1896 election (USA), gold and silver

Factual Questions
1

So I’m reading through this thread, and not being a history buff or someone who understands economics I need help understanding things.

The bimetallic issue. So. . . the US was basically on the gold standard at the time, right? And Bryan and supporters wanted to go back to a gold and silver based system because they supposed this would allow a lot more money to go into circulation which would somehow allow farmers, for instance, to get out of debt and stimulate the economy. McKinley argued that moving to silver would cause, what, runaway inflation, or that it would devalue all the money currently in the system, throw the banking system into chaos?

Help me understand more clearly by correcting my above assumptions and also explaining this . . .

well I was going to list various questions regarding the issue, but I’m so ignorant of economics that I can’t even keep them straight in my head. So maybe just try to explain to me how exactly moving back to silver could have been seen as a viable solution to the recession. I can think of several reasons why sticking with gold would be preferable (even pretending not know about all the gold that come available soon after the election), but I’m having trouble understanding exactly how silver would have immediately, and perhaps permanently, helped out victims of the recession. I don’t have even a partial understanding of how money worked at the time I guess.

2

was a pretty good article - and if I read it a few more times, I’ll probably understand more of the various details.

3

At a basic level, inflation is caused by too much money chasing too few goods. Deflation (which is often associated with recession, or used to be when deflation actually sometimes occurred) is caused by the opposite.

Today, in the US, the Federal Reserve Bank controls this by adjusting the money supply in a variety of ways. This is a vast oversimplification, but it may help you to think about the Fed (when it wants to prevent deflation) as printing more currency. (Yes, yes… I know all about adjustments to the discount rate, and other interest rate tools available to the Fed, but let’s not turn this into a treatise on finance.)

The Fed can do this (print more currency) these days, because US currency is not backed by gold or silver today. You can’t take a $20 bill to the Fed and demand a set weight of gold or silver, as you once could.

Back in the time you are speaking of, the US was on the gold standard. IN order to issue more currency, the goverment had to obtain more gold. Gold is rare. It was thought that making it a gold/silver standard would increase the money supply and avoid deflation/cause mild inflation.

So far so good?

(continued)

4

[QUOTE=Random]
At a basic level, inflation is caused by too much money chasing too few goods. Deflation (which is often associated with recession, or used to be when deflation actually sometimes occurred) is caused by the opposite.

Today, in the US, the Federal Reserve Bank controls this by adjusting the money supply in a variety of ways. This is a vast oversimplification, but it may help you to think about the Fed (when it wants to prevent deflation) as printing more currency. (Yes, yes.. I know all about adjustments to the discount rate, and other interest rate tools available to the Fed, but let’s not turn this into a treatise on finance.)

The Fed can do this (print more currency) these days, because US currency is not backed by gold or silver today. You can’t take a $20 bill to the Fed and demand a set weight of gold or silver, as you once could.

Back in the time you are speaking of, the US was on the gold standard. IN order to issue more currency, the government had to obtain more gold. Gold is rare. It was thought that making it a gold/silver standard would increase the money supply and avoid deflation/cause mild inflation.

So far so good?

(continued)
[/QUOTE]

Yes, I think. So say the US then did move to silver. So the (what was it the Treasury at the time?) grabs up a lot of the silver floating around and is able to print out tons more money. How does that money then get into the hands of farmers etc? Was the silver “sold” to the Treasury in return for currency? Did the farmers have silver or was this some sort of “trickle-down” scheme that would eventually benefit the farmers?

5

If you are a debtor, you want inflation and don’t want deflation. This is true for two related reasons. First, let’s say that you are a farmer and owe $5000. You intend to pay this back from selling your farm produce over the next 10 years. If the price of corn goes up a bit each year (inflation), you will find it easier and easier to make your annual loan payments. Relatively speaking, with inflation, that $5000 is a smaller debt as time goes by. (Think about people who took out
mortgages 25 years ago – often, what once was a burdensome payment when the loan was new is a smaller concern for them now. That’s because we have had inflation over those 25 years.)

