“Resumption”
and the
Politics of Silver and Gold
Macroeconomics:Civil War to World War I
• Civil War, 1861-1864
– Fiscal: Huge DeficitsHuge Increase in Federal Debt
– Monetary: Abandon the Bimetallic (Effectively Gold)
Standard
– Monetary: Inflation in North, Hyperinflation in the
South
• Greenback Period, 1864-1879
– Fiscal: SurplusReduction in the Debt
– Monetary: Deflation
• “Resumption” 1879
– Monetary: Return to the Gold Standard
• The Gold Standard, 1879-1914
– Fiscal: SurplusReduction in the Debt
– Monetary: Continued Deflation and Silver Politics,
1879-1897
– Monetary: Gold Inflation, 1897-1914
Greenback Period, 1864-1879
• Fiduciary or paper money standard—print money to
finance Civil War---greenbacks fall in value relative to
gold/silver, i.e. inflation
• Floating exchange rate—Dollar depreciates
• Deflate to return to price level consistent with the
bimetallic standard.
• Price Level Falls by ½ by reducing Greenbacks in
circulation
• Two Questions: HOW? And WHY?
£/$
Or $4.86 per £
Inflation
Deflation
£0.206
£0.103
“HOW”
Quantity of $
“Why?” The Problem
• 1860 Exchange Rate £1 = $4.86 under specie standard
• Cotton dress in U.S. costs $4.86 and in U.K it costs £1. So
it is competitive because $4.86/($/ £)4.86 = £1
• But in war, no promise to exchange $ for gold or silver.
Prices in U.S. rise by 232%. In U.S. prices of dress now:
$4.86x2.32=$11.32
• At end of war, U.S. cannot compete, $11.32 dresses cost
11.32/4.86= £2.32, would result in huge outflow of specie to
Britain
• Two choices (1) devaluation so £1=$11.32 or (2) deflation
reduce prices so that dress is again $4.86
• Problem of the Debt: $100 principal with 6% coupon sold
with promise that will repay in gold.
• Annual coupon is $6 but this is now only worth
$6/2.32=$2.89, imply that $100 bond is worth less if
investors continued demand in 6% in real terms:
2.89/.06=$43.10. Bond holders would feel defrauded. So
government picks deflation over devaluation.
Moving from Greenbacks to Gold
• 1866 House of Rep.votes 144 to 6 to return to gold---but parties soon split: Republicans generally
“hard money” and Democrats “soft money”
• Coinage Act of 1873, (later called the “The Crime of
1873”)—lists coins to be minted: gold and
subsidiary silver but not silver dollar. Decision by
Secretary of the Treasury and leading Senators--but no popular protest.
• 1874 Congress sets maximum for greenback issue
• Resumption Act of 1875---sets resumption of
specie standard on gold basis on January 1, 1879. .
• 1879---Resumption of convertibility of dollar into
gold!!!
SURPRISE! PRICES CONTINUE TO FALL-DEFLATION!!!
U.S. Price Level (GDP Deflator)
190
Crime of 1873
180
Return to Pre-War Price Level
170
160
Resumption 1879
150
140
130
120
110
100
90
18
50
18
52
18
54
18
56
18
58
18
60
18
62
18
64
18
66
18
68
18
70
18
72
18
74
18
76
18
78
18
80
18
82
18
84
18
86
18
88
18
90
18
92
18
94
18
96
18
98
19
00
19
02
19
04
19
06
19
08
19
10
19
12
19
14
80
Surprise of More Deflation!!
Gold Standard Deflation, 1879-1897
• Increased world demand for Gold coincides with
slowing production of gold.
• Rising productivity, increasing world output.
• Result: Upward pressure on prices
• Deflation in U.S. 1875-1896 1.7% p.a. (but
agricultural goods fall at 3.0%---terms of trade!).
• Farmers and debtors susceptible to propaganda
representing “Crime of 1873” as a result of evil
Wall Street plot.
