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Monetary System Bailout Historical Perspective
By Tim Shuck

Political favoritism, incompetence, corporate greed — phrases right out of news headlines regarding the current financial crisis. It would be easy to believe that the present situation is unique, unprecedented in our history, but that is likely not true. From 1893 to roughly the end of the century there was another crisis in the American economy. It has been estimated that as many as 15,000 businesses, 600 banks, and 74 railroads failed; and that 10%, perhaps even 20%, of American were unemployed in the worst of those years. Causes of that debilitating event included declining building construction; depressed agricultural production, at least partially attributable to adverse weather; an overbuilt and over capitalized railroad system; and (a numismatic connection at last) the gold standard and monetary policy. But, in a bizarre reversal of the situation today, the U.S. government was bailed out by private citizens.

The events that culminated in the Panic of 1893 had their start in the early 1870s. Following the end of the Franco-German War, Germany established a national gold standard and placed 8,000 tons of silver on the world market. The result was predictable: silver prices declined, particularly in reference to gold, at the same time vast amounts of the metal were being mined in the American West. There was one potential bright spot: silver was the preferred medium of payment in trade with the Orient, particularly China. To better position U.S. coins for that purpose, the U.S. Liberty Seated dollar was discontinued by the Mint Act of February 12, 1873, and a new, heavier Trade dollar was introduced.

But, with the availability of low-priced silver, coupled with a reduced need for silver by the Treasury for coinage, miners and other silver interests foresaw the inevitable result. Walter Breen describes their response: “the silver lobby and their ignorant partisans nationwide called the bill the “Crime of ‘73″. As if to add insult to injury, Congress in June 1874 demonetized all previous silver dollars and revoked their legal tender status” (Complete Encyclopedia of U.S. and Colonial Coins, 1988). Not about to give up, the silver lobby intensively lobbied Congress in the next few years, vying with those who instead favored a gold standard. Their persistence was rewarded on February 28, 1878, in the form of the Bland-Allison Act, which mandated a new silver dollar and the purchase by the Treasury of millions of dollars of silver bullion each month for the production of those coins.

The euphoria of this victory for silver was short lived. While the new Morgan dollars circulated in the West and South the rest of the country generally preferred paper money. At an international monetary conference, also authorized by Bland-Allison, European delegates rejected U.S. propositions for unrestricted silver coinage under a bi-metallic standard (silver and gold); which, unsurprisingly, would have further benefited silver interests. Nevertheless, U.S. silver dollar production continued apace even though the price of silver continued to decline under a glut of bullion. Sensing that something needed to be done (sound familiar?) Congress again acted, or perhaps reacted, producing the Sherman Act of July 14, 1890.

The Sherman Act mandated additional silver purchases for dollar coinage, with a specific means of payment: “The Government was to pay for the bullion with Treasury notes which could be redeemed in gold or silver coin at the discretion of the Secretary of the Treasury … the Act declared that it was “the established policy of the U.S. to maintain the two metals on a parity with each other upon the present legal ratio or such ratio as may be provided by law.” [Treasury] Secretary Windom reasoned that this could not be done except by submitting to public demand and redeeming the notes in gold. Otherwise, they would depreciate with the depreciation of silver, and destroy the parity between the two metals by a creating a discrimination in favor of gold. A decision was thus made to pay out gold, and reissue the redeemed notes, together with the new issues. The result was a sudden rush on the gold reserves, particularly by European banks. Before long, the exportation and hoarding of gold had reached new peaks, and the nation found itself hurtling toward insolvency.” (The U.S. Mint and Coinage, Don Taxay, 1966).

Those holding the notes quickly discovered a “silver” lining: redeem the notes for gold, get more notes at par using silver, then receive even more gold with those notes, and so on, potentially collecting significant profits along the way. The result was unprecedented removal of gold from the U.S. government, leaving reserves barely above legal requirements. According to one account “… such a situation could not continue long. The very sight of this desperate struggle going on to maintain the public credit was sufficient to alarm both home and foreign interests, and this alarm was now reflected everywhere. The feverish money market, the disordered and uneasy market for securities, and the renewed advance in foreign exchange, combined to bring matters to a head. On April 15, Secretary Carlisle gave notice that issue of Treasury gold certificates should be suspended. This action was taken merely in conformity with the Law of 1882, already cited. It was, however, public announcement that, for the first time since resumption of specie payments, the reserve against the legal tenders had fallen below the statutory minimum ….the public mind was on the verge of panic. During a year or more, it had been continuously disturbed by the undermining of the Treasury, a process visible to all observers. The financial situation in itself was vulnerable. In all probability, the crash of 1893 would have come twelve months before, had it not been for the accident of 1891’s great harvest, in the face of European famine (The Panic of 1893, Alexander D. Noyes, reproduced on usgennet.org).

Realizing something needed to be done (here we go again!), Congress approved the repeal of the Sherman Act, with the new measure signed by President Grover Cleveland in November, 1893. By then the damage had been done, but the politics of course kept going. Free silver advocates felt betrayed but did not give up. The debate of “silver vs. gold” was portrayed as being a struggle of “farmers, merchants, and laboring classes against Wall Street capitalists.” Democrat presidential candidate William Jennings Bryan, representing the silver interests, gained fame with his “Cross of Gold” speech, which included the memorable and at the time electrifying statements that “… we will answer their demand for a gold standard by saying to them: “You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold.” The posturing, however elegant, was to no avail, and Republican William McKinley was elected in 1896.

But what of the near insolvency of the U.S. government? In the answer to that question is a remarkable irony. Financier J.P. Morgan, one of the best known U.S. entrepreneurs of the late 18th and early 19th centuries, formed a syndicate in 1895 that replenished the U.S. government’s gold reserve with $62,000,000 in gold, allowing the issue of a federal bond issue that eventually resulted in a Treasury surplus of $100,000,000. The impending crisis was averted. One of the standard bearers of capitalism and his business cohorts were thus called upon to “bail out” the federal government, providing a rescue that enabled the “farmers, merchants, and laboring classes” to once again be secure in their labors. Morgan was to reprise his role as financial savior during the Panic of 1907, acting along with others of substantial means as a central bank, the last time persons in the private sector were invested with such authority prior to the creation of the Federal Reserve System in 1913. The times and faces have changed, but machinations of conflicting political interests have not. And so today we hear in our financial news the echoes of another century’s watershed event.

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