By Ludwig Von

Despite the Great Depression and numerous extended financial troubles in the century since passage of the Federal Reserve Act (I may detail these in a future article), supporters cite the “panics” and other crises of the late 19th century as reason for this current system. Often this criticism is leveled specifically at “gold-bugs” or those who advocate for a return to the gold standard.

In this article, I will discuss major events in the approximately 50 years between the War Between the States (my preferred term for the conflict more commonly called the Civil War) and the passage of the Federal Reserve Act, with primary focus on the period of 1873 to 1897. Apart from such events as the War Between the States itself and Reconstruction, there were no major crises between early 1859 (when the effect of the Panic of {Fall} 1857 subsided) and 1873 or between 1897 and 1907, when another panic occurred due in part to different types of economic tinkering.

I’m going to describe some political situations, but before I do that, I wanted to supply some background. The Republican Party was (and to an extent still is… although the region as a whole is now strongly Democratic) the party of entrenched, wealthy East Coast businessmen. Although that was not a group sympathetic to “free silver” and certain other monetary-expansion movements, it has always been susceptible to a tendency to try to manipulate markets to further enshrine its own continued power.

Even a serious student of history may associate the Democratic Party of the late 19th century most strongly with the likes of William Jennings Bryan, he of the famous “Cross of Gold” speech. The movement he represented was Populism. I capitalize the term because it was actually a political party that was enveloped into the Democratic Party. Why was this populist? The idea was that scarcity of money (gold) was a major hindrance to debtors such as rural farmers, at least at times, and any inflationary movement (the elevation of silver, or the return to fiat “greenbacks” used as an emergency measure during the War Between the States) would allow a more ready escape from those debts.

Without trying to get too technical about monetary policy, it’s important to remember that without a central bank, the banks wouldn’t have been as able to control access to the increased liquidity (to their own benefit) like they are now able to when an inflationary initiative begins.

Anyway, although it was a more natural partner than the Republicans (although Republicans would make later inroads and accommodations), the Democratic Party existed separate and (in some quarters anyway) apart from the Populist movement. The only Democrat actually elected President during that period (Bryan of course lost three times as the Democratic nominee but was only nominated for the first time in 1896) was Grover Cleveland, a “Bourbon” Democrat. They were directly at odds with the Populists on monetary policy. Cleveland is remembered as holding firm on the gold standard.

He was also a disappointment to unions, which seemed to have also increased support for Bryan in coming primary fights against Cleveland’s Bourbon successors. Although he is championed by many “classical liberals”, I believe it was fair to call Cleveland a conservative Democrat, at least in these respects.

That’s the end of the background discussion. The election where there was actually a major Populist candidate was not until 1892 (when James Weaver won 4 states, and those states went from being Republican in prior elections to Democratic in future elections), so there is a lot of detail to fill in. I just didn’t want people to have improper associations with Democrats and Republicans of the time.

Despite the common depiction of the dire consequences of the gold standard, there were only two major economic calamities of this period, the Panics of 1873 and 1893. The Panic of 1873 actually did take place while the United States was on the gold standard, but the triggers for that Panic was the failure in confidence of other countries in silver, most significantly in 1871 when Germany insisted on a large gold indemnity from France and ceased mining silver for coinage.

The (U.S.) Coinage Act of 1873, which put the United States officially back on the gold standard 6 months before the panic struck, was simply an attempt to cushion the blow from the lowering demand for silver internationally. And it may have actually done so, being that Europe suffered what is called the “Long Depression” which was a period of stagnation lasting decades (arguably all the way until 1896), in contrast with the 5 years of depression in the United States (which would have another depression from 1893 to 1897).

Regardless of whether the fault for the 1873 crisis can be fairly laid at the feet of bimetalism for not working to the satisfaction of other countries, it does not make sense to blame the gold standard because silver failed (the value of silver relative to gold fell by about 60% between 1873 and 1900). Also, in the United States, the global repercussions from the falling demand for silver coincided with the end of the post-war railroad boom.

To be fair, there was an increase in the price of gold, so it wasn’t entirely the failure of silver that was to blame for the changing value between the two metals, but deflation of 1-2% as a result of gold was surely much better than the dramatic changes that would have taken place if the currency were tied to silver alone.

Nonetheless, two major pro-silver initiatives were passed between the Panic of 1873 and that of 1893. The first was the Bland-Allison Act, which was passed over President Hayes’ veto in 1878, and the second was the Sherman Silver Purchase Act, which was signed into law by President Harrison in 1890.

The two acts combined to require millions of ounces of silver to be purchased each month over the 15 years they were in effect, with the Sherman Silver Purchase Act more than doubling the requirements of Bland-Allison. This depleted gold reserves to such an extent that they had to be replenished by a loan from J.P. Morgan, which in turn likely gave credence to the notion of an “independent” federal reserve underwritten by such financiers.

Unlike what happens now, at least the politicians had the good sense to undo the later measure when the Panic of 1893 took place. However, due to the depth of that Depression, the Bourbon Democrats (who in the person of Cleveland were returned to the White House in the 1892 election) were never heard from again in any meaningful way.

Bryan was nominated in 1896, and he was defeated easily by McKinley, even though the Republican Party was partly responsible for the Sherman Silver Purchase Act, as Harrison and Sherman himself were both Republicans. After all, the Republicans were able to position themselves as moderates since the Sherman Silver Purchase Act was enacted largely as a compromise to avoid “free silver”.

As I touched on earlier, there was another Panic in 1907, but this could not have been the fault of a hands-off philosophy. President Theodore Roosevelt, who embraced the label “Progressive”, had hardly been hands-off. Even McKinley, who was considered relatively conservative, while in Congress had his name affixed to a 50% increase on import tariffs, directly against what Cleveland and the Bourbon Democrats supported (Cleveland would allow a reduction of that tariff to become law without his signature). At any rate, I don’t see 1907 as an argument against the gold standard, although I suppose it was an example of politicians not being trustworthy on economic issues, but that’s a discussion for another day.