Specie Resumption Act of 1879

August 1, 1980 NEW SOLIDARITY Page 5

THE SPECIE RESUMPTION ACT of 1879America's Lost Economic Sovereignty

by Richard Freeman

The groundbreaking Corliss engine at the 1876 U.S. Centennial exposition (above). Thanks to the foundation laid by President Lincoln (below), America enjoyed a modest measure of industrial expansion after the Civil War.

It has been a long while, over 100 years, since America has had the sovereignty to decide its credit and fiscal policies. When presidential candidate Lyndon LaRouche calls for a credit policy reflecting the sovereign needs of this country as an industrial Republic, it is a wonder that any in his audience can still recall what he is talking about.

In the aftermath of the American Revolution, this nation's credit policy to meet its needs as an industrializing republic were defined by Alexander Hamilton. Treasury Secretary in George Washington's administration. Hamilton created the First National Bank of the United States as the essential element in this credit policy. Through this bank, Hamilton tunneled cheap, abundant credit to canals, and highway building, internal improvements, new manufacturing and to overall increasing the development of "artificial labor," the high-technology goods that industrialize a country. By following Hamilton's policy, the U.S. became a wealth-generating giant.

Over the next 90 years, however, Hamilton's policies were contested by the British-controlled faction of lower Manhattan and Boston banks and their politicians, who wished to de-industrialize America and "de-centralize" its dirigistic credit facilities. Chief among this anti-industrialization faction were Thomas Jefferson, and later Andrew Jackson who attempted to undermine the Republic and turn America into a backward, bucolic agrarian plantation.

In the 1870s, the Jefferson-Jackson faction won a crushing victory. In 1875, the Specie Resumption Act passed Congress: it was implemented on Jan. 1, 1879.

The Specie Resumption Act put the U.S. on a gold standard that took away America's power of national government to control its own credit.

The Specie Resumption Act launched an austerity-based gold system, in which gold acted as a brake on economic development. It resulted in the devastating recessions of 1877 and 1883, the full-scale collapse of 1893-97 and subsequent panics in 1905 and 1912.

Although U.S. industry and agriculture found ways to circumvent the full contractionary effects of the Specie Resumption Act, the rates of U.S. economic growth began to ease off after 1900. After the passage of the Federal Reserve Act in 1913 administered a second nasty shock to the U.S. economy, only the national industrial mobilizations during the First and Second World Wars provided the U.S. with sufficient industrial base to prevent the country from devolving, following a path laid out by the Specie Resumption and Federal Reserve Acts, into a junk heap by the 1920s.

Lincoln's American System

The most immediate target of the Specie Resumption Act was the eradication of the entirety of the Henry Carey-inspired Lincoln administration's banking reforms of the Civil War years.

The banking law reforms of President Abraham Lincoln and his chief economic adviser Henry Carey were initiated to undo the wreckage of the U.S. banking system bequeathed to the nation by British puppet and populist President Andrew Jackson. In 1837, by killing off the Second National Bank of the United States, Jackson had thrown the banking system into anarchy and given speculators free rein. The U.S. banking system was in a shambles, without even a national currency, for the next twenty-three years.

During the 1840s and 1850s, demagogues such as Thomas Hart Benton attempted to solidify the fragmentation of the Jackson-imposed banking system, by advocating a gold standard, prefiguring the later Specie Resumption Act.

In the laws of 1861, 1863 and 1864, Lincoln and Carey revived the dirigistic economic spirit of Alexander Hamilton and recentralized the U.S. banking system in order to promote increased rates of economic growth. The 1861 Act created a uniform national currency, secured by U.S. government bonds. The 1863 Act chartered federal banks that would operate under national, not state, jurisdiction. The 1864 Act taxed any bank that wanted to remain a state bank and set reserve requirements for banks. The United States once again had a national banking system. Just before Lincoln was assassinated, Lincoln and Carey were moving to wipe out some of the most pernicious British-controlled New York banks; they had already significantly restricted speculative real estate loans by law.

This banking system, combined with the other high-technology-vectored, dirigistic pieces of legislation passed by the "revolutionary" Lincoln administration set the groundwork for the unprecedented U.S. industrial and agricultural boom which erupted in the years 1862-1900.

The 1873 Crisis

To stop the Lincoln-Carey success, the British centered banks in Wall Street and New England organized the Panic of 1873.

The chief instrument of this crisis was British financial asset, J. Pierpont Morgan.

Morgan's father, a New England banker, who spent his later years in London, had set J.P. up in gold trading. During the Civil War J.P. Morgan sold large quantities of U.S. gold abroad, thus wrecking the value of the U.S. currency, and leading several newspapers to correctly identify J.P. Morgan as a British-affiliated traitor.

