A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical bank run in the Depression of A.D. 1893.. (Photo credit: Wikipedia)
In the 1890s, the American silver mining industry suffered from a major problem: overproduction.
The silver glut caused such steep price declines that silver was sometimes selling for less than the cost of production. The silver industry faced bankruptcy.
Therefore, the silver mining industry persuaded Congress to pass legislation to compel the U.S. Treasury to buy silver each month with the intent of coining that silver into millions of additional silver dollars.
It was presumed by silver mining industry that by creating an artificial demand for silver, the price of silver would increase and the mining companies would become profitable and spared bankruptcy.
Congress agreed (or was bribed to agree) with that presumption and enacted the Sherman Silver Purchase Act of A.D. 1890. This Act mandated that the US Treasury purchase 4.5 million ounces of silver each month to be coined into silver dollars.
Unfortunately, the presumption that an artificial demand would increase the price of silver was mistaken. When Congress enacted the Sherman Silver Purchase Act, they mandated that the Treasury Department pay for the silver being purchased with “Silver Coin Notes” that could be redeemed in either silver or gold. People quickly realized that the number of silver dollars in circulation was inflating and the true value of silver dollars was depreciating and therefore used the “Silver Coin Notes” to purchase gold. As a result, no one wanted silver dollars, the price of silver fell even more, causing more damage to the silver mining businesses; the demand for gold became so great that the U.S. Treasury’s supply of gold was nearly exhausted.
The government’s legislative meddling with the free market for silver in A.D. 1890 was blamed, in large part, for causing an economic decline that started by the end of A.D. 1891 and came to be called the “Depression of 1893”.
In A.D. 1892, Grover Cleveland was elected President to end the Depression. He took office on March 4, 1893, and delivered a speech to Congress on August 8th, A.D. 1893 that offered his perspective on the causes and remedies for the existing “Panic”.
In that speech, President Grover Cleveland said, in part,
“Our unfortunate financial plight is not the result of untoward events nor or the conditions related to our natural resources . . . With plenteous crops, with abundant promise of remunerative production and manufacture, with unusual invitation to safe investment and with satisfactory assurance to business enterprise—suddenly financial distrust and fear have sprung up on every side. [There was a “panic” that was not caused by some “natural” event like drought. The panic occurred “suddenly” due to man-made causes.] Numerous moneyed institutions have suspended business because abundant assets were not immediately available to meet the demands of frightened depositors. [There were bank runs that forced banks to close.] Surviving corporations and individuals are content to keep in hand the money they are usually anxious to loan [Credit dried up.], and those engaged in legitimate business are surprised to find that the securities they offer for loans though heretofore satisfactory, are no longer accepted. Values supposed to be fixed are fast becoming conjectural, and loss and failure have invaded every branch of business.”
And there’s the fundamental cause for the Depression: the formerly steady values of the national currency were now constantly fluctuating due to the Sherman Silver Purchase Act and subsequent monthly purchases of 4.5 million ounces of silver. Without the steady values of a stable monetary system, people didn’t know whether to buy or to sell. They became frightened and often decided to do nothing until the money stabilized and they could again act with confidence. As the value of the dollar became unpredictable, people became paralyzed by fear and indecision, the economy slowed and then slipped into a depression.
The Depression of A.D. 1893 was precipitated partially, and probably primarily, by government’s attempts to meddle with the monetary system artificially “stimulating” the price for silver.
Today, government routinely meddles with the monetary system by suppressing the prices of gold and silver, dropping interest rates to nearly zero, falsifying economic indicators, and increasing or decreasing the supply of currency in circulation. It’s called “economic stimulation”—but it’s really just “manipulation”.
Do you suppose that today’s monetary manipulation will have an effect similar to the Depression caused by the monetary manipulation of the 1890s?
“I believe these things are principally chargeable to Congressional legislation touching the purchase and coinage of silver by the General Government.”
Exactly. In order to shield the special interests of the silver mining industry from the harsh realities of the free market, government enacted the Sherman Silver Purchase Act. Under that Act, government would create an artificial, 4.5 million-ounce-per-month demand for silver that would raise silver’s price and thereby protect the silver industry’s profits from the consequences of overproduction. In their attempt to protect one industry, the government contributed to an economic imbalance that plunged the entire nation into a depression.
In the 2000’s, government sought to protect the housing industry by ordering Fannie May to buy virtually every mortgage in America. Because government would buy all mortgages, banks would issue mortgages to anyone, regardless of their credit worthiness. Banks even made “liar’s loans” to persons who claimed to earn $50,000, or even $250,000 a year when, in fact, they were basically living on welfare.
Result? As in A.D. 1893, governmental legislation intended to stimulate one industry (housing), blew up in everyone’s face, caused enormous losses to home-builders and home-owners, and made a major contribution to causing a national recession and/or depression.
Similarly, today’s government has designated some financial institutions to be “too big to fail”. I.e., those special interests (banks) are deemed to be so important they (like the 1890s silver industry) must be shielded against the realities of the free market.
