The History of Bimetallism in the United States
Part III, Chapter XVII
Cessation of Silver Purchases, 1893
§ 1. The real difficulty with the currency in recent years was due, in my judgment, to the prolonged agitation in regard to the standard. The persistent attempts of the silver party to pass drastic measures through Congress excited alarm. The failure to properly understand the essential functions of money masked the real cause of trouble, for the public was constantly forced to hear discussions of the dependence of prices on the quantity of money, the need of more money, and the like. In this agitation concerning the standard was disclosed some misunderstanding of the fundamental principles of money.
Since recent events—to my mind at least—indicate a failure to distinguish between two different functions of money, it will be advisable to make perfectly clear the basis for such a distinction. The two things to be kept distinct are: (1) The undisturbed maintenance of the standard, or common denominator, for prices and contracts; and (2) the means by which goods are exchanged. The stability of the standard is a matter quite distinct from the determination as to how much of this or that kind of money is needed as a medium of exchange. The standard in which prices are expressed should not be confounded with the machinery by which goods (whose relative values are already expressed in the standard money) are exchanged.*77
A perfect standard of value, as every economist knows, is unattainable. Neither gold nor silver is a perfect standard, because price is a relation; and this relation may be altered either by causes affecting the money side, or by causes affecting the goods side of the comparison. Gold and silver have in fact been used as standards in default of better ones; silver having been mainly so regarded up to 1850, and gold having been largely so employed since 1850. Prices, with which every man of affairs has to deal, are affected by all the various influences touching not only the goods side, but the money side of the ratio. Prices, consequently, are modified (1) by an increase or diminution in the supply of money, (2) by an increase or diminution in the demand for the money material, or (3) by an increase or diminution in the cost of producing the goods exchanged against money. It is evident, then, that there are many natural and unavoidable causes at work on both gold and silver to modify their relation to goods, and thus to affect prices. Changes in prices are sure to arise from the numerous causes here set forth, over which legislation can have no control. The business community has enough to do to watch for and guard against changes arising from natural causes affecting the demand and supply of money and the vicissitudes of cost of production. It has not only a right to be saved from legislative artificial changes in the standard; but it will be incensed beyond endurance if such legislation is the result of political intrigue and campaign bargains. It is ready to demand in a very ugly humor that it shall no longer be worried by unnatural legislative changes in the common denominator itself.
But, more than this, gold is not the same kind of article as silver for monetary purposes, and the forces affecting the value of gold work differently from those which affect the value of silver. Gold is heavier than silver: gold is thirty times as valuable as silver, weight for weight: gold is needed for large denominations of coin; silver for small denominations. Therefore, for monetary uses, gold and silver are not homogeneous; a demand for money in general can not be satisfied indifferently by either gold or silver, since monetary needs differ among different people. Gold and silver are not interchangeable as money, any more than corn and wheat are interchangeable as food: both corn and wheat may serve as food, but corn-meal and flour will never be the same, will never equally please all palates, and will never be in demand equally the one for the other. The difference between gold and silver is still more pronounced. From the simple fact that gold is a metal different from silver, the conditions affecting the demand and supply of gold are different from those affecting the demand and supply of silver. The main supplies of gold come from regions other than those which furnish silver: the largest deposits of gold have been found in California, Australia, South Africa, and parts of the Rocky Mountains; while the largest finds of silver have been in Mexico, South America, and Nevada. From this brief summary of facts it must be evident why a standard of silver must inevitably be wholly different from one of gold. From the point of view of the function of money as a standard, every one must admit that the two are not homogeneous.
