Monday, February 2, 2015

Standards, VIII: “The Money Question”


Once upon a time in the late 19th century in America, there was a financial panic.  By coincidence (or maybe not), the “free land” under the Homestead Act of 1862 had effectively come to an end.  At the same time, a sudden demand for converting investments into cash from overseas investors put a strain on the inelastic, debt-backed money supply.  This consisted of United States Notes (the “Greenbacks”), the National Bank Notes, and the Treasury Notes of 1890.

The Panic of 1893
Foreign investors, of course, had no use for debt-backed government currency (bills of credit), or for asset-backed private sector notes (bills of exchange).  They wanted gold — and got it.  This drained the gold reserves of U.S. banks, altering the ratio of reserves to outstanding loans.  The banks were forced to call loans in order to maintain their required reserve ratios.  Companies that only a few weeks before had been the bluest of blue chips found themselves in receivership.  This precipitated the Panic of 1893, and began the Great Depression of 1893-1898.

Coxey's Army marching for jobs and welfare, 1894.
For the first time in U.S. history there were widespread demands for the government to inflate the money supply and create jobs by engaging in massive public works projects.  This was dangerous territory, for the faith and credit of the U.S. government had finally been restored after the inflation of the Civil War barely fifteen years before with the restoration of the convertibility of the paper currency into gold at par.  Democrats, populists, and socialists merged and split on how best to restore prosperity.

“Gold Democrats” split from the populists and the “Silver Democrats,” and joined with the Progressive Republicans who were in alliance with the Old Guard Republicans.  This eventually resulted in the defeat of the silver-populist-Democrat William Jennings Bryan and the election of William McKinley as president.

"The Great Commoner": William Jennings Bryan
Before then, however, the populists split between the moderates who favored a return to cheap silver (“silver socialism”), headed by Bryan, and the radicals who, allied with the moderate socialists, wanted the government to expand its debt to back more greenbacks, but who lacked a clearly identifiable leader.  Henry George, the agrarian socialist, attempted to reunite the Democratic Party, but insisted on his “single tax” proposal and the effective abolition of private property in land, and was rebuffed by Bryan — for which georgist-populists like Ignatius Donnelly and “Sockless Jerry” Simpson called for the formation of a new populist party to get rid of Bryan’s influence.

The split in the Democrat-populist-socialist alliance allowed the Old Guard Republicans, the Gold Democrats, and the Progressive Republicans to prevent the proposed money manipulation by means of silver or debt.  Unfortunately, this simply maintained the status quo, as the fights over “the silver question” prevented any real reforms from being enacted.  It was not until the Panic of 1907 that the weaknesses inherent in an inelastic debt-backed reserve currency again revealed themselves that effective action was taken — and even then, it was quickly undermined.

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