Today’s “too big to fail” banks have not yet failed. Their governmental shields from the free market have held. But how much longer do you suppose that might be true?
Do you suppose the similar events (special interest legislation) and the subsequent Depression of A.D. 1893 and then today’s “Great Recession” are related by mere coincidence or by cause and effect?
“Undoubtedly the monthly purchases by the Government of four million and five hundred thousand ounces of silver, enforced under that statute, were regarded by those interested in silver production as a certain guaranty of its increases in price. The result, however, has been entirely different, for immediately following a spasmodic and slight rise, the price of silver began to fall after the passage of the act and has since reached the lowest point ever known.”
After the housing collapse of the last few years, the price of homes fell dramatically—but probably not to the “lowest price ever known”. However, today’s “Greater Recession”/“Greater Depression” is far from over. It’s entirely possible that before our current economic decline ends, housing prices might yet fall to the “lowest price ever known”.
Ironic, no? In the 1890s, government tried to boost the price of silver, and instead caused that price to collapse. In the 2000’s, government tried to support the price of houses, and the price of housing collapsed.
Are you beginning to see a pattern here?
“This law [Sherman Silver Purchase Act] provides that in payment for the four million and five hundred thousand ounces of silver bullion which the Secretary of Treasury is commanded to purchase monthly, there shall be issued Treasury [paper] notes redeemable on demand in gold or silver coin . . . .
“It is, however, declared in the act to be ‘the established policy of the United States to maintain the two metals on the parity with each other upon the present legal ratio [16:1] or such ratio as may be provided by law.’ This declaration so controls the action of the Secretary of the Treasury as to prevent his exercising the discretion nominally vested in him, if by such action the parity between gold and silver may be disturbed. Manifestly a refusal by the Secretary notes in gold, if demanded, would necessarily result in their discredit and depreciation as obligations payable only in silver, and would destroy the parity between the two metals by establishing a discrimination in favor of gold.”
In other words, the Treasury Department was bound by two, contradictory laws: 1) the Treasury must purchase 4.5 million ounces of silver each month for coining silver dollars; and 2) the Treasury must also maintain parity (16:1 fixed ratio) between the prices of silver and gold.
The public was smart enough to see that the dramatic increase in the supply in silver dollars made them cheaper in relation to the constant supply of gold dollars. But because federal “policy” mandated that parity—a fixed ratio of value 16 ounces of silver to 1 ounce of gold—must be maintained, the real value of silver dollars became much cheaper in relation to the fixed value of gold.
Therefore the public acquired relatively inexpensive silver dollars or silver notes and used them to purchase gold and thereby: 1) pushed the price of silver even lower; and, 2) threatened to deplete the US Treasury’s entire supply of gold.
“ We have thus made the depletion of our gold easy, have tempted other and more appreciative nations to add it to their stock.”
Exactly. And, today, after all our government’s meddling with the gold and silver markets, Asia is “tempted” to add gold from “somewhere” to their stock. Whether that “somewhere” includes Ft Knox is unknown, but suspicions are high. In any case, so long as the US sets the price of gold artificially low today (as the government inadvertently did back in A.D. 1890), we can assume that some significant portion of gold owned privately (or publicly) by the American people is emigrating to China and India.
“. . . large amounts of gold . . . have been recently drawn from our Treasury and exported to increase the financial strength of foreign nations.”
If exporting our gold to foreign nations makes them stronger, it must also make us weaker.
More, President Cleveland knew and reported the amount of gold being exported in A.D. 1890.
But how much American gold is currently exported?
Today, it’s not hard to find numbers on how many tons of gold are being imported into China. Those numbers might not be precisely accurate—in fact, they’re probably understated—but at least the numbers are available.
But when was the last time you heard how much gold has been exported from, or imported into, the U.S.? How much gold has been added or subtracted from our national treasury in the past decade?
The Federal Reserve claims that the number of tons of US gold held for the US Treasury has remained a constant 8,200 tons for several decades. But the US supply of gold hasn’t been officially audited in over 50 years.
So, what if the Fed is lying?
What would it mean if our total quantity of gold was increasing? Do you think they’d keep it a secret?
What would it mean if our gold was decreasing?
What does it mean that we seem to have no easily accessible numbers on the import or export numbers for American gold?
In fact, Chris Martensen of Peak Prosperity recently published a rare report (the first I’ve seen) showing that from A.D. 1991 to A.D. 2012, the US exported 5,504 more tons of gold than it imported. It’s bad enough that, as a nation, we’re exporting more gold than we import. But, worse, of the 5,504 tons we’ve exported, the source of 4,490 tons (213 tons/year) is so far “unexplained”.
I’m trying to think of where we might find a secret source for exporting 213 tons of gold each year. All I can think of is the Federal Reserve’s cache of 8,200 tons. Do you suppose it’s possible that the Fed has secretly exported 4,490 of its former 8,200 tons of gold?
“. . . [I]t is apparent that the operation of the silver purchase law now in force, leads in the direction of the entire substitution of silver for the gold in the Government Treasury, and that this must be followed by the payment of all Government obligations in depreciated silver.”
