“The poor man who takes property by force is called a thief, but the creditor who can by legislation make a debtor pay a dollar twice as large as he borrowed is lauded as the friend of a sound currency. The man who wants the people to destroy the Government is an anarchist, but the man who wants the Government to destroy the people is a patriot.”
William Jennings Bryan
“Nation after nation, when at the zenith of its power, has proclaimed itself invincible because its army could shake the earth with its tread and its ships could fill the seas. but these nations are dead, and we must build upon a different foundation if we would avoid their fate.”
William Jennings Bryan
“Plutocracy is abhorrent to a republic; it is more despotic than monarchy, more heartless than aristocracy, more selfish than bureaucracy. It preys upon the nation in time of peace and conspires against it in the hour of its calamity. Conscienceless, compassionless and devoid of wisdom, it enervates its votaries while it impoverishes its victims. It is already sapping the strength of the nation, vulgarizing social life and making a mockery of morals.”
William Jennings Bryan
Previously,we saw the holy Grail of banking reform was actually a hidden agenda of politics, banking, and big business.The seeds were planted in Indianapolis and now, the game is surely afoot.
The National Monetary Commission in 1908
Informing the public via a predetermined public relation campaign, with surveys and solutions of a predetermined outcome worked well. Keeping the scheme going for a decade took time, effort, and investment.
With the passage of the Aldrich-Vreeland Act in 1908 contained two important but little-known provisions: the emergency currency potential and the establishment of the NMC. The former provision would have expired in 1914 but curiously, was used for the one and only time that year.
However, Aldrich had packed his commission in June of 1908 with senators and representatives but, more significantly, powerful banking leaders.
This junket headed for Europe in the fall, studying and gather information with heads of private European banks and central banks. They concluded European banking was more efficient and the European currencies had more gravitas compared to the dollar. By December,, back in the U.S., Aldrich added Paul Warburg and others to the inner circle. Charles A. Conant was chosen for ‘research and public relations’. Warburg consulted with many academic economists at top-tier universities.
The American Bankers Association recommended a U.S. Central bank along the lines of the German Reichsbank. Hesitant heads of national banks were assured the business model would not be adversely affected by the origin of a U.S. Central bank.
Regional banking districts in the country, under control of a central board, was a recommentation in November, 1909. Throughout this whole era, the Morgan and Rockefeller banking interests had agreed to agree on a central bank. Yes.
Incidentally, William Howard Taft was elected president, a friend of Aldrich and others since 1900. On September 14, 1909, President Taft spoke in Boston and gave a big boost to the notion of a central bank. Wow. And a week later, The Wall Street Journal gave space to various op-eds, unsigned, praising that great idea of ‘elastic currency’ and other benefits. Actually, these letters were crafted by Charles Conant. He also recommended the regulation of interest rates by the central bank as a useful tool. The Washington Bureau of the Associate Press was also co-opted.
Another significant speech by Paul Warburg in New York on March 23, 1910 impressed the Merchants’ Association of New York. They had printed 30,000 copies of the transcript and distributed these far and wide.
For public consumption, a monetary conference in New York in November 1910 presented a specific recommendations for a central bank and an appeal for all part of the country to support the Bill that Alrich would soon craft.
The Private Railroad Car
G. Edward Griffin [1] sets the scene at a New Jersey railroad station like the opening of a thriller movie: it’s 10 p.m. on November 22, 1910 as a handful of important men board a private car. Unlike the numbered cars of the rest of this train, this one has no number, only a small plaque with the inscription “Aldrich”.
The senator greets his guests by first name only – and this rule is adhered throughout the trip and the week at Jekyll Island, Georgia. The private club on the island is part-owned by J.P. Morgan.
The personnel lineup:
(The last two are questionable due to differing accounts in the ‘historical record’ but both were in the Morgan camp. Aldrich, incidentally, was a financial partner of J.P. Morgan, and also father-in-law of John D. Rockefeller, Jr.)
If Strong wasn’t there, he surely knew about it – we will hear more of him.
