1873: The year America ditched silver as money and all hell broke loose

0:00In 1898, John Nuveen had a vision to underwrite municipal bonds that would propel American infrastructure into the 20th century. More than 125 years later, that vision lives on. Today, Nuveen has grown into a leading global asset manager with expertise spanning public and private markets, still investing with a future in mind. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. Then in 1896, he delivered perhaps the most consequential speech at an American political convention. This was the famous cross of gold speech.

0:43If they dare to come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost. You shall not press down upon the bow of labor this crown of thorns. You shall not crucify mankind upon a cost of gold. Wow. Well, if anyone thinks that monetary policy is boring, think again.

1:15Today on The Story of Money, a seemingly innocuous monetary reform that inflamed American politics for a whole generation. and its unanticipated consequences were so disastrous and caused such vitriol that it came to be known as the crime of 1873. Now, Robin's away this week, sadly, but here to tell the story with me is Lyakit Ahmed, an amazing author. So, Lyakit, thanks for joining me. Thank you for having me, Julian. Now, your new book is called 1873. And it's about the many financial disasters that happened around the world in that pivotal year. And today, we're looking at just one of those disasters, which at first glance appears to be rather boring.

2:05It's to do with a bit of financial legislation that was passed by US Congress in February 1873. But this particular law would open up a vicious political divide in US politics for decades afterwards. And you're going to tell us a story of the two politicians in particular whose careers were defined by this. Yes, that's right. These are two men with sharply contrasting personalities. One, an uncharismatic political insider. The other, a polarizing demagogue. They were on totally opposite sides of the divide. And each would prove to be right. But things did not work out the way that either of them expected.

2:53And neither would achieve their objectives. Well, that's called a monetary policy cliffhanger. So listen on and hear about who those two people were and why their bitter fight matters enormously for the Federal Reserve and governments today. particularly given that we're facing a lot of inflammatory debate around monetary politics all over again. It's all coming up here on the story of money from the Financial Times with me, Gillian Tett.

3:36so our story begins back in 1873 america it's the reconstruction era the united states is still piecing itself back together after a bloody and destructive civil war you have the venerated Union General Ulysses S. Grant, who's president. And in February of that year, Grant signs a bill into law called the Coinage Act. Now, it sounds pretty unassuming, if not rather boring, but it's actually a monetary time bomb. So, Liaka, tell us about this law. What exactly was the Coinage Act? And why did no one really notice it or care about it initially? So let me give you a bit of background first. For most of the U.S.

4:25history, the country had a bimetallic standard, which meant the currency was backed by both silver and gold. That meant that notes issued by banks were matched by either gold or silver bullion held in the vaults of those banks. To fund the Civil War, the country had to start issuing money that wasn't backed by precious metals. This was paper money called greenbacks. After the Civil War, the government decided to return to having its currency backed by precious metals. So the Coinage Act was supposed to be about formalizing how the U.S. currency would be organized once the U.S. dollar became backed by metals again.

5:16And that is what people in Congress thought they were voting on. What people missed was that among the list of coins the US Mint would produce, the standard silver dollar, which was the official unit of US currency since 1792, was actually left off. So Lekker, knocking silver out of the equation was incredibly important. And it's worth stressing that because today people tend to just talk about gold-backed currencies and gold and forget that silver was so important in American monetary history. So whose decision was it to knock silver out? The person responsible was a senator from Ohio called John Sherman.

6:05He was the eighth of 11 children. His older brother was, in fact, a famous Union Civil War hero, General William Tecumseh Sherman. John Sherman entered politics as one of the very early representatives of the newly formed Republican Party. In 1861, he was elected to the Senate, and there he established himself as a currency expert, eventually becoming chairman of the Senate Finance Committee. You know, he was not especially popular with his colleagues, and that may become significant later. In fact, he was nicknamed the Ohio Icicle by the press because of his austere and charmmous character. Well, these days people tend to have much ruder words for different politicians.

