A History of US Economic Law Part 2: G, S, or Bi?
A serious economic issue back in the late 1800's was which metal should be used to back up the currency. In 1873, the US adopted gold as the official legal tender. Silver was still used in small coins, but was no longer legal tender for large debts.
Back in those days, the value of US currency was tied directly to gold. You could bring gold in to a mint and trade it for its equivalent in gold coins minus a small fee for seignorage. When the country adopted the gold standard, naturally certain sectors of the economy were upset. It created a large divide across party lines with a large group arguing for "free silver".
The "silverites" as they were called, argued that having the value of the dollar pegged to silver was better than gold because silver was more inflationary, while gold was monopolized by the industry tycoons. They supported silver over gold, but many were willing to accept bimetallism; the use of both metals.
The 1870's and 1880's saw a lot of expansion into the western US as railroads expanded their lines and increased the number of trains running. This created a boom for both the farmers and railroads. Farmers in the western midwest were now able to export grains (mostly wheat) overseas and railroads made good profits transporting the grains to ports. Another result of the railroads western expansion was the discovery of silver. Lots of silver.
These events conspired in 1890 to create conditions favorable for the silverites. The prices of silver and food were falling because both were being overproduced. Obviously, silver miners supported using silver as a currency because it added the US government as a consumer. Farmers, many of whom had accumalated debt to purchase land and equipment were having difficulty meeting their obligations. Inflation would help them get more money for their crops and make it easier to pay off the banks using inflated money.
Obviously the banks, industrialists and wealthy in general were opposed to the idea. Their holdings were mostly in gold. They argued that inflation wouldn't help anyone because prices would rise on everything with large amounts of new currency entering the monetary supply.
However, the pressure was significant enough that congress passed the Sherman Silver Purchase Act on July, 14th 1890. Yes, the same Sherman that wrote the Sherman Antitrust Act (who also happened to be the brother of the infamous General William Tecumseh Sherman).
I can't find the full text of the Sherman Silver Purchase Act anywhere, but basically the law required the US treasury to purchase 4.5 million ounces of silver each month and issue treasury notes that could be redeemed for either silver or gold.
For the next few years, smart people made good money by getting silver notes and exchanging them for gold which was more valuable. The result was a dwindling supply of gold in the treasury. When it became apparent that the government was not going to be able to continue to honor gold notes the already struggling economy went into a panic.
It is known as the Panic of 1893 caused by runs on banks and a contraction of the credit market. Eurpoean banks started selling their American holdings. Many businesses that were surviving on loans closed down resulting in more defaults and more banks running out of funds. An old newspaper article provides an account of the beginning of the panic.
In August 1893, President Cleveland called an emergency session of congress and encouraged them to repeal the Sherman Silver Purchase Act.
The existence of an alarming and extraordinary business situation, involving the welfare and prosperity of all our people, has constrained me to call together in extra session the people's representatives in Congress, to the end that through a wise and patriotic exercise of the legislative duty, with which they solely are charged, present evils may be mitigated and dangers threatening the future may be averted.
Our unfortunate financial plight is not the result of untoward events nor of conditions related to our natural resources, nor is it traceable to any of the afflictions which frequently check national growth and prosperity. With plenteous crops, with abundant promise of remunerative production and manufacture, with unusual invitation to safe investment, and with satisfactory assurance to business enterprise, suddenly financial distrust and fear have sprung up on every side. . . . Values supposed to be fixed are fast becoming conjectural, and loss and failure have invaded every branch of business.
I believe these things are principally chargeable to Congressional legislation touching the purchase and coinage of silver by the General Government.
This legislation is embodied in a statute passed on the 14th day of July, 1890, which was the culmination of much agitation on the subject involved, and which may be considered a truce, after a long struggle, between the advocates of free silver coinage and those intending to be more conservative. .
This law provides that in payment for the 4,500,000 ounces of silver bullion which the Secretary of the Treasury is commanded to purchase monthly there shall be issued Treasury notes redeemable on demand in gold or silver coin, at the discretion of the Secretary of the Treasury, and that said notes may be reissued. It is, however, declared in the act to be
"the established policy of the United States to maintain the two metals on a parity with each other upon the present legal ratio or such ratio as may be provided by law."
This declaration so controls the action of the Secretary of the Treasury as to prevent his exercising the discretion nominally vested in him if by such action the parity between gold and silver may be disturbed. Manifestly a refusal by the Secretary to pay these Treasury notes in gold if demanded would necessarily result in their discredit and depreciation as obligations payable only in silver, and would destroy the parity between the two metals by establishing a discrimination in favor of gold.
The policy necessarily adopted of paying these notes in gold has not spared the gold reserve of $100,000,000 long ago set aside by the Government for the redemption of other notes, for this fund has already been subjected to the payment of new obligations amounting to about $150,000,000 on account of silver purchases, and has as a consequence for the first time since its creation been encroached upon.
We have thus made the depletion of our gold easy and have tempted other and more appreciative nations to add it to their stock. .
Unless Government bonds are to be constantly issued and sold to replenish our exhausted gold, only to be again exhausted, it is apparent that the operation of the silver-purchase law now in force leads in the direction of the entire substitution of silver for the gold in the Government Treasury, and that this must be followed by the payment of all Government obligations in depreciated silver.
He continues on, the full text of the speech is here.
Congress did repeal the act, but much of the damage was already done. Gold reserves were depleted, companies were failing and unemployment was high going from an estimated 3% to the mid teens. Unemployment numbers from back then are not as accurate today, but we know that there was a massive and very fast increase in unemployment.
With the repeal of the act, demand for silver dropped, causing silver mines to close down as well as the railroads that serviced them, contributing to the recession. It wasn't until 1898 when the country began to really recover, making it the longest recession at that point in our history.
Even after repealing the Sherman Silver Purchase Act, the government still had trouble maintaining its gold reserves. In 1895, JP Morgan, financier and banker, formed a syndicate that provided the government with $62 million worth of gold by selling gold bonds, which he reportedly did in an astonishing 22 minutes.
The debate wasn't over. Prominent silverites insisted that silver was not the cause of economic problems. They blamed the wealthy and (naturally) the Jews. The face of the silverites was William Bryan, a politician who ran for president several times. He gave a prominent speech at the Democratic National Convention in 1896.
Mr. Carlisle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses? That is the question that the party must answer first; and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as described by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.
Full speech is available here.
Also, there was a prominent pamphlet going around called "Coin's Financial School" which was used to create class warfare rhetoric in favor of bimetallism. It is worth checking out for the pictures alone. They say political campaigning is negative today- modern politicians don't know what good mud-slinging is. If there aren't pictures of women have their heads cut off and people dying in the streets, your campaign is positive. If you have stuck with me through all this dryness you should check it out. It has comics.
After losing both the 1896 and 1900 elections the silverites pretty much disappeared. But as I will get to later, the gold standard supporters didn't exactly win either.