The public did indeed hear something of this secret meeting, but it was in 1935. The Saturday Evening Post carried an article by Vanderlip and the key takeaway was:
If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have had no chance whatever of passage by Congress.
Warburg led the argument for a regional structure, presumably cognizant of public mistrust of too much power located in one area. Aldrich wanted an overt central bank with no political meddling. The compromise that was reached became the Aldrich Plan, introduced in Congress in 1912 and 1913.
(On November 5–6, 2010, Ben Bernanke stayed on Jekyll Island to commemorate the 100-year anniversary of the original meeting.)
Alas, the Democrats won the 1912 elections resoundingly. The Republican Aldrich Plan seemed to fall by the wayside.
Shiny new President Woodrow summoned a special session of Congress in April 1913. To seal the importance, he appeared in person, the first president since John Adams to do so. Wilson’s address outlined various approaches to economic policies, banking and currency reform, tariffs, and the income tax.
The 16th Amendment had been ratified on February 3, 1913. Wilson needed that tax to support lower tariffs. A little bit of patronage pressure, and the Revenue Act of 1913 was passed by the House on May 8, 1913; finally it went through the Senate on September 9, 1913.
Meanwhile, the Aldrich Plan was not dead, though that hated Republican name vanished. Representative Carter Glass, chairman of the House Banking and Currency Committee, and Senator Robert Owen, chairman of the Senate’s did a little tinkering here and there. Wilson mandated a central Federal reserve board be appointed by the president – with the consent of the Senate.
There was one thorn in Wilson’s side, his Secretary of State, William Jennings Bryan. The “Cross of Gold” person was still a power in the Democratic Party. The sop to Bryan was that Federal Reserve currency would be a liability of the government – and also, provision for federal loans to farmers.
All this horse trading took time, though, and Wilson had other fish to fry during 1913.
The 17th Amendment (Direct Election of U.S. Senators), ratified and declared, became part of the Constitution on May 31, 1913..
Finally, months in the making, what started as the Glass-Owen bill became the Federal Reserve Act of 1913. It passed the House on December 13 and the Senate, after an all nighter, on December 23. Wilson signed it that morning.
A great year for the Populists, remember they wanted:
and before long, they got women’s suffrage (19th Amendment), the eight-hour work day, and restricted immigration.
The Federal Reserve System, 1914 and Beyond
Aldrich had convened the Jekyll Island cabal but Warburg was the only expert on the European central bank model. Galbraith asserted that “Warburg has, with some justice, been called the father of the system.”
In the end, everybody won something. Aldrich’s ‘decentralization’ became the regional banks and avoidance of the term ‘bank’ itself inevitably led to the Federal Reserve System nomenclature. And having the Federal Reserve Board in Washington, D.C. implied ‘government’. Smoke & mirrors.
A decade later, the little Orphan Annie comic strip appeared. Did anyone recognize Daddy Warbucks, the self-made billionaire doing good works with his wealth as an avatar of Paul Warburg? Anyway …
Back in the day, the public story was that the Federal Reserve System would stabilize the economy. We’ll see how that worked out.
The real power of the System was – and is – the Federal Reserve Bank of New York. And who was offered the post of governor there? Benjamin Strong. Whether or not he was at Jekyll Island, there is no doubt he had influence, having been the personal auditor for J. P. Morgan, Sr. during the Panic of 1907, and also a long-time friend of Henry Davidson.
Paul Warburg became one of the seven members of the Federal Reserve Board in Washington.
History has a droll way of throwing some unexpected crises – who would have imagined the assassination of an obscure archduke would lead to a worldwide conflagration? Well, that’s the myth, anyhow. That the British mercantilist system might have been under threat from a foreign export power is unthinkiable as a cause for war. Isn’t it?
The outbreak of World War One had one immediate financial side effect: the New York Stock Market closed. Public anxiety was dispelled by the Secretary of the Treasury, using that dormant part of the Aldrich-Vreeland Act. Emergency currency was available, by October 23, 1914, $368,616,990.
