To Understand Today's 'Bubbles', We Must Look to the Past

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The Supreme Court decided in 1877 in Munn v. Illinois to uphold state legislation regulating the rates a private business could charge in the normal course of its enterprise. At issue was the concept of "public good", in other words private businesses that provided goods and services in the public interest. Munn had argued under the Fourteenth Amendment that due process to his private property was being violated by the Illinois Legislature's attempt to impose restrictions on what he could charge farmers to store product in his grain elevators. Under Chief Justice Morrison Waite the Court upheld the Illinois regulations, voting 7 to 2 that Munn's business fit the definition of operating in the public interest. Therefore, the business would be deemed a private utility serving the public interest and that the state of Illinois had an interest and duty to regulate that utility, including the cost of privately providing goods and services.

The Munn decision was one of six so-called "Granger" decisions. The National Grange had no direct involvement in the cases, but the interests of farmers, to which the Grangers were focused, were prominent in each. And in all the cases, the Supreme Court ruled that there existed "public interest" and thus subject to regulations. Later courts would narrow the provisions, but the principle was established in defining the boundaries of government intrusion into commerce.

The Grangers themselves were a rather youthful organization at that point in time. The National Grange of the Order of Patrons of Husbandry had been around in unofficial formats before its founding in 1867, largely as collections of farmers in individual towns. The associations were created for community development in the most basic sense of the word. The approach of industrialization, particularly railroad development, had introduced new factors in the operations of agriculture. As such, the National Grange began to seek larger redress to the problems and viewpoints of the previously amorphous bands of millions of farmers scattered across the American geography.

As the official structure of the national organization began to create networks of people with common interests and philosophy, particularly the political idea of public interest, a nascent political movement was developed in the conflictive years of the 1870's. We often think of that period under the guise of Southern Reconstruction, but political and, perhaps far more importantly, economic development was not limited to the former Confederates.

Beginning in 1874, a convention call was issued to all men of the "greenback" persuasion to assemble in Indianapolis. The impetus behind the congress was to investigate the potential for a more structured political movement dedicated to not just the greenback (fiat paper currency) but to also eliminating the power of "Eastern" influences in the monetary and economic landscape. To these burgeoning politicians, the gold standard was a curse that was rightfully recast by greenbacks during the Civil War.

The idea of paper "money" issued by the federal government was nothing new, but war expediency in 1862 forced the Lincoln administration to issue the first federal currency. Unable to float enough bond sales to pay for war expenditures in that crucial first year of conflict, the Union government was left with a choice of printing money (greenbacks) or allowing banks to issue notes backed by government bonds (rather than solely gold). By the end of the Civil War, both had actually been approved and implemented.

Some $450 million in greenbacks were ultimately issued. The public much preferred notes backed by gold, as Navy Secretary Gideon Welles observed in July 1864:

"The idea with [Treasury Secretary] Chase seemed to be to pay low interest in money but high prices in irredeemable paper, a scheme that might have temporary success in getting friends and popularity with speculators but is ruinous to the country."

The "value" of greenbacks, that is their tradable price relative to gold or gold-backed dollars, fluctuated wildly. There began a robust speculative industry, centered on Wall Street, that aimed to profit from this volatility. These speculators were openly disdained as "General Lee's left wing on Wall Street." By the end of the war, the greenback was trading at less than half the relative price to the gold-backed dollar.

As the war ended, the greenback question became more prominent as the Johnson administration sought not only reconstruction of the South, but economic expansion in the whole of the US. It was an open inquiry as to whether these various war "currencies" would become a permanent fixture into the American monetary system. The debate intensified as the gold standard appeared to gain the political support (in the East) necessary for its re-adoption.

The nation's economic system began to re-orient toward the resolution of gold, and come the panic of 1873, the "deflation" that was being driven by the resumption of golden money was an easy target for those most disaffected by currency changes. During that decade, the idea of public interest and the greenback began to meld into the Greenback Party.

Currency expansion even gained a measure of support in Congress due to the economic depression immediately after the 1873 panic. Both the House and Senate passed the "Inflation Bill", as it became known, calling for increasing the amount of greenbacks in circulation to wartime levels. President Grant vetoed the bill in April 1874, but the basis for its presentation and validity remained a significant political topic - perhaps even the pre-eminent issue of the last quarter of the 19th century.