6:59But I guess in those days, Ohio Icicle was quite an insult. But the big moment for him was in 1867 when he visited Europe and he was invited to the International Monetary Conference. in France. And there he mixed with some of the great statesmen of the era, Bismarck, Napoleon III. And he was taken by a plan that was being touted by a French technocrat. And this plan involved unifying the world's currencies under a single standard linked exclusively to gold. The French and English government dismissed the idea, but Sherman loved it. So when he returned to the United States, he tried to pass legislation limiting the legal tender of silver.

7:56It doesn't actually go anywhere initially. And he submits, he keeps on submitting it, and it keeps on being debated in Congress. And finally, with the Coinage Act, he manages to include the clause that leaves out the silver dollar, which essentially locks America into a gold standard. Wow. So basically, he's imported this French idea that not even the French or British government have actually adopted themselves and got this really quite momentous change through Congress. So when do people wake up and why does it matter so much for the overall monetary system in the US knocking silver out? So it was disastrously timed.

8:43The Coinage Act became law in February. That was immediately followed by a sequence of financial crises. In May, the Vienna Stock Exchange crashed, the Grunde krach. In September, the U.S. railroad bubble burst, sparking a U.S. banking panic. In October, the Berlin market collapsed, spreading panic across Europe. So the U.S. economy was being starved of liquidity when it most needed it. Because during economic panics, there's a rush into cash, meaning the economy desperately needs more liquidity. But instead of expanding the money supply to help banks, the demonetization of silver did the exact opposite, severely tightening the credit markets.

9:42Historically, bimetallism, that is currency backed by both gold and silver, had worked remarkably well in keeping prices stable Because gold and silver acted as a buffer for the other So when one metal was scarce, the other could stabilize the system and keep credit flowing By removing silver, the availability of credit became completely dependent on the supply of gold. Now, that would not have been a problem in the 1850s and 60s, because gold was remarkably abundant thanks to new discoveries in California and Australia. But by the late 1860s, new discoveries of gold had plateaus. This made the US highly vulnerable.

10:39If there was a shock and the government wanted to create more money to stabilize the financial system, it would only be able to use gold, not silver. Right. So it's a bit like, you know, because we learned about this after the 2008 financial crisis. And then again, in the early days of the COVID pandemic, when essentially the central banks flooded the market with liquidity to stop a crisis turning into depression. But from what you're saying, the very opposite happened as a result of this little noticed silver reduction or rather silver being knocked out of the monetary system. Yeah, I mean, the US had in effect surrendered the ability to use silver just months before the moment when it would most need it.

11:26So Lekker, at a time when gold was starting to be in short supply, was that the same case for silver? Was it also in short supply? Because that mattered in terms of its ability to act as a buffer or not. There was actually a glut of silver, thanks to events in Europe. Bismarck, the Chancellor of Germany, had just decided to take Germany off silver and switch to gold. That had been announced in July of 1871, after France's defeat in the Franco-Prussian War. He was trying to emulate Britain and undercut France's central role in the bimetallic system. Germany offloaded its unwanted silver onto the market, creating a glut.

12:15This sank the price of silver, triggering a chain reaction across Europe as all governments began to abandon silver before the price fell further. And all central banks began stocking up on gold reserves, which made monetary conditions even tighter after the financial crisis. Wow. So what we're seeing illustrated here are two key points. One is the law of unintended consequences and people starting on one reform that brings about all kinds of unexpected implications. And then secondly, how all these markets are so tightly integrated even back then. So you get these chain reactions occurring, which no one quite unexpected.

13:04Yes, very much so. And everyone had switched to gold. There wasn't enough gold to go around, which meant that there was a spike in the level of interest rates. So this sounds like a really nasty cocktail of unintended consequences and chain reactions around the world. And I'm curious, what did this actually mean for the U.S. economy? Because suddenly having this monetary squeeze and shortage of credit cannot have been at all good for the U.S. economy in any way. No. In fact, it was terrible for the world economy. We got the longest recession in U.S. history, lasting six years. with the US government unable to create new money, lending dried up.

13:52Europe was also in a recession and that lasted until the late 1870s. The effect was even more profound because without silver, the global economy got stuck into a 20-year deflationary spiral. Wholesale prices around the world fell by more than a third. So when did people actually realise the source of this disaster, if you like? Because, you know, as we discussed earlier, the Coinage Act attracted very little attention when it went through. When did the world wake up and realise what had gone wrong? And when did they start to blame the Coinage Act? The reaction began originally with the silver industry.

