What was the economic policy debate behind Free Silver vs Gold in US 1890s?

Factual Questions
1

Based on modern economic understanding, and not the rhetoric of the era, what were the economic policy debates behind the Free Silver movement and its opponents?

Would the policy that the Free Silver movement folks (largely midwest rural) wanted have accomplished something of value to farmers? Or was it based on an economic myth? Their opponents claimed the silver policy would have increased unemployment and a host of other uglies. Or would it have mattered at all?

And why was it called “free silver”?

Thanks.

2

It would have increased the money supply. This would have been good for debtors (e.g. most farmers) and bad for lenders. The bad stuff that would supposedly happen was mostly scare tactics.

I think “free silver” was short for “freely minted silver”. You could take any gold to the mint and have it minted into coins (for a charge), but not silver. The amount of silver coinage was limited by law.

3

Compare it to today’s Federal Reserve (which didn’t exist in that era.) Free silver would have put more money into circulation. More money is good, until it turns into inflation. Staying strictly on the gold standard would have kept inflation in check. Keeping inflation in check is good, until the money supply is so tight no one has any money to spend or lend.

4

I thought there was also a price control component. An ounce of silver was mandated by law to be worth exactly 1/16th of an ounce of gold. “Free silver” proponents wanted its price to fluctuate freely on the market. That’s why they called it “free silver”.

5

That’s pretty much the opposite of what the “Silverites” wanted. The value of silver had previously been fixed by law at a ratio of sixteen to one, but by the late 19th century that had been dropped (the Coinage Act of 1873), and the country was on a gold standard alone; silver was just another metal, like copper or nickel. The “Free Silver” movement wanted to return to that fixed ratio (people with silver could “freely” have it coined into lawful money at a ratio of sixteen to one with gold, less seigniorage). Since there was a large supply of silver on the market at the time, this would (as already mentioned) lead to an increase in the money supply, along the lines of “printing more money” during a recession with a modern fiat currency. All of this was in the context of the Long Depression of the late 19th century.

6

A relatively cogent summary of the politics and economics involved can, surprisingly, be found at the Wikipedia entry on Free Silver.

7

MEBuckner is correct, but there’s an interesting history here that is worth exploring.

After the Coinage Act of 1836, the US mint would freely coin either silver or gold into the legal tender of the country, at the ratio of 16:1, that is, an ounce of gold was 16 times as valuable as an ounce of silver. “Free coinage” meant that the mint would coin as much metal as you had, without limitation. If you found a mountain of metal, they would turn the entire mountain into coins. (Altho that might take a while.) This was legally a bimetallic standard. In actual practice, however, it came to pass that only gold was really used after 1836. Despite the bimetallic law, the country was effectively on a gold standard from 1836.

Why?

Suppose you have a 20 dollar contractual debt. US dollars were legal tender for the dissolution of that debt, whether they were gold or silver. Being an honest, god-fearing, debt-paying person, you were prepared to pay this debt and therefore had sufficient silver to pay it, around 16 ounces worth. You could go to the mint and get the silver converted into around 20 silver dollars, and you could then use those silver dollars – legal tender of the country – in order to dissolve the debt. However! The actual market rate of exchange between the two metals was not 16:1 in Europe. It was, instead, 15.5:1. So instead of paying your debt with silver, you could first sail to Europe, exchange 15.5 ounces of silver for one ounce of gold using the international market rate, come back to the US, mint the ounce of gold into 20 dollars, dissolve your debt, and still have half an ounce of silver leftover. Of course, this would not actually be economical for small debts. But it would be for sufficiently large debts. Spending silver money to resolve large debts was ridiculous, because silver was overvalued at the legal ratio, used for legal tender. Better to convert the silver into gold, and use the gold to dissolve debts. And from that market pressure, pretty much the entire monetary system of the country ended up being based on gold when the legal ratio for free coinage was made 16:1, while the market ratio was 15.5:1. No reason to waste silver.

But then the world changes.