Second, if money is tight, people are less willing (or able) to lend. That drives up interest rates. So if you are a prospective borrower, or if you are an existing debtor without a fixed interest rate on your loan, you like an increased money supply for that reason, too. (Inflation and interest rates are interrelated issues for reasons that would make this reply way too long, but those are the basics.)

6

[QUOTE=neorxnawange]
Yes, I think. So say the US then did move to silver. So the (what was it the Treasury at the time?) grabs up a lot of the silver floating around and is able to print out tons more money. How does that money then get into the hands of farmers etc? Was the silver “sold” to the Treasury in return for currency? Did the farmers have silver or was this some sort of “trickle-down” scheme that would eventually benefit the farmers?
[/QUOTE]

We cross posted there. Did my last reply answer some of these questions for you? If not, let me know.

7

[QUOTE=Random]
If you are a debtor, you want inflation and don’t want deflation. This is true for two related reasons. First, let’s say that you are a farmer and owe $5000. You intend to pay this back from selling your farm produce over the next 10 years. If the price of corn goes up a bit each year (inflation), you will find it easier and easier to make your annual loan payments. Relatively speaking, with inflation, that $5000 is a smaller debt as time goes by. (Think about people who took out
mortgages 25 years ago – often, what once was a burdensome payment when the loan was new is a smaller concern for them now. That’s because we have had inflation over those 25 years.)

Second, if money is tight, people are less willing (or able) to lend. That drives up interest rates. So if you are a prospective borrower, or if you are an existing debtor without a fixed interest rate on your loan, you like an increased money supply for that reason, too. (Inflation and interest rates are interrelated issues for reasons that would make this reply way too long, but those are the basics.)
[/QUOTE]

I can understand this, and it helps considerably in understanding why those who supported silver were from a certain demographic. You are explaining this quite well, btw.

But wasn’t there a whole lot of silver out and about at the time? Wouldn’t this have caused wild inflation rather than mild inflation had the system been adopted? What is the danger of runaway inflation, or of a high, sudden inflation spike?

8

[QUOTE=neorxnawange]
I can understand this, and it helps considerably in understanding why those who supported silver were from a certain demographic. You are explaining this quite well, btw.
[/QUOTE]

Glad I could help!

[QUOTE=neorxnawange]
But wasn’t there a whole lot of silver out and about at the time? Wouldn’t this have caused wild inflation rather than mild inflation had the system been adopted?
[/QUOTE]

This one is beyond my expertise. Actually, I think historians and economists still debate this issue.

[QUOTE=neorxnawange]
What is the danger of runaway inflation, or of a high, sudden inflation spike?
[/QUOTE]

It helps some people and hurts others. Some categories of people who will be helped: 1) As I’ve said, debtors. 2) People who have an existing asset or commodity that makes them money, but which doesn’t have a fixed price. 3)People who can increase what they charge or earn, quickly and freely, in response to the spike, especially if their associated costs are fixed.

So a retiree on a fixed income loses. A merchant who sells a product, might do very well, if he can quickly adjust prices up. (His inventory just got more valuable). A wage earner, who might like mild inflation, is hurt by a spike, because his expenses (food, clothing, heating coal, weekly boarding house rent) will go up quickly, but his wages (which might be adjusted only annually) will not.

In addition to the general concepts regarding inflation, unpredictable spikes create their own issues. Generally speaking, people hate uncertainty and risk, in economic terms. Lenders jack up rates because they think high inflation* might* occur. People make economic decisions that are otherwise poor choices, in order to avoid that risk. Overall, that hurts the economy and everyone loses.

9

[QUOTE=Random]
A merchant who sells a product, might do very well, if he can quickly adjust prices up. (His inventory just got more valuable).
[/QUOTE]

Only in nominal terms. His merchandise has the same real value, so I don’t see how inflation would help him.

10

[QUOTE=neorxnawange]
But wasn’t there a whole lot of silver out and about at the time?
[/quote]
Yes. Gold and silver have non-monetary uses and people continue to mine them and trade them whether they serve as currency anchors or not. A great deal of silver had been mined in the Western states in the late Nineteenth Century, and silver was trading at a historic low relative to gold. In 1896, one ounce of gold was worth about 40 ounces of silver.