Morgan eventually held huge amounts of stocks and bonds in U.S. railroads. A notorious stockjobber, Morgan looted, watered and speculated in railroad financial instruments without regard to the operation of the railroads themselves. Wrecking the U.S. railroad system was fine, thought Morgan, because it kept U.S. industrial expansionist tendencies in check.

The bankers Jacob Schiff, Joseph Seligman, August Belmont, Levi Morton, Edward Harriman and a host of others drawn from British or Hapsburg Empire circles shared Morgan's monetarist outlook.

The Morgan group's first move was to scare the Republican Party into believing that there would be fundamental difficulties in maintaining the soundness of U.S. Treasury bonds. During the Civil War, to finance the Union Army and the industrial mobilization of the North, Lincoln had issued 20-year bonds paying a 5 percent interest rate—the type of long-term investments in the United States that could be afforded by the average citizen.

Morgan circulated the rumor that the "5-20" bonds, as they were nicknamed, might not have the interest portion paid in gold because of "radical" monetary notions pushed by the Democrats. Through this and other lies, and a type of debt moratorium on the gold payment of interest on the "5-20" bonds organized by Rothschild agent August Belmont in the Democratic Party, many Republicans were stampeded into demanding a gold-backed monetary system to enforce austerity, and an end to the Lincoln policy of funneling of cheap credit to industry.

To clinch the case the Panic of 1873 was organized. In late 1871 and early 1872, the financiers in London who held the bulk of the $1.466 billion of foreign-held U.S. government bonds and U.S. corporate bonds and stocks, began liquidating their holdings, causing a panic on the U.S. stock market.

In the summer of 1873, as the U.S. economic picture worsened, speculators Morgan and Gould hammered at the stock market, causing certain stocks to fall.

They zeroed in on stocks held by Jay Cooke, the leader of the House of Cooke, the largest bank in America.

Cooke was a Whig banker and an ally of Henry Carey. Cooke had come to America's rescue during the Civil War to buy and market U.S. government bonds when no one else would touch them. He had also bailed out many valuable U.S. industries, and found himself financially overextended. An attack on Cooke was an attack on the Carey-Lincoln policies.

On Sept. 18, 1873, under intense pressure, the House of Jay Cooke crashed and brought down with it the entire U.S. economy. Other Whiggish banks and bankers were wiped out. In the resulting panic and depression, a fundamental change of leadership occurred in the U.S. banking community: American System banks like Cooke's fell back or disappeared altogether and international British-Austrian-linked banks whose strength lay in their ability to mobilize large amounts of British capital came to the fore.

Thanks to the crash, and with some help from vote fraud, the Democrats ousted the Republicans in the congressional elections of 1874. The demoralized, lame-duck Republicans, who were increasingly under the manipulative control of Morgan and the Roscoe Conkling New York faction in the party, were fed wild horror stories of what the Democrats would do to the currency and gold-backed bonds when they took office. So in early 1875, a lame-duck Congress passed the Specie Resumption Act with the specification that it take effect on Jan. 1, 1879.

The Greenback Dollar

The Specie Resumption Act was a direct attack on the Lincoln banking reforms. Lincoln had given America a national currency to build its industry. He had made credit cheap and plentiful to feed the emerging railroad, steel, iron, nascent machine tool, clothing and shoe manufacture, agricultural implements, infant chemical and other industries that were starting to make America great.

As part of the Banking Acts of 1861, 1863 and 1864, $450 million worth of greenback dollars had been created. These were Treasury obligation notes that circulated as common currency; they were identified as greenbacks because of their green coloring on the back of the notes. At the time of issue, greenbacks constituted almost half the amount of currency in circulation; this massive infusion of credit was needed to feed, house and arm the Union Army and build the

industrial infrastructure that would lead the Union to victory. The greenback became doubly necessary when speculators such as Morgan acted to undercut the value of U.S. currency and refused to help market U.S. debt.

The Specie Resumption Act provided that the U.S. maintain strict convertibility between greenbacks and other U.S. notes and between greenbacks and gold. This meant that a reserve of gold had to be set aside, in some multiple, for each greenback in existence. The creation of new greenbacks was therefore to be strictly limited.

Reinforcing the contractionary intent of the measures during the 1870s, the Grant administration actually retired greenbacks and thus needed currency, out of circulation. The credit restrictions were carried out in the name of "halting inflation."

At this point it might be asked, "But shouldn't one favor a gold-backed monetary system? And if so, why object to the Species Resumption Act?"

The answer is that gold in itself is no economic cure-all. Gold can be used to instigate a sharp industrial contraction or to promote non-inflationary economic growth. The outcome of a gold-based system is determined by the way the credit policy of the gold system is constructed.

