This year marks the 100th anniversary of the most important presidential campaign ever to revolve around an issue largely ignored in contemporary politics—monetary policy.
The Republicans, with William McKinley as their candidate, defended the classical gold standard. The Democratic nominee, William Jennings Bryan, supported silver coinage at an above-market rate and inspired inflationists with his now-famous “Cross of Gold” speech.
McKinley won the 1896 election, but the money issue would be eclipsed by fiscal policy in the 20th century. It is fascinating, however, to consider that most U.S. presidents prior to McKinley discussed issues that have virtually disappeared from today’s public discourse. Their opinions on gold, silver, and central banking were not only relevant then but remain so today.
Establish a Central Bank?
There was no interest in paper money in the early United States after the inflationary experiences of the Revolutionary War. Instead, monetary discussions centered on whether or not to establish a central bank. Alexander Hamilton and the Federalists advocated a bank through an expansive interpretation of the Constitution, which made no provision for chartering federal corporations. Thomas Jefferson and other Anti-Federalists urged “strict constructionism” and opposed the bank. In 1791, both Hamilton and Jefferson gave Federalist George Washington (1789-1797) their interpretations. Washington sided with Hamilton and signed a law creating the First Bank of the United States.
Adopting a bimetallic standard is one thing; maintaining it in the face of fluctuating market values is another.
Under Federalist John Adams (1797-1801), all foreign gold coins ceased to be legal tender. Adams also signed a proclamation exempting Spanish silver dollars from similar silver legislation. The United States was on a bimetallic monetary standard of value at this time. Gold served in high-denomination coins, silver for smaller amounts.
Adopting a bimetallic standard is one thing; maintaining it in the face of fluctuating market values is another. Gresham’s Law states that debased coins (those overvalued by government) tend to remain in circulation, while undervalued coins are hoarded. Since silver was overvalued, gold began to disappear from circulation.
Thomas Jefferson (1801-1809) grappled with this problem even before assuming the presidency. Observing that Spanish silver dollars varied in their silver content, Jefferson proposed they be assayed by the government. This led to the Coinage Act of 1792.
Part of Jefferson’s opposition to the central bank stemmed from his belief that it catered to commercial and financial interests while hurting the agricultural sector. While critical of the Bank of the United States, Jefferson did not undermine it as president. But when the bank’s charter expired in 1811, his interpretation of the Constitution swayed public opinion against the bank. His successor, James Madison (1809-1817), vetoed a bill rechartering the bank, although he believed in central banking.
Unfortunately, the War of 1812 caused suspension of specie payments and state bank inflation. This led to the creation of the Second Bank of the United States late in Madison’s second term of office. Presidents James Monroe (1817-1825) and John Quincy Adams (1825-1829) supported the central bank during their terms of office.
The Jacksonian Democrats
Andrew Jackson (1829-1837) had a profound influence on monetary policy in the mid-19th century. Jackson vetoed a bill rechartering the Second Bank of the United States and signed the Specie Circular of 1836, which required gold payment of federal debt obligations. In his annual messages to Congress, Jackson discussed monetary matters more than any other president.
In 1831, Congress rechartered the Bank, but Jackson vetoed the bill.
By this time, the money issue was more than an economics discussion; it grew out of regional and even class politics. Jackson believed the central bank created an alliance between Big Business and government that benefited a few while costing most Americans.
“[B]oth the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens,” Jackson said in 1829, “and it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency.” He declared in 1830, “Nothing has occurred to lessen in any degree, the dangers of which many of our citizens apprehend from that institution, as at present organized.”
In 1831, Congress rechartered the Bank, but Jackson vetoed the bill. “It is to be regretted,” Jackson said, “that the rich and powerful too often bend the acts of government to their selfish purposes. ... [W]hen the law undertakes to ... make the rich richer and the potent more powerful, the humble members of society—the farmers, mechanics and laborers ... have a right to complain of the injustice of their government.”
Central bank abolition was a cornerstone of Jackson’s successful 1832 re-election campaign. He confided to Charles Carroll, the last surviving signer of the Declaration of Independence, “No bank and Jackson—or bank and no Jackson.” After his re-election, Jackson attacked bank officers in 1833 for “actively engaging in attempting to influence the elections of the public officers by means of its money ... [in] violation of its charter.”
Jackson was not