In November, the 12 regional banks of the Federal Reserve System had opened and the emergency currency was withdrawn. The FRS was open for business!
England and various European countries had been preparing for war for years. Armies were trained, alliances arranged. But when war occurred, England found itself fiscally bereft. John Pierpoint “Jack” Morgan, Jr. ruled the House of Morgan, his father having died in March, 1913. Jack became the sales representative of British bonds and also the procurement officer for their needed war material. Nice profit on money going and coming!
In 1915, President Wilson removed the ban on private bank lending to foreign allies. The House of Morgan immediately loaned $12,000,000 to Russia and $50,000,000 to France. Meanwhile, the first $12,000,000 British contract arrived, the first of many. The final total would be $3,000,000,000.
Author John Moody, writing in 1919 summed it up:
Not only did Britain and France pay for their supplies with money furnished by Wall Street, but they made their purchases through the same medium … Inevitably the House of Morgan was selected for this important task. Thus the war had given Wall Street an entirely new role. Hitherto it had been exclusively the headquarters of finance; now it became the greatest industrial mart the world had ever known. In addition to selling stock and bonds, financing railroads, and performing other tasks of a great banking centre, Wall Street began to deal in shells, cannon, submarines, blankets, clothing, shoes, canned meats, wheat, and the thousands of other articles needed for the prosecution of a great war.
Large profits and small. A commission for selling $2 billion of Allied stock holdings to buy munitions. The sale of 4,400,000 rifles for $194,000,000. The House of Morgan was both buyer and seller, and no surprise that many of the purchase contracts went to businesses where Morgan was a shareholder.
A reputation as war profiteer does attract some resentment. On July 3, 1915 an intruder stole into Jack’s Long Island mansion and shot him twice in the groin. Jack, however, survived.
Great Britain, having burned through the Australian gold, from the 19th century gold rush there, found itself short of money to fund a war. It did the thing that is obvious to every politician: achieve fiat money by golng off the gold standard. Every other country in Europe did also. America maintained a gold standard but not redemption for foreign held dollars.
By the end of the war, every country had inflated its money supply; Germany went eight times the pre-war amount. This explains much of things to come.
The Cunard Lines had turned over their record-breaking Lusitania over to the Admiralty. The speedy ocean lined proved inadvisable to refit into an auxiliary cruiser due to operational expense (910 tons of coal a day!), so it was ordered to continue passenger (and mail) service. On April, 22 1915, the German embassy ordered advertisements in 50 U.S. newspapers, advising prospective passengers that an Atlantic crossing went through a war zone, the seas around the British Isles.. Many of these advertisements were never published …
On May 1, 1915, the Lusitania set out on its final voyage to Liverpool, England. Little did the passengers know there was a hidden cargo of munitions and other material for the British war effort.
At this point in time, the German navy followed the code of limited submarine warfare. Neutral vessels were off limits.
At 1420 hours on May 6, the commander of the U-20, Walther Schwieger, fires one torpedo at a target:
Torpedo hits starboard side right behind the bridge. An unusually heavy detonation takes place with a very strong explosive cloud. The explosion of the torpedo must have been followed by a second one [boiler or coal or powder?]… The ship stops immediately and heels over to starboard very quickly, immersing simultaneously at the bow… the name Lusitania becomes visible in golden letters.
U20 log
The Lusitania sank in only 18 minutes. Few lifeboats were properly launched due to the extreme starboard list.
Of 1,959 passengers and crew, 1,195 perish, including 128 Americans.
Several official inquiries were convened that created enough obfuscation to keep tinfoil hat manufacturers busy to this very day. Prevented testimony, state secrets, crew statements in identical handwriting with similar phrasing; definitely one, no, two, or was it three torpedos. Some closed hearings, other open with no access to some evidence. Two sets of Admiralty papers, depending on the type of hearing. Perjury.
At any rate, Wilson’s immediate response was three diplomatic notes to Germany: strong, stronger, ultimatum. After the second, Secretary of State William Jennings Bryan resigned in protest.
Nonetheless, the American public had been fired up, just not enough for war.
