The Other Great Depression


At first, sixteen to one was approximately the market price of silver, but as the great strikes in the West began to come in, the price of silver dropped steadily, reaching about twenty to one by 1890. That year Congress passed the Sherman Silver Act requiring the government to buy 4.5 million ounces of silver a month, just about all the silver the country was mining. With the government price for silver well above the market price, this was a sure recipe for inflation.

But the year after Bland-Allison, the country had fully returned to the gold standard, with Congress mandating that the Treasury keep $100 million in gold on hand at all times to meet any demand for the precious metal. With its silver policy greatly increasing the money supply, and the gold standard keeping the value of the dollar steady, the government managed both to guarantee and to forbid inflation.

So what happened? Well, as anyone who has studied economics anywhere other than on Capitol Hill could predict, Gresham’s law kicked in. This law, an economic truth recognized more than two hundred years before Adam Smith was even born, holds that “bad money drives out good.” Silver, worth one-twentieth the price of gold in the market, was declared to be worth one-sixteenth the price of gold when coined as money. So, naturally, people spent the silver and kept the gold. Gold began to trickle out of the Treasury.

Because the government ran a persistent surplus all during the 1880s, the effects of the country’s schizophrenic monetary policy were masked. But when the crash of 1893 hit, the trickle rose to a flood. With government revenues plunging, Congress repealed the Sherman Silver Act, but the people had lost faith in the dollar and hoarded gold. The government issued bonds to buy more gold and maintain the reserve, but the metal continued to flow out of the Treasury.

Before long the situation was critical. The Treasury gold reserve dipped below the $100 million required by law in 1894 and reached just $64 million the following January. Congress refused to allow President Cleveland, a staunch supporter of the gold standard, to sell another public bond issue to replenish the vanishing gold reserve.

Because of the iron law of euphemism (weak terms drive out strong ones), we no longer have depressions, only recessions.

With a free-coinage-of-silver Congress and a gold-standard President, the government was paralyzed. Bets were being made on exactly when the U.S. government would be forced off the gold standard. Badly alarmed, J. P. Morgan took a train to Washington. President Cleveland, all too aware of how Wall Street was hated in much of the country, at first refused to see him.

“I have come down to see the President,” responded Morgan in his most imperial manner, “and I am going to stay here until I see him.” With the situation deteriorating by the minute, Cleveland relented the next morning.

The President, the Attorney General, and the Secretary of the Treasury all clung to the hope of persuading Congress to permit a new public bond issue, thus sparing them the political embarrassment of having the U.S. Treasury bailed out by the country’s ultimate plutocrat. Then a clerk informed them that the New York Subtreasury had only $9 million in gold remaining in its vaults. Morgan said that he knew of a $10 million draft that might be presented at any moment. If that draft is presented, Morgan warned, “It will all be over by three o’clock.”

“What suggestions have you to make, Mr. Morgan?” Cleveland asked.

Morgan made an astonishing offer. He and the Rothschilds, the two most powerful forces in international banking, would purchase for the government’s account 3.5 million ounces of gold in exchange for about $65 million worth of thirty-year gold bonds. Further, he promised that the gold, once in the hands of the government, would not flow out again, at least for a while. In effect, Morgan was offering to act as the country’s central bank during the crisis, insulating the Treasury from market forces. It was an awesome display of Morgan’s faith in his own power.

The scheme worked, and with confidence restored, the bonds were sold at a handsome profit to the bankers. Cleveland, a sound-money man to the core, never regretted taking Morgan up on the offer. But the silver wing of the Democratic party never forgave him for it.

The following year the grip of the great depression of the 1890s began to lessen, and the political appeal of funny-money schemes therefore waned. But William Jennings Bryan swept to his party’s nomination by promising to prevent the crucifixion of mankind upon a cross of gold. He was soundly defeated, but for the next sixteen years, as the country matured economically, the Democratic party dragged a cross of silver through the political wilderness.