I’ve been reading several sites that talk about the debate over ‘free silver’ in the 1896 election, but they all seem to assume one has some kind of background in economics. Which I don’t—can someone explain what the actual arguments were in this debate to me in simple terms? I’m not entirely clear what Bryan was advocating or why anyone thought it would work.
We were suffering from deflation–falling prices–between the 1870’s and the 1890’s. We were on a gold standard, and at that particular time, the economy was growing faster than the gold supply.
Deflation is good for lenders and bad for borrowers. The Free Silverites advocated the “free and unlimited coinage of silver” as a means of increasing the money supply and halting the deflation, which would be good for borrowers (in that era, typically small farmers, who were Bryan’s constituency) and bad for lenders.
I guess that’s what I’m not grasping. If I’m poor and have no money, how does it help me if the government coins more of it? How does that money get to me? (sorry, I really should have taken an economics class at some point. )
Short cash supply causes deflation.
Your loan balance is static, and doesn’t adjust DOWN for deflation.
Your income from farming and most income sources is not static, and the deflation cuts your wages, making your loans harder to repay.
Coincidentally, the real value of the same amount of money is going up, so the banker’s 1M in loan repayments last year will actually buy him the equivalent of what it would have cost him 1.05M last year.
Are you asking how short cash supply causes deflation?
The money gets to you when you take out a loan. Farmers, especially, are dependent on loans since a lot of their expenses (seed, for instance) have to be paid before their income (selling the harvest).
If there’s no money for loans, then the farmers suffer. Bankers weren’t making loans since the money supply was static (unlike today, when we can print more money). Without the actual gold coins in their vaults, they couldn’t give them out to anyone.
You may be poor and have very little money, but what you have plenty of is debt. You have loans for seeds, loans for equipment, and mayb even you’ve mortgaged your farm. If the economy is growing but the supply of money isn’t, the dollar you borrowed two years ago is worth $1.25 (or whatever), and that doesn’t include the interest. Also, prices for your production are going down, so you’re getting less of the now-worth-more dollars. So you’re caught with loans that you never can repay.
If free and unlimited coinage using a more-plentiful metal was put in place, then inflation kicks in. Today, we consider inflation a bad thing almost without qualification. But if you’re that small farmer, then the dollar you borrowed two years ago is now worth $0.75. Also, prices for your production are going up, so you’re getting more of the now-worth-less dollars. So your loans are easier to repay.
I guess this is the part that I’m having a hard time with. Maybe it’s because I’m used to a world where I almost never do anything with actual cash anyway; if I get a loan from the bank, it doesn’t come in the form of cash, nor do I repay it with cash. I’m obviously missing something here that the rest of the world seems to think is quite simple…
Skip the whole cash bit. Ok, let us assume you have a $10,000 loan, and you repay it in 10 years in one lump sum (and for this we’ll skip the interest). If there is a lot of inflation, you can repay that $10000 in 1999 dollar with $8000 in todays dollars, since you now earn more. But if there is deflation, you’d have to repay that $10000 with $12000 of todays dollars. To use another example, if your years income when you take out the loan is $50000, then $10000 is 1/5th your yearly income. But if you repay it when you are earning $60000, it’s only 1/6th, right? I m assuming here your wages keep exact track with inflation.
Now, in times of rare deflation, you’d now be earning $40000, so you’d have to repay the $10000 with 1/4 your income.
Is not 1/4 of your income a lot more than 1/6th your income?
Dudes who live by borrowing (and farmers nearly always do, they borrow to plant, then they repay when they sell the harvest) like inflation and hate deflation. Dudes on fixed incomes, like deflation and hate inflation. In general, of course.
Free Silver would have caused a lot of inflation, or so it was thought.
here’s a wiki link:
Thanks, DrDeth—that makes more sense to me.