18. The Farmer and Demonetization

Source:  Southern Mercury (Dallas, TX), October 19, 1893

The money issue of late nineteenth century America is best viewed as a debtor-creditor rivalry.  America suffered from massive deflation between 1865 and 1896.  The production of goods and services expanded considerably faster than the supply of money (gold and silver) at the time.  Students today have lived through a period of inflation.  Deflation, however, is much worse. Major economic depressions are characterized by deflation (consumers fail to purchase goods and services, which drives prices down).  Two of America's three worst depressions occurred during the late nineteenth century (1873-79 and 1893-97).

If a person owned a dollar in 1865, the same dollar would purchase 1.88 times as much in 1896.  This means that the person owning the dollar saw its value nearly double without performing any labor.  Thus, owners of wealth (the rich) benefited from deflation by obtaining considerably greater purchasing power.  But, if a poor person needed a dollar, he would have to perform almost twice as much labor in 1896 as in 1865 to earn it.  Also, a person who took out a loan in 1865, would have to pay the loan back with increasingly more valuable dollars over time.  In addition, because the per capita amount of money in circulation decreased over this period, interest rates increased.  Third party supporters of this era blamed the metallic basis of money (gold and silver).  The production of such metals did not keep up with the production of other goods and services.  They advocated greenbacks (fiat money -- not backed or based upon precious metals).  Greenbacks were used during the Civil War to meet governmental expenses, but retired (exchanged for gold certificates) afterward.  The amount of greenbacks in circulation could be decreased or expanded in order to create monetary stability.  Today, all modern industrial nations use fiat money.  But, nineteenth century people (including most Americans) feared they might become worthless.  If irresponsibly produced, greenbacks could be inflationary.  

Minting silver and gold at a ratio of 16 to 1 also would have reversed deflation after 1873, although to a much lesser degree than greenbacks.  Advocating the "Free (untaxed) coinage of silver and gold at a ratio of 16 to 1," or "free silver," however, had the advantage of circumventing the argument about the value of fiat money.  In 1873, the federal government removed silver dollars from the list of coins to be minted.  The relative market values of gold and silver at the time meant that most people used gold, and hoarded silver anyway.  Later in 1873, large deposits of silver ore were discovered.  If the pre-1873 ratio had still been in effect, the results would have reversed deflation.  Westerners immediately labeled the new minting policy a conspiracy by the "Money Power."  Although scholars have found no evidence of a conspiracy, the circumstances certainly looked suspicious to those hurt by the new policy.  It became known as the "Crime of '73."  

Because the "free silver" issue circumvented the arguments over fiat money, many inflationists (or more accurately, reflationists) found it easier to promote, and it came to overshadow the call for greenbacks.  Congress periodically found it expedient to "do something for silver."  This usually meant do something for silver mine interests, rather than debtors.  In 1878, Congress passed the Bland-Allison Act, which required the secretary of the treasury to purchase between $2 and $4 million of silver.  The Treasury Department usually purchased the minimum amount at the market value and made legal tender notes redeemable only in gold, thus maintaining the gold standard.  In 1890, Congress passed the Sherman Silver Purchase Act, which committed the federal government to purchasing 54 million ounces of silver a year (roughly the total American production).  This was about twice the amount purchased under the Bland-Allison Act.  But, avoiding the bimetallic standard at 16 to 1 meant that neither of these acts had a major effect upon deflation.  The Omaha Platform called for both "free silver" and a "circulating medium . . . of not less than $50 per capita."  The latter phrase meant greenbacks.

For more on the money issue, see:

Freedman, Milton and Schwartz, Anna Jacobson. A Monetary History of the United States, 1867‑1960. 860 p. Princeton: Princeton UP, 1963.

Goodwyn, Lawrence C. Democratic Promise: The Populist Moment in America. New York, Oxford U P, 1976.  Abridged as The Populist Moment: A Short History of the Agrarian Revolt in America. New York, Oxford U P, 1978

Inflation Calculator
Use "Back" on Toolbar  to Return

| Index | Back to Cartoon |