TCH: 'Cross of Gold' and the Panic of 1893

           In 1896, a monetary debate became the defining issue in an American presidential election. The question was whether the country should carry its commitment to the gold standard with it into the new century or replace it with a looser standard based on both gold and silver. One of the candidates argued that existing policy would ‘crucify mankind upon a cross of gold’ and the issue took on greater importance since the country was just beginning to exit one of its most severe economic depressions. The Panic of 1893 affected just about every major industry and region of the country and marked the beginning of the end for the ‘Gilded Age’ in American history.

Gold and Silver

           In America during the Gilded Age, which ran from the end of the American Civil War in the 1860s through the final years of the century, the country maintained a commitment to the gold standard. Put simply, this meant that currency in the form of Treasury banknotes could be redeemed for gold at a fixed price. However, the gold standard was not without criticism and alternative monetary standards were contemplated. One previously employed in America, and then common in Europe, was bimetallism. Under this system, issuances of currency would be backed not by gold alone but by both gold and silver.

           Advocates of bimetallism believed it superior for a growing economy that would otherwise be constrained by a limited supply of gold. In the mid-19th century, rising silver production allowed for an enlarged money supply and credit availability under a hypothetical silver standard. By contrast, gold production was not increasing, limiting the availability of money and credit under a gold standard, even as the economy grew. This would tend to create deflation, a reduction in prices and wages over time. For all these reasons, debtors favored bimetallism while creditors favored gold in the debates about the structure of America’s monetary system.

           Nonetheless, support for bimetallism grew from the 1870s on, as many blamed the gold standard for persistent deflation. In the U.S., legislative success for the bimetallist cause peaked with the Sherman Silver Purchase Act, which became law in July 1890. Essentially a compromise on the monetary question, the law required the Treasury to purchase 4.5 million ounces of silver per month. The purchases would be funded by issuing notes convertible into either silver or gold at a fixed ‘mint ratio’.

Reserves        

           Support for silver continued when, in the early 1890s, the gold standard came under threat. Economic weakness in Europe and a flight of capital from risky markets, including Australia, Argentina, and South Africa, prompted foreign investors to sell American securities for dollars they could convert to gold and send abroad. This reversed a previous trend benefiting the American economy since the country had usually relied on inbound European investment to balance out its current account deficits. These deficits had persisted for decades, save for years when good harvests boosted American grain exports only temporarily.

           Despite Treasury purchases under the Sherman Silver Purchase Act, the value of silver fell relative to gold in the early 1890s. Because of the deflationary bias of gold money and foreign withdrawals of gold from the Treasury, many speculated that the U.S. would abandon the gold standard by the end of the century. This caused some to hoard the metal to preserve purchasing power, furthering the evaporation of the Treasury’s dwindling gold reserves.

Panic

           The steady drain in Treasury gold reserves gave way to panic in 1893. Gold reserves fell below $100 million in April, a level closely monitored. Pressure on gold reserves begot more pressure as the gold standard, at least at the valuation of the dollar then in force, seemed increasingly vulnerable. Wall Street was keenly following the situation and stock prices were falling and many questioned what the capital flight from the country would mean for the nation’s banks and companies. Stocks notably fell on July 26, Black Wednesday, but had been falling in value for months by then anyway.

           It was also a year of massive business failures. Several of the nation’s largest railroads went bankrupt, including the Reading Railroad, Erie Railroad, Union Pacific Railway, Northern Pacific Railway, and the Atchison, Topeka and Santa Fe Railway. All of these failed in 1893 alone. The damage went beyond railways; over 15,000 American firms with liabilities of over $350 million liquidated or reorganized. Banks also went under, with 340 suspending operation during the summer of 1893. By the end of the crisis, roughly 575 banks in all would fail or temporarily suspend operations. Bank weakness was likely aggravated by the preceding deflation which made it more difficult for borrowers to make payments. As they met demands for withdrawals, banks had to sell assets, a need that accelerated the slide in commercial conditions.

           Withdrawals and bank failures reduced the aggregate money supply and the availability of credit in the economy. Facing a shortage of credit, businesses struggled to cover expenses and payroll costs. Thus, employment and wages fell and remained depressed for years to come. Unemployment, still not formally tracked by the government, likely stayed above 10% for half the decade. The political tension of the period was further heightened by more frequent trade union strikes and business combinations that created monopolies.

