When Nobody Knew What a Dollar Would Be

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The Caxton Press has just published my book, The Panic of 1893, and I can now write for Liberty about it. Its topic is the final economic downturn of the 19th century. For more than three years, my head was in the 1890s — in books, articles, personal and official papers, lawsuits, and, especially, old newspapers, chiefly from my home state. The book’s subtitle is, The Untold Story of Washington State’s First Depression.

It is a popular history, not a libertarian book as such. But I have a few thoughts for a libertarian audience.

Many libertarians espouse the Austrian theory of the trade cycle, in which the central bank sets interest rates lower than the market rate, leading to a speculative boom, bad investments, and a collapse. In the 1890s the United States had no central bank. Interest rates before the Panic of 1893 were not low, at least not in Washington. The common rate on a business loan was 10%, in gold, during a period in which the general price level had been gently falling. Washington was a frontier state then, and it needed to pay high interest rates to attract capital from the East and from Europe. Credit standards, however, were low, sometimes appallingly low. Many of Washington’s banks had been founded by pioneers — optimistic patriarchs who lent freely to their neighbors, associates, relatives, and themselves. By a different road from the Austrians’ theory, the economy was led to the place it describes: a Hallowe’en house of bad investments.

The Sherman Silver Purchase Act was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver.

The dollar was backed by gold, with the US Treasury intending to keep at least $100 million of gold on hand. But in 1890, at the peak of the boom period, Congress passed the Sherman Silver Purchase Act, obligating the Treasury to buy up the nation’s silver output with newly printed paper money. It was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver, which it had been doing to create silver dollars. Politically the Sherman Silver Purchase Act was also part of a deal to pass the McKinley Tariff, which raised America’s already high tariff rates even higher.

The problem with the Sherman Silver Purchase Act was that the new paper money being paid to the silver miners could be redeemed in gold. The prospect of an increase every year in paper claims against the Treasury’s gold alarmed foreign investors, and they began to pull gold out. Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893. These crises shifted the thoughts of financial men from putting money out to getting it back, from a preference for holding promises to a preference for cash.

By the time Grover Cleveland took office in March 1893, the Treasury’s gold cover had shrunk to $101 million. A run began on the Treasury’s gold — and that triggered the Panic of 1893.

In the Pacific Northwest, the four-year-old state of Washington (pop. 350,000 then) had 80 bank failures in the following four years.

Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893.

Economists have listed the ensuing depression as the second-deepest in U.S. history. (One estimate: 18% unemployment.) But they don’t know. The government didn’t measure unemployment in the 1890s. And the rate of unemployment may not be the best comparison. America was less wealthy in the 1890s than in the 1930s, and living conditions were harsher. In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The Left of the 1890s, the Populists and silverites, wanted cheap money. They blamed the depression on the gold standard. And gold is not an easy taskmaster; libertarians have to admit that.

The silverites wanted a silver standard. Most of them were “bimetallists,” claiming to favor a gold standard and a silver standard at the same time, with 16 ounces of silver equal to one ounce of gold. Their idea was that by using gold and silver the people would have more money to spend.

Free silver was a policy well beyond the Sherman Silver Purchase Act, which compelled the Treasury to buy silver at the market price. In the mid-1890s, silver fell as low as 68 cents an ounce. At that price, a silver dollar had 53 cents’ worth of silver in it and the silver-gold ratio was 30-to-1.

In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The bimetallists wanted 16-to-1. That was the ratio for U.S. currency set in the late 1700s when the market was at 16-to-1. Later the market shifted and Congress changed the ratio to 15 1/2-to-1. Then came the Civil War, and the U.S. government suspended the gold standard, and printed up its first “greenbacks,” the United States Notes.

The United States Notes were effectively a new currency, and traded at a discount from metallic dollars. In September 1896, the Seattle Post-Intelligencer reminded readers of those times:

There never was a time from the beginning of the first issue of greenbacks down to the resumption of specie payments when the greenback dollar was ever accepted on the Pacific Coast for anything more than its market price in terms of gold.

The greenback was discounted, sometimes by 50 to 60%.

In 1873, Congress decided to define the dollar as a certain weight of gold, but not silver. The silver people in the 1890s called this “The Crime of ’73.”

