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Gold vs. Silver Standard
The Gold vs. Silver Debates And its Successes, Failures and Consequences
This page will describe the debates of the 19th century over whether the US should have a gold or silver standard.
History of the gold vs silver debates
Throughout the first 100 years of United States history there was relatively little discussion of what backed the federal currency. In fact, a majority of the talk centered around how much the dollar was worth and whether the federal government or state banks should control the country’s currency. But beginning in the latter half of the 19th century, arguments of whether the currency should be backed by gold or silver increased. This dispute would be solved by the end of the century. The American currency debates of the late 19th century succeeded in establishing a gold standard but led to deflation of the dollar which prolonged the effects of the Great Depression.
The first strictly American currency was issued in 1775 for the continental congress. This money had little success and foreign coins continued to be the dominant choice. The Mint and Coinage act of 1792 established the official federal money. This system created a bimetal dollar, backed by either silver or gold. The continued charter of a federal bank, along with Congress forbidding the use of foreign coins in 1857, helped the dollar grow in both value and stability (Federal Reserve Bank of Philadelphia 1).
A combination of several events in the 1870’s intensified the debates. Attempting to put an end to the intermission from a weighted currency seen by the Union’s issuing of greenbacks, Congress passed The Coinage Act of 1873. This act made gold the official metal to be minted. Meanwhile on the other side of the country, miners had just found vast deposits of silver in the Rocky Mountains. These two factors seemed to have little importance at the time but they created the foundations for future free-silver supporters.
The Coinage Act of 1873 “attracted little attention at the time, even from those members of Congress… who voted for it yet later attacked it in vitriolic terms” such as “the crime of 1873” (Friedman 52). These attacks became a common ground when the dollar severely deflated during the 1880’s and 1890’s thanks to a shortage of gold to support the currency. Like in all cases of deflation, the indebted were weakened the most (Farrer 2). Farmers and other Western entrepreneurs suffered greatly. This deflation was the drive for free silver supporters. The supporters of silver wanted to reinstitute silver as a specie payment and inflate the dollar in order to promote economic prosperity (Kazin 50).
The debates reached an all-time high during the presidential campaigns of 1896. The campaign saw William Jennings Bryan and silver supporters pitted against William McKinley and gold supporters. Those who supported the gold standard feared that a silver policy would lead to high inflation that would make the dollar worthless and crash the world economy (Ashby 34). The country became embroiled in an intense and emotional debate. The winner of the election would decide whether the United States reverted back to bimetallism or continued a gold standard.
The political parties hosted several conferences over the topic. One of these sessions was home to a speech that in the words of an ordinary citizen “will go down in the history of ages and be remembered as long as the English language is spoken” (Harris 1). William Jennings Bryan gave a 3 hour speech in which he declared “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” (Bryan 146). Bryan was calling out the eastern bankers seen as the enemy to the poor of the country. Unfortunately for supporters of bimetallismÂ¸ Bryan’s answer wasn’t enough. McKinley won the election. In 1900, true to his word, McKinley signed the Gold Standard Act into action. The Bill officially established a fixed ratio of gold as the sole standard of the United States Dollar.
The success of the debate
The debates during the 19th century over whether to adopt a gold standard or revert to bimetallism seemed to reach its peek intensity during the 1896 elections. William McKinley, backed by supporters of gold, won the election on a promise to make gold the only specie backing the dollar. During his inaugural address McKinley said that “The credit of the Government, the integrity of its currency, and the inviolability of its obligations must be preserved. This was the commanding verdict of the people, and it will not be unheeded” (McKinley 1). True to his word, McKinley did not disregard the call for a gold standard. On March 14, 1900, Congress passed the Gold Standard Act. The debates had succeeded in establishing a dollar backed by only gold.
The Act succeeded in accomplishing its primary goal by recognizing a set ratio of the value of gold to the dollar. The bill established that each dollar was to be backed by 25 and 8/10’s grains of gold (United States Congress Bill 1). The bill declared that the treasury was to keep 150 million dollars in gold coin and bullion to allow the exchange of paper monies for actual gold. The bill also successfully demonetized silver coins.
The success was solidified when large amounts of gold poured into the federal reserves. In 1887, chemists discovered a cyanide process that could effectively extract gold from ore. This procedure was applied to the goldfields in Africa and gold exports grew exponentially (Friedman 105). The increased gold reserves temporarily inflated the dollar and achieved the effects desired by the supporters of bimetallism. This secured the gold standard as the monetary system of America’s future. The gold versus silver debates that had been scattered throughout the entire history of America had finally succeeded in creating a gold standard for the dollar.