The British were already hinting that, should they lose the war, they would never be able to repay their debt to America. In early 1916, President Wilson sent his personal adviser, “Colonel” Edward Mandell House to London. And why not – House was the shadow power that had arranged Wilson’s nomination for president. House even had two rooms at the White House. And while Wilson sought re-election on the slogan “he kept American out of war”, his adviser consulted with British foreign office officials, notably Sir Edward Grey. Secretary of State William Jennings Bryan had not be told of this unofficial arrangement, nonetheless, he was not stupid.
Mary Baird Bryan, co-author, The Memoris of William Jennings Bryan:
While Secretary Bryan was bearing the heavy responsibility of the Department of State, there arose the curious conditions surrounding Mr. E.M.House’s unofficial connection with the President and his voyages abroad on affairs of State, which were not communicated to Secretary Bryan … The President was unofficially dealing with foreign powers.
U.S. Ambassador Walter Hines Page:
House arrived … [with] the idea of American intervention … a minimum programme of peace – the least the Allies would accept, which, he assumed, would be unacceptable to the Germans …we should plunge into the War, not on the merits of the cause, but by a carefully sprung trick.
(memorandum, February 9, 1916)
On March 9, 1916, President Wilson sanctioned the secret agreement with England and France for the United States of intervene on behalf of the Allies. It seems Wilson and House believed the worthy end, of world peace and a world government, lay through the means of war. They had help: Assistant Secretary of the Navy Roosevelt (the Franklin Delano) urged arming merchant ships in violation of neutrality.
And time passed with America on the sidelines and the Allies accusing Wilson of dragging his feet. Maybe they didn’t understand the U.S. election cycle. The attitude of the British public toward America was “too proud or too scared” and they termed unexploded shells on the front line as “wilsons”.
Both British and German propaganda served to inflame the American public over the next months.
Wilson was narrowly re-elected in 1916. A tipping point happened when Germany attempted to enlist Mexico as an ally, following their new policy. Of unrestricted submaine warfare. This threated American commercial shipping.
On April 2, 1917 in his message to Congress, Wilson spoke of armed neutrality no longer working, “enemies against us at our very doors … unsuspecting communities … and offices of government with spies … criminal intrigues” … and a warning: disloyalty “will be dealt with a firm hand of repression.” And finally, the world must again be safe for democracy.
With fifty representatives and six senators opposted, a declaration of war was passed by Congress on April 4, 1917 and signed by Wilson the April 6.
Behind the scenes during this period, the Federal Reserve went into full operation in 1915. They played a significant role in financial Allied and U.S. War efforts (with some help.)
Wilson furthered Democratic values with the agricultural Smith-Lever Act of 1914 and the Federal Farm Loan Act of 1916. He also thwarted a national transportation shutdown by guiding the Adamson Act through Congress which instituted the eight-hour day.
Then there was the Espionage Act of 1917 and the Sedition Act of 1918. A firm hand, yes. Anarchists, Wobblies, communists, anti-war activists, and even newspaper editors were grist for the DoJ mill. Deportation of recent immigrants who opposed the war came with the Immigration Act of 1918. Then there was Wilson’s Committee of Public information, the first official propaganda office.
Wilson’s League of Nations concept came via a speech on January 8, 1918, his Fourteen Points.
Liberty Bonds
We have a war! And on April 24, the 1917 Emergency Loan Act initiated the first of four bond issues. Buy Liberty Bonds! It’s a patriotic duty. A limit of $5 billion was set; $2 billion were sold.
The second, third and forth issues appeared in, respectively, October 1,1917, April 5, 1918, and September 28, 1918.
A poor response to the bonds was met by the Treasury with a sales campaign promoted by Hollywood stars, Boy Scouts, and even a special Army Air Corps elite group that travelled the country. Buy a bond and get to ride in a JN-4 airplane!
Incidentally, that 1917 act is the tool by which U.S. Treasury bonds are issued to this very day.
We will re-visit the fourth Liberty Bond issue in fifteen years.