Redemption of paper money under the gold standard began in 1879. To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars — the Morgan dollars prized by collectors today. At the beginning, the silver in a Morgan dollar was worth about a dollar, but by the 1890s, the value of silver had fallen.

In 1890, the silver-dollar law was replaced by the Sherman Silver Purchase Act, which created paper money. The government still coined silver dollars, and by 1896 had more than 400 million of them in circulation.

To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars.

The law did not require the Treasury to pay out gold for silver dollars, and it hadn’t. But the law declared all the different kinds of dollars (and there were five different kinds of paper money, at that point) to be equally good for everyday use except for taxes on imports. At the amounts an individual was ever likely to have, a silver dollar was as good as a gold dollar.

If you ask why a sane person would have designed a monetary system with gold dollars, silver dollars, Gold Certificates, Silver Certificates, National Currency, Treasury Notes, and United States Notes — Congress had designed it, one variety at a time.

Under the proposal for “free silver,” gold would be kept at the official price of $20.67 and silver set at one-sixteenth that price, or $1.29. Just as the world was free to bring an ounce of gold to the Treasury and take away $20.67 — “free gold” — the world would be free to bring an ounce of silver to the Treasury and take away $1.29. Free silver! The advocates called this the “unlimited coinage” of silver, but the aim was to create dollars, not coins. Most of the silver could pile up in the Treasury and be represented by crisp new pieces of paper.

The gold people argued that for the United States to set up a 16-to-1 currency standard in a 30-to-1 world was nuts. Essentially, the Treasury would be offering to pay out one ounce of gold for 16 ounces of silver. It would be a grand blowout sale on gold, and the world would come and get it until the gold was gone. The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

Surely the gold people were right about that. (And today’s ratio is 78 to 1.)

Milton Friedman argues in his book Money Mischief that two standards, with the cheapest metal defining the dollar in current use, would have worked all right. If the cheap metal got too expensive, the system would flip and the dollar would be defined by the other metal. In theory it makes sense, and apparently before the Civil War it had worked that way. But the financial people didn’t want a system like that.

The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

In 1896, America had a watershed election, with the silver people for Bryan, the Democrat, and the gold people for McKinley, the Republican. A third party, the People’s Party, endorsed Bryan. Its followers, the Populists, didn’t want a silver standard. They were fiat-money people. But Bryan was against the gold standard, and that was enough.

In that contest, the silver people were derided as inflationists. They were, to a point. They wanted to inflate the dollar until the value of the silver in dollars, halves, quarters, and dimes covered the full value of the coin. The silver people were not for fiat money.

Here is the Spokane Spokesman-Review of October 1, 1894, distinguishing its silver-Republicanism from Populism:

Fiat money is the cornerstone of the Populist faith . . . Silver money is hard money, and the fiatist is essentially opposed to hard money . . . He wants irredeemable paper money, and his heart goes out to the printing press rather than the mint.

The Populists and silverites argued in 1896 that the gold standard had caused the depression, and that as long as gold ruled, the nation would never recover. History proved them wrong. They lost, and the nation recovered. It began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Milton Friedman makes a monetarist point in Money Mischief that starting in about 1890, gold miners had begun to use the cyanide process, which allowed gold to be profitably extracted from lower-grade ore. The result was an increase in gold production all through the decade. I came across a different story in my research. The increase in the supply of gold (about which Friedman was correct) was outstripped by the increase in the demand for gold. Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold. Deflation helped spur a gold-mining boom — in the Yukon, famously, but also in British Columbia, in Colorado, and in South Africa.

The US began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Under a gold standard, a deflation sets in motion the forces that can reverse it. This is a useful feature, but it can take a long time.

The recovery from the depression of the 1890s began not with a burst of new money but with a quickening of the existing money. What changed after the election was the psychology of the people. They knew what sort of money they held and could expect. The important point wasn’t that it was gold, but that it was certain. If Bryan had been elected and the dollar became a silver currency, people would have adjusted. With gold, they didn’t have to adjust, because it was what they already had.

The writers of the 1890s had a less mechanistic view of the economy than people have today. People then didn’t even use the term, “the economy.” They might say “business” or even “times,” as if they were talking of weather conditions. They talked less of mechanisms (except the silver thing) and more of the thoughts and feelings of the people. People today are cynical about politicians who try to manipulate their thoughts and feelings, and think that it’s the mechanisms that matter. And sometimes mechanisms matter, but the thoughts and feelings always matter.

Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold.

Now some observations about the ideas of the 1890s.

The Populists, called by the conservative papers “Pops,” were much like the Occupy Wall Street rabblerousers of a decade ago: anti-corporate, anti-banker, anti-bondholder, anti-Wall Street, and anti-bourgeois, but more in a peasant, almost medieval way than a New Left, university student way. Many of the Pops were farmers, with full beards at a time when urban men were shaving theirs off or sporting a mustache only. More than anti-Wall Street, the Pops were anti-debt, always looking for reasons for borrowers not to pay what they owed. On Wikipedia, Populism is labeled left-wing, which it was mainly. It was also rural, Southern, Western, anti-immigrant, and often racist. In Washington state it was anti-Chinese.

In the 1890s traditional American libertarianism was in the mainstream. In the newspapers this is very striking, with the Republican papers championing self-reliance and the Democratic papers championing limited government. Democrats, for example, argued against the McKinley Tariff — which imposed an average rate of more than 50% — as an impingement on individual freedom. Here is Seattle’s gold-Democrat daily, the Telegraph, of September 10, 1893:

If it be abstractly right that the government shall say that a man shall buy his shoes in the United States, why is it not equally right for it to say that he shall buy them in Seattle? . . . Where shall we draw the line when we start out from the position that it is the legitimate and natural function of government to regulate the affairs of individuals . . .

Our idea is that the least government we can get along with and yet enjoy the advantages of organized society, the better.

Here is the silver-Republican Tacoma Ledger of Dec. 3, 1895:

Thoughtful men must perceive that our whole system of civilization is undergoing a revolution in its ideas; and we are in danger of gradually supplanting the old, distinctive idea of the Anglo-Saxon civilization — the ideas of the individualism of the man, his house as his castle, and the family as his little state, which he represents in the confederation of families in the state — by the Jacobinical ideas of . . . continental republicanism . . . The continental republican theory contemplates the individual man as an atom of the great machine called the nation. The Anglo-Saxon considers every man a complete machine, with a young steam engine inside to run it. The continental republican must have a government that will find him work and give him bread. The Anglo-Saxon wants a government only to keep loafers off while every man finds his own work and earns his own bread.

Contrast that with today’s editorial pages.

The Populists were anti-debt, always looking for reasons for borrowers not to pay what they owed.

Here’s a final one I particularly liked. Archduke Franz Ferdinand of Austria-Hungary — the same gent whose assassination 21 years later would touch off World War I — came through Spokane on the train in 1893. Americans, fascinated with him just as they would be a century later with Princess Diana, stood in the rain for hours to get a glimpse of the famous archduke — and they were sore because he never showed himself. On October 9, 1893, here is what the Seattle Telegraph had to say about that:

Why in the name of common sense should the people of this country go out of their way to honor a man simply because he happens to be in the line of succession to a throne . . . The correct thing is to let their highnesses and their lordships and all the rest of them come and go like other people. To the titled aristocracy of Europe there is no social distinction in America.

The America of the 1890s had some unlovely aspects. But in my view, the Telegraph’s attitude toward princes is exactly right. I recalled the Telegraph’s patriotic comment during all the blather over the wedding of Princess Diana’s son.

The 1890s had its blather, but after 125 years, sorting out facts from nonsense is easier. Silly statements, especially wrong predictions, don’t weather well. It makes me wonder what of today’s rhetoric will seem utterly preposterous in the 2100s.




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Good as Gold

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James Grant is the best-spoken and most accomplished hard-money man in Wall Street. Plenty of people can inveigh against the Fed; the publisher of Grant’s Interest Rate Observer can put it in the context of today’s financial markets and also in the context of history.

Grant is also a historian. He wrote a biography of John Adams, and another of financier Bernard Baruch, and several other histories, including my favorite among his works, The Trouble with Prosperity: The Loss of Fear, the Rise of Speculation and the Risk to American Savings (1996). His new book, “Mr. Speaker! Mr. Speaker!” should be of particular interest to readers of Liberty.

That’s not because of any deep interest I have in his nominal subject, Thomas B. Reed (1839–1902). Reed was a moderately interesting figure. He was fat, he ate fish balls for breakfast, and he spoke French. He was a congressman from Maine, first elected in the centennial year, 1876. He was a man of his time, a Republican stalwart who supported the tariff and gold and opposed foreign wars. Though he was for woman suffrage, he was no progressive, at least in the sense that today’s progressives are. He had no desire to teach other people how to live. “Pure in his personal conduct,” Grant writes, “he had no interest in instructing the impure.”