Bryan was proposing that silver be “coined” at a ratio of 1:16 with gold, based on the historic ratio that had been in place earlier in the century. At this ratio, gold would immediately have stopped circulating as money, and silver would become the de facto currency standard.

You’re absolutely right, if we had converted to bimetallism (effectively, to a silver standard) at a 16:1 ratio in 1896, there would have been a huge one-time inflationary spike. It would have been the equivalent of a Third World country today that “devalues its currency”. As others have noted, this would be fine for borrowers and crappy for lenders.

Had we remained on bimetallism throughout the Nineteenth Century, it would have been a different story. The gold:silver ratio dropped below 16:1 in the 1830’s, which led to gold driving silver out of circulation. The ratio then rose above 16:1 during the Civil War, but we dropped the specie anchor between 1862 and 1879 (because of the war), and when we resumed, the silver anchor was dropped. Had it remained, silver would driven gold out of circulation, and we would have seen gentle inflation through the 1870’s and 1880’s rather than deflation. Arguably we would have been better off. This is why I say in the other thread that Bryan was correct to identify gold-based deflation as a serious problem in the 1896 campaign, but incorrect to propose sudden reversion to bimetallism at a 16:1 ratio as a cure.

11

And another long-held minor worry goes away… I saw the term “Free Silver” in one of the MAS*H novels years ago and now I know what that was all about. I assume it was, however, an obsolete political issue by the 1970s - it would certainly make sense in context if it was.

12

[QUOTE=Malacandra]
And another long-held minor worry goes away… I saw the term “Free Silver” in one of the MAS*H novels years ago and now I know what that was all about. I assume it was, however, an obsolete political issue by the 1970s - it would certainly make sense in context if it was.
[/QUOTE]

I don’t know, I started looking into this issue becasue apparently the Republican candidate Ron Paul is calling for a return to some sort of modified gold and silver standard. Though I’m not clear on why he thinks is a good idea. Do any developed nations use a gold or silver backed currency system anymore?

13

[QUOTE=Malacandra]
And another long-held minor worry goes away… I saw the term “Free Silver” in one of the MAS*H novels years ago and now I know what that was all about.
[/QUOTE]
The exact demand, as rendered by the Bryanites, was for the “free and unlimited coinage” of silver, at a value of $1.29 per ounce (1/16 of the gold value of $20.67 per ounce).

“Free”, in this context, means that the mint wouldn’t charge “seigniorage”. You would bring in, say, 77.4 ounces of silver, and the mint or the Treasury would either mint it into 100 silver dollars, or give you a paper $100 bill, without taking anything off the top as a service charge. (Everybody wants free stuff from the government!)

“Unlimited” meant that you bring it, they coin it, with no limit. Earlier Nineteenth Century legislation allowed silver to be coined, but only in limited amounts.

For sloganeering, this demand was often shortened to “Free Silver”, with free serving double duty to mean free, as in no charge, and freely, as in no limit.

14

[QUOTE=neorxnawange]
I don’t know, I started looking into this issue becasue apparently the Republican candidate Ron Paul is calling for a return to some sort of modified gold and silver standard. Though I’m not clear on why he thinks is a good idea. Do any developed nations use a gold or silver backed currency system anymore?
[/QUOTE]

Ron Paul wants a switch back to the gold standard because it doesn’t (or so he says) allow the government to intervene in the economy. With a floating currency, the federal reserve can adjust the amount of money in the economy on its own in order to try to curb inflation and stuff. With a hard currency pegged to a gold standard, this is no longer possible. Ron Paul claims that these adjustments by the federal reserve are unconstitutional and that they hurt average Americans.
Completely rubbish claims, if you ask me. But that’s for another thread - I just wanted to mention that his arguments are by no means taken as economic fact.

15

neorxnawange: Where do you get the idea Ron Paul is a Republican?