Financial History Issue 117 (Spring 2016) | Page 32

Collection of the Museum of American Finance Certificate for shares in the Erie Railway Company, signed by Jay Gould as president, October 13, 1869. throughout the week. The stock market fell 20% as speculators who had shorted gold had to fire-sell other securities to cover their shorts. Several venerable brokerage houses went bankrupt. To protect himself, Gould paid off William “Boss” Tweed  and some New York judges to delay the settlement of unfavorable trades, and he ultimately escaped with his wealth intact. Fisk, who had been buying gold contracts on behalf of other investors, simply reneged on his obligations and also came out unscathed. Neither ever spent a day in jail. Three years later, Fisk was murdered  in mid-town Manhattan by a romantic rival who was trying to extort him. Was Gould’s Rationale Plausible? If you look past all his scheming and conniving, Gould may have actually had a point. US monetary policy in the late 1860s was de jure contractionary; the Contraction Act of 1866 required the Treasury to retire greenbacks with gold with the goal of eventually returning to the gold standard at the pre-Civil war parity. Those 19th century “open market operations” contracted the money supply by 20% between 1865 and 1867, which triggered a severe deflation that fell especially hard on heavily indebted farmers (by increasing the real value of their debt burden). Against that monetary and macroeconomic background, Gould’s proposal made some sense. His perception of a “general business dullness” was on target. According to  official recession designations, the economy slipped into recession in June of 1869. Gould was essentially urging President Grant to adopt a more expansionary, or at least neutral monetary policy (by halting greenback purchases), which would lead to currency devaluation and stimulate exports. Easier money and devaluation are standard prescriptions for a contracting, deflationary economy. While Gould’s motives and machinations were suspect, to put it 30    FINANCIAL HISTORY  |  Spring 2016  | www.MoAF.org mildly, his diagnosis of an ailing economy and his policy prescription were reasonable. But that’s our, possibly unorthodox, opinion.  Reprinted from Donald P. Morgan and James Narron, “Crisis Chronicles: The Gold Panic of 1869, America’s First Black Friday,” Federal Reserve Bank of New York Liberty Street Economics blog, January 15, 2016, available at http://libertystreeteconomics .newyorkfed.org/2016/01/crisis-chroniclesthe-gold-panic-of-1869-americas-firstblack-friday.html. Don Morgan is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group. James Narron is first vice president and COO at the Federal Reserve Bank in Philadelphia. The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.