14:39The silver industry had actually expanded enormously during the late 1860s and 70s. And previously, the ability to mint silver dollars had provided a flaw to silver prices. But the combination of all this new supply and no flaw led to a collapse in the silver price. before 1873 for 70 years the price had held steady for decades at$1.32 an ounce. It then fell 15 % over the next two years and more than 50 % by the mid 1890s. Ouch. Yes, ouch. I mean, because we've just seen a small version of that and silver doesn't matter as much, but silver's fallen about 50 % from its peak just this year. and already people are squealing.

15:34I mean, given how central silver was, that must have been devastating. It was. What made it even more devastating was what happened to agricultural prices. Because as silver prices declined and the supply of money did not expand, agricultural commodity prices also collapsed. So they fell by 50%. And that put terrible pressure on farmers because their mortgage debts remain fixed, but their prices of their products have fallen by 50%. So the real burden of their debts have effectively doubled. So rural communities in the West remain stuck in a prolonged depression that lasted well into the 1890s.

16:26And to counter this, farmers began campaigning for an easing in monetary policy. And reinstating silver as a form of currency was the obvious route. So they joined hands with the free silver movement. Free silver movement. It sounds almost like a campaign slogan or something like that. But so when people were campaigning on this free silver movement, did they target John Sherman in particular? Was he blamed for this? Very much so. I mean, he became something of a hate figure. In Congress, most congressmen disavowed their votes for his famous bill, claiming that Sherman had tricked them by burying the silver dollar clause in the legislation.

17:19In 1876, this alleged subterfuge was being referred to in the papers as the Crime of 73. Sherman defended himself. He reminded everyone that a draft of the bill had been in front of Congress for three years, that it had consumed hours of debate on the floor of Congress. It didn't do any good. But his reputation was badly damaged. So one lesson from all this is read the footnotes, read the small print, look at the details. Because, of course, people in Congress are still doing this kind of game where they try and bury stuff deep in bills. And people complain later on they didn't see it. But in practical terms, how did the political conflict then play out in the following years?

18:09I mean, did it sort of actually snowball, the sense of political crisis and the free silver movement? Yes. I mean, the free silver movement and the populist movement among farmers to get monetary policy eased led to an increasing number of conspiracy theories. So that sounds familiar. Yes. And many people, particularly farmers, blamed foreign bankers, especially the Rothschilds. One particular conspiracy theory that was publicized in the papers claimed a British banker, Ernest Saeed had come to the United States armed with$500 ,000 in cash and he had used his cash to bribe congressmen to pass the bill.

19:10In reality there was domestic opposition to reinstating silver. Bankers and bondholders in the financial centers of the northeast like Philadelphia, New York and Boston, were absolutely against trying to ease monetary policy and reinstate silver. They took the moral hike around and accused their opponents of being loafers, gamblers, and bankrupts. And the main reason was they would be totally self-interested. falling prices raised the value of that raised the real value of their bond holdings. And it was all at the expense of borrowers like the farmers. So it's a long established pattern. We've seen that play out so many times that when there's a crunch, people often blame foreigners first and foremost, if in doubt, blame the Brits quite often.

20:09Sadly, by attacking the Rothschilds, I suspect there might have been some really ugly anti-Semitism there as well. But there was a real sense of finger pointing on outsiders, even though the people who were backing the original abandonment of the silver monetization system were actually domestic for the most part. But was there any attempt to kind of wiggle the way out of this with any compromises at all? There were a couple of compromises with the silverites. Silverites, I love that. Where Congress passed legislation to mint some silver coinage. In fact, Sherman was even involved. But the amounts of silver involved were woefully inadequate.

20:54And it never succeeded in easing monetary policy or raising prices. And if they had suddenly turned around at that point and said, right, let's just go backwards and reinstate silver, could that have worked? Would that have been even an option at that point? No. The irony is that if the U.S. had really tried to restore silver, it would have failed. There would have been a flood of investors from outside the country selling silver and buying up U.S. gold reserves. The US would have been forced entirely onto silver and effectively had to devalue the way that China was devaluing, the way that India was devaluing.

