Transcript Lecture 10: The Civil War and its Consequences

The Civil War and Its
Consequences
Before the Civil War
•
•
•
•
•
Minimal federal debt
Minimal federal taxes (tariffs, excises)
No central bank
Fixed (bimetallic) exchange rate
State-chartered banks (damaged by panic
of 1857 and outbreak of war)
• HUGELY COSTLY WAR—forces changes
Federal Budget: postwar surplus
Pub
Fed
Debt
Defict
$
$M
M
Total
Rev
Cust
o
m
s
Intern
al
Rev
Other
3
63
3
39
1,297
77
1860
-7
65
56
53
1865
-963
2,677
333
85
209
Total
Exp
Pensi
o
n
Other
27
1
32
1,253
16
Intere Milita
st
ry
1911
1908
1905
1902
1899
1896
1893
1890
1887
1884
1881
1878
1875
1872
1869
1866
1863
1860
1857
1854
1851
1848
1845
1842
1839
1836
1833
1830
1827
1824
1821
1818
1815
1812
1809
20.0
1806
1803
1800
1797
1794
1791
Percent
US Debt to GDP 1791-1913
45.0
40.0
Civil War
35.0
30.0
25.0
War of 1812
15.0
10.0
5.0
Mexican War
0.0
1913
1910
1907
1904
1901
1898
1895
1892
1889
1886
1883
1880
1877
1874
1871
1868
1865
1862
1859
1856
1853
1850
1847
1844
1841
1838
1835
1832
1829
1826
1823
1820
1817
1814
1811
1808
1805
1802
1799
1796
1793
1790
Price Level GDP Deflator 1790-1913
225
215
205
Civil War
195
185
175
165
155
145
135
125
115
105
95
How to finance the war? The North
• Taxes?
– Primary source: customs—reduced by war, shift to internal revenue,
more indirect taxes and income tax—first time
• Bonds?
– Huge Effort---Massive Bond Sales
• Money?
– Issue of Greenbacks, declared legal tender—government accepts
these in payment of taxes and for government expenditure. These
are not convertible into gold and silver….gold and silver are hoarded--fiat money standard
The South? Hyperinflation and default on
debt and destruction of financial system
The Union’s Financing
of the Civil War
Taxation
Borrowing
Money Creation
Total
Percent
21
56
23
100
Indices of Prices and Real Wages During the Civil War
(1860=100)
Union
Confederate
Year
Prices
Real
Wages
Prices
Real
Wages
1860
100
100
100
100
1861
101
100
121
86
1862
113
93
388
35
1863
139
84
1,452
19
1864
176
77
3,992
11
1865
175
82
The War and the Monetary System
• What did a bimetallic (or gold) standard
guarantee?
• Gold and economy grow at “about” the same
rate: MV=PQ or in rates of change m + v = p + q
• U.S. abandons gold standard
• Fixed exchange rateFloating exchange rate
• Value of dollar falls, inflation and depreciation of
the $.
• Why did the U.S. go off the standard in the Civil
War?
• Coinage Act of 1792---defined
basic monetary unit as the dollar
• Set U.S. $ equal to 371.25 grains
of fine (pure) silver or 24.70
grains of pure gold.
• Authorized free coinage of both
silver and gold at ratio of 15.
Public brings in as much gold or
silver as it wants and it is coined.
• U.S. effectively on silver
standard 1792-1834 because
world price > 15:1
• Act of 1834—Jackson’s
supporters aim to injure Bank of
U.S. whose large denomination
notes were widely used---set
ratio at 16:1---aim to put more
gold in circulation…de facto
gold standard…..1834-1860
U.S.
Bimetallism
1913
1910
1907
1904
1901
1898
1895
1892
1889
1886
1883
1880
1877
1874
1871
1868
1865
1862
1859
1856
1853
1850
1847
1844
1841
1838
1835
1832
155
1829
1826
1823
1820
1817
1814
1811
1808
1805
1802
1799
1796
1793
1790
Price Level GDP Deflator 1790-1913
225
215
205
Civil War
195
185
175
165
1834-1860
145
135
125
115
105
95
The Problem
• 1860 Exchange Rate £1 = $4.86 under specie standard
• Cotton dress in U.S. costs $4.86 and in U.K it costs £1. So
it is competitive because $4.86/($/ £)4.86 = £1
• But in war, no promise to exchange $ for gold or silver.
