WASHINGTON, March 10, 1933 (UP) - The history of United States' finance in the 150 years between the "Valley Forge" of revolution and the "Valley Forge of Depression" strongly suggests the possibility of a prompt recuperation from the present banking and money crisis.
Many times in the nation's history a dislocation of the money system has precipitated "panics" or crises which seemed at the hour to mark the crack of doom, but were soon followed by a swift recuperation based upon limitless natural wealth and an incredible capacity for production once financial facilities were normal.
The present crisis is to a large degree deprived of its terror because it is lacking every aspect of mystery or novelty. Economists without number have called attention to major circumstances leading toward fiscal crisis, but a change in the national political temper was a necessary antecedent to correction.
These fundamental causes which culminated in temporary panic, according to a consensus of disinterested expert opinion have been (1) failure to readjust international commercial policy in the light of the United States' post war status as a tremendous "creditor nation" (a readjustment now largely made by calamity); (2) over-expansion of credit motivated in part by speculative impulse, at home and abroad, which led to surplus production of most commodities; and (3) dilatory action by Congress to correct the heavy budget deficit in three successive fiscal years.
The speed of the economic "slump" undoubtedly has been intensified by the extraordinary facility of international communications, which caused "sympathetic" economic disturbances in all countries when there was a negative development in any one. But this same great communications machine will be at hand to speed recovery once a definite "turn" is in evidence.
The first serious financial crisis in the United States followed the Revolutionary War. The period from 1783-1789 was marked by growth of debt at home and abroad, military dissatisfaction with depreciated paper currency, demands for an officers' "bonus," agitation for state issues of credit money. The crisis culminated in 1786 when the government had great difficulty in obtaining loans, domestic creditors were "panicked" and the confederation was unable to obtain consent for a national tax system.
The crisis was overcome by the drafting in 1787 of a new federal Constitution, with tax powers granted to the central government, provisions for duties and excises, and authority for national coinage. As early as 1790 the United States government was able not only to fund its debt, but to assume large debts which had been incurred by the individual states for war purposes.
The five-year period following 1816 was the next period of acute depression in the United States, attributable to difficulties of commercial and industrial readjustment after the extraordinary conditions produced by the War of 1812, during which trade embargoes had greatly stimulated domestic manufacturing.
Extreme contraction of credit and unbalanced budgets were gradually corrected by fundamental reforms in banking.
With approximate "normalcy" again restored the nation embarked on a merry program of territorial and business expansion westward, occasioning wholesale land speculation and an undue expansion of credit. The "prosperity" tide was checked, inevitably, by the so-called "specie circular" issued by the Treasury Department of July 11, 1836 which ordered agents for sale of public lands to take payment in specie only, and not in bank notes.
The consequence was an abrupt termination of land speculation, a drain on banks for specie, and banking difficulties for New York, and English banks with American connections. The remedy was found in issue of Treasury notes, lenient treatment of banks and importers in paying moneys due to the United States. From "The Panic of 1837" until 1843 Treasury notes were issued to the amount of $47,000,000.
The United States-Mexican War from 1846 to 1848 occasioned national war expenditures around $100,000,000 which were met by loans, Treasury notes and government stock. The normal setback that follows a war did not occur for the reason that the discovery of gold in California, heavy migration and development in new sections of the country, and an unusually good European demand for cotton and grain in the post-war period were all conducive to national prosperity.
In 1857, the "prosperity" was suddenly and rudely interrupted, by causes which are disputed; some economists believe that a low tariff with widened free list was a factor; others think that speculation induced by great additions to monetary medium through gold discoveries was the chief cause.
Most banks suspended specie payments soon after the outbreak of the Civil War in 1861, and in December of that year followed loss of confidence in the Union armies and an inadequate program of federal taxation. The federal government met this crisis early in 1862 by an act which authorized issue of $150,000,000 in legal tender notes, $500,000,000 in bonds, and interest bearing certificates of deposit.
Subsequently other issues of legal tender notes were made, and gold came to demand a premium. The gold premium progressively increased until in 1864 it ranged from 155 to 285 per cent and "gold gambling" became rampant in New York. This situation necessitated legislation to prevent speculation in price of gold and to control foreign exchange transactions, but public protest caused its early repeal. Unionists success in the war soon brought temporary relief in the acute situation.
As a consequence of the Civil War the United States became a heavy "debtor nation," internationally. National, state, railway, and miscellaneous debts estimated at a total of $1,500,000,000 were incurred abroad in the period of 1861 to 1868. This debt necessitated heavy interest payments abroad, in the period when value of American agricultural commodities suffered depressed prices due to agricultural over-expansion in this country, Russia, and South America.
These factors contributed to the "Panic of 1873," succeeded by the longest period of depression that has followed any financial crisis in this country. The federal government met this situation by a "sound money" policy, aiming at reduction of note circulation-the so-called "greenbacks" and provision for specie payments.
This deflationary program caused political "backfire" leading to the organization in 1876 of the "Greenback Party" which, in general, represented the "managed currency" idea which has found increasing favor during the present crisis. This school of political thought conceived money as the creation of the state, deriving its value and its use from the laws of the state, as contrasted with the schools of thought which conceive money as dependent for its ultimate value upon bullion.
The "Greenback Party" polled one million votes in congressional election of 1878, but two years later had slumped to $308,000. Other parties in some degree took over its ideas, and a presidential candidate in 1884 polled only 173,000 votes.
In the latter part of the 19th century, the rapidly expanding production of silver, particularly in the world famous "Comstock Lode" of Nevada, disturbed traditional ideas of the approximate relative value of gold and silver. This led to political maneuvers to sustain the value of silver in terms of gold, the most significant being the "Silver Purchase Act." Heavy purchases of silver were a drain on Treasury gold.
Great Britain in 1893 stopped the free coinage of silver in India, contributing further to a political strife in the United States.
A panic occurred in 1893, which was met by the repeal of the Silver Purchase laws, and subsequently by purchase of gold for reserve with government bonds. The period was marked by industrial depression, and banking difficulties which occasioned widespread use of clearing house certificates.
The "Panic of 1907" has been variously attributed to violent speculation, and to the weakening of national banks through the encroachment of trust companies into their field. A federal sanction to clearing house note issues was given in this period, and was at first contemplated as a remedy for the present crisis.
In the period since the World War, the sequence of events has been somewhat similar to that after the Napoleonic Wars; an early Depression (1920-1921) followed by a period of hectic prosperity, and finally, the inevitable period of liquidation and revaluation. After the early national corrective measures, the greatest hope for the future logically depends upon well-advised international action, hence the extraordinary importance of the approaching world economic conference.