Gradual Resolution

           The resolution to the Panic of 1893 came gradually; prolonging the slump. First, banks suspended withdrawals which had the effect of reducing the number of bank failures but at the cost of further economic deterioration elsewhere. Customers looking to convert their deposits would have to sell them, usually at a discount. In essence, this constituted a partial suspension of the gold standard by decoupling bank deposits from gold. The monetary problems were further eased by new “clearing house certificates” issued by payment clearing houses. These constituted one of the more notable forms of scrip used to compensate for the falling traditional money supply.

           Meanwhile at the Treasury, new reserves of gold were purchased with bond issuances in 1894. New gold allowed interest rates to fall but the depletion of reserves continued, hitting a low of $45 million in January 1895. The financier John Pierpont Morgan arranged new bond issuances for the Treasury that year. Further issuances in 1895 and 1896 raised $260 million for the purchase of gold. It took several infusions but the drain on gold reserves dissipated in 1896 and reserves recovered to a sizable $245 million in 1898.

Free Silver

           The gold standard may have been saved but for many that was no feat worth celebrating. There was strong opposition to gold from the advocates for bimetallism. Early in the crisis, President Cleveland called for the repeal of the Sherman Silver Purchase Act, which some gold supporters blamed for the crisis. However, pro-silver senators filibustered the repeal attempt which did eventually pass in 1893 though with some delay. The next year, Congress passed a bill that would have allowed for new coinage of silver but this was vetoed by Cleveland who was at odds with most of his fellow Democrats as a strong supporter of gold.

           The coming presidential election was peculiar for the role monetary questions played in establishing the contrast between the candidates. The new Democratic Party nominee for the presidency, William Jennings Bryan, delivered a panegyric in praise of silver and denouncing gold. Bryan’s ‘Cross of Gold’ speech in 1896 is one of the most famous political speeches in American history, and is especially remarkable in that it concerned something unlikely to trigger much chatter today - the money supply.

“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.” - William Jennings Bryan's "Cross of Gold" Speech, July 9, 1896, at the Democratic National Convention, Chicago

           Bryan won the Democratic nomination and ‘free silver’ became the cause of progressives alleging that the past demonetization of silver was a conspiracy to benefit bankers against the common people. To them, the bond issuances of the previous years were proof that the gold standard could only be sustained by a self-serving conspiracy between politicians and financiers.

Recovery and Election

           While Bryan called for bimetallism, his opponent in the election of 1896, William McKinley supported sticking with the gold standard and was willing to make it a defining difference between him and Bryan. Nonetheless, the prospects of a bimetallist victory helped accentuate the gold run and may have reversed some of the progress made by the Treasury in replenishing reserves through the middle of the decade. A recovery continued regardless though, especially once McKinley won in November. The current account deficits that were part of the basis for the panic were diminished as trade surpluses grew.

           Regardless, though Bryan lost, and would again in 1900 and 1908, support for a more activist government pursuing novel economic policies rose. That said, silver never became the rallying cry again. Gold discoveries in Alaska, Canada, and South Africa were alleviating the shortage of gold relative to commercial activity and put opposition to the gold standard to rest for some years. Indeed, the Gold Standard Act passed in 1900 represented the practical end for 'free silver' as a political movement in the United States.

Lesson

            Support for bimetallism in America may have peaked at the end of the 19th century but the gold standard continued to draw its critics. In time, gold would be abandoned. The old standard was suspended during the Great Depression of the 1930s, which was even more severe than that of the 1890s. Until then though, it survived courtesy of new gold finds in the farthest reaches of North America, Africa, and Australia. However, if it survived the 1890s, it did so against tough odds. Economic and political tension made the nature of money one of the most significant issues in late 19th century America.

Further Reading

1.      Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States: 1867-1960; A Study by the National Bureau of Economic Research, New York. Princeton Univ. Press, 1971.

2.      Hostetler, L. Merle. “75 Yrs. of American Finance: A Graphical Presentation 1861 to 1935.” Mar. 1936.

3.      Klitgaard, Thomas, and James Narron. “Crisis Chronicles: Gold, Deflation, and the Panic of 1893.” Liberty Street Economics, Federal Reserve Bank of New York, 13 May 2016.

4.      Richardson and Tim Sablik, Gary, and Tim Sablik. “Banking Panics of the Gilded Age.” Federal Reserve History, Federal Reserve Bank of St. Louis, 4 Dec. 2015.

5.      Whitten, David O. “The Depression of 1893.” EHnet, Economic History Association, 14 Aug. 2001.