POST-CIVIL WAR MONETARY AND BANKING READJUSTMENTS
In the decades after the Civil War, the clash over fiscal policy was mild in comparison with the bitter disputes between debtor and creditor classes over greenbacks, free silver, and national banking. These issues were intermeshed with fiscal problems, but above all, they were related to secular and cyclical changes in prices, especially farm prices.
As a result of heavy war expenditures financed by currency and credit expansion, the price level in September, 1864, was more than double the prewar average. After the war, as industrial and agricultural production increased phenomenally, prices began to decline. Debtor classes complained that they had to pay their debts in scarcer and dearer dollars. Believing in a crude quantity theory of money, farmers and impecunious seekers of capital blamed their difficulties on an insufficient supply of money and demanded that the government increase the circulation, either by printing more greenbacks or, at a later date, by remonetizing silver.
The advocates of "sound money"--the creditors and financiers-contended, more correctly, that the secular price decline was caused by increased production. The majority denied that increasing the money supply would raise prices. But some frankly favored a contraction of the money supply and a deliberate deflation of prices in order to make possible a quick return to a specie standard.
In the monetary controversy which raged for the next thirty years, the advocates of sound money prevailed just as they did in fiscal policy. The supporters of easy money pressed their claims only when prices fell. When prices rose and relative prosperity came to the farm, agitation for monetary panaceas declined. The creditor classes then breathed more easily and mistakenly thought that the so-called "monetary heresies" had passed away.
Changes in the Banking Structure, 1865 to 1890. While currency and the price level were being bitterly debated, important changes took place in American banking. Only one of these, the steadily declining importance of national-bank currency, was clearly recognized. Yet even more important, though much less discussed, were the constant growth of checkbook money, the resurgence of state banking, the secular growth in the percentage of total assets represented by loans, and the close correlation between business activity and changes in total bank loans.
Up to 1874 changes in the National Bank Act and the declining importance of state banks caused a relative as well as an absolute increase in