Discoveries like the Comstock Lode increased the supply of world silver faster than the supply of gold was increasing. In addition, the Franco-Prussian war ended with a humiliating French defeat, and a subsequent demand of reparations from the new German empire. France had been using a bimetallic standard, too, but the Germans were envious of the British, who were on an official gold standard, and so the Germans were on a gold standard, too. They demanded the payment of reparations from France in gold. France therefore liquidated its vast silver reserves to help raise the gold in order to pay the reparations, which put yet more silver into world markets.

The value of silver started slipping. The ratio started creeping upward from 15.5:1 past 16:1 and eventually upward to 20:1. An ounce of gold eventually became 20 times as valuable as an ounce of silver. (Today the ratio is closer to 80:1. Gold is now much more valuable than silver, ounce to ounce.)

If the US had maintained free coinage of both gold and silver at the fixed legal rate, while the market ratio crept past 16:1, then the effective gold standard would have changed back into an effective silver standard. (This was actually the case before 1836, when the legal ratio was 15:1 while the market ratio was 15.5:1. The early United States was on an effective silver standard, because originally silver was legally undervalued compared to the market. The Coinage Act of 1836 changed that legal ratio, deliberately, as a fuck you to the second Bank of the United States, a silver-using institution.)

Maintaining the same legal ratio, while the world supply of silver is exploding, means the US money supply would return to silver. Debt-holders would have stopped using gold, and started using silver to repay what they owed. They would have sucked the gold out of the country to exchange in Europe, bringing back silver for the payment of debts. Soon enough, the US would have reverted back to silver. And because so much silver would have been floating around, prices would have risen more than they otherwise did under the gold standard. In retrospect, we can say that this is probably what the US should have done – at least if they had started the process in 1873.

But instead, the US demonetized silver in the Coinage Act of 1873.

There were some limited coinages of silver authorized occasionally by Congress, as a political sop to Nevada mining interests to increase the demand for silver. But never free coinage. Only a limited number of minted US dollars were made out of silver. The rest had to be gold. A mountain of silver had been found, and instead of the mint coining that silver, the US just demonetized silver, and stopped the free coinage of the metal. The US was no longer bimetallic. Gold only.

The late 19th century was deflationary. Gold became more and more valuable – which is the same thing as saying that the dollar price of goods dropped and dropped. The economy, as a result, became extremely volatile. Many sharp and painful recessions. When times were good? They were very good, and growth was strong. But often enough, times were bad. Falling prices are bad for debtors. You borrow 100 dollars, and then you repay the debt with money that is even harder to get than it was originally.

The “free silver” movement was a push to return to the 16:1 legal ratio. This is the same as saying that the legal ratio would have greatly undervalued silver. It would have turned the country back into a silver standard if it had passed, and prices would have increased sharply as all the dollars became silver instead of gold. That is what debtors wanted. It would have been much easier to repay their debts if the debts could be paid with silver, since silver was so easy to get.

The bankers, in contrast, did not want that. The bankers won.

This is what William Jennings Bryan – who represented farmers – was arguing about in his fancy speeches. He wanted the free coinage of silver at the previous ratio. Which is to say: farm debtors wanted inflation. They lost the political fight. Nevertheless, new gold discoveries, both in ore and in mining techniques, eventually started pumping more gold into world markets in the early 19th century, and this (finally) helped alleviate the debt pressure.

And people today read about “free silver” and scratch their heads wondering what the hell was going on. It was all about the ratios, peeps.

8

For most of the supporters of Free Silver, the silver metal itself was tangential. They wanted the dollar devalued (which restoration of 16:1 silver would have done). Many farmers etc. were suffering under burdens of debt which devaluation would partially discharge.

Just recently I posted a link to Milton Friedman’s views on bimetallism. Still worth a read?

9

Thanks, all! I miss these boards. Glad I’m back.

10

The phrase in party platforms was “free and unlimited coinage of silver at sixteen-to-one”

11

A follow up to this, if anybody is still reading. Did farmers actually have silver laying around that they couldn’t convert to coinage? Or was it the devaluing of the dollar that would follow that would benefit them?

12

It was the devaluing. The people who had silver they wanted to coin were mostly mine owners.

13

thanks for restarting this thread. I had missed it the first time. I learned something new today-thanks to the Dope!