By 1875, the Greenback Party itself was officially formed in Cleveland. Immediately, its most prominent member was surely Thomas Ewing. As a Civil War veteran, the first Chief Justice of the new state of Kansas, private secretary to President Zachary Taylor, brother-in-law of William Tecumseh Sherman and friend of Abraham Lincoln, Ewing brought respect and acknowledgement to the nascent movement - though he remained nominally a Democrat (switching from a Republican during the Grant administration). That year he engaged in a prominent series of debates with "hard money" defender, Stewart Woodford, Governor of New York.

The debates did much to help spread the greenback/currency caucus, but it was always difficult for the new party to overcome the stigma that had been placed upon fiat money during the war. Governor Woodford, speaking at the second date in the series at Circleville, Ohio, remarked of this quite stingingly at the outset,

"Should he [Ewing] speak here, as he has spoken elsewhere, he will tell you that this ‘money power' is centered in New York, and that in New York it has its main strength in Wall Street.

"Unfortunately for him the only inflationists in New York are the gamblers of Wall Street, to whom it is an advantage to have gold bobbing up and bobbing down like the mercury in a thermometer. While every man in New York, who has an interest in the welfare of the country, has an interest in your welfare. To who does New York sell? To Ohio and the West. If Ohio is not prosperous, how can New York be paid?"

It was clear from that statement, and subsequently during the debate series, that there remained a distinction between sound banking and the "gamblers of Wall Street." Sound banking would mean prosperity for the whole country, while inflationism would mean continued dysfunction and unnecessarily reckless currency. Businesses required monetary stability in order to flourish, and monetary stability was fully at odds with the monetary impulse toward disproportionate speculation.

As prosperity did, in fact, return to the nation despite "deflation" and restoration of the gold standard, the agitation toward inflation did not end. Once the greenback question had been settled by the resumption of gold-backed money (all government notes would be backed by gold, regardless of their original issue as a remaining greenback), that political idea turned from fiat currency to silver.

As a party, the Greenbackers faded into history. In 1880, they nominated James Weaver for President, but he polled less than 3.5% of total voting. During the rest of that decade the party devolved into mostly state-level political units. Most of its former members simply became Democrats.

With the silver "agitation" reaching a crescendo entering the 1890's, the inflationists again reappeared in the form of the People's Party, otherwise known as the "Populists." James Weaver was among the founding members, and was again nominated for President in 1892. At that time there had already been a near panic in 1891, though the full measure of the 1893 panic and subsequent disastrous depression was still in the future. Weaver ended up carrying four states for the People's Party and gaining 22 votes in the Electoral College.

It was a terrific showing for a third party in a Presidential contest, partly because of continued silver agitation but due moreso to the expanded party platform of the Populists. Its "Omaha Platform" sought the dissolution of the national banks (returning them to state charter since the national banks had their currency privileges undermined by the gold standard), direct election of US Senators, eight-hour working days, and nationalization of railroads, telegraphs and the newly invented telephone system. All were intended as collective measures of regulating business in the public interest.

As the Great Depression (as it was known before the 1930's) took hold after the 1893 panic, the Populists resumed their efforts at what they saw as needed reform. As before, the gold standard was a convenient mark in no small part because of the remaining Greenback element. But monetary reform was not the only amends this time, as the People's Party would demand greater action.

An associate of James Weaver from the Greenback Party days, Jacob Coxey, took the plight of the vast number of unemployed in Ohio as his own. Displaced by a depression he blamed on gold-backed Easternists, he began a march to Washington with 100 men on March 25, 1894. His "army" would travel through Western Pennsylvania, including Pittsburgh, to arrive in Washington and demand greater government action to alleviate the unemployment situation. Among the protestors' demands were government works projects, putting unemployed workers into paid positions building roads, railroads and laying telephone wires. And, as per the greenback tradition, they were to be paid with fiat currency, unbacked by any other true money.

Coxey's army reached Washington in late April 1894 with about 6,000 encamped in Maryland. Coxey himself was arrested for trespassing on the grounds of the Capitol, as were many of the movement's leaders, forming the, for them, dissatisfying climax of the affair. However, they inspired similar protests throughout the country, particularly in their natural constituencies of the silver/greenback Midwest.

By the election of 1896, the People's Party was welcomed into the Democratic Party in the form of William Jennings Bryan. In the course of that election, Bryan would deliver his famous "cross of gold" speech that revisited the same themes dominant in this political strain reaching back to the days of the overt inflationists. It was the gold standard that was to be blamed for the deep and disastrous economic depression that still had not ended after almost three years, and economic salvation was more than tinged with silver. Bryan would lose to William McKinley.