21:41So the falling silver prices were a consequence, ultimately, of Bismarck's decision to take Germany off silver. and the US would have faced the same market pressures that forced all of Europe and France to abandon silver. It's an example of what is known as Gresham's law, that bad money drives out good money. Absolutely. It's also an example of that infamous image of a flap of a butterfly's wing can cause a hurricane on the other side of the world in our sort of globally interconnected netted markets. It's worth remembering that, you know, you had a lot of financial globalization in the 19th century with all these chain reactions and unintended consequences.

22:28Okay, so to set the scene before we go to the second half of this episode, we have the US stuck on the gold standard with disastrous consequences for farmers who are facing an economic depression. And as so often in the world, when you have an economic pain playing out, you end up with volatile, angry politics. So populism is rising, finger pointing and xenophobia is rising. And out of this comes our second protagonist, who is a populist firebrand orator, who comes out of nowhere to suddenly dominate American politics, a bit like, dare I say, President Trump in 2016. and we'll be talking about him and the parallels to today after the break.

23:14So, listen on.

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23:58So we're back. So Ljekert, we're now in the 1890s after the disasters of 1873 have gone on to create an economic depression and a lot of pain, a lot of populist anger. And none of the economic and monetary policies problems that we've been talking about have actually been resolved. So at this point, a new politician pops up very dramatically. Tell us about him and where he came from. William Jennings Bryan was a young and relatively the unknown congressman from rural Nebraska, who was first elected to Congress in 1890 at the age of 30. He was a messianic orator and a religious zealot who loved to use biblical references.

24:46And he positioned himself as a champion of the long-suffering farming community and made the remonetization of silver, his personal crusade. He called the cause of free silver a cause as holy as the cause of liberty, the cause of humanity. So you get a sense of his rhetoric. Now, there was a dark side. He happily traded in xenophobic and anti-Semitic conspiracy theories, blaming foreign bankers for America's woes. Well, all of that sounds horribly familiar again today. And obviously, he was a radically different character from the sound of it to John Sherman. Now, as I understand it, in 1890, John Sherman was a big name in US politics, never mind the criticism he'd suffered around the silver issue before.

25:45But William Jennings Bryan was still an absolute nobody. He was just a sort of newly elected congressman from a rural backwater. How did he end up having this meteoric political rise? Because in those days, there was no cable TV or social media. How did he suddenly burst on the scene? Well, within six years of entering the House, he was the Democratic nominee for president at the age of 36. His rise can be largely attributed to a single issue, silver. Here's what happened. In 1892, in a clean sweep, the Democrats captured the presidency, the Senate, and the House. Now, because the party had become excessively identified with the free silver movement, it sparked the fear that the U.S.

26:39would abandon the gold standard. Gold flooded out of the country, the cost of money shot up, at one point hitting 74 % per annum During the ensuing financial panic, the economy was plunged into a deep recession Essentially because of the run on the dollar The newly elected Democratic president, Grover Cleveland, now found himself in a terrible quandary To prevent a collapse of confidence in the dollar, he was forced to disavow the free silver wing of the party, splitting the Democrats down the middle. In 1894, as a consequence of the deep recession, Democrats lost the House. Eventually, to stabilize confidence in the dollar, Cleveland was forced to borrow gold through J.P.

27:43Morgan and the Rothschilds. William Earnings Bryant by then had made himself the face of Free Silver. He was only 36 years old, untainted by the party's failures, and had spent the last four years building a reputation as a spellbinding orator on the silver question, and now saw his opportunity. He famously attacked the Cold Deal by comparing the Rothschilds to Shylock, demanding his pound of flesh in The Merchant of Venice. And then in 1896, he delivered perhaps the most consequential speech at an American political convention. This was the famous Cross of Gold speech. If they dare to come out in the open field and defend the gold standards, the good thing, we will fight them to the uttermost.