During the 1890s, Reed was speaker of the House. His claim to fame is how he changed the House rules to give himself, and the majority, much more power to get things done. Whether that was good or bad depends on your point of view.

Parts of the book are about Reed’s parliamentary maneuverings and also about his wit. These parts are well-written, but I was not much interested in them. The greater part of the book, however, is about the financial events and national political battles from 1870 or so to 1899, which I found very interesting.

Now gold is the money of the distant past. In the 1870s, Grant observes, “Gold was the money of the future."

Grant covers several such things, from the collapse of the Freedmen’s Bank to the stolen election of 1876. He has a particular interest in the currency. One story he tells is of Lincoln’s printing of greenbacks during the Civil War, and the struggle afterward over restoring the link to gold. In the ideology of the day, restoration was necessary. It was part of honorable dealing. But people dragged their feet about doing it, because a national debt had been piled up during the war, and what was the need to repay investors in gold if they had bought bonds with greenbacks? And besides, there was a boom on, and shrinking the money supply would spoil it.

The boom went bust in 1873. For the rest of the decade the country was arguing about the commitment to return to gold. The way in which this argument was conducted was much different from the way it would be today. Now gold is the money of the distant past. In the 1870s, Grant observes, “Gold was the money of the future”:

“A 21st century student of monetary affairs may stare in wonder at the nature of the monetary debate in mid 1870s America. A business depression was in progress. From the south, west and parts of the east arose a demand for a cheaper and more abundant currency. Yet such appeals were met with, and finally subdued by, a countervailing demand for a constant, objective and honest standard of value.”

“Resumption day” was Jan. 1, 1879. There followed “a mighty boom.” In the 1880s, prices fell 4.2% and wages rose.

This was the era of laissez-faire. “The government delivered the mails, maintained the federal courts, battled the Indians, examined the nationally chartered banks, fielded the army, floated the navy and coined the currency.” The big social program was Civil War pensions — for the Union side, not the Confederates. By the standards of the day, the Democrats were the small-government party and the Republicans were the big-government party, but policy differences were at the margin only.

The federal government was funded by the tariff, which the Republicans, and Reed, thought was good for American labor. The Democrats quoted the free-trade arguments of Frédéric Bastiat. “The Republicans,” Grant writes, “having no ready answer for Bastiat’s arguments, were reduced to pointing out that he was, indeed, French.”

The ideological atmosphere started changing in the 1890s. The Panic of 1893 brought on a severe depression, and another political battle over the currency. This time the supporters of gold battled it out with the supporters of silver, with bimetallists arguing for both at once.

Grant provides the best explanation of the gold-versus-silver battle I have read, especially the futility of having two metallic standards at the same time. Here he is not so proud of Thomas Reed, who was by then speaker: “One senses, reading him, that he was not quite sure what the gold standard was all about.” Reed’s position “lacked clarity, or, one might even say, courage. [President Grover] Cleveland had one unshakable conviction, which was gold. Reed had many convictions, only one of which — no free silver — was strictly nonnegotiable.”

Reed’s final battle was over war with Spain. He was against it. The new president, William McKinley, seemed to be against it, but lacked the courage really to oppose it. Ex-President Cleveland was against it, as was William Jennings Bryan, the presidential candidate whom McKinley had beaten in 1896. But the Congress was for it, and even with his self-enhanced power as speaker, Reed couldn’t block the war resolution of 1898. It passed the House 310 to 6.

A year later, Reed resigned. He wrote to a friend, “You have little idea what a swarming back to savagery has taken place in this land of liberty.” Publicly he said nothing. Three years later he was dead.

And so Grant ends his book. It is a fine book. I recommend it. Don’t be put off by any lack of interest you may have in Thomas B. Reed. I wasn’t much interested in him, either. You don’t have to be.

Grant covers several such things, from the collapse of the Freedmen


Editor's Note: Review of "'Mr. Speaker! Mr. Speaker!' The Life and Times of Thomas B. Reed, the Man Who Broke the Filibuster," by James Grant. Simon & Schuster, 2011, 448 pages.



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