• Formation of the Greenback Party in 1876,
Alliance in 1880s and Populists in 1890s
Resumption: M* + V* = P* + Q* (growth rates)
Silver Interest’s Sops
• Bland-Allison Act of 1878 authorizes the
Treasury to buy $2-4 million of silver. Buys silver
at market price—lower than legal price. Coins
silver, most in Treasury vaults for which silver
certificates issues---effectively fiat money.
• “Inflationists” and Mining Interest are unhappy.
• Sherman Silver Purchase Act of 1890 increases
silver purchases to $4.5 million of silver per
month. Repealed in 1893---political struggle
Who opposed “hard money?”
• Political Constituency: largely rural,
farmers and small-business, Southern
and Western supporters of Jackson in
1834 and William Jennings Bryan in 1896
against the bankers, financiers, big
business of East and Northeast
• Why? Inflation reduces the value of debts
and deflation increases it.
Also: the Tariff and Resumption
• Initially East
Coast and
Midwest
manufactures
were hostile to
resumption.
Why?
• In Civil War
(1861-1864)
Morrill and War
Tariffs
• Decline after the
war
• Later restored to
to high level.
• Why did that
satisfy
manufacturing?
Opposition to Gold becomes largely
about Agrarian Unrest
• 1890 Census: state foreclosure rate for
– Farms in Illinois was 0.61% and 0.93% in
1880 and 1888
– Farms in Minnesota in 1881 and 1891, 1.38%
and 1.55%.
• Is this small? Large enough for a
movement?
Your neighbors…..
Battle Over Deflation
• Initially some wanted reissue of
Greenbacks.
• Too clearly Inflationist and seems
irresponsible.
• Becomes Battle between Bimetallism and
the Gold Standard
• Why?
– Hope that two metals would reduce deflation
– Yet not seem irresponsible because supply of
silver is limited unlike paper
– But silver appears to be unstable in value! So
great resistance
The problem of the gold-silver price ratio
• U.S. legal rate at 16:1 since 1834---most
countries are on a bimetallic system---Britain the
world’s financial center is on gold.
• Market rate fluctuated around 15.5 for decades
then falls to 15 by 1859 with California gold
discoveries. Afterwards it starts to rise.
Discovery of the Comstock Lode of silver in
Nevada in 1859
• 1871 Germany defeats France uses gold
indemnity to abandon bimetallism---sells silver--moves to gold standard 1873. Followed by
France, Italy, Belgium and Switzerland, Denmark,
Norway, Sweden, the Netherlands, Austria and
Russia. Only India and China on silver standard.
• Silver is Dumped---price falls---silver producers
unhappy.
Silverites of early 1890s want to
reverse monometallism
• But too late, the market gold-silver ratio was not
16:1 BUT 30 to 1.
• For U.S. mint to set a ratio of 16:1 would have
produced huge increase in demand for silver—
huge silver inflows, inflation---with major
worldwide disturbances.
• Furious when Sherman Act of 1890 repealed in
1893, as a result of election, no more silver
purchases…..then as if to make their point…..
The Disturbed Years of 1891 to 1897
• Sherman Silver Purchase Act 1890, repealed
1893
• Sharp contraction of 1892-1894, fiscal crisis
for government---increasing deficits
• 1893: Banking panic and bank failures. A run
on U.S. gold reserves by foreigners fearful
that silver agitation would force U.S. off gold
standard.
• Who want to hold $? Investments in U.S.
would fall in value.
• Speculative Attack on the $$$$
P. Garber and V. Grilli (European Economic
Review, 1986)
Congressional deadlock prevents Treasury
from borrowing by issuing more debt—issue
more legal tender notes, expanding circulation.
Crisis
• Run on gold reserve begins in late 1894.
• In 1895, Treasury contracts with a Syndicate of J.P. Morgan
and August Belmont(for Rothschild of London) for loan
• Syndicate to market a bond issue in return for a large
spread
• Loan: 30 years 4% bonds for $65.1 million are for purchase
by gold coin.