The active “war to end war” ended on November 11, 1918 with a cease fire. The Treaty of Versailles was signed on June 28, 1919.
In our next exciting episode, we will see the Federal Reserve assistance to restoring the gold standard for the world. Only it wasn’t …
In our last exciting episode, we saw barter, foreign coinage, fiat money, the rise of a banking system and systematic efforts to fiddle the system, by both banks and government. From one Turning to the next …
When the War Between the States ended, federal expenses had doubled, to $130 billion. The United States notes called the “greenback” arose from the Legal Tender Act of 1862, especially useful for all debts, public and private when there was already not enough specie to support the banking system.
The old state banking operations were supplanted by a system of banking entwined with the federal government. This new scheme led to the establishment of the Federal Reserve System.
First, of course, the government had assured the people that only $150 million greenbacks would be issued. Alas, they made two more issues, reaching a total of $415 million in 1864, all of which depreciated in real terms. Secretary Salmon P. Chase had tried unsuccessfully to manipulate the gold market to stem the depreciation along with other ‘tricks’. He ended up losing office.
Meanwhile, the state banks were still operational, and quite happy with the new fiat currency.
Needless to say, price inflation increased significantly. In the South, the Confederate fiat money issuance was far worse.
In 1865, Congress legislated a 10 percent tax on existing state banks notes. After that, the federal national banking system that had arisen had the legal monopoly on fiat money.
Much argument about the large public debt which existed after the war, and what to do about it and the greenback question. A federal debt of about $65 million in 1860 had blown out to $2.3 billion in 1866. The greenback issue was finally ruled unconstitutional in 1870 by Chief Justice Salmon P. Chase. Yes, he was for it before he was against it. Chase had become a born-again sound money supporter.
The Republicans of the day loved the legal tender laws; Democrats supported specie resumption. The railroads weren’t happy at the thought of paying their massive debts in gold. President Grant had two vacancies on the Supreme Court – and judiciously filled them with a pair of railroad lawyers. A 5-4 revisit to The Law in 1871 established paper money in accordance with the Constitution. All the banks, state and national, were happy, too, and the money supply more than doubled in seven years.
The Panic of 1873
Easy money led to easy loan, to individuals and companies. When the growth levelled off after their period of prosperity, the money supply did not decrease, nor productivity. Prices fell because costs were down and output up.
So where, really, was the panic? Yes, with a bloated banking system and railroads fat with subsidies from the federal government and the inevitable boom time speculation. Then Jay Cooke’s Northern Pacific railroad crashed and burned – hoist on his own petard of inflationary policy.
The U.S. Mint ratios, as determined by the Constitution, undervalued silver. As a result, silver coinage left for better climes where the value was respected. That’s the flaw of a bimetallic system. Also, European countries were shifting from silver to a gold standard. Add the discovery of silver mines in the American West and a government intervention.
February 1873, Congress passed a bill discontinuing further minting of silver dollars. Further legislation in June, 1874, demonetized silver for good. The GSR reached 18-1 in 1876 and was 32-1 on 1894!
The lack of transparency regarding silver had not been unnoticed by those who called for the free coinage of silver at the traditionally accepted ratio, and in unlimited quantities. This faction carried on throughout the century. Really, this movement was essentially the people vs. eastern bankers …
In 1875, the ubiquitous greenbacks still circulated, albeit discounted by 17% against gold. Grant’s administration determined to resume specie resumption in 1879. The next decade experienced great productivity, gold flowed into the country, prices were still edging downward, yet wages were up by 23 percent. Goodbye greenbacks.
Even the great Panic of 1873 had GDP growth of 6.8 perent a year. Prices going down is a signal for some economists to shriek “deflation”. Ordinary people hardly noticed; maybe the main deflation was that of fatcats whose greed brought them down.
(1877 – The Department of the Treasury’s Bureau of Engraving and Printing started printing all U.S. currency, A year later, they issued Silver Certificates in exchange for silver dollars. The last issue was in the Series of 1957. )
The Gold Standard Era, 1879 –1913
The NBER identifies a Long Depression from October 1873 to March 1879. At 65 months, this was a bigger record than the Great Depression of the 20th Century, which contraction was 43 months.
