Editor's Note: Dan Ascani is an internationally acclaimed market analyst, specializing in gold. In addition to his insightful investment newsletter and website, Mr. Ascani dedicated a great deal of time to prepare an in-depth and comprehensive Special Report on GOLD IN A DEFLATIONARY ECONOMY. Due to its length it will be run as a weekly series. Simply A Must reading for all serious goldbugs.
Gold In A Deflationary Economy
The American Experience
Period 2: Deflation of 1864-1897
Duration: 33 years
Commodity Prices: -65%
Purchasing Power of Gold: +40%
Monetary System: Fiat, then Gold Standard
After the Civil War, prices, which had run up sharply during the war years, plunged. In America, the south was in economic chaos with a complete collapse of its currency and government finance. The economic record thereafter until 1879 (the year the U.S. returned to the gold standard) was one of depression and extreme hardship.
In England, recession hit in the last part of 1873 with a stringent money market and poor wheat harvests. A long depression set in. During the next 23 years, only 4 could be labeled as prosperous. Nearly all the rest were years of full depression or recession9. Prices reached their low point in the summer of 1896.
The deflation had begun in the U.S. after the soaring inflation of the Civil War. Inflation occurred to a lesser extent in England during the first half of the 1860s.
The U.S. abandoned the gold standard when the Civil War broke out and issued new fiat currency notes. U.S. dollars had been convertible into specie (i.e., gold coin) until the Civil War. At the war's peak in 1864 the price of a twenty-dollar gold coin reached more than $50 in U.S. greenbacks. The U.S. Treasury's one dollar bill said:
"This note is a legal tender for all debts public and private except duties on imports and on the public debt; and is receivable in payment of all loans made to the United States."
The South issued a Confederate States of America fiat note with a little more tenuous wording:
"The Confederate States of America will pay to the bearer on demand one dollar six months after the ratification of a treaty of peace between the confederate states and the United States of America."
CAPTION: The U.S. rate of deflation was exacerbated by the South's inability to meet its fiat promise to pay bearers of Confederate dollars six months after the War.
Since most of the periods featured in this report are defined by major monetary events, this period of time between 1864 and 1897 could be further divided into three periods: one between 1864 and 1873, and the second between 1873 and 1879, and the third between 1879 and 1897. For all practical purposes, the period between 1864 and 1897 was one of deflation following the civil war, but the period between 1864 and 1873 was one which was characterized by strong deflation following the virtual hyperinflation of the Civil War. The downward acceleration in the rate of deflation occurred in part as a result of defaults and depression in the South, and as the country began the long process of bringing its balance sheets back into balance during the period of time following the Civil War, which had resulted in a need to suspend all prudence in favor of the war machine.
The year 1873 marked a period of strong global deflation reflected also in England, which obviously was not tied up in the Civil War of the early 1860s. In 1879 the U.S. resumed specie payments, effectively returning to the gold standard it abandoned at the start of the Civil War. The years 1880-1885 were comparatively good, but there were numerous bank failures in 1884 and labor strife became severe. Anti-Chinese riots occurred in 1885, and the Knights of Labor went on railroad strike in 1886. Widespread coal strikes were called, and the "Haymarket Massacre" exploded in Chicago10.
The key to this deflationary period, as with any period in which the goal is preservation of operational wealth, was that the purchasing power of gold skyrocketed and wealth was preserved. A hoard of gold exchanged for about 40% more commodities in 1896 than at the end of the American Civil War. It exchanged for about 80% more in 1896 than in 1873, the year deflation went "more global" and struck England. Gold gained purchasing power from 1873 on to the end of the period, whether or not the U.S. was on a gold standard or a fiat standard and, when it was not on the gold standard, even as the price of gold was falling!
© 1998 Global Market Strategists, Inc.TM
All Rights Reserved.
Dan Ascani President,
Global Market Strategists, Inc.
1 January 1999
(Part - VI will be posted next week)