Free Silver or Cross
of Gold
(Activity 27)
Mystery
From 1870 to 1900, prices for goods and
services purchased by American consumers
generally declined. For Farmers, this
meant lower costs, since prices for
supplies and equipment declined. Yet many
farmers supported the Greenback and
Free Silver movements--movements
committed to increasing the money supply
in order to raise prices.
Why would farmers support policies that
would increase the prices they would have to
pay for tools, clothing, household goods and
all the other things needed by their families.
VOCABULARY
Greenbacks: paper money not backed by gold.
Deflation:
decrease in the overall price level-- the
purchasing power of money increases.
Inflation:
increase in the overall price level-- the purchasing
power of money decreases.
Gold Standard:
bank notes exchanged for gold.
Bimetallic Standard:
gold or silver
Index Numbers:
bank notes could be exchanged for
takes average of prices for large number
of goods and compares it to a base year (such as 1880) and
comparing it to prices in other years. (ie CPI)
CONCEPT
A decrease in the money supply
normally causes prices to go
down, UNLESS the quantity of
goods and services available for
sale decreases even more.
ECONOMIC HISTORY
•1870s-1900s: time of great deflation
•During Civil War, the US government greatly
increased the money supply by issuing greenbacks
•After the war, the government gradually withdrew
greenbacks from circulation, reducing the amount of
money available to consumers (see concept)
•After the war, production of goods increased
dramatically due to improvements in technology and
mass-production techniques.
•Farm production also increased dramatically
--These factors caused
prices to fall.
Farmers position:
•Farmers did not want to see prices fall . . . felt
they were being cheated
•Farmers were in debt to buy land, seed, and
machinery et.al.
•Farmers borrowed in gold notes and had to
repay their debts in gold notes, but the price of
gold increased over the course of the century as
the price of their commodities dropped.
Farmers tended to support inflationist
movements such as Greenback movement
and Free Silver movement. (western and
southern part of the country)
Banks/business position:
•Before Civil War, the US was on bimetallic standard
•Silver is overvalued, so producers of silver objects
(jewelry, tableware) will pay more to silver miners than
the government would pay for silver to make coins.
•CAUSED people to not want to exchange banknotes for
silver
•Silver coins could be melted down and sold to
producers of silver objects for profit
•After the gold rush of 1849, gold was plentiful and people
were exchanging bank notes for gold.
Banks and business people tended to support
money backed by gold. (Eastern part of country
--also much of Europe)
CURRENCY SITUATION:
•Coinage Act of 1873 made no provision for minting silver
coins (Crime of 1873)
•Price of silver began to fall as the supply of silver increased
•rich silver strikes were discovered in the west
•More silver sold in international markets by European
nations that were adopting gold standard
•Farmers and silver producers, “the SILVERITES” pressed
for free silver (the unlimited purchase and coinage of
silver by government)
•Only in the 1890s did price of silver rise (because the supply
of gold increased)
•Major gold strikes in Alaska and South Africa
•New technology (cyanide) made gold mining easier and
cheaper
•Increase of US exports causing gold to come into the US
Visual 27.4
PRICES FOR FARM PRODUCTS 1864-1896
Prices for farm products fell by 60 percent from 1864 to 1896
and by an additional 20 percent between 1886 and 1896.
WHEAT:
$3.00 a bushel in 1866
56 cents a bushel in 1894
COTTON:
40 cents a pound in 1866
7 cents a pound in 1894
U.S. WHOLESALE PRICE INDEX, 1870-1890(BASE YEAR 1880)
1870 1875 1880 1885 1890
135
118
100
85
82
1. WHAT HAPPENS TO BORROWERS DURING DEFLATION?
Year One
Year Two
Year Three
Price Index = 100 Price Index = 90 Price Index = 81
Total Income
$1,200
$1,080
$972
Farm Supplies,
- 550
- 495
- 455.50
Living Expenses
Loan Payments
- 500
- 500
- 500
Net Income
_____
_____
_____
2. WHAT HAPPENS TO BORROWERS DURING INFLATION?
Year One
Year Two
Year Three
Price Index=100
Price Index=110
Price Index=121
Total Income $1,200
$1,320
$1,452
Farm Supplies, - 550
- 605
- 665.50
Living Expenses
Loan Payments - 500
- 500
- 500
Net Income
_____
_____
_____
Visual 27.8
WHAT IS A GOLD STANDARD?
•Government guarantees to exchange gold for its national
currency at a fixed rate.
•Both domestic and foreign holders of that currency can redeem
the currency in gold
•When a nation imports more than it exports, it pays the
difference in gold
•The money supply of a nation on the gold standard is limited by
the amount of gold available. Banks must be prepared to pay
out gold in exchange for checks written against the accounts of
their customers. This limits the number of loans bankers can
prudently write.
•Advantage of gold standard is that it tends to prevent inflation.
•Disadvantage is that the money supply may not be able to grow
as the economy grows.
TODAY
FISCAL POLICY
MONETARY POLICY
Government policies to
stabilize the economy
Federal Reserve (1913)
policies to control the
money supply which helps
stabilize the economy
METHODS:
•Raise/lower taxes
•Raise/lower spending
METHODS:
•Increase/decrease
interest rates
•Increase/decrease
reserve requirement
•Buy/sell T-bills
Conclusions
Farmers
believed that an increase in the money supply
would cause prices of farm products to rise. (probably
not true as farm prices are determined by worldwide
forces of supply and demand)
With
free silver, farmers believed those who had taken
out loans could pay them back in cheaper dollars. (True.
When inflation occurs money is worth less and the
borrower is paying back less in terms of goods and
services than when he/she originally borrowed)
When
the quantity of available goods and services
increases faster than the amount of money in circulation,
prices tend to fall.
Disaster at the Teller’s
Window: A Banking
Tragedy
(Activity 28)
Mystery
Most people today have no recent memory
of banks failing. Yet, for people in the
nineteenth century, bank failures were
common events. Why did so many banks
fail in the nineteenth century? Why is it
very rare for a bank to fail today?
TODAY
FISCAL POLICY
MONETARY POLICY
Government policies to
stabilize the economy
Federal Reserve (1913)
policies to control the
money supply which helps
stabilize the economy
METHODS:
•Raise/lower taxes
•Raise/lower spending
METHODS:
•Increase/decrease
interest rates
•Increase/decrease
reserve requirement
•Buy/sell T-bills
Conclusions
Money
panics and bank runs occurred in the
nineteenth century because banks whose
customers made too many withdrawals had no
reliable source from which to borrow new
reserves.
The
discount rate is the interest paid by member
banks on the reserves that they have borrowed. If
the Federal Reserve district bank wanted to
encourage business activity within its district, it
could lower the discount rate (interest rate) which
would tend to increase the amount of money in
circulation.