The Gold Standard Act of 1900 had several negative effects. The treasury and government were severely limited in their ability to influence the dollar. Since it was on a fixed rate and ratio recognized by the international community, there was little the feds could do to control the currency. When the international community saw economic troubles during World War 1 the dollar experienced sever deflation because of its adherence to the gold standard.
In order to support the dollar the Federal Reserve often imposed deflationary measures on the economy. If they had not levied these measures it is likely that investors would have lost support in the United States’ commitment to the gold standard. When there was a large amount of speculation over said commitment around 1930, the government was forced to deflate the dollar to preserve the fixed gold ratio (Keynes 1). The Gold Standard Act failed in that it forced the Federal Reserve to promote deflation. The deflated prices made cheap American goods seem more desirably to the world economy. Money began pouring into the United States gold reserves. Banks around the world were forced to raise interest prices to keep gold in their reserves. The result was more deflation.
The effects of the gold standard on the United States only got worse. Christina Romer explains that “the gold standard, by forcing countries to deflate along with the
United States, reduced the value of banks’ collateral and made them more vulnerable to runs”. The instability of the banks created a widespread fear of financial institutions. People began hoarding cash rather than risking holding their money in banks and “hoarding effectively removed money from circulation, adding further to the deflationary pressures” (Bernanke 1). The results of the debates had created a government and economy that was forced into widespread and severe deflation, a failure of astronomical amounts.
How adopting the gold standard led to the great depression
The economic downturn of the 1930’s, now known as the great depression, started as a cyclical example of economic troubles. The normal recession quickly grew into the worst downturn of all time by the economic policies of the United States government regarding the gold standard. The Federal Reserve was counting on the gold standard to fix the economy. The reliance on the gold standard became a crisis waiting to happen (Hamilton 1).
Bankers and economists had grown to believe that the gold standard was the linchpin of financial stability. Economists were willing to “entertain the heresy of a tariff before recommending that the gold standard be abandoned” (Eichengreen 16). As a result the government did little to preserve employment and only raised interest rates, worsening the depression. The more the government dedicated itself to the gold standard, the worse the depression became. (Eichengreen 17).
The failures of the gold versus silver debates also played a role in the prolongation of the Great Depression. When, because of deflation, people lost faith in the banks and demanded their money in cash, banks were forced to liquidize loans and many banks were forced to close (Romer 3). Since the banks had little to no money to loan out, capital became impossible to obtain. Without capital, already struggling business faced even harder times.
The consequences of the gold versus silver debates weren’t realized until the Great Depression. The Gold Standard Act forced the Federal Reserve to maintain a strict adherence to the gold standard. This created an economic ideology that increased unemployment, did little to stimulate the economy and crashed the banks. The devotion to the gold standard effectively prolonged the Great Depression.
Ashby, LeRoy. William Jennings Bryan: Champion of Democracy. Boston: Twayne, 1987
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Federal Reserve Bank of Philadelphia. "Money in Colonial Times - Philadelphia Fed." Federal Reserve Bank of Philadelphia. Web. 06 Nov. 2010. .
Friedman, Milton. Money Mischief: Episodes in Monetary History. San Diego: Harcourt Brace &, 1994
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Kazin, Michael. A Godly Hero: the Life of William Jennings Bryan. New York: Knopf, 2006.
Phillips, Kevin. William McKinley. New York: Times, 2003
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See Best Secondary Source 2
Bryan, William J. "Bimetallism." Speech. Chicago. 9 July 1896. Speeches of William Jennings Bryan. Vol. 1. New York: Funk And Wagnall, 1909. 78-146.
Farrer. "Bimetallism and Legal Tender." Gold Standard Defence Association 10 (1895): 2
Harris, J.W. Editorial. Boston Globe 5 Sept. 1896. 1896: The Currency Question. Rebecca Vassar. Web. 8 Nov. 2010. .
Keynes, John M. "An Open Letter to President Roosevelt." Letter to President Roosevelt. 16 Dec. 1933. New Deal Network. New Deal Documents. Web. 08 Nov. 2010. .
McKinley, William. "Inaugural Address of President McKinley March 4, 1897." Address. Presidential Inauguration. 4 Mar. 1897. American History and World History at Historycentral.com the Largest and Most Complete History Site on the Web. Multieducator. Web. 08 Nov. 2010. .
United States. Cong. Bill. American History and World History at Historycentral.com the Largest and Most Complete History Site on the Web. Multieducator. Web. 07 Nov. 2010. .
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