The Currency Question

Objectives

• Students will…– Determine the nature of currency and the

relationship between inflation and debt. – Identify the problems facing farmers at the

end of the nineteenth century.– Evaluate competing responses to those

problems. – Explain the causes of the outcome of the

Election of 1896.

I. Our Currency Today

• What is a dollar worth?

I. Our Currency Today

• As much we want it to be! (Kind of)

• Our currency is a variety of Fiat currency.

• Fiat currency is money that exists because an government or set of customs declares it to be money.

• It has value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services.

• Most importantly, fiat currency has value because people trust that the value of the currency will be reasonably stable.

I. Our Currency Today

• Historically, societies have relied on monetary systems where currency used in trade was either

• A. composed of a physical commodity (such as gold coins)

• B. was exchangeable for a predetermined amount of a named physical commodity, making it a representative money

II. What was our Currency?

• Up until 1971, the United States operated on the Gold Standard.

• The Gold Standard is is a monetary system in which a government issues paper notes that are normally freely convertible into pre-set, fixed quantities of gold.

II. What was our Currency?

• A country under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold.

II. What was our Currency?

• The main benefit of a gold standard is that it insures a relatively low level of inflation.

• Inflation is caused by a combination of factors, one of which is:

• The supply of money goes up.

• So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold.

II. What was our Currency?

• Keep in mind that the US did not officially use the Gold Standard until 1900.

• Before then, both silver and gold could be redeemed.

• This was known as bimetallism.• However, there was far more gold in the

treasury than silver, so the US was unofficially using the Gold Standard.

III. The Clash Between the Gold Standard and the Silver Standard

• Why are the farmers so mad?– Since the Panic of 1873, farmers had been

facing increasingly difficult obstacles• Overproduction of crops • Increased freight rates• Inability to pay off debt and interest accumulated

on debt

III. The Clash Between the Gold Standard and the Silver Standard

• A number of groups formed to work in the interest of farmers– Farmers Alliances (1860s)– The Grange (1870s-1880s)– The Populist Party (1892- early 1900s)

III. The Clash Between the Gold Standard and the Silver Standard

• Support from Westerners and farmers helped to push through the Sherman Silver Purchase Act of 1890.

• This law forced the Federal Government to buy a great deal of silver each month, thus expanding the money supply.

• Why would farmers especially want the money supply to expand?

III. The Clash Between the Gold Standard and the Silver Standard

• Why would farmers want a great deal of inflation?

III. The Clash Between the Gold Standard and the Silver Standard

• Generally speaking, those who benefit from higher inflation are debtors and those who suffer from it- creditors. If one has substantial debt, each dollar one has to repay would be worth less than when it was borrowed. In this way, one pays back less in real terms than one had borrowed. Those who may benefit from higher inflation are people with significant debt.

III. The Clash Between the Gold Standard and the Silver Standard

• Debtors love inflation because it allows them to pay back with "cheaper dollars" than they borrowed. If I borrow $100 from you today and the value of the dollar declines 6% over the year, if you don't charge me usury I will pay you back an equivalent of $94 the next year. This is great for me, the borrower. It's a sorry deal for you, the lender. The reason the dollar would decline 6% (give or take) is because the law of supply and demand works in the market for money. When the supply of dollars increases, if everything else is held constant, the value (purchasing power) of the dollar declines. One must pay $100 to purchase what he could have bought last year for only $94; thus, the value of the dollar has declined because of increased supply.

III. The Clash Between the Gold Standard and the Silver Standard

• However, there was a problem with the Purchase Act.

• All bank notes could be exchanged for silver OR gold.

• What was the potential danger?

III. The Clash Between the Gold Standard and the Silver Standard

• Wealthy Easterners looked with horror at this act because of the potential for runaway inflation and destruction of America’s money supply.

IV. The Election of 1892

• The successor to the Farmers’ Alliances and the Grange, the Populist party voiced the discontent of millions of farmers.

• The Populists demanded:– Unlimited coinage of silver– graduated income tax– government ownership of railroads– direct election of Senators

IV. The Election of 1892

• Though Grover Cleveland ended up winning 1892, the Populist candidate, General James Weaver, made a strong showing in western states.

• This was the first time a third party had made a serious dent in the two party system.

IV. The Election of 1892

• The Populists courted the votes of Southern blacks, but were stymied by the overwhelming racism of many Southern whites.

• Since so many blacks were not allowed to vote because of grandfather clauses, literacy tests and outright fear, a large amount of support for the populists was lost.

V. The Depression of 1893

• The worst depression of the century hit the US in 1893 and lasted for four years. Unemployment was rampant. – To find security, many citizens exchanged

their banknotes not for silver, but gold. – Soon, gold became so depleted that the US

government was on the verge of losing its creditability at home and abroad.

V. The Depression of 1893

• Cleveland took action by repealing the Purchase Act, which aroused a great deal of anger in the West.

• He also sold government bonds for gold, and asked J.P. Morgan for a loan of gold to the treasury. This, too, created anger among farmers.

V. The Depression of 1893

• The stage was set for the next election to become a contest between “Free Silver” and the Gold Standard.

• Election of 1896– Democrat: William Jennings Bryan– Republican: William McKinley – Populists: James Weaver?

V. The Depression of 1893

• Frank Baum, 1900

• Political Allegory (?)– Probably Not

VI. The Cross of Gold

• William Jennings Bryan– A Democrat, not a populist, took upon the

Free Silver Campaign.– Bryan, a son of Illinois Judge, was a powerful

orator who basically stole the Populist/silver message.

– His most famous expression of this sentiment is found in his “Cross of Gold Speech”

VI. The Cross of Gold

• Cross of Gold– What is Bryan’s thesis in the Cross of Gold?– Why did he use Christian imagery?– How might he have alienated workers in big

cities in the East?

VII. “Demopop Party”

• What should the Populists do?– On the one hand, Bryan agreed with one of

their basic arguments, yet he ignored their other concerns, like government ownership of railroads.

– On the other, they were destined to lose the Election of 1896 if they did not have the Democratic party with them.

VII. “Demopop Party”

• In the end, the Populists agreed to work with the Democrats.

• Not everyone was pleased with this arrangement.

VIII: The Election of 1896

VIII: The Election of 1896

• Why did the Demopops lose?– Racial Divisions– Working class suspicion of farmers– Pressure of industrialists on the working class

VIII: The Election of 1896

• The US was now officially on the Gold Standard.

• McKinley, as we shall see, was not only a proponent of the gold standard, but territorial expansion as well.