Thomas Tooke

Analyzing the three phases of the Gold price during the Greenback period

In The Greenback inflationary period on June 3, 2012 at 8:41 pm

As Mitchell wrote:

“These summary tables and the chart show the existence of four clearly differentiated periods in the fluctuations of the premium during the 17 years of the greenback standard of value. The first period begins with the suspension of specie payments and ends in April, 1865 with Lee´s surrender. It is characterized by violent fluctuations in the price of gold and high average premiums. The second period extends from May, 1865, to “Black Friday,” September 24th, 1869. During these years the gold market was on the whole quieter than it had been during the war, the premium averaged much lower than in 1864 and the early months of 1865, and the range of fluctuations was narrower – even in 1866, the year when McCulloch´s policy of contraction was checked and when London suffered the Overend-Gurney panic, and in 1869, the year of “Black Friday.” But despite many temporary ups and downs there was no permanent reduction of the premium within this period; for the average gold quotation of its first month was 135.6 and of its last month 136.8.

The third period begins October, 1869, and extends to March 1876. This period, when compared with the second, is characterized by a much lower average premium and a narrower range of fluctuations; but it is like the second in showing no permanent reduction of the premium within its own limits. The average premium for the last year, 1875, is the same as the average for the first year, 1870. Doubtless the generally lower level about which the premium fluctuated during these years was due mainly to the improvement in the financial credit of the government caused by the “public credit” act of 1869, by successful refunding operations, and by the reduction of the principal of the public debt. That no progressive decline of the premium took place between the beginning of specie payments seemed as remote in 1875 as it had seemed in 1870. The resumption act bears the date of January 14th, 1875, to be sure; but current comment of well-informed journals shows that at the time of its enactment it was not taken seriously by the public. One interesting feature of this period is that the great crisis of 1873 led to a sharp fall of the premium, despite the fact that the Secretary of the Treasury reissued $26,000,000 of greenbacks which had been withdrawn by Secretary McCulloch. The final period in the history of the paper standard extends from April, 1876, to the resumption of specie payments on January 1st, 1879. It is characterized by an almost unbroken decline in the premium on gold and a narrow range of fluctuations. The reason for this decline- at least after March 1877, when John Sherman became secretary of the treasury — is obviously found in the effective preparations to execute the resumption act of 1875, and the fortunate turn of foreign trade which facilitated Sherman´s operations.”

A few comments. It is interesting to note that in the United States clearly, we are talking about a reduction of the debt, while the debt keeps increasing. On the other hand it seems increasingly likely that politicians of both sides are really unwilling to limit their own power by limiting government expenditures. In Europe however, Germany is clearly serious about reducing government expenditures, even though in reality all governments around the world are increasing their debt levels, which is still fundamentally a positive for precious metals. Policies of contraction are not considered, no central bank is currently increasing rates or willing to diminish seriously the stock of government debt. The policy prescription is inflating away. So in that context, it is hard to envision how we are at the beginning of the decrease in premium of Gold to paper. Finally it should be noted that the escalation of war with Iran is a real possibility, which is also very positive for Gold.

The impact of the crisis of 1873 is very interesting, and it is very similar to what happened in 2009 with Gold. In fact it seems that while the quantity of greenback was increased the Gold price when down. It is to be remembered that Gold could not be spent at the time, so a large crisis is making people in need of liquidation to get means of payment. A debt crisis forces economic agents to reach for cash. What was true then is still true today!!

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