A photographic negative of recent election results
To the south are the debtors. With their incomes slumping and debt burdens rising they demand that the monetary authorities act, wanting a little inflation to ease the load. To the north are the creditors. Anxious that the rising wages from their manufacturing output will buy tomorrow what it will buy today they, by contrast, demand monetary discipline.
This is an apt description of contemporary Europe. It is, in fact, a description of the United States in the late 19th century. For the PIIGS we have the indebted farmers of the south and Great Plains demanding the inflationary coinage of silver. For the Germans, protecting the principle of (relatively) sound money, we have the bankers and industrial workers of the north-eastern states urging sound money and adherence to the gold standard.
The United States Constitution gave Congress the power “To coin Money, regulate the Value thereof, and of foreign Coin” and a Coinage Act was passed in 1792. This provided for the free coinage of silver and gold, a bimetallic system, with silver being coined at the rate of $1 for 371.25 grains of pure silver and gold at 24.75 grains of pure gold, a ratio of 15:1. This held while this mint ratio matched the market price ratio. But when, as was likely, they diverged then the metal undervalued at the mint flooded out and the other became the de facto monometallic money. After 1792 gold was undervalued and a de facto silver standard came about; after an alteration of the mint ratio in 1834 silver was undervalued and a de facto gold standard came about.
Messy and protracted attempts to restore convertibility after the Civil War inflation culminated in the fateful Coinage Act of 1873. Considering the controversy it would subsequently generate this Act passed rather unremarked but it was a clear break in American monetary affairs. While it allowed for free coinage of gold to resume in 1879 it said nothing about silver. This de jure demonetising of silver was little noticed as it had been de facto demonetised since 1834.
Two things returned the monetary question to prominence. One was a rise in the gold/silver ratio from around 16:1 in the early 1870s to 30:1 by 1896 owing to an increased international demand for gold and supply of silver. Another was agricultural hardship. Between 1872 and 1895 on a US Farm Average wheat prices fell by 59%. The price of cotton fell by 55.5% between 1881 and 1890. This crippled heavily indebted farmers in the south and Midwest.
There were two explanations for this. One credited dramatic agricultural productivity increases which saw cotton production increase by 111% and wheat production by 446% between 1859 and 1919. The activist Edward Atkinson wrote “[T]here is not a single commodity which has been subject to a considerable fall in price since 1873 or 1865, of which that change or decline in price cannot be traced to specific applications of science or invention…either to the production or distribution of that specific article without any reference whatever to the change in the ratio of gold to silver”
The other, favoured in agricultural areas, blamed a deflationary shrinkage in the money supply following the 1873 demonetisation of silver, which ‘Silverites’ called ‘The crime of 1873’. Figures emerged showing that money per capita in circulation had fallen from a peak of $31.18 in 1865 to $20.00 between 1875 and 1896. “Money in the business world and blood in the body perform the same functions and seem to be governed by similar laws” commented Illinois governor John Peter Altgeld, “When the quantity of either is reduced the patient becomes weak and what blood or money is left rushes to the heart, or center, while the extremities grow cold”
A succession of organisations arose seeking the remonetisation of silver at 16:1, a de facto silver standard. The most successful was the Populist Party under whose pressure the Democrats adopted a free silver policy in 1896. Both parties nominated Nebraska’s William Jennings Bryan for president that year. Bryan, gifted orator to his supporters, demagogue to his opponents, thundered famously at the Democratic convention in Chicago “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold”. To Bryan his opponents were “creditors; they hold our bonds, and our mortgages, and as the dollars increase in purchasing power, our debts increase and the holders of our bonds and mortgages gather in an unearned increment”.
The Republicans raised the gold standard with little enthusiasm, their traditional economic panacea was protectionism. Their nominee, Ohio’s William McKinley, had made his reputation on the tariff issue. Unlike Bryan, he won the nomination thanks to diligent preparation. While Bryan stumped 18,000 miles round the country McKinley, reasoning “I might just as well put up a trapeze on my front lawn and compete with some professional athlete as go out speaking against Bryan”, stayed in Canton, Ohio. There he pushed the themes of the protectionism and sound money; “We know what partial free trade has done for the labor of the United States. It has diminished its employment and earnings. We do not propose now to inaugurate a currency system that will cheat labor in its pay”.
McKinley won. Just as silver had a popular constituency so did gold. It was found among industrial workers, many of them German immigrants, who saw their real wages increase by 18% between 1879 and 1889. When, in previously Democrat and heavily German Milwaukee, the Democratic candidate said that “gold, silver, copper, paper, sauerkraut or sausages” could serve as money Milwaukee went Republican.
And almost as soon as the election was over prices began to rise as new gold discoveries increased the money supply. Whether this was due to luck or equilibrating tendencies in the gold standard is still disputed. And here, if not before, the historical analogy breaks down. There is no such light at the end of the Euro-tunnel.
This is an early draft of an article which appeared in The Salisbury Review