By now you’ve probably heard the Treasury say they will not be minting a $1 trillion coin to help the U.S. avoid the debt ceiling.
But the federal government exploiting obscure loopholes under moments of extreme duress is not without precedent.
At the beginning of 1895, the country was facing default after its gold reserves evaporated.
But through some artful legal JP Morgan located an obscure, Civil War-era statute that would allow he and some fellow international financiers to replenish the Treasury’s gold stocks.
The country was saved.
With the help of Bancroft Prize-winner Jean Strouse’s biography “Morgan,” we retell the story.
The story begins with a yawning U.S. trade deficit at the beginning of the 1890s.
Fearing rising U.S. demand for cheap money, foreign investors continue to sell American securities and take the proceeds home. Between 1890 and 1894 anxious creditors unload $300 million worth of American securities and transferred gold abroad. ‘Few people have any idea of the amount of property in this country that is held by foreigners.” National City Bank (the forerunner of Citi) chair James Stillman writes at the time.
By the end of 1893 the Treasury’s gold reserve has fallen below $60 million.
“Since there was no income tax and the government had no power to issue money, the Treasury had to buy or borrow gold in order to maintain its reserve — and its ability to borrow depended on foreign confidence in the dollar,” Strouse writes.
The main problem is that President Cleveland is unable to convince Congress to issue new bonds that could be sold in exchange for gold.
Sentiment against “goldbugs” — including from Cleveland’s own Treasury secretary, John Carlisle — is running high. Western and Southern states instead favor silver. Cleveland, a New Yorker, had at one point been declared the “great financial Gorgon.” By February 1894, Treasury was losing over $2 million a day. The government would default in three weeks time.