Wednesday, November 26, 2008

Where's Grover Cleveland When You Need Him?

The decade of the 1880's, which saw falling prices and exploding productivity, real wages and gross domestic product, was one of the most prosperous in our history. Not coincidentally, this prosperity occurred following passage of the Specie Resumption Act which forced the government to redeem paper money for gold starting in 1879. This act was passed in reaction to the inflation caused by the irredeemable "greenbacks" issued by the federal government during the Civil War.

In 1890, under political pressure from farmers and western mining interests, the government passed the
Sherman Silver Purchase Act which increased the amount of silver that the federal government had agreed to buy each month under the Bland-Allison Act of 1878 and also forced the government into redeeming silver at parity to gold (or in some legally fixed non-market rate) which overvalued silver relative to gold.

So guess what people did? They took their silver certificates (currency which the government issued in exchange for the actual silver) and redeemed them for the more valuable gold which caused a massive run on the Treasury's gold stock. This essentially bankrupted the United States and forced the government to issue bonds in exchange for gold which was depleted almost instantly in a reoccuring cycle.

The situation is described in the 1922 novel The Driver by Garet Garret:

All other business having come to a stop while this matter was at an impasse, a truce was effected in this wise by law: Gold should remain paramount nominally, but the Treasury should buy each month a great quantity of silver bullion, turn it into white money, force the white money into circulation and then keep it equal to gold in value. Now, the amount of precious metal in a silver dollar was worth only half as much as the amount of precious metal in a gold dollar. Yet Congress decreed that gold and silver dollars should be interchangeable and put upon the Treasury a mandate to keep them equal in value. How? By what magic? Why, by the magic of a phrase. The phrase was: "It is the established policy of the United States to maintain the two metals at a parity with each other by law."

Naive trust in the power of words to command reality is found in all mass delusion.

The Coxeyites were laughed at for thinking that prosperity could be created by phrases written in the form of law. Congress thought the same thing. It supposed that the economic distress in the country could be cured by making fifty cents' worth of silver equal to one hundred cents' worth of gold, and that this miracle of parity could be achieved by decree.

Anyone would know what to expect. The gold people ran with white dollars to the Treasury and exchanged them for gold and either hoarded the gold or sold it in Europe. In this way the government's gold fund was continually depleted, and this was disastrous because its credit, the nation's credit in the world at large, rested on that gold fund. It sold bonds to buy more gold, but no matter how fast it got more gold into the Treasury even faster came people with white money to be redeemed in money the color of red inclining to yellow, and all the time the Treasury was obliged by law to buy each month a great quantity of silver bullion and turn it into white money, so that the supply of white money to be exchanged for gold was inexhaustible.

Needless to say, this boondoggle was mostly responsible for the Panic of 1893 and repealing the law that caused it was essential. In today's day and age, the cause of this disaster, namely, the government program, would not be identified as the cause nor would the cause per se even be considered relevant. No doubt, the government would pass a new law that would effect more controls and even greater disaster. Well, not to give the 19th century too much credit since they were dumb enough to have passed this law, but it is almost shocking to see the speech printed below by President Grover Cleveland in which he both identifies the cause of the disaster as government intervention and demands its immediate repeal. (Cleveland inherited the mess caused primarily by the previous Republican administration. Cleveland was a Democrat which in those days meant he advocated limited government and sound money whereas the Republicans advocated big government, protectionism and soft money.) This may have been the last time excepting Prohibition that the federal government actually repealed a law...

Try to imagine a modern politician giving the following speech. (I have bolded some of the best passages.)

President Cleveland Message on the Repeal of the Sherman Silver Purchase Act
(August 8, 1893)

The existence of an alarming and extraordinary business situation, involving the welfare and prosperity of all our people, has constrained me to call together in extra session the people's representatives in Congress, to the end that through a wise and patriotic exercise of the legislative duty, with which they solely are charged, present evils may be mitigated and dangers threatening the future may be averted.

Our unfortunate financial plight is not the result of untoward events nor of conditions related to our natural resources, nor is it traceable to any of the afflictions which frequently check national growth and prosperity. With plenteous crops, with abundant promise of remunerative production and manufacture, with unusual invitation to safe investment, and with satisfactory assurance to business enterprise, suddenly financial distrust and fear have sprung up on every side. . . . Values supposed to be fixed are fast becoming conjectural, and loss and failure have invaded every branch of business.

I believe these things are principally chargeable to Congressional legislation touching the purchase and coinage of silver by the General Government.

This legislation is embodied in a statute passed on the 14th day of July, 1890, which was the culmination of much agitation on the subject involved, and which may be considered a truce, after a long struggle, between the advocates of free silver coinage and those intending to be more conservative.

This law provides that in payment for the 4,500,000 ounces of silver bullion which the Secretary of the Treasury is commanded to purchase monthly there shall be issued Treasury notes redeemable on demand in gold or silver coin, at the discretion of the Secretary of the Treasury, and that said notes may be reissued. It is, however, declared in the act to be "the established policy of the United States 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."