Some economists see price deflation over a long span and interpret that as the Great Depression of 1873 – 1896. While this period was most noticeable in Great Britain, in the U.S. after the inevitable correction to the panic, Main Street nor farmers hardly noticed any problem.
Productivity through 1897 continued to grow at 3.7% each year, average. Prices crept downward one percent a year. The change in money supply made the difference. A small panic hit in 1884 due to a minor contraction in the money supply.
Foreigners noted the increase of silver reserves at the Treasury and wondered if the U.S. would stay on the gold standard. The domestic agenda actually had to do with favors to the pro-silver bugs, including the western miners.
This was a tremendous period of growth – real wages climbing, prices declining slightly, savings up, inflation modest. High employment, significant investment activity, and continued rise in productivity created a period seldom equalled in American history. In real terms.
Like some say, no good deeds go unpunished.
The Devils in the Details
In the real world, one cannot separate politics and economy – it’s a symbiosis. Only academics can do this, as though it is meaningful. Back before Lincoln’s War, we saw the Whig Party implode, and Lincoln seeking his destiny with the new Republican party.
He did say, however, “I will always be a Whig in politics” which meant following his idol, Henry Clay, with internal improvements, high protectionism by tariff, a strong central government, and a national bank predicated on inflationary money policy.
In other words, mercantilism, cronyism, central control. And regionalism. For decades, tariffs had been based on the bulk of the costs borne by the South and the expenditures by the federal government primarily in the North.
The new Republican party in 1854 grew from a coalition of Whigs in disarray, “Free Democrats”, the Liberty Party, “Free Soilers” and abolitionist Democrats. Everybody had an agenda and none of it amounted to “the party of limited government” and the rest of the hype.
After Andrew Johnson’s one term, there were Republican administrations: Grant, Hayes, Garfield, Arthur – and in 1885, the first term of Democrat Grover Cleveland.
The Republicans’ nomination of James G. Blaine of Maine, former Speaker of the House, for president dissatisfied many partisans who considered Blaine as immoral. Democrats seized the day by nominating Cleveland, whose reputation of opposing corruption in government appealed to voters generally.
Cleveland’s first term was marked by significant government reform. He repudiated the ‘spoils system’ in which an incoming president appointed party cronies and turfed out the opposition. Cleveland said Republicans doing their jobs well would not be fired, merit ruled. He also diminished government departments staffed by chair warmers. Even worse, from some points of view, he attacked railroad robber barons who had not extended rail lines in accordance with agreement – those land grants were forfeit.
Cleveland was also the master of the presidential veto.
He also believed in a gold standard as opposed to bimetallism, which won him more enemies of the silver persuasion. And he also advocated tariff reform, as the beloved Republican high tariffs had actually created a government surplus. The Republic Senate, however, defeated the reform bill. The tariff question became a significant issue in the 1888 election.
Republican candidate Benjamin Harrison won two swing states, narrowly defeating Cleveland yet slightly behind the national popular vote – another victory for the Electoral College.
The advocates for free silver resurrected. The Sherman Silver Purchase Act of 1890 required the Treasury to buy 4.5 million ouces of silver each month. To pay for this increase in reserves, wait for it … a new issue of greenbacks although these were redeemable, with Treasury deciding whether gold or silver would be used.
1890 – Inflation is good!
Harrison, of course, had supported the Sherman Silver Purchase Act of 1890. Add the McKinley Tariff Act of 1890 and the supporters of high tariffs and an inflationary policy were happy.
Also, in August of that year, the New York Subtreasury used old greenbacks and the new greenback (silver) Treasury Notes. The result was paper replacing gold for settling customs charges. Cause and effect thus yielded gold outflows to foreigners, decreased imports, and growth declined.
Interventions beget interventions.
With foreigners already concerned about the U.S. honoring the gold standard, the Treasury imposed a fee on exported gold bars. As a result, all gold leaving the country was by American gold coin! Then the Senate put the cat among the pigeons in 1892 by passing a free-silver coinage bill.
