Financial History Issue 132 (Winter 2020) | Page 30

THE
Pan,
THE
Sluice Box
AND
American
Monetary
History
By Daniel C. Munson
Those students of financial history with
a fondness for the precision of the gold
standard of money, where currency is
exchangeable for a governmentally-man-
dated amount of gold, tend to gloss over
its shortcomings. While a gold standard
system has some features that can appeal
to us today—fixed exchange rates, zero
inflation, no cryptic, market-gyrating pro-
nouncements by central bankers—it is not
without its limitations.
The 19th and early-20th centuries saw
the popularity of the gold standard reach
high tide, when it was used in west-
ern Europe, the British Commonwealth
and the United States—Britain’s opinion-
ated and independent son. This was also
perhaps the most economically vibrant
and technologically innovative period in
human history, so the reliance on gold
exposed its central shortcoming: namely,
the inability of gold stores to expand as
rapidly as the economy itself.
This inability of gold stores to track
economic growth and prevent occasional
bouts of deflation laid the groundwork
for gold’s eventual loss of governmentally
sanctioned monetary status. In the United
States, it didn’t happen suddenly; it was
more a matter of decades of trial and error
driven by political expedience.
William Jennings Bryan and “Skookum” Jim Mason: Two men, unknown to
one another, whose fortunes collided in the summer of 1896.
The founders and framers of the US
government rebelled against the British
crown and its parliamentary system, but
in monetary matters they followed Brit-
ain’s lead. Gold coins were minted, and
the US dollar was exchangeable for gold
at roughly $20/troy ounce. The federal
government’s first 50 years were filled
with controversies, but few involved this
dollar-gold connection.
Reliance on gold got its first big shake-up
when gold was found in large amounts in
the streams flowing west out of the Sierra
Nevada mountains in California in 1848,
gold that then coursed through the nation’s
banking system. Capital projects—many
of them railroad projects—arose to meet
this new supply of money. The economy
soared. A big economic slump resulted in
1857 when some of those loans went bad
just as gold mining output began to decline
and as gold drained from US to European
banks to pay for imported goods.
Monetary affairs then experienced a
still bigger jolt with the coming of the
Civil War and the printing of unsecured
“greenback” paper currency necessary to
finance the war. The nation’s citizens,
especially the farmers, noticed an odd—
and for the farmers, fortuitous—fact:
Crop prices consistently rose during the
conflict, fueled by the gradual decline in
value of the greenback as the war dragged
28    FINANCIAL HISTORY  |  Winter 2020  | www.MoAF.org
on. Illinois farmer John Griffiths watched
his son go off to fight and began working
the farm by himself. “It has been a good
time for making money in the North since
the war began,” he later wrote. “Every-
thing was so high,” he recalled, referring
to crop prices denominated in greenbacks.
Farmers did not forget this little bout
of prosperity. The nation returned to the
gold standard in the early 1870s, and as
it did farm profits declined. The agricul-
tural interest could have chalked up those
Civil War-era profits to fewer farm work-
ers and, therefore, lower supply or to a
war-induced bump in demand, but many
chose to attribute them to the use of the
greenback. The Greenback Party coalesced
in the 1870s around the idea of returning
to an unsecured paper currency. Most
voters still regarded paper money with
suspicion, however, and the party never
achieved any nation-wide success.
The Greenback Party disappeared in
the late-1880s, but their monetary motives
survived. The Populist Party of 1892 advo-
cated minting silver-based dollars—some-
thing they called “bimetallism”—with the
same goal in mind: increase prices through
expansion of the money supply. Their
platform was explicit: silver-based money
should be minted and valued at 1/16th that
of gold, and the aggregate money supply
should be increased to the point where it