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The Specie Payment Resumption Act of January 14, 1875 was a law in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
that restored the nation to the
gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...
through the redemption of previously-unbacked
United States Notes A United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for 109 years, they were issued for longer than any other form of U.S. paper money. They were k ...
and reversed inflationary government policies promoted directly after the
American Civil War The American Civil War (April 12, 1861 – May 26, 1865; also known by Names of the American Civil War, other names) was a civil war in the United States. It was fought between the Union (American Civil War), Union ("the North") and t ...
. The decision further contracted the nation's
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
and was seen by critics as an exacerbating factor of the so-called
Long Depression The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used. It was most severe in Europe and the United States, which had been experiencing st ...
, which struck in 1873.


History

Late in 1861, seeking to raise revenue for the American Civil War effort without exhausting its reserves of gold and silver, the United States federal government suspended specie payments, or the payments made in gold and silver in redemption of currency notes. Early in 1862, the United States issued legal-tender notes, called greenbacks. By war's end, a total of million in greenbacks had been issued, and authorization had been given for another million in small denominations, known as fractional currency or "shin plasters." The issuance of greenbacks caused
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
during the period. Immediately after the Civil War during Reconstruction, there were large capital inflows into the United States and a general improvement in the export-to-import ratio since the export-dominant South was reintegrated with the North. The
United States Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
, however, had increased its cash balance through the summer of 1873 by selling gold for million.
National bank In banking, the term national bank carries several meanings: * a bank owned by the state * an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally) * in the United States, an ordinary p ...
s also increased issuance of national bank notes by million. The failure of several railroad companies including Jay Cooke & Company on their bond obligations encouraged capital outflows from the United States to Europe and weakened demand for dollars leading to the
Panic of 1873 The Panic of 1873 was a financial crisis that triggered an economic depression in Europe and North America that lasted from 1873 to 1877 or 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the ...
. Increased Treasury cash balances, continued issuance of national bank notes, and capital outflows together depreciated the currency. These factors further caused a reduction in reserves held by monetary institutions because higher prices increased domestic demand for currency. Reserves held by banks were insufficient to be able to meet seasonal demands in autumn of 1873 as greenback reserves declined from million in September 1873 to million in October 1873. Tensions surrounding the Panic of 1873 between creditors and debtors revived the specie payment resumption debate. Two views dominated this debate. Conservatives and the creditor class favored " hard money," that is, they favored resumption as a method for making up losses incurred due to dollar depreciation during the past decade. The resumption of specie payments was perceived as a method to curb the rise in the price level and eventually equate currency with gold. For creditors that had issued debts in inflated greenbacks, resumption would increase the real interest rate that they received. Supporters of the Resumption Act argued that the Panic of 1873 might not have occurred had there been sufficient reserves of gold in the United States Treasury as would have been the case if specie payments were resumed. Opposed to resumption, a new coalition of agrarian and labor interests found common cause during Reconstruction in advocating for "soft money" or the promotion of inflationary monetary policies. These groups viewed the Panic of 1873 as the result of insufficient currency that should have been used to fuel the growth in production that occurred in the South and the West. These regions relied on cheap money – that is low interest rates – to be able to continue to grow. Other soft money advocates included gold speculators and the railroad industry.
Collis P. Huntington Collis Potter Huntington (October 22, 1821 – August 13, 1900) was an American industrialist and railway magnate. He was one of the Big Four of western railroading (along with Leland Stanford, Mark Hopkins, and Charles Crocker) who invested i ...
and other railroad leaders called for further greenback issuance in light of harsh business conditions that made honoring debt obligations difficult. Opponents of the Resumption Act also argued that many debt obligations were made in an environment in which there existed a premium on gold, that is that inflation in the currency in the previous decade made gold relatively more valuable than currency. Resumption therefore entailed up to a 50% increase in debt obligation if gold and currency equalized. For manufacturers, the rising price of gold made domestic prices cheaper relative to import prices since many European currencies including sterling were fixed to the price of gold. Hence continued inflationary measures such as further issuance of greenbacks artificially supported domestic industries. Hard and soft money interests often did cross party lines, although a larger portion of Democrats were hard money advocates. Following a Democratic congressional victory in the elections of 1874, a lame-duck Republican congress passed The Resumption Act of January 14, 1875. It required the
Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
to redeem greenbacks in specie on demand on or after 1 January 1879. The Act, however, did not provide for a specific mechanism for redemption. The Act, though, did allow the Secretary of Treasury to acquire gold reserves either via any federal surpluses or the issuance of
government bonds A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...
. An established gold reserve allowed for daily variations in specie flows and facilitated resumption. The act abolished the
seigniorage Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
fee on coining gold and substituted silver for any still existing fractional currency. The Resumption Act set no limit on the quantity of national bank notes that could be issued; this idea became known as "free banking." This provision led many conservatives to believe that the Act was inflationary in nature. However, the Resumption Act also required that greenbacks be retired in a proportion of 80% of new national bank note issue, which in theory aimed to contract the money supply and hence encourage dollar appreciation such that gold and currency might equate. However, in practice the effect was mild: the total quantity of greenbacks in circulation fell from million at the end of 1874 to million following the passage of the Resumption Act. The Resumption Act was hotly debated during the 1880 presidential election, with most western politicians opposed to it. Specie payments finally resumed during the presidency of
Rutherford B. Hayes Rutherford Birchard Hayes (; October 4, 1822 – January 17, 1893) was an American lawyer and politician who served as the 19th president of the United States from 1877 to 1881, after serving in the U.S. House of Representatives and as governo ...
. Aided by the return of prosperity in 1877, Secretary of the Treasury
John Sherman John Sherman (May 10, 1823October 22, 1900) was an American politician from Ohio throughout the Civil War and into the late nineteenth century. A member of the Republican Party, he served in both houses of the U.S. Congress. He also served as ...
accumulated a gold reserve to be redeemed for existing greenbacks mostly from transactions with Europe. Sherman earmarked a redemption fund by January 1, 1879 that amounted to million acquired from the sale of bonds to Europe and Treasury surplus. However, when people found greenbacks to be on par with gold, they lost their desire for redemption.


