Contraction or Inflation ?

The war being ended, the financial question took this form: Shall we withdraw the paper, recover specie, reduce prices, lessen imports, and live economically until we have made up the waste and loss of war, or shall we keep the paper as money, export all our specie which has hitherto been held in anticipation of resumption, buy foreign goods with it, and go on as if nothing had happened?

Mr. McCulloch, who was now Secretary of the Treasury, proposed to contract the inflated paper, and pursue the former alternative. On the 18th of December, 1865, the House voted, 144 to 6, to authorise a contraction of 10,000,000 in the next six months, and of 4,000,000 per month after that. This operation went on until January, 1868, but, in the meantime, the National banks were going into operation, being allowed 300,000,000 of circulation, 150,000,000 apportioned by population, and 150,000,000 by banking capital, and their notes more than compensated for the greenbacks withdrawn. During the year 1867, also, war fears being laid aside, speculation had sprung up and begun to absorb the redundant paper. The turning point at which the greenback contraction met the bank-note expansion was January, 1868. On January 1, 1866, the banks stood as follows:

During the whole year 1866, there was a superabundance of currency at New York, and money ruled at 5 to 7 per cent. for the best 60 day two name paper.

January Ist, 1867, the banks stood:

In January there was a crisis in stocks, and the rate was 8 to 10 for the same paper as above. For the next six months the money market was dull and easy. In July many dry-goods firms failed, and rates were 8 to 10. August and September were easy, but in October the rate was again 10.

On the first day of January, 1868, the banks stood:

At this juncture outcries were raised against contraction by those who were engaged in the movement of expansion, though, in regular business, credit was still kept in the narrow bounds to which it had been reduced during the war, and the people at large, understanding that the Legal-Tender Act was a war measure, and expecting in good faith that resumption must follow peace, had made their arrangements accordingly. Congress forbade any further contraction, and we turned to the second of the above alternatives, which we have since consistently followed.