Spaulding and his allies argued that the Constitution’s prohibition against any nongold or nonsilver money applied only to states, not the federal government. Moreover, the Constitution also gave Congress power to coin money and “regulate the value thereof.” The American government had long regulated the value of metallic money (including, importantly, defining how pure the metal had to be and what the exchange ratio between gold and silver was); Spaulding maintained that his bill would simply transfer this power of regulation to paper money. Massachusetts senator Charles Sumner allowed that while of course the Constitution may not explicitly give the government the power to issue paper money, it also doesn’t give it the right to issue Treasury notes, the legal sanction of which had been unquestioned since the War of 1812. Proponents also rejected the assumption that paper currency would inevitably fail; the British, as a result of the Napoleonic Wars, had effectively moved to a “paper pound” standard between 1797 and 1821 without economic disaster.
The constitutional debate was at times fascinating and arcane (much energy was expended on determining the correct meaning of the word necessary), but it could never be finally resolved outside of court review. The urgency of fighting the South trumped any philosophical or even practical monetary views; as Spaulding put it, “Our army and navy must have what is more valuable to them than gold and silver. They must have food, clothing, and the material of war.” The Senate approved the legal-tender bill (with some seemingly modest modifications that would soon be roundly attacked) on February 13 by a vote of 30 to 7; the House and president approved a final version on February 25.
By that time, the case for legally tender paper money had become almost indistinguishable from the case supporting the Union in the war. It was an argument in favor of a strong, centralized federal government, an acknowledgment that the Industrial Revolution and its affiliated social effects had strained the limits of the American socioeconomic contract to a point where the arguable letter of the Constitution (not merely the gold and silver clause but also the Tenth Amendment’s limitation on the powers of the federal government) had to give. The move to a nationally authorized paper currency was a blow against Jacksonian economics, not only because it broke money out of its metallic cocoon, but because it acknowledged officially that debt is not something in all instances to be feared but rather is an essential part of national growth. Legal-tender paper currency also forced the North to choose among a set of values that had become collectively untenable. That is, while protecting the Union, fighting slavery, and holding on to hard money might all be worthwhile goals, it was no longer possible to maintain all of them; setting a pattern for the future, when fundamental national goals would come into direct conflict with a strict insistence on hard currency, hard currency lost. Moreover, as will become especially pointed in the next chapter, paper currency signaled to the world that monetary value is not God-given and thereby fixed, but is fluid, variable, and subject to manmade assessments and vagaries. The financial historian Bray Hammond elevated the legal-tender debate to a realm of political metaphysics. “As an exercise of sovereignty,” Hammond wrote, greenbacks “advanced the national government’s powers far beyond what had ever been ascribed to it before. They lifted federal powers . . . to a mystical level where . . . the nature of a thing could be changed by giving it, through legislative enactment, a new name.”39
The flip side is equally true: the arguments in favor of asserting gold and silver as the only possible backing for currency became increasingly indistinguishable from those favoring states’ rights, secession, and slaveholding. They were an argument for a government both formally limited in power (in the sense of not having the authority to print paper money) and practically limited in size (in the sense of being forced to live within its means). They were an argument to default to states’ rights on questions where the Constitution did not explicitly give the federal government authority. Given the country’s geographic concentration of financial power, the agrarian identification with metallic money—already strong from the days of Jackson—deepened, while the industrial cities became more identified with paper currency. And because legal-tender paper currency represented a novel monetary wave, gold-standard advocates found themselves implicitly arguing in favor of tradition and against modernity. And yet, even while these battling categories represented the full passions of the Civil War, they would not withstand the convulsions that were to come.
CHAPTER 2
A Crash, a Clash, and a “Crime”
This chalkboard was used to record the wild price swings in the price of gold on “Black Friday,” September 24, 1869. The market crash erased fortunes and shattered confidence in gold as a protector of the American economy. Courtesy Library of Congress
IN MID-JUNE 1869, President Ulysses S. Grant was traveling with his family through the Northeast. He attended the commencement at his alma mater, the United States Military Academy at West Point, where his son was a cadet in the third class. Also on his agenda was the National Peace Jubilee, a massive, three-day music festival in Boston featuring tens of thousands of performers. Between the two events, Grant and his wife visited the president’s newly wed sister in her mansion on West 27th Street in Manhattan. Grant’s sister Virginia had lived a quiet life with her parents in Ohio and reached the age of 37 with few marital prospects. This changed with her brother’s political ascendance, and Virginia had caught the eye of a 61-year-old financier named Abel Corbin; they married within two months of Grant’s March inauguration.