28:45Having 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 bow of labour this crown of thorns. You shall not crucify mankind upon a cross of gold. Wow. Well, if anyone thinks that monetary policy is boring, think again, because we're showing just how explosive it can be sometimes. But a bit of a spoiler alert here. On that background we've just heard about, you might have presumed that he then rocketed up with his populist message to become president of the United States, and yet he didn't.

29:33So what happened to deny him the presidency? Well, he lost decisively, first of all. The Republican candidate, William McKinley, became president for two reasons. One is the entire Northeastern financial establishment rallied against him. Bankers, industrialists, all the money men. The New York Times said of him at the time of his Cross and Gold speech that he's an irresponsible, unregulated, ignorant, prejudiced, pathetically honest and enthusiastic crank. So tell us what you really think. I mean, again, it makes some of the language thrown around the Twittersphere today seem almost mild by comparison.

30:21But there you go. The other dilemma was that his time had come and gone. In 1886, two prospectors in South Africa stumbled across the largest gold field in the world on a farm at the Bitwatersrand. It ended a 20-year gold drought. And by the time of the 1896 election, the U.S. had finally escaped its post-1873 deflation. And prices had started going up. The Free Silver movement was never able to recover as a political force. Fascinating. Was there any aspect of the shifting power of the farmers within the political structure of the US as well that mattered? Because I'd imagine that urban voters probably had a different perspective on it.

31:17Yes, the US was becoming increasingly urbanized and Brian's silver campaign offered little to the urban poor, who were not like farmers, heavily indebted. So we have a situation where Bryan's had a meteoric rise. It's looked for a while like he might become president on the back of the Free Silver Movement. And then he loses the election. And perhaps we shouldn't be unsurprised that actually the moneyed class, Wall Street, then goes out and celebrates. So what that meant was, you know, you'd had this dramatic political fire around the Coinage Acts of 1873 that had flared up and then finally burned itself out.

31:58And I guess one of the questions or one of the lessons is that William Jennings Bryan was maybe right that it's not a good idea to nail your currency in your economy to Golden Cross. The gold standard presumably did actually prolong the recessions of the 1970s and 1890s and cause deflation, which was very unfair for borrowers like the farmers. So I guess the question is, why did the US government then continue to insist on sticking to gold? Why didn't they just go back as silver or print greenbacks, a bit like Ben Bernanke did after the 2008 crisis? Well, there were two constraints. One is they didn't really understand the way the system worked.

32:41I mean, it took decades for them to finally cotton on to the constraints imposed by the gold standard. The second is that every time the US looked as if it might soften the gold standard, there would be a run on the dollar. That was at the heart of the 1893 financial crisis. And presidents who tried to experiment or talk about moving away from gold would end up paying a heavy political price. And the kowtowing to foreign bankers and markets also fueled populist anger at foreign bankers. So I guess one of the big lessons from all of this, which is incredibly relevant for where we are today, is that it's not a great idea to tie your currency's value to a random precious metal, whether it's gold or silver or anything else.

33:47And the reason I say that's irrelevant for today is there's a lot of concern expressed amongst some investors about the future of fiat currency, given that we have exploding debt burdens in the US, given that it's unclear whether the government wants to maintain the independence of the Fed and given the risk of inflation. So some people are saying, well, we need something other than fiat currency to guarantee sourd money in the future. And inevitably, there are a few calls for a return to the gold standard. But from what you're saying, this whole story shows that actually that is not an automatic panacea or magic wand to fix your problems at all.

34:25Yeah, absolutely not. Even during this period, it would spark runs on the currency. The link to gold in the Great Depression of the 1930s was even more pernicious. It prevented countries from responding to mass unemployment by easing their monetary policy and, in effect, led to the rise of fascism. Right. I mean, of course, some people ironically are saying that using a currency that's constrained in its supply, like Bitcoin, is another option for today instead. But that would have the same problem as tying yourself to gold or silver or anything else with capacity constraint. Absolutely. So, no, I think we have to accept that fiat currency, like democracy, may be a terrible thing, but it's the best thing we have.