Prices in U.S. rise by 232%. In U.S. prices of dress now:
$4.86x2.32=$11.32
• At end of war, U.S. cannot compete, $11.32 dresses cost
11.32/4.86= £2.32, would result in huge outflow of specie to
Britain
• Two choices (1) devaluation of $ so £1=$11.32 or (2) allow
gold outflows deflation reduce prices so that dress is again
$4.86
• Problem of the Debt: $100 principal with 6% coupon sold
with promise that will repay in gold.
• Annual coupon is $6 but this is now only worth
$6/2.32=$2.89, imply that $100 bond is worth less if
investors continued demand in 6% in real terms:
2.89/.06=$43.10. Bond holders would feel defrauded. So
government picks deflation over devaluation.
Postwar Problems:
Price Level and the Debt
• Policy makers understand the need for
commitment to repay real value of the
debt---decide to reduce the Greenbacks in
circulation.
• Deflation to lower the price level to prewar
level--but huge political pressures.
• Effects on debtors and creditors??
Price Level GDP Deflator 1790-1913
Price
Level
Real Debt in 1865 $
Nominal
Debt
225
215
205
=
1865
$100
210
=(100/210)*210
100.00
1870
$100
135
=(100/135)*210
155.56
195
185
175
165
155
145
135
125
115
105
1913
1910
1907
1904
1901
1898
1895
1892
1889
1886
1883
1880
1877
1874
1871
1868
1865
1862
1859
1856
1853
1850
1847
1844
1841
1838
1835
1832
1829
1826
1823
1820
1817
1814
1811
1808
1805
1802
1799
1796
1793
1790
95
How did they move from
Greenbacks to Gold?
• 1866 House of Representatives votes 144 to 6 to return
to gold----but parties soon split: Republicans generally
“hard money” and Democrats “soft money”
• Coinage Act of 1873—lists coins to be minted: gold and
subsidiary silver but not silver dollar. Clear decision by
Secretary of the Treasury, Comptroller of the Currency
and leading Senators---but no popular protest.
• 1874 Congress sets maximum for greenback issue
• Resumption Act of 1875---sets resumption of specie
standard on gold basis on January 1, 1879. (Parallels
Britain: off specie 1797, demonetize silver in 1816,
resumption in 1819 on gold).
• 1879---Resumption of convertibility of dollar into gold!!!
Making Good on Your Commitment
How Is Resumption Achieved? Method?
(Friedman and Schwartz, 1963)
M* + V* = P* + Q* ?????
Federal Budget: postwar surplus
key to commitment
Federa Public
l
Deficit
$M
Debt
$
M
Total
Rev
Custo
m
1860
-7
65
56
53
1865
-963
2,677
333
85
1870
101
2,436
411
1875
13
2,156
1880
66
1885
Interna
l
Rev
Total
Exp
Other
Interes
t
Military
Pensio
n
Other
3
63
3
27
1
32
209
39
1,297
77
1,253
16
194
185
32
309
129
78
28
74
288
157
110
21
274
103
62
29
80
2,090
333
186
124
23
267
95
51
56
65
63
1,578
323
181
112
30
260
51
58
56
95
1890
85
1,122
403
229
142
32
318
36
66
106
110
1895
-31
1,096
324
152
143
29
356
30
81
141
104
1900
46
1,263
567
233
295
39
520
40
189
141
150
1905
-23
1,132
544
261
234
49
567
24
243
142
158
1910
-18
1,146
675
334
290
51
693
21
312
161
199
1911
1908
1905
1902
1899
1896
1893
1890
1887
1884
1881
1878
1875
1872
1869
1866
1863
1860
1857
1854
1851
1848
1845
1842
1839
1836
1833
1830
1827
1824
1821
1818
1815
1812
1809
1806
1803
1800
1797
1794
1791
Percent
US Debt to GDP 1791-1913
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Success also measured by fall in yields/interest rates
Civil War to World War I
and the
Politics of Money
• Civil War, 1861-1864
• Greenback Period, 1864-1879
• The Gold Standard, 1879-1914
– Deflation and Silver Politics, 1879-1897
– Gold Inflation, 1897-1914
Bordo (1981) Chart 2