Grant’s Manhattan visit was a brief encounter of a few hours but, unbeknownst to him, a group of calculating businessmen—including his brother-in-law—used it to gain access to the president as part of a scheme that would, in just a few weeks, create perhaps the greatest gold panic in the history of the United States.1 Waiting at the home of Grant’s sister and brother-in-law was Jay Gould, a 33-year-old financier already notorious for successfully battling with the Vanderbilt brothers for control of the Erie Railroad. A year before, Gould and his buccaneering partner Jim Fisk had been threatened with arrest if they set foot in New York State; now they were about to meet the president of the United States in a family setting. Gould knew Grant’s son-in-law Corbin through a real estate transaction that the two men had conducted in New Jersey. Gould had convinced Corbin to allow him to meet the president in order to try and persuade him to pursue a particular policy path regarding gold and agricultural prices. Not coincidentally, Gould had been speculating on the still new, and effectively unregulated, gold market in New York—and had a plan to corner it. He had recently purchased some $7 million in gold at a price of $131 per $100 of gold coin. At the time this was, remarkably, nearly half of all the gold in circulation in the New York market.
When the two men met, Gould suggested to the president that the most pleasant way to travel to Boston would be on a steamship to Fall River, Massachusetts, and to take a train from there. Grant, who enjoyed the company of wealthy men, agreed, and Gould arranged for a military escort for the president and his party downtown to a pier on Chambers Street. The steamship Providence was docked there, decorated lavishly for the president’s visit, which the owner and captain—Gould’s Wall Street partner Jim Fisk—knew in advance to expect. A brass band on the wharf played “See the Conquering Hero Comes” as the president approached; cigars, champagne, and liquor were passed along; and each of the ship’s 125 rooms came with its own caged canary.
Dinner began at about 9 p.m., and Grant found himself smoking cigars with an incestuous ring of businessmen—including Cyrus Field, who earlier that decade had dramatically laid the first trans-Atlantic telegraph cable and was now in the railroad business with Gould; and the once-powerful stockbroker William Marston, who was in the shipping business with Fisk—who were keen to learn his views on gold, money, and the economy. Grant, perhaps aware of the sleazy reputation of his hosts, was taciturn and noncommittal. At the time, Grant favored the “contraction” policy that he had inherited from
the beleaguered Andrew Johnson administration. The idea was to take the greenbacks out of circulation, a process that had begun almost as soon as the war ended; when greenbacks came in as tax revenue, Treasury would literally destroy the paper. Congress approved of this action although it wanted to put constraints on it; in 1866 it authorized the destruction of as many as $4 million per month, a rate that would have removed all greenbacks from circulation by the mid-’70s. Greenbacks were viewed as a once-necessary evil that should now be purged. Echoing the view of many of the nation’s founders, the Treasury Department’s official position was that paper money brought shame to the United States if it was not convertible to gold: “It is not supposed that it was the intention of Congress . . . to perpetuate the discredit which must attach to a great nation which dishonors its own obligations by unnecessarily keeping in circulation an unredeemable paper currency.”2
Grant shared this view and wanted ultimately to restore money backed by gold—and he equated that cause with the honor and morality of the Civil War that he had won. In his inaugural address in 1869, Grant declared that “to protect the national honor, every dollar of Government indebtedness should be paid in gold, unless otherwise expressly stipulated in the contract.” Within two weeks of this pledge, Congress passed the Public Credit Act—mostly on party lines, with Grant’s Republicans supporting and most Democrats opposing—which required the government to pay back all bondholders who funded the Civil War in gold. This was the most concrete action since the war ended indicating that the government intended to return to money backed by gold (and it corresponded to a low point in the price of gold, right around the level at which Gould was snapping the metal up).
Grant’s inaugural address had taken the point a step further. He argued that the very timing of the discovery of gold and silver on American soil suggested it was God’s will that they be used to pay the country’s war debt. “It looks as though Providence had bestowed upon us a strong box in the precious metals locked up in the sterile mountains of the far West, and which we are now forging the key to unlock, to meet the very contingency that is now upon us,” said Grant.3
The logical next steps for contraction policy, naturally, involved the government selling into the private market as much of the gold stock it had acquired during the war—estimated at about $100 million—as practical, in preparation for “reentry” into a gold-backed currency. After all, if banks were to issue gold-backed currency as they had in the past, they would need to restock their vaults. Accordingly, Treasury had sold $1 million of gold into the market in April and $6 million in May, and that June would sell $8 million. These large government sales hurt Gould and his cronies by suppressing the value of gold that they were sitting on. Gould adopted the position that, as a railroad magnate, he had special insight into the importance of a high gold price and freely circulating greenbacks to being able to move the country’s crops in the fall and to secure a market abroad for them—the nation’s interests and his interests were perfectly and conveniently aligned. Thus, aboard the Providence, Gould offered a rebuttal to Grant’s implied plans to put more gold into the market. “I remarked that I thought if that policy was carried out, it would produce great distress, and almost lead to civil war; it would produce strikes among the workmen, and the workshops, to a great extent, would have to be closed; the manufactories would have to stop,” Gould later told Congress.4
Gould’s implication that financial ruin in the country’s farmlands could have revived armed rebellion might have been alarmist and self-serving, but it wasn’t entirely off base. The reintegration of the United States following the Civil War is one of the most complex tasks ever undertaken by the federal government, and it took place under conditions so contentious that they often resembled wartime.