Any gold-based monetary system, in order to work, must function internationally. It must peg all currencies to each other by pegging them to a fixed amount of gold, and require settlement of trade imbalances—import-export differentials-through shipment of gold by the import deficit nation to cover its imbalance to the nation to which it is in deficit.

The amount of currency in circulation is thus a function of some multiple of gold reserves. Currencies will therefore grow in a measured way.

Under an intelligent, growth-fostering gold-based system, industrial reconstruction is the principal aim. For example, that is the working arrangement of today's gold-based European Monetary System initiated by German Chancellor Schmidt and President Giscard. A portion of the world's gold is deposited at a central world discount bank which buys up non-performing private commercial bank paper and issues in exchange gold-backed bonds. The private banks can discount the bonds, thus receiving new credit, which is lent to the third world for the import of high

technology goods from the advanced sector. In this sense, gold disciplines the world into a policy of measured issuance of credit for industrial growth.

Below: the May Day riots in Cleveland. Brutal "class struggle" violence, breaking apart the "harmony of interest" between labor and industry established by Lincoln and Carey, was the fruit of British-connected banker J.P. Morgan's "gold standard" policies embodied in the Specie Resumption Act.

Under the gold system of the Specie Resumption Act, only credit and currency restriction and industrial contraction were envisaged. Since the British controlled the world gold standard and the world's supply of gold in the 19th century, any country forced onto that standard was put under Britain's control.

Developing industrial nations which ran trade deficits, such as the United States, had to settle their imbalances in gold. As often as not, they didn't have it, and could only obtain it by going hat-in-hand to a British bank. Britain used this to impose austerity programs on countries and force contraction of currencies or

equally devastating devaluations. The British also controlled all new lines of credit in this system.

By joining the British-run gold standard, America joined the British credit system. Each new collapse in the British credit system meant a new American collapse.

Since Britain was constantly overextending its pound in speculative looting operations which did not always pay off, the pound would crash periodically, and so would every credit system in the world linked to it. In large measure, this accounts for the frequent U.S. recessions, depressions, and panics of the 19th and 20th centuries,

The earlier 1873 crash turned into a five-year depression of biting severity, prolonged by the monetary contraction that everyone anticipated for January 1879 when the Specie Resumption Act would take effect.

On the agricultural side, U.S. agricultural prices fell steadily from 1879 to 1900 in every basic farm commodity by at least 50 percent. Because farm incomes collapsed, the period was one of bitter hardship for many farmers. Bad harvests simply intensified the misery, providing the fuel for the Agrarian Populist movement and farm revolts of the 1880s and 1890s.

The British-directed monetary contraction opened the door for the most massive speculation of all kinds by those with access to British-supplied funds. Speculation lawfully centered in railroads, which represented the most concentrated form of wealth and most traded stocks and bonds in America in the 19th century. The British-Austrian bankers in America, such as Morgan, Harriman, and Schiff, used railroads as they do Manhattan real estate today.

The Morgans led the pack. The essence of this railroad speculation was to run a railroad into the ground, looting its rolling stock, its track, etc. The run-down railroad, worth perhaps $5 million, would then be merged with another run-down railroad also worth $5 million. The newly merged line would be given a new name, and new stocks and bonds to the value of $25 million or $50 million would be issued. This so-called "watering of stock" was to be sold to a gullible public.

Small internal improvements would be made in the new line, just enough to get it functioning, and then the looting process would be repeated all over again on a grander scale.

Because the stocks and bonds were traded in the financial markets, they could be leveraged through borrowing into huge speculative bubbles, attracting large additional "hot money" flows. Thus an increasing share of the economy's funds was drawn off into railroad speculation and its trapped accomplice, the stock exchange.

There was an additional angle to this swindle, particularly devastating to the American farmer. The railroad holding companies, on whose boards sat every major banker, were also large real estate companies, leasing huge plots of land to the farmer.

But, when the economy went bad, the entire leverage principle worked in reverse. Bad harvests and falling food prices meant that farmers often couldn't pay their mortgages. This left railroad holding companies without income, and they had to sell their stocks. This collapsed the stock market, and left railroad holding companies further in the hole.

When this happened the railroads initiated depressions and austerity. For example, the major railroads of the East—the Baltimore and Ohio, the Pennsylvania, and the New York Central—in the face of declining revenues and shaky financial structures, during the 1873-77 period cut the wages of railway trackmen by 37 percent, cut conductors' wages by 24 percent and brakemen's by 23 percent. The wage cuts were accompanied by huge layoffs and lengthened train runs.

The huge wage cuts led to the bloody, violent rail strikes in the 1870s, 1880s and 1890s and to wage cuts and strikes in other industries affected by the dominant railroad financial pyramid. This violence dealt a final blow to the labor-industry "harmony of interest" alliance that Lincoln and Carey's program had been geared to creating in order to foster growth.