35:22Or the least bad option we have, perhaps, in a way to put it. Yeah. Which, of course, is another reason why we have to hope that our central bankers and governments will be really scrupulous and responsible in how they actually handle it, which right now, of course, is a great concern. But of course, the other great lesson from all this is that what issues that start off seeming incredibly geeky and obscure and deeply linked to financial concepts that no one normally cares about or monetary abstract ideas can end up being politically explosive. And so I'm curious, what ended up happening to the two key characters here who were so different in nature, but ended up being entwined with each other?

36:09Well, take John Sherman. I mean, he was right on the finance, but wrong on the economics and dead rock on the politics. I mean, he correctly foresaw that the days of silver were numbered, that after Bismarck had caused Europe to abandon silver, the U.S. had no hope of remaining on silver. But by preempting the end of silver, Sherman made himself the lightning rod for two decades of political ill will and damaged the Republican Party's brand. William Jennings Bryan, on the other hand, may have been right on the economics. He understood the gold standard was a giant burden on farmers, but he was wrong on the politics and he was wrong on the finance.

37:07The fact that he failed to understand the international financial constraints that the U.S. was operating under and lived under the illusion that the U.S. could go back to silver without any long-run consequences undermined his stance. And he also ended up having quite a mixed political career in subsequent years, didn't he? Both in terms of religious fundamentalism and in other aspects to do with World War One. Yeah, I mean, he was, you know, ultimately he was a total failure. He ran again twice in 1900 and 1908. In 1908, he dropped silver as a major plank of his campaign. But he also served as Secretary of State under Woodrow Wilson and tried unsuccessfully to keep the U.S.

38:10out of World War I. But I suppose he's best remembered today for a quixotic crusade against Darwin's theory of evolution. Wow. I mean, he was a religious fanatic. He believed in the literal word of the Bible. So he testified as a witness in the Scopes trial of 1925, where a schoolteacher was accused of breaking Tennessee law by teaching evolution. So he never really adjusted to the modern world. Wow. So I guess, you know, one of the other lessons is there's nothing new under the sun, because here we are today in America with the rise of the Christian right, where we have a lot of xenophobia bubbling again.

38:59We have a lot of populism, a lot of finger pointing and blaming. We have the rise of the gold bugs again, people calling for a return to the gold standard. You know, I'm constantly getting research in my inbox from people talking about that. I used to joke when I was overseeing the US editorial part of the FT that gold, the word gold was a bit like Kim Kardashian for Financial Times readers. The minute you put in a headline, the readership would soar because people were so obsessed about it. So you've got all these currents swirling together and you've got President Trump having attacked the Federal Reserve for its monetary policy and putting monetary politics on the front page of newspapers again.

39:43So what lessons do you think we can learn from all this about where we are today, not just in America, but across the modern world? Well, I think two things. One is that monetary policy is incredibly important. And it's not just simply a matter of what happens in financial markets. Whether we have tight money or easy money has a direct impact on the average person. Secondly, monetary policy is best taken out of the political sphere. The politicians are unable to resolve the issues in the national interest. And that is why we've ended up with independent central banks where experts can debate the issues and try and act as best as they can in the national interest.

40:47Absolutely. Well, I hope that President Trump is listening. I hope that the new Fed chair, Kevin Walsh, is also listening to that. And I take away two extra lessons. One is that politicians tend not to do the right thing until there's a crisis. Let's hope we avoid one now. And the fourth thing I take away, which is perhaps the center of the Story of Money podcast, is that history matters. We have to look back at the past sometimes to make sense of the present and see where the future might be going as well. So on that note, thank you very much indeed, Liakert, for joining us. I loved your book, The Lords of Finance.

41:23I love this one arguably even more. And it's great to have your perspective. So thank you. Thank you, Julian. And thank you for having me on. That's it for this week's episode of The Story of Money. If you liked this episode, make sure you subscribe and review the show and leave us a comment if you have time. But before I go, there's one other thing to tell you about, which is that this September, Robin and I will be recording an episode of The Story of Money in front of a live audience, which could include you, at the FT Weekend Festival in London. So if you want to see how we make this show, how the podcast Sausage is made, then you too can come and join in and listen.

42:03So I'm Gillian Tett, and we'll see you again next week.

42:10Thank you.

42:46Thank you.