Most people today recall the Fourteenth Amendment for outlawing slavery and giving America’s former male slaves citizenship and the right to vote—but this was a sea change in American economics as much as it was in civil rights. Slaves were property, and emancipating them meant taking property away from existing slaveholders. The text of the amendment explicitly prevents any state or the federal government from paying for “any claim for the loss or emancipation of any slave.”
How America valued its currency, therefore, was one of several issues that threatened to reopen the issue of secession and rebellion. Not only did the South on the whole decline to repay its war debts, but it would have been severely challenged if it wanted to, given that the war and greenback system greatly weakened the state banking system on which the South had relied.5 Many, probably most, southern property owners expected that part of the conditions for rejoining the United States was that the government would compensate their war losses. A US Army general who had been stationed in Alabama since Lee’s surrender said, “They talk very freely in regard to an effort being made by their members, once in Congress, to get pay for all the negroes they have lost, or that have been freed under the President’s proclamation.”6 Closely related to this was southerners’ expectation that their real estate damage would be compensated, and that they would seek to have the members of Congress not pay the northern war debts if these conditions weren’t met. What Andrew Johnson’s government had faced, then, was a very real threat that if the South were allowed to reenter the Union largely under the conditions of the status quo antebellum, they might combine forces with northern democrats and essentially refight the Civil War. Thus the Fourteenth Amendment contains a sweeping (and to this day much-debated) section, which Grant’s inaugural invoked less than a year after it had been ratified: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” For Grant and many leaders of the national Republican Party in the 1860s, returning to the gold standard was the only honorable and creditworthy way to retire the country’s staggering war debt (estimated at more than $2 billion—far higher than the total amount of currency in circulation in the country, and not including the $428 million in greenbacks which were supposed to be removed from circulation). To suggest otherwise was to question the validity of the horrible war’s outcome, although putting the brakes on gold’s return was precisely what many in the South and West wanted, and what Gould was advocating.
The steamship encounter was, as Gould later put it, a “wet blanket” over his gold-market plans. But he, Fisk, and Corbin had many other plans of attack. The position of being the president’s brother-in-law carried considerable unwritten influence. Corbin had tried to get his first wife’s son-in-law appointed as deputy treasury secretary, a position responsible for monitoring the gold market. When the man found out that he would be expected to signal Corbin in code in advance of any government gold sales, he withdrew from consideration. Corbin’s next choice was Daniel Butterfield, a family friend who had been a Civil War general and was the son of the founder of American Express. Butterfield had also raised the money that Grant used to buy a house in Washington, DC—from Corbin. Shortly after Butterfield took the job, he met Gould, who gave him a check for $10,000—which was higher than his annual government salary—seemingly with no strings attached. Through his new friends, Butterfield maintained active trading accounts in the very gold market he was supposed to be overseeing.
The next step was to create the public impression that the government was going to slow or cease its gold sales. The price of gold that summer had dropped from its onetime high, thanks to the government sales and capital inflows from abroad. Gould and a few other Wall Street associates formed a “bull pool” to buy up gold wherever possible, and before the end of August the pool held more than $10 million in gold. In the meantime, Gould and Corbin drafted an appraisal of Grant’s monetary intentions and managed to convince the pro-Grant New York Times to publish it as an unsigned editorial. The paper praised Grant’s sound thinking and predicted, true to Gould’s desired scenario, that “until the crops ar
e moved, it is not likely Treasury gold will be sold for currency to be locked up.”7 In fact, the opposite was true; Treasury Secretary Boutwell was planning for September to be the biggest month for government gold sales since Grant took office. But Gould almost certainly knew that it would be irresponsible of Boutwell to publicly confirm or refute the assertion, and thus the editorial had its desired effect: the gold price began to creep back up. To enhance the illusion that the government was officially in cahoots with the Gold Ring, Fisk created a special account at Gould’s brokerage called the National Gold Account.
At this stage, Gould seemed to have fallen victim to his own propaganda. Nearly everything he saw confirmed his hope that the government would stop selling gold. On Wednesday, September 1, Grant stopped in at his sister’s Manhattan home after several days’ vacation in upstate Saratoga and had breakfast with his brother-in-law, Corbin. Over breakfast, Grant effectively declared that he had converted to Gould’s theory that gold should be scarce and expensive. The harvest looked strong and farmers deserved the government’s support; Grant told his brother-in-law that he had written a letter to Boutwell telling him to cancel the government’s plan to sell gold in September.
What happened next is so absurd that it seems lifted from the script of a drawing-room comedy. Unbeknownst to the president of the United States, the largest gold speculator in the country was just down the hall in the living room. Corbin excused himself from the president, shut the door, and went down the hall to tell Jay Gould that Grant would now abstain from gold sales for the foreseeable future. With this ultimate insider’s tidbit, Gould slipped out of the house and scurried downtown to buy more gold. Corbin then went back to the kitchen to resume his breakfast with the president.
One Nation Under Gold Page 5