Today the speech, and even that vital election, is remembered almost exclusively in terms of silver and farmers' debts. That is far too simplistic, and perhaps even wrongheaded. The issue of farmers, debt and inflationism was but as a remedy for economic decline and disaster. As with Coxey's Army, the Populists of that age, included in the Democratic platform, were demanding a full range of government-driven, top-down responses to depression. They wanted not only currency expansion driven by actual money printing but an economic program that would fit right into the weekly New York Times column of Paul Krugman. Bryan was not arguing over the relative price of debt and repayment, but the role of government in managing the economy - all in the name of public interest.

The Populists, like the Greenbacks, would eventually fade into the Democratic Party, but the ideals gained newfound currency (pardon the pun) in the Progressive Age. It was not just the Democrats that would champion government inflationism and fiscal intrusion, but also many Republicans including Teddy Roosevelt (thus his attempt at defeating Taft in 1912). Even the now-vilified Herbert Hoover, as Secretary of Commerce in the Harding administration during the Depression of 1920-21, advocated an approach that sounded like it was created by Jacob Coxey.

Hoover had been a Republican supporter of Roosevelt's Bull Moose Progressives and then the first head of the US Food Administration under Democrat Woodrow Wilson. Owing largely to his efforts at organizing food relief in war-torn Europe, Hoover had come to appreciate centralization as an agency for alleviating suffering caused by war. It wasn't a big leap between the public interest in war to the public interest in depression. As such, Hoover was courted by both Democrats and Republicans in the 1920 election.

By the time he was elected President in 1928, Hoover had developed the "Hoover Plan" with the close cooperation of Waddill Catchings and William Foster; both men belonging to the growing economic movement of "underconsumption." The theory of underconsumption convinced Hoover of the government's ability to "outlaw depression." Its central axioms were nothing more than the Populist economic prescriptions, the appeal to both inflationism and public works. Underconsumption would form the basis of Keynes' economic doctrine.

This idea of an economic "public interest" was more than fifty years old by the time of the New Deal. There was nothing revolutionary about FDR's efforts, only that he was the second to actually see it in practice - Hoover had beat him to it, implementing the Hoover Plan in 1930. And the Great Depression of the 1930's ended up as the longest and deepest on record, including the epic failure of inflationism in 1937.

The New Deal and the modern greenbacks required the removal of the gold standard, which was accomplished in 1933 and 1934. But in the postwar world, gold was brought back at least as a mechanism for monetary stability in global trade. It was not until the Great Inflation of the 1970's that it was finally disbanded for good, and we have been living in a world of bubbles and Wall Street gambling ever since. Even the hardcore modern Keynesians and monetarists/inflationists are beginning to see this, though they have now posited that asset bubbles are actually necessary in this modern, top-down world.

What the public interest demands, according to this 19th century philosophy, is redistribution via artificial means. The Greenbackers of the National Grange were convinced that redistribution was needed to alleviate what they saw as unfairly low agricultural prices, when in fact it was a healthy economic system enticing resources out of agriculture (due to productivity and innovation) and into new industry and industrialization. Instead of a God-given right to farming, as they believed, it was just the second wave of massive economic transformation.

And society and the public interest were/are better for it. We may sympathize with the farmers, even today, as it is easy to do with such a hardworking and noble profession, but the modern economy would not have been possible with a third of the labor force dedicated to growing food. Those forced by pricing to give up farming to those that could employ capital to profitably engage in agricultural production at lower and lower price points was what drove the process that cheapened labor enough to make industrial adoption widespread. The Populist and Greenback coalitions were, in the end, anti-innovation and anti-change. They sought to create artificial stability, using monetary instability to try to hold back real economic advancement because it was a form of redistribution that did not immediately and obviously benefit their constituencies. Government redistribution, top-down, is always and everywhere a counteraction to market forces that are generating necessary adjustments that create rising living standards.

Fortunately, they did not succeed until the 1930's, and not fully until the 1970's. As we ponder the absence of innovation in the last few decades, and its replacement by "necessary" asset bubbles, we should look to our past. The attempt to "banish depression" only banishes rising living standards over the longer-term. We may not notice it in the year-to-year changes, preferring instead the false-comfort of monetary and fiscal "stimulations", but we sure feel its absence even if the Pope chooses to re-embrace the Populist spirit. Inflationism and Populism were/are the enemy of true capitalism, even as it gave us an unprecedented era of economic expansion and benefits to all society - including foreign nations. Which system do we have now, due rightful scorn?


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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