Inevitably, gold exports increased. The gold-backed dollar was untrusted.
Banks submitted $6 million in Treasury notes for redemption. Treasury, worried about their declining gold reserves, implored the banks to exchange the gold for paper.
But as imported goods became more expensive, formerly Republican voters, particularly in the western states, opted for the new Populist Party. The election of 1892 was a curious and quiet affair: Harrison’s wife was dying of tuberculosis and he elected not to actively campaign. Cleveland followed in deference.
Nonetheless, much activity by the free silver factions opposing the Republican agenda, and others, led to a strong victory for Cleveland’s second term, with a significant margin in both electroal and popular vote.
He was inaugurated during this period of uncertainty and money crisis. In May 1893, the stock market collapsed. And in June, a run on the banks caused failures across the land. Many remaining banks suspended specie payment with government permission. The full-blown Panic of 1893 rocked the country. The total money supply diminished over 6 percent.
Cleveland, a sound money advocate, strongarmed the repeal of the Sherman Silver Purchase Act in November.
The gold-standard was reaffirmed.
Even so, silver advocates continued to press their case in 1895. The Treasury actively bought gold from a cartel of banks, including J.P. Morgan, and reassured everyone that gold was king.
Meanwhile, the fight against the McKinley Tariff continued. A revision bill passed the House with a large margin, after much debate. The Republican Senate, however, felt compelled to add over 600 amendments, all protectionism for cronies. The tariff, especially on raw materials was decreased, but to make up the revenue shortfall, a compromise income tax of 2% on earnings over $4,000 was added. Cleveland was not wholly satisfied with the reform but let the bill become law without his signature.
Gold and Party Politics in 1896
The once-and-forever two-party political system as we know it simply did not exist in the 19th Century.
As mentioned earlier, the Whig party effectively shot itself in the foot. Whigs became new Republicans. Four political parties contested the 1860 election. After the unCivil War, several special interests coalesced: farmers wanting lower railroad freight charges and higher crop prices, silver miners and silver bugs, prohibitionists and factions for certain populist changes to the system.
A People’s Party began in the Utah Territory in 1870 and expired in 1891. More concerned with local issues, they purported to represent the majority of Utah residents; supporting women’s suffrage helped the party. The dissolution of the party as such was an aid to gaining statehood in 1896.
The People’s Party of 1887 – 1908 is more commonly know as “the Populists” and became formally organized in 1893 with the adoption of the “Omaha Platform.” This resolution included:
Everyone knows the phrase “the man behind the curtain” and the metaphor gets wide use in our time. L. Frank Baum’s 1900 “The Wonderful Wizard of Oz” may well contain political imagery, though it is unclear if Baum himself intended this or if later commentary reads the story as allegory.
Most people in our time are probably more familiar with the movie version. Perhaps a significant clue, Dorothy’s silver shoes in Baum’s story became ruby slippers, courtesy of Technicolor.
The movie departs from the story significantly, as Baum wrote Oz as a real place, not a dream. Another clue might be that a later Baum Oz book mentioned Aunt Em and being unable to pay the mortgage on the new house which replaced the carried-away one.
If the symbolism was intended, then the characters represent:
Baum supported women’s suffrage, and had known a Populist advocate who later was an elected People’s Party senator.
The Panic of 1893
Haven’t we seen this movie before?
Well, yes, we did skim it above – but 1893 is a reprise of 1873. The usual suspects: Treasury mistakes undermining the greenback, their gold reserves declining, railroad speculation, national and state banks suspended specie payments. McKinley’s Tariff of 1890 contributed rising import prices and gold outflow from the U.S.
The Philadelphia and Reading Railroad went bankrupt ten days before Grover Cleveland’s second inauguration. Then, the National Cordage Company went into receivership – it had been the most active stock on the exchange. Several other railroads went bankrupt. The stock market crashed completely. Unemployed soared to near 20%.
Distrust of the banking system caused runs on banks all across the country. The money supply diminished over 6% in less than a year.