Today, we may be substituting debt instruments in our Treasury for gold.
In A.D. 1893, the effect of the Sherman Silver Purchasing Act caused government to pay its debt in “depreciated” [less valuable] silver. They were paying their debts back then with what we currently call “cheaper dollars”.
Since A.D. 1971, instead of paying our debts with gold, government has discharged our debts with depreciating paper dollars.
A depreciating currency preceded the Depression of A.D. 1893. A depreciating currency preceded the “Great Recession” of A.D. 2009. Do you think those similarities are coincidental or more evidence of cause and effect?
“ At this stage gold and silver must part company and Government must fail in its established policy to maintain the two metals on parity with each other. Given over to the exclusive use of a currency greatly depreciated according to the standard of the Commercial world, we could no longer claim a place among nations of the first class, nor could our Government claim a performance of its obligations . . . to provide for the use of the people the best and safest money.
Imagine! The government of a century past recognized an “obligation” to provide the American people with the “best and safest money” (gold).
Today’s “liberated” government sees no such obligation.
“The knowledge . . . that our Government cannot make its fiat equivalent to intrinsic value, nor keep inferior money on a parity with superior money by its own independent efforts, has resulted in such a lack of confidence in the stability of currency values that capital refuses its aid to new enterprises while millions are actually withdrawn from the channels of trade and commerce to become idle and unproductive in the hands of timid owners.”
I.e., people who had capital (gold) feared that if they loaned their gold to others, they’d be repaid with depreciated (silver) dollars. Therefore, they refused to lend their gold and the economy slowed into a depression.
Today, American banks also fear inflation and are therefore reluctant to lend currency if it might be repaid with depreciated dollars. Result? Credit is harder to find and the economy slows towards recession.
“But when our avowed endeavor is to maintain such parity in regard to an amount of silver increasing at the rate of fifty millions of dollars yearly, with no fixed termination to such increase, it can hardly be said that a problem is presented whose solution is free from doubt.”
Government passed one law mandating a fixed parity between silver and gold (16 ounces of silver = 1 ounce of gold) and another law mandating an enormous increase in the supply of silver—but not gold. Government supposed it could simply pass laws to defy and overcome the law of supply and demand. Result? A contradiction and lie (that silver was still at parity with gold), that ultimately helped push the economy into the “Depression of A.D. 1893”.
Will today’s government’s meddling in the prices of gold and silver result in similar contradictions and lies?
If so, will today’s contradictions and lies also collapse our economy?
Bet on it.
“The people of the United States are entitled to a sound and stable currency and to money recognized as such on every exchange and in every market of the world. Their Government has no right to injure them by financial experiments opposed to the policy and practice of other civilized states . . . .
“This matter . . . vitally concerns every business and calling and enters every household in the land. . . . when the evils of unsound finance threaten us, the speculator may anticipate a harvest gathered from the misfortune of others, the capitalist may protect himself by hoarding or may even find profit in the fluctuation of values; but the wage-earner—the first to be injured by a depreciated currency and the last to receive the benefit of its correction is practically defenseless. . . .
“[Congressman Henry Clay] . . . said; ‘The very man of all others who has the deepest interest in a sound currency and who suffers most by mischievous legislation in money matters, is the man who earns his daily bread by his daily toil.’ [Such legislation] especially injures those of our countrymen who labor . . . .
“. . . I earnestly recommend the prompt repeal of the provisions of the [Sherman Silver Purchasing] act . . . and that other legislative action may put beyond all doubt or mistake the intention and the ability of the Government to fulfill its pecuniary obligations in money universally recognized by all civilized countries.”
Within months of President Cleveland’s A.D. 1893 speech, the Sherman Silver Purchase Act was repealed. Nevertheless, the U.S. economy didn’t fully recover until A.D. 1900.
On behalf of a single special interest (silver mining businesses), Congress had meddled with the free market for three years and precipitated a depression that lasted for seven.
Point: a little meddling goes a long ways.
• Can today’s government “fulfill its pecuniary obligations? I.e., can it pay the national debt?
No.
Are today’s fiat dollars “universally recognized by all civilized countries” as money?
Not exactly. Yes, we can still spend our fiat dollars in foreign countries–but thanks to fiat currency “wars,” the dollar’s value is quickly and intentionally depreciating. Ordinary Americans are being robbed and impoverished. Where our paper dollars were once prized by foreign countries and deemed to be “good as gold,” they are now merely accepted—sometimes with disdain. For some countries like the BRICS (Brazil, Russia, India, China, South Africa), dollars are expressly avoided in foreign trade. The dollar remains the world reserve currency only because there is no better fiat alternative. It has become the “lesser” of one evil.
But everyone can see what’s happening and where we’re inevitably heading. The fiat dollar is dying. The only question is, When will the dollar expire? Eighteen months? Five years?
Who can say?
But if Grover Cleveland’s understanding of the economy and the nature of money was roughly correct back in A.D. 1893, and if it’s true that “those who don’t learn from history will repeat that history,” then it seems inevitable that we’re approaching, or already in, another major economic depression.
Buckle up.