• If the public took legal tender to Treasury for gold coin, the
syndicate would replace lost gold. Also promise to intervene
in the foreign exchange market if individuals borrowed
exchange on London and sold it in New York.
• Defeat of speculative attack on the dollar.
• Brief and mild recovery 1894-1895
• Contraction 1895-1896, unemployment at 14%
Democratic Convention, Chicago 1896
• Convention divided between Hard Money and Silver
Democrats
• One of the most famous speech in American political history
was delivered by William Jennings Bryan on July 9, 1896, at
the Democratic National Convention in Chicago.
• After speeches on the money question by several U.S.
Senators, Bryan rose to speak. The thirty-six-year-old former
Congressman from Nebraska aspired to be the Democratic
nominee for president, and he had been skillfully, but quietly,
building support for himself among the delegates.
• His dramatic speaking style and rhetoric roused the crowd to
a frenzy. The response, wrote one reporter, “came like one
great burst of artillery.” Men and women screamed and
waved their hats and canes. “Some,” wrote another reporter,
“like demented things, divested themselves of their coats
and flung them high in the air.”
• The next day the convention nominated Bryan for President
on the fifth ballot.
Silverites
hijack the
Convention
The Cross of Gold Speech
• It is the issue of 1776 over again. Our ancestors, when but 3 million, had
the courage to declare their political independence of every other nation
upon earth. Shall we, their descendants, when we have grown to 70
million, declare that we are less independent than our forefathers? No,
my friends, it will never be the judgment of this people. Therefore, we
care not upon what lines the battle is fought. If they say bimetallism is
good but we cannot have it till some nation helps us, we reply that,
instead of having a gold standard because England has, we shall
restore bimetallism, and then let England have bimetallism because the
United States have.
• If they dare to come out in the open field and defend the gold standard
as a good thing, we shall fight them to the uttermost, having behind us
the producing masses of the nation and the world. Having behind us the
commercial interests and the laboring interests and all the toiling
masses, we shall answer their demands for a gold standard by saying to
them, you shall not press down upon the brow of labor this crown
of thorns. You shall not crucify mankind upon a cross of gold.
• http://historymatters.gmu.edu/d/5354/
• http://www.historicalvoices.org/earliest_voices/bryan.html#recordings
The Combatants:
William Jennings Bryan v. William McKinley
Or viewed by cartoonists
The Election
The Wizard of Oz
by L. Frank Baum (1899)
Well, there was also a movie in 1939 with Judy Garland, Bert Lahr,
Ray Bolger…
Where Does the Story Start?
What’s the Premise?
Who Does Dorothy Meet?
And the Wicked Witch of the East
is……
The arrive at Oz…the color of….
The confront the Wizard
How does Dorothy get back to
Kansas?
Questions for review..
• Why is Bryan a cowardly lion in 1899?
• When the foursome arrive at the Emerald City
and stay the night in the Emerald Palace, why
does Dorothy have to go through 7 passages
and 3 flights of stairs to get to her room?
• Irving Fisher’s 1896 paper: would indebted
farmers gain from inflation (Hint: time to maturity
of average mortgage was 2.33 years) The “what”
effect for new mortgages.
• Was Bryan a fool?
• The quantity theory—Jevons, Laughlin, Fisher
18
50
18
52
18
54
18
56
18
58
18
60
18
62
18
64
18
66
18
68
18
70
18
72
18
74
18
76
18
78
18
80
18
82
18
84
18
86
18
88
18
90
18
92
18
94
18
96
18
98
19
00
19
02
19
04
19
06
19
08
19
10
19
12
19
14
Gold Inflation, 1897-1914
U.S. Price Level (GDP Deflator)
190
180
170
160
150
140
130
120
110
100
90
80
Contributing Factors
• New gold discoveries in South Africa,
Alaska and Colorado and new techniques
• Poor European harvests, excellent
American harvests---balance of payments
surplus
• Dingley tariff holds down imports.
• U.S. Capital exports
Friedman and Schwartz (1963)