By November, Cleveland had killed the silver purchase act, the Treasury acted to restore confidence in the gold standard, and the panic was over.
But there was yet no joy on Main Street Unemployment remained high. Ohio congressman Jacob Coxey led a “petition in boots” march from Massillon in March, 1894. Coxey’s Army of over 500 reached Washington, DC and were arrested – don’t walk on the grass at the Capitol!
Another faction out west had commandeered a Northern Pacific train, avoided detainment by Federal marshalls as they headed east. They were stopped most of the way across Montana, at Forsyth, by the army. This action foreshadowed the military breaking the Pullman Strike later in the year.
The Populist movement thought they had a win by getting Lincoln’s income tax resurrected. “Curse you, robber barons,” they might have said. But the Supreme Court had the last word in 1895 and struck down the measure.
Needless to say, with Republicans and Democrats blaming each other for everything, the 1894 election was a bloodbath for Democrats. And the Populist movement was marginalized and thus had to support the Bryanite Democrats in the 1896 election.
The election of 1896
It was a year that the political party system in the U.S. changed for the fourth time. For the Populists, every cloud had a silver lining and William Jennings Bryan was one.
This election was about money in more than one way: bimetallism and free silver, the gold standard, the tariff – and who could spend the most.
1896 truly ushered in modern campaigning. Republican campaign manager Mark Hanna commanded $3.5 million, easy when your candidate, McKinley represents the moneyed classes. Bryan appealed to the Rocky Mountain states, rural Midwest, and the South.
And so much for the two-party myth: there were nominations from the Democrats, National Democratic Party (pro-gold), the Populist Party, the Socialist Labor party, and the Prohibition Party and the Silver Party of Nevada.
Bryan appeared to be an outside chance at the nominating convention of the Democratic party but had the final word on the third day of the debate: his “Cross of Gold” speech turned the tide. Having begun with humility, and illustrated the equivalence of all walks of life as kinds of business; praised bimetallism, invoked an early ‘trickle-down’ concept as a bad idea, and finished with the killer quote:
“Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, 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.”
He walked back to his chair, in silence, thinking he had failed. Only then, the crowd exploded in praise, a frenzy that took nearly a half hour to quell.
It took five ballots the next day but Bryan carried that day.
Alas, his rhetoric did not carry the election. This key aspect of the Democratic platform more than anything:
We demand the free and unlimited coinage of both silver and gold at the present legal ratio of 16 to 1 without waiting for the aid or consent of any other nation. We demand that the standard silver dollar shall be a full legal tender, equally with gold, for all debts, public and private, and we favor such legislation as will prevent for the future the demonitization of any kind of legal tender by private contract.
killed Democratic aspirations and McKinley reigned. The free silver enthusiasts built a castle of dreams and good intentions, failing to understand that they could not impose their GSR on the rest of the world.
The real outcome of 1896 was the death of any support for the quaint Democratic party belief in small government, sound money, and laissez-fare ‘mind your own business’ attitudes. The wowsers won and the drive for Prohibition would not go away.
Old-time Democrats had voted Republican for the first time in their lives.
The McKinley campaign also succeeded because “those men behind the curtain” were the Morgan and Rockefeller banking groups; $3.5 million war chest had to come from somewhere! One of the stipulations for McKinley was to agree to support the gold standard.
The Populists were down but not out. Another Reform movement began, to solve the problems they perceived in monetary police and their dislike of the gold standard. A grassroots currency reform in the Midwest was suggested in a letter to the Indianapolis Board of Trade – by Mark Hanna, businessman, political manager and also friend of President McKinley, and U.S. Senator from Ohio from 1897 to 1904.
The Indianapolis Monetary Convention began in 1897 with representatives from 26 states and the District of Columbia. The Yale Review noted it was an assembly of “businessmen in general” and not “bankers in particular”.
One of their resolutions suggested a new and improved system of elastic bank credit. Do you see where this is heading?
Meanwhile, the economy had recovered in 1897 and the Progressive Era would soon remake the society.
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