The logical consequences of these facts are momentous to our present discussion. If, in this country, gold should happen to have long been the common denominator with which all goods had been habitually compared; and if as a consequence prices and contracts had during this long period been expressed in gold (for this has been true of gold legally and in fact since 1834, except in the paper period of 1862-79)—then it follows that any attempt to change from an existing gold standard to one of depreciated paper, or to one of silver, having its own peculiar conditions of value, would have the destructive effect of a monetary earthquake. It would cause an upheaval of all prices and contracts not specifically expressed in gold. After having adapted itself to one metal, the business public must go through the trying process of learning how to adat itself to a new metallic denominator. Here is the destructive influence of a change. And, as Nature abhors a vacuum, the world of trade abhors change. The business community demands conditions in which it can clearly see a short distance ahead. Whatever be the length of time involved in a productive process—such as between buying the wool and marketing the finished woolen goods, or between buying iron and completing the house or bridge—men of affairs must be protected against unnecessary changes in the common denominator in which their sales and orders are expressed.
All this exposition seems so very elementary that I shall probably be taken to task for it; but the astounding fact remains that our Solons have for seventeen years (or since 1878) been straining the very timbers of the ship of state in a frantic—and, from a business point of view, an insane—attempt to tamper with the standard. A concerted and continuous effort to render the country uncertain as to the permanence of its standard, actually kept up for seventeen years, and embodied in national legislation, seems like a piece of folly too gross to be true in a modern civilized state; but that is the exact truth of the United States. Since 1878 we have not intermitted the policy, forced on us by selfish private interests, to keep steadily before us the possibility of a change from the gold to the silver standard. Since 1878 it must be recorded that there has never been a period of absolute certainty; there has never been a period when a producer could feel so entirely sure of the standard of payments that he could, without fear or hesitation, make his estimates a few years ahead.
A correct analysis of the situation, therefore, in my judgment, discloses the fact that the cause of all our monetary disturbances is not one connected with a medium of exchange, but one concerning the maintenance of a definite measure, or, common denominator, in which prices and contracts are expressed. It is not now a question as to how much, but what kind of money we shall have. It was the doubt as to what kind of money, or what standard, we were to have which brought us the panic of 1893. Politicians, manœuvring for party advantage, have been playing the game of tampering-with-the-standard at Washington, while the crippled industries of the land were burying their dead.
§ 2. The story of our standard since the Civil War is one of the most humiliating chapters of our monetary history; and that is saying a great deal. It was on December 31, 1861, that specie payments were suspended, after a long experience on a gold basis, since about 1834. In 1862 the Government made the error of trying to get a loan without interest by issuing irredeemable paper. The inability to understand that the interest on $450,000,000 was a small matter compared with the confusion produced in prices and credit by changing the standard from gold to a paper of dubious value (behind which there was not a dollar of reserve) was severely punished by disaster. The greenbacks then issued depreciated even 65 per cent. Without going into the subsequent history of this depreciated paper standard, it is sufficient to recall that, in 1875, the Resumption Act was passed, under the provisions of which a sufficient gold reserve was collected, and specie payments were resumed January 1, 1879. After a seventeen years' wandering in the wilderness of uncertainty, we returned to the same gold standard which had existed previous to the war. This return, however, was accomplished only after painful sacrifices which convulsed the country; but the result has proved well worth the cost.
Prosperity and credit have been chilled by every slightest suggestion of doubt as to the maintenance of this standard. Strange to say, with fatuous lack of judgment, the fixity of the standard had not been actually established before operations were started to undermine it. After resumption was attained, its guardians seemed to forget to care for it; and from 1878 to the present day the country has suffered under constant and repeated attempts to change the standard. Knowing the necessity of fixity in the standard for business prosperity, why have we allowed it to be constantly threatened? The first serious threat to it stability began with the Bland-Allison Act, in February, 1878. It will be remembered that the Bland Bill, as it passed the House, was a free-coinage measure. It is true that the fangs of the bill were drawn by Mr. Allison in the Senate; otherwise, if passed, the standard would have been changed front gold to silver in the twinkling of an eye. But although we were saved by the Senate, the uncertainty produced by the agitation remained. The ill results have been far greater than is generally supposed. If a free-silver measure—meaning a complete transition to the silver standard—could pass one House, why might it not pass both houses in the future? The Senate to-day (1896) would not save us from free silver, our whole reliance being on the lower House and on the Executive. This uneasiness once aroused, although partially allayed for short periods, is ever present. It leaves the business system in a highly nervous condition, as after a bad attack of monetary grippe; and ordinary emergencies are magnified by the unhealthy conditions.
