differ. Business depression and tight money were general that year in Europe as in America. Paris, Berlin, and Vienna had their crises, as well as New York. It is hardly necessary to seek further causes for the economic panic than the coincidence of a period of reckless overtrading here with a critical moment in European finance. However, it is certain that our recovery from the panic was retarded by the currency situation. The new structure of business confidence would have risen more quickly on the sound foundations of a specie basis than on the shaky supports of a paper currency. This is shown by the fact that while the downward trend of prices was checked in Europe

in a few months, prices here continued to fall until the legislation of 1875 gave assurance of the return to specie payments. The greenbacks had been issued during the Civil War purely as an emergency currency. The debates in Congress on the issues in the early sixties make it evident that there was no thought of introducing an inconvertible paper into our currency as a permanent feature. Soon after the cessation of hostilities Secretary McCulloch had initiated a plan for the retirement of the greenbacks. Their volume had been reduced from about $433,000,000 to $356,000,000, when Congress suddenly put a stop to further contraction by the law of February 4, 1868.

The reason for this reversal in our financial policy was the growing conviction, especially in the West, that contraction was unfavorable to business and particularly hard on the debtor communities. The increasing volume of business demanded more rather than less money. Thus was set the currency problem which vexed the country in acute form for a generation after the close of the war, and which was not settled with final satisfaction until the creation of the Federal Reserve System in 1914; namely, how to provide a volume of currency sufficient for the expanding business of the country and at the same time keep that currency up to the highest standard of national financial honor and on a par with the systems of gold countries like England and France, with which we must maintain international exchanges. It was easier to solve the problem in theory

1

1 James A. Garfield, with his usual clarity in debate, stated the case in a speech delivered in the House, May 15, 1868: "When the money of the country is gold and silver, it adapts itself to the fluctuations of business without the aid of legislation. If at any time we have more than is needed, the surplus flows off to other countries through the channels of international commerce. If less, the deficiency is supplied through the same channels. . . . Not so, however, with an inconvertible paper currency. . . . We are cut off from the money currents of the world. Our currency resembles rather the waters of an artificial lake which lie in stagnation or rise to full banks at the caprice of the gate-keeper. Gold and silver abhor depreciated paper money and will not keep company with it. If our currency be more abundant than business demands, not a dollar of it can go abroad; if deficient, not a dollar of gold will come in to supply the lack. There is no legislation on earth wise enough to adjust such a currency to the wants of the country."

than to apply the solution in practice. Many a financial expert, like John Sherman himself, who believed that the elimination of the greenbacks from our currency was sound policy, appreciated, nevertheless, the hardship which a too rapid application of the policy would entail. But while the advocates of contraction recommended caution for expediency's sake, the inflationists urged their demands as a matter of principle. They had incurred their debts in greenbacks, and did not wish to pay them in gold. Moreover, to the Western farmer, accustomed to the unreliable paper issues of the wildcat banks before the war, the greenbacks were a remarkably satisfactory currency. They were uniform in value and stamped with the guarantee of the United States government. They were the currency of patriotism, the "battle-scarred" greenbacks that had saved the Union. If they had been useful in war, why should they be dishonored in peace? An emotional appeal backed by economic interest is likely to be stronger than the dispassionate arguments of logic.

When Congress met, therefore, in the midst of the panic, a flood of petitions poured in praying for the relief of the financial stringency. After a lively debate, covering four months, both Houses passed a bill in April, 1874, to increase the issue of greenbacks to $400,000,000. President Grant hesitated for a time between his own convictions and the argument of party expediency. "I never was so pressed in my life," he said some years later, "to do anything as to sign that bill, never. It was represented to me that to veto would destroy the Republican party in the West; that the West and South would combine and take the country and agree upon some even worse plan of finance." In the end conviction won. On the ninth day after the passage of the bill the President sent in his veto. By this courageous act Grant frustrated the hopes of the inflationists and gave notice to the world that the United States would pay its debt in coin. The veto paved the way for the act of 1875 providing for the return to specie payments, and set the precedent for the resistance of the sound-money men to later schemes to commit the country to a lowered standard of currency. The greenback movement lived on, to be sure, developing considerable strength

in the West. In 1875 the greenbackers formed a national party, and in the three succeeding presidential campaigns put candidates in the field, generally in fusion with the labor reformers. But the repudiation of their principles by Grant's veto of 1874 relegated them to the company of "third parties," which, in spite of earnest convictions and great activities, failed to register any conspicuous political success until their amalgamation into the People's Party in the early nineties.

President Grant's veto of the Inflation Bill undoubtedly cost the administration votes in the mid-term congressional election of 1874, as the "soft money" Republicans, like Morton, Logan, and Ferry, predicted that it would. The panic also injured the administration; for the people at large tend to blame the party in power for public misfortune of any sort. However, there was abundant cause in the political situation in the autumn of 1874 for opposition to the Grant régime. Aside from the persistent disorder in several of the Southern states, new scandals were added to the revelations of the Crédit Mobilier. A protégé of Benjamin Butler's in Boston, named Sanborn, was found to have made over $200,000 in fees from "moiety" contracts with the Secretary of the Treasury, which allowed the agent who ferreted out and collected unpaid Federal revenue taxes to keep 50 per cent of the proceeds as a commission. Secretary Richardson resigned to avoid a vote of censure by the House. Alexander ("Boss") Shepard, governor of the District of Columbia, enriched his friends of the "District Ring" by fat contracts for paving, draining, and building, before the governorship was abolished and the District put under a commission form of government in 1874.1 Benjamin H. Bristow, who succeeded Richardson in the Treasury Department in June, 1874, discovered the existence of a "Whisky Ring," with headquarters in St. Louis, which had been defrauding the government of several hundred thousand dollars annually in collusion with the revenue officers. Needless to say, President Grant had no part in the counsels of dishonesty; but the fact that such extensive schemes

1 In spite of the outcry against Shepard, Grant nominated him as one of the commissioners. The nomination was rejected by the Senate by a vote of 6 to 36.