Reaction and evaluation

Reactions as to the effects of the Resumption Act are mixed. Contemporaries did not consider it an outright victory for hard money. The legislation stood as a compromise engineered by Senators John Sherman and George Edmunds between hard and soft money advocates.
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna J. Schwartz Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
argue that the Resumption Act had mixed effects on actual resumption of specie payments, saying that primary economic product of the Act was that it instilled confidence in the business community on the maintenance of specie payments. According to Jennifer 8 Lee, backing American currency with gold helped curb inflation and stabilize the dollar. The Act served as a signal to businesses of an approaching exchange rate between gold and currency. Preparations among businesses for this exchange rate actually encourage parity between gold and currency. The Act did not directly address the
price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...
although successful resumption at
par value Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value). Bonds A bond selling at par is priced at 100% of face valu ...
required that the premium on gold to fall to zero, which in turn required a fall in the price level as the world price of gold was exogenous. In fact, the final date for Resumption was decided only after the premium on gold had fallen to a tenth of its peak level. The decline in the premium cannot entirely be attributed to the Resumption Act, as downward pressure on the overall price level also resulted from increased production in the South especially during 1877. The first four months of that year sold as much beef to England as had been sold all of the preceding year. The act has also been criticized for both failing to remove all greenbacks from circulation and failing to dictate what might be done with the greenbacks remaining in circulation.


Footnotes


References

* * * * * *


Further reading

* * Henry Carey Baird
''The Results of the Resumption of Specie Payments in England, 1819-1823: A Lesson and a Warning to the People of the United States''
Philadelphia: Henry Carey Baird & Co., 1875. * Henry V. Poor, ''Resumption and the Silver Question: Embracing a Sketch of the Coinage and of the Legal-Tender Currencies of the United States and other Nations. A Hand-Book for the Times.'' NY: Greenwood Press, 1969 (reprint of 1878 edition) * Gretchen Ritter, ''Goldbugs and Greenbacks: The Antimonopoly Tradition and the Politics of Finance in America.'' New York: Cambridge University Press, 1999.


External links

* {{Reconstruction Era 1875 in law United States federal currency legislation Financial history of the United States 1875 in the United States 1875 in economics