As Figure 19.2 shows, prices continued to fall from the resumption of gold payment in 1879 to the mid-1890s. This was true not only in the United States but also in other countries on the gold standard. Only countries on the silver standard experienced rising prices.
Why did prices fall? The basic problem was that the demand for money (and ultimately for gold, which was the base of the monetary system) was growing faster than the supply. The rapid increase in economic activity, growing financial sophistication, and the addition of more countries to the gold standard all increased the demand for gold. Meanwhile, the supply, although growing at a good rate by historical standards, could not keep pace.
Although the silver acts of 1878 and 1890 made silver certificates redeemable in either gold or silver, in practice, Treasury authorities redeemed them in gold if it were demanded. After 1879, Treasury secretaries and the public came to believe that a minimum gold reserve of $100 million was necessary to back up the paper circulation. By early 1893, the gold drain had become serious, and the gold reserve actually dipped below $100 million toward the middle of the year. Several times during the next three years, it appeared certain that the de facto gold standard would have to be abandoned. Two kinds of drains—“external” (foreign) and “internal” (domestic)—plagued the Treasury from 1891 to 1896. The difficulty was that when the danger of abandoning gold became apparent, people rushed to acquire gold, thus making it even more likely that the Treasury would have to abandon the gold standard. Chiefly by selling bonds for gold, the administration replenished the government’s reserve whenever it appeared that the standard was about to be lost. The repeal of the Sherman Silver Purchase Law of 1893 reduced the number of Treasury notes, which the public was presenting along with greenbacks, for redemption. Increasing commodity exports at last brought an influx of gold from abroad in the summer of 1896, improving public confidence to the point that the gold standard was saved.
The election of 1896 settled the matter of a monetary standard for nearly 40 years. The Democrats, under the leadership of William Jennings Bryan, stood for free coinage of silver at a ratio of 16 to 1—even though the market ratio was then more than 30 to 1. At the Democratic national convention, Bryan inspired the inflationists and won the party’s nomination with his famous “Cross of Gold” speech, which ended with this stirring call to arms:
Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand 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.
The Republicans, with William McKinley as their candidate, stood solidly for the gold standard.97 The West and the South supported Bryan; the North and the East supported McKinley. In the East, industrial employers brought every possible pressure, legitimate or not, to bear on employees. One genuine issue that divided workers from farmers was the tariff. Bryan, like many of his supporters in the farm states, opposed a high tariff, but workers may have been persuaded that a high tariff protected their jobs. In any event, Bryan did not draw the great urban vote, as Franklin Roosevelt would do 36 years later, and when well-to-do farmers in the older agricultural states deserted Bryan, the cause was lost.98
The Republican victory of 1896 was not followed immediately by legislation ending the controversy because free-silver advocates still held a majority in Congress. The return of prosperity, encouraged by new supplies of gold, however, made Congress receptive to definitive gold legislation. The new supplies of gold, although partly the result of the high real price for gold (the price paid by the mint relative to prices in general), were largely unanticipated. New gold fields were opened in many areas of the world, including the immensely rich gold fields of South Africa, and a new method for processing gold
In his 1896 campaign for the Presidency, Bryan crisscrossed the nation by rail. It has been called the first modern campaign. Although defeated by McKinley, many of Bryan’s Populist ideas were adopted during the New Deal.
Using cyanide was developed. Ironically, the increase in the supply of gold accomplished the goal of the silverites: expansion of the money supply and inflation. Figure 19.1 clearly shows the rapid increase in monetary gold after 1896.
Under the Gold Standard Act of 1900, the dollar was defined solely in terms of gold, and all other forms of money were to be convertible into gold. The secretary of the treasury was directed to maintain a gold reserve of $150 million, which was not to be drawn on to meet current government expenses. The United States had at last committed itself by law to the gold standard.
Who was right, Bryan and the silverites or McKinley and the “gold bugs”? Economist Milton Friedman has argued that eliminating the silver dollar in 1873 was a mistake that produced an unnecessary deflation, but that by Bryan’s time, it was probably too late to do much about it (Friedman 1990). But perhaps a better question to ask is whether the whole controversy was worthwhile. In their classic A Monetary History Friedman and Anna J. Schwartz (1963, 133-134) argued that a firm commitment to either standard would have been better than the long, drawn-out battle that took place. The lessons to be drawn from this unique experience with deflation are discussed further in the accompanying New View 19.1.
World History