During the 1880s, railroads in default represented 20 percent of all railroads. The shakiness of the railroad speculation left the entire economy shaky. All this was a product of the process unleashed by the Species Resumption Act.

Death Blow to Economic Sovereignty

But, there were worse consequences. By collapsing U.S. internal sources of credit, the Specie Resumption Act allowed the British-Hapsburg-run New York and Boston money center banks to gobble up the assets of smaller banks and

concentrate credit into their own hands. By the late 1800s, New York banks had 53 percent of the nation's currency and credit.

With the New York banks controlling credit, and with credit very tight, each new margin of credit could come only from the margin of credit doled out by the London, Genoa and Amsterdam bankers. The U.S. economy was at the mercy of the financial and associated political designs of the feudal-minded financial-rentier crowd of the combined British-Dutch-Hapsburg aristocracies.

Just how true this was to become can be seen in the extent of British-Dutch control of the market in U.S. government debt, shown in Chart 1.

Chart 1Foreign Holdings of U.S. Obligations in 1899Creditor country Amount heldUnited Kingdom $2,500,000,000

Netherlands 240,000,000

Germany 200,000,000

Switzerland 75,000,000

France 50,000.000

Others 235,000,000

Total: $3,300,000,000

In 1899, British financiers held 76 percent of all U.S. obligations, and when the holdings of the Dutch are added, the combination controlled 83 percent of U.S. obligations.

Moreover, all U.S. trade, even with its neighbors Mexico and Canada, was not conducted in U.S. currency, but in pounds sterling. To conduct foreign trade, U.S. business had to run to sterling bankers.

The United States no longer held sovereignty over its finances. It could no longer determine the amount of its credit, to whom it should be given, and for what kind of growth. All these decisions were transferred into the hands of the British-Dutch

mafia and their geopoliticians. The U.S. was now financially the prisoner of a foreign power.

In the 1890s, the Morgans pulled a credit crunch through a rigged gold crisis that showed just how much the United States was held hostage to a foreign power. At no time during the crisis, was this nation able, by its own sovereign efforts, to pull itself out of a crisis being imposed from without.

During the deflationary period of the 1880s and 1890s, U.S. industrialists, typified by such men as Andrew Carnegie, continued to grow. Often these industrialists used internally generated funds, or quick money made from venture capital invested in industrial firms (Carnegie had invested in Western Union in its infancy for example). Unlike the lawyers and tax accountants heading up major industrial firms today, the industrialists of the late 19th century plowed back their profits, as retained earnings, into technological advances and new capital formation. Many of the proindustrial laws and protectionist statutes enacted by the Lincoln administration were still on the books and helped the U.S. industrialist and farmer to grow.

Because the U.S. had to settle its trade deficits in gold (the U.S. did not become a steady surplus nation until the First World War), its gold reserves sometimes ran low. In 1893, the U.S. Treasury ran gold stock below the $100 million mark, and promptly judged itself in violation of the law for so doing.

The run on the gold reserves was fed by the Morgan bank, by now the largest in the U.S., which cashed in its gold-backed U.S. currency for gold. When the U.S. Treasury tried to get gold to replenish its depleted reserves, it found that Morgan and a few other banks were the only ones with gold or connections to gold abroad.

Morgan asked for and got the Treasury to issue to it a gold-backed bond, with a huge premium that the government had to pay in gold. Once the government agreed to this stipulation and Morgan given the government gold, the banker turned right around and redeemed more U.S. currency for gold, drawing down the U.S. Treasury reserves below the danger point and necessitating further government gold purchases.

This rip-off was repeated several times. The ensuing financial crisis, caused by the uncertainty of government finances, together with an international pound sterling crisis and excessive speculation, threw the U.S. into a deep depression that lasted

from 1893 until 1897. Twenty-five to 33 percent of U.S. production was shut down.

In the early 1890s, Morgan, Schiff of Kuhn Loeb and Harriman had tried to strip U.S. companies away from their entrepreneurial Yankee capitalist owners, in what was called the merger movement. Between 1890 and 1893, mergers totaling $0.85 billion were made, but from 1897 until 1900, merger takeovers totaling $2.75 billion were consummated, as the financiers bought up the basic U.S. companies, often at a nickel on the dollar.

In 1900, the Carnegie Steelworks, the largest steel complex in the world representing the height of U.S. industrial might, passed into Morgan hands.

A change in the ownership of the United States was occurring.

The credit concentration and takeover of basic U.S. industry by the British-Hapsburgs as a result of the Specie Resumption Act helped to consolidate an Anglo-American elite on the U.S. east coast. The weakened state of U.S. political and financial forces rendered the nation easy prey for the next stage of economic warfare, the Federal Reserve Act of 1913, which transferred British private market control of U.S. finances into the formal, public policy-making apparatus of the United States.