Under the operations of the Bland-Allison Act, the country received serious shocks to its confidence in the fixity of the standard, and especially in 1884-1886. This arose, as previously explained, from doubts as to the condition of the gold reserves in the Treasury. The Government can maintain gold payments only if it has gold with which to pay. But in the years 1884-1886, so great was the distrust in the ability of the Treasury to breast the stream of silver coinage, that the usual supplies of gold ceased to flow in through payments of revenue: gold was held back, and other kinds of money were sent in instead. The flood of silver choked the inlets to the Treasury; and a panic was narrowly averted. Finally, by making a vacuum for silver money in the general circulation, the stream of silver was prevented from overflowing the Treasury, and confidence was again temporarily established. By October, 1886, gold was once more freely paid into the Treasury for public dues. (See Chart XX for the result since 1886.)
During this period of disturbance the net gold in the Treasury fell to within about $15,000,000 of the reserve of $100,000,000, then regarded as the danger line. It is of present interest, however, to note that this reduction of gold had no connection with deficits between national income and expenditure; for the surplus in each year was as follows: in 1884, $57,603,396; in 1885, $17,859,735; in 1886, $93,956,583. No device for increasing the revenue would at that time have been considered for a moment as helping to restore the confidence in the standard. There was no question of a lack of revenue in other kinds of money than gold; there was money in abundance in the Treasury, but not money of the right hind. The difficulties of the tin time arose solely from a fear that the standard might be changed from gold to silver; and this fear was distinctly reflected in the nature of the payments by the public into the Treasury. Gold was withheld, and other forms of money sent in for dues.
When it had been once shown, by the administration of the Bland-Allison Act, that the annual coinage of silver could be kept from choking up the Treasury, a period of four years of monetary quiet ensued, except in so far as ineffective silver agitation during these years may have disturbed the situation. The uncertainty as to the standard was again temporarily removed; but vigilance was still necessary. The net gold reserves in the Treasury were fully adequate, remaining during this period at from $150,000,000 to $200,000,000. Large reserves like this, so long as they existed, removed all anxiety. It was not essential to the situation in 1887-1890 that the revenues supplied a surplus; for a surplus, as was shown, had existed when the troubles of 1884-1886 were upon us. In short, the surplus theory gives us no explanation of the history in those years; the source of evil was elsewhere.
The success in warding off the dangers to the standard inherent in the Bland-Allison Act seemed to encourage the belief that the country could take more and greater risks with impunity. In l890 Congress redoubled its sinister attempts to pry up the foundations of our monetary system. Congress passed, and President Harrison signed, July 14, 1890, the so-called Sherman Act, which nearly doubled our purchases of silver, and thereby increased the difficulties of maintaining our existing standard, which in 1884-1886 had almost succumbed to the operations of the Bland-Allison Act. We might have carried the burdens of the latter lay vigilance and skill, but the additional weight of the Act of 1890 brought us humiliation and enormous losses. The question of the standard was opened all anew: from the very passage of the act dates the steady decline in the percentage of gold paid into the Treasury for public dues (see Chart XX) from which we have not since recovered; from it dates the steady decline in the amount of the Treasury balances, and the swift collapse of the net gold reserve (see Chart XIX); and from that time began the heaping up of the explosives which burst out in the fearful monetary catastrophe of 1893. It was not a question of sufficient revenue; for we had no deficits to the end of the fiscal year of 1893, which included the outbreak of the panic. The cause of disaster seems to have been the unspeakable blindness to the folly of tampering with the standard.
The free-coinage agitation, directed openly against the standard on which we have done business since 1834 (excepting the paper period, 1802-1879), unsettled confidence at home and abroad in the stability of our monetary policy. No one could know that contracts entered into when a dollar stood for 100 cents in gold might not be paid off in silver which stood for 50 cents on a dollar. That was the predicament in which every investor found himself who had an obligation payable only in "coin" and not in gold.
