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.
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| 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.
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| 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.
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| "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.