This declaration so controls the action of the Secretary of the Treasury as to prevent his exercising the discretion nominally vested in him if by such action the parity between gold and silver may be disturbed. Manifestly a refusal by the Secretary to pay these Treasury notes in gold if demanded would necessarily result in their discredit and depreciation as obligations payable only in silver, and would destroy the parity between the two metals by establishing a discrimination in favor of gold.

The policy necessarily adopted of paying these notes in gold has not spared the gold reserve of $100,000,000 long ago set aside by the Government for the redemption of other notes, for this fund has already been subjected to the payment of new obligations amounting to about $150,000,000 on account of silver purchases, and has as a consequence for the first time since its creation been encroached upon.

We have thus made the depletion of our gold easy and have tempted other and more appreciative nations to add it to their stock. .

Unless Government bonds are to be constantly issued and sold to replenish our exhausted gold, only to be again exhausted, it is apparent that the operation of the silver-purchase law now in force leads in the direction of the entire substitution of silver for the gold in the Government Treasury, and that this must be followed by the payment of all Government obligations in depreciated silver.

At this stage gold and silver must part company and the Government must fail in its established policy to maintain the two metals on a parity with each other. Given over to the exclusive use of a currency greatly depreciated according to the standard of the commercial world, we could no longer claim a place among nations of the first class, nor could our Government claim a performance of its obligation, so far as such an obligation has been imposed upon it, to provide for the use of the people the best and safest money.

If, as many of its friends claim, silver ought to occupy a larger place in our currency and the currency of the world through general international cooperation and agreement, it is obvious that the United States will not be in a position to gain a hearing in favor of such an arrangement so long as we are willing to continue our attempt to accomplish the result single-handed. .

The people of the United States are entitled to a sound and stable currency and to money recognized as such on every exchange and in every market of the world. Their Government has no right to injure them by financial experiments opposed to the policy and practice of other civilized states, nor is it justified in permitting an exaggerated and unreasonable reliance on our national strength and ability to jeopardize the soundness of the people's money.

This matter rises above the plane of party politics. It vitally concerns every business and calling and enters every household in the land. There is one important aspect of the subject which especially should never be overlooked. At times like the present, when the evils of unsound finance threaten us, the speculator may anticipate a harvest gathered from the misfortune of others, the capitalist may protect himself by hoarding or may even find profit in the fluctuations of values; but the wage earner-the first to be injured by a depreciated currency and the last to receive the benefit of its correction-is practically defenseless. He relies for work upon the ventures of confident and contented capital. This failing him, his condition is without alleviation, for he can neither prey on the misfortunes of others nor hoard his labor. .

It is of the utmost importance that such relief as Congress can afford in the existing situation be afforded at once. The maxim "He gives twice who gives quickly" is directly applicable. It may be true that the embarrassments from which the business of the country is suffering arise as much from evils apprehended as from those actually existing. We may hope, too, that calm counsels will prevail, and that neither the capitalists nor the wage earners will give way to unreasoning panic and sacrifice their property or their interests under the influence of exaggerated fears. Nevertheless, every day's delay in removing one of the plain and principal causes of the present state of things enlarges the mischief already done and increases the responsibility of the Government for its existence. Whatever else the people have a right to expect from Congress, they may certainly demand that legislation condemned by the ordeal of three years' disastrous experience shall be removed from the statute books as soon as their representatives can legitimately deal with it.

It was my purpose to summon Congress in special session early in the coming September, that we might enter promptly upon the work of tariff reform, which the true interests of the country clearly demand, which so large a majority of the people, as shown by their stiffrages, desire and expect, and to the accomplishment of which every effort of the present Administration is pledged. But while tariff reform has lost nothing of its immediate and permanent importance and must in the near future engage the attention of Congress, it has seemed to me that the financial condition of the country should at once and before all other subjects be considered by your honorable body.

I earnestly recommend the prompt repeal of the provisions of the act passed July 14, 1890, authorizing the purchase of silver bullion, and that other legislative action may put beyond all doubt or mistake the intention and the ability of the Government to fulfill its pecuniary obligations in money universally recognized by all civilized countries.


Anonymous said...

"Sherman Silver Purchase Act"

My guess is this is the same Sherman from the "Sherman Anti-Trust Act." This Sherman must have been one of the biggest political collectivists of his era.

John Kim

Doug Reich said...

You are right.

John Sherman (apparently known as the "Ohio Icicle") was a Republican from Ohio. 1890 was a busy year as he sponsored both the Anti-Trust Act and the Silver Purchase Act. Cleveland oversaw the repeal of the Silver Act in 1893 but the Sherman Act continues to haunt us - certainly a distinguished member of the Destroyer Hall of Fame.

(Imbecility didn't run in his family apparently as one of his older brothers was the great William Tecumseh Sherman.)