That is the reason, too, why Government bonds would be more desirable to investors if made specifically payable in gold. Objectors may say that it destroys credit in our bonds to introduce this clause, because it raises the question which ought to be taken for granted—that the "coin" bonds are to be paid in the best money. But this answer is conclusively falsified by the very facts of past and present distrust as to our monetary policy, and by the utter impossibility of predicating that coming Congresses and their constituents will be any more sane than they have been in the past. How does any one know that the Treasury will always pay gold, when a majority of the Senate in 1896 would destroy the gold standard in a moment if it could?
§ 3. The same reasons which led Americans to distrust the stability of the gold standard affected Europeans who held our securities. In the very nature of things, they would try to dispose of these securities before the gold standard was abandoned, and a very general distrust and large sales would certainly cause a fall in prices of obligations and general depression, if not worse. When all are affected by the same fear, and all are selling, a panic is to be expected.
The extent of the foreign distrust of our monetary situation was measured by the amounts of our securities sent home, and the consequent exportation of gold to pay for them. In brief, this was a withdrawal of capital from the United States, and, of course, if withdrawn, it must go back in that kind of money, which was equally good abroad and at home—gold. In 1891 the net exports of gold amounted to $68,130,087. The Baring failure, moreover, required London to sell securities marketable in other places, and many of the best stocks and bonds were sold here to help hard-pressed merchants in London over the crisis. The American crops were large and in great demand for export. Indeed, in 1892 the excess of exports of merchandise was over $200;000,000. And yet no gold came back in payment of these enormous exports, for the reason that Europeans were alarmed, and sent back securities as an offset to food purchased from us—that is, the silver specter prevented our circulation from filling up normally with gold. And it did more than that: in addition, it sent gold out of the country. There could be but one result of this condition of affairs if long continued. As the gold reserve of the Treasury must bear the strain, it must soon become exhausted. Both home and foreign demands reduced the Treasury reserve, already weakened. When the gold reserve should go below the danger point, the demand for gold before the silver standard was reached would result in the withdrawal of gold from circulation, and thereby produce a contraction of the currency. The limit of $100,000,000 had been always regarded as sacredly kept for redemption of United States notes.*78
The panic came in 1893, but it did not break out until—for the first time since the resumption of specie payments in 1879—the net gold reserve fell below $100,000,000. In April, 1893, this traditional amount was broken into, and then the unrestrained fear as to the standard of payments culminated in a panic. Safety disappeared and chaos reigned. As there was a universal desire to exchange property for gold, it seemed as if gold was scarce; in reality, it was an abnormal offer of property for sale brought on by a fear of the silver standard. It is not now my purpose to explain in full the causes and progress of the panic of 1893; suffice it to say, it was a standard panic. It was not caused by any scarcity of money; so far as that factor could be said to have entered, it was only a consequence, not a cause, of the panic. The dominating cause was the final culmination of the long-felt uncertainty as to the fixity of the gold standard, which had been operating since 1878 and had been intensified since 1890. It was the perfectly natural fear—natural after what had appeared in our legislation—that, before securities could be sold and realized upon, silver would take the place of gold as the standard of payments. This was the reason of the frightful rapidity with which the gold reserve fell during the latter part of 1892 and early in 1893 (see Chart XIX). The decline of the general Treasury balance followed the inevitable diminution of revenue due to the panic. The gold reserve was not low because the balance was low. That is a complete inversion of cause and effect. The true sequence was as follows: The distrust of the standard, caused by wild legislation, diminished gold payments into the Treasury; that lowered the gold reserve; that produced a reflex influence on a public confidence already impaired; the probability that the Treasury could not long maintain gold payments brought on the rush to sell; the panic caused the falling off in the general revenues and in the Treasury balance. For to July 1, 1893—after the panic broke out—there was no deficit. To suppose that more revenue would have saved the gold reserve at the end of 1893 is, in my judgment, sophistical. The true cause was the tampering with the standard.
§ 4. An uprising of public sentiment against our silver legislation, due to the panic of 1893, was the force which swept that legislation out of existence. Seldom in our history has anything been more dramatic. Congress was supposed to have a majority in both Houses favoring silver, and yet such a general consensus of belief existed throughout the business world that our silver laws had brought on the panic that the great wave of indignation swept everything before it. President Cleveland called an extra session of Congress for August 7th, and on the 21st a bill repealing the purchase clause of the Act of 1890 passed the House by the extraordinary vote of 239 to 108. The public feeling was very ugly, and grew stormy with impatience while the Senate delayed action on the bill for over two months. There was a great wrench of former political relations; the strong influence of President Cleveland conquered, and on October 30th the bill passed the Senate by a vote of 43 to 32. November 1, 1893, the bill became a law, and the date is memorable as marking the close of a long period of fifteen years' folly in the purchase of silver. It is a policy unique in monetary history; it is unequaled for audacious disregard of all sound reasoning and of the experience of the last.
It might be said that since the Sherman Act brought us disaster, its repeal ought to restore prosperity. It is to be borne in mind, however, that it was the existing accumulations of silver heaping up since 1878 which finally brought us destruction, and all that weight is still bearing down upon our financial mechanism. The question now is, Can we carry the present silver burden?
Moreover, although repealed, the Sherman Act still remained with us in the form of $150,818,582 (November 1, 1893) of Treasury notes issued under its provisions, which requires that the "Secretary of the Treasury shall, under such regulations as he may prescribe, redeem such notes in gold or silver coin, at his discretion, it being the established policy of the United States to maintain the two metals at a parity with each other upon the present legal ratio," etc. Hence the Secretary must always be ready to redeem these notes in gold; for a discrimination against them would create two standards of money—one redeemable in gold, another in silver. Consequently, these notes created an additional demand on a gold reserve already too small even for the greenbacks. Under such circumstances the doubts as to the fixity of the standard must still remain. The reserve could not possibly serve for a sudden emergency, such as a threat of war against Great Britain. To mean anything, redemption must redeem on any and all occasions. Anything short of this is a share.
It has been urged in some quarters that the dwindling gold reserve was due to the deficits of our budgets; that, if the revenue were increased sufficiently, the gold reserve could be maintained intact. There are two ways by which the Treasury can obtain gold: (1) Through the receipts from revenue; or (2), just as blankets or shoes can be got, by purchase through the offer of bonds or their equivalent. It has been shown that the first and normal source of supply had been entirely cut off; and hence the reserve could be replenished in only one other way, so long as the existing distrust continues—and that is by the sale of bonds. No matter how much more revenue be raised, no matter how much larger the mere surplus of income over expenditure may be, the gold reserve could not be maintained if that greater revenue and that larger surplus consisted of greenbacks or silver money—the very objects to be redeemed. To increase taxes, to swell out the surplus, would not avert our monetary danger unless thereby a change were made in the kind of money paid into the Treasury. It seems like a joke to say that increasing taxes would increase confidence in the standard, when no gold could come in from an increased revenue, as things then stood.
From 1890 to the end of 1893 the steady fall of the net gold reserve was accompanied by a fall of the Treasury balance; but whether the balance was large or small, it was during this time largely made up of gold. From the end of 1893, however, a very different condition of things appeared. The balances were increased by the sale of bonds for gold; and yet gold continued to escape. The wide discrepancy between the Treasury balances and the net gold showed that the resources of the Government were ample, but that these resources were not made up of the right kind of money. Two years of experience proved that increasing Government balances did not insure a stable gold reserve, even though the increased balances were caused by the direct purchase of gold by the sale of bonds. Now, on the other hand, if the increased balances had been produced by a mere increase of revenue, when the revenue was sure not to be paid in gold, how much less ground was there for supposing that the gold reserve could have been maintained! If it were wrong to have used, even indirectly, for the general demands on the Treasury, the proceeds of the sale of bonds intended only to supply the gold reserve, it must be apparent that the deficits, whatever they were, have been already met by the new funds covered in to the Treasury. If the deficits have been paid by the proceeds of the bonds, and yet the gold reserve were still threatened, it would be nonsense to propose to increase the revenue to pay off deficits already met, in order to protect a gold reserve already shown to be uninfluenced by increased Treasury balances.
The Treasury had money, but not the proper kind of money. The situation resembled that of a body of troops suddenly surrounded by the enemy: their supply of ammunition is running low, when they are startled by the announcement that, although the wagons contain an abundance of cartridges of a different size, there are only a few that fit their rifles. Just as the proper cartridges give out, the enemy presses in on them; but they can make no resistance—with useless ammunition. So it is with the Treasury: when its stock of gold ran low, it could not defend itself with silver or paper; for that would be a confession of bankruptcy, and a public notice that an end of solvency had been reached.
It may be true that the notes once redeemed by the gold obtained by bond sales have been paid out again, and paid out to meet general demands on the Treasury. This is why it has been charged that the Secretary took funds intended for the gold reserve and applied them to meet the deficits. But how else could the Secretary have acted, in view of the law of May 31, 1878, which required him to reissue redeemed notes? How else could he reissue them except in payment of general demands? If not only the gold itself obtained by bond sales, but also the notes presented in exchange for gold, should be kept inviolate, then the fault is in the law requiring the reissue of the notes, not in the Secretary's policy. If the Opposition wished to "corner" the Administration, and to prevent it from using the redeemed notes in paying off deficits (an indirect result of the bond sales)—thereby making tariff legislation for increased revenue a necessity—the only way it could be done was by forbidding the reissue of notes once redeemed, and by providing for their cancellation. If this had been done, the proceeds from the sale of bonds for gold could not have been indirectly used in wiping out the deficits. This measure would have entirely separated the tariff question from the money question.
The effect of allowing the reissue of notes once redeemed is the same as largely increasing the volume of currency secured by the gold reserve; the consequence is, that any given reserve is smaller in proportion to the demands upon it than it would otherwise be. If we wish the happiness of proving ourselves superior to all experience by reissuing redeemed notes, and do it all over again, we must simply provide a larger gold reserve than would be otherwise necessary. If we wish to maintain the gold standard, no other kind of money than gold will serve the purpose as a reserve. It makes no difference how high in the bucket stands the level of the water which is kept for thirsty men, if the bucket is largely filled with sand; so a large Treasury balance does not mean a large gold reserve. Or if there be a hole in the bucket by which only the water, and not the sand, goes out, filling up the bucket with water only temporarily raises its level; so the constant re-presentation of notes once redeemed acts like a hole in the Treasury to draw off the gold and leave the other kinds of money within. At present (1896), redemption is skillfully arranged so as not to redeem; and it presents another of the many curious absurdities of our monetary history.
Notes for this chapter
General Francis A. Walker says money performs the function of a measure of value "in respect to a vast bulk of commodities where it is not called on to become a medium of exchange.... It requires the actual use of money, for a longer or shorter space of time, to effect those double exchanges which we call buying and selling; but the prices resulting from such exchanges may be applied to far greater bodies of wealth without the use of money. For example, a farmer sells a cow to be sent to the city for beef. It is only in the actual sale that money is used: but he takes the price—the money-value—thus determined, as the means of estimating the value of his herd; and so does the Government in taxing him.... The farmer compares his cow with the one he has just sold for money, and, knowing it to be as good a cow, or better, or poorer, fixes her price, in denominations of money, for the purposes of the contemplated exchange."—"Money," p. 64.
As to the understanding regarding this limit of the gold reserve, cf. Horace White, "Money and Banking," p. 206.
[Note: Footnotes to the many tables in the Appendices are available within the scanned gifs of those tables. Footnotes to the text sections in the Appendices are recorded below, numbered in order of appearance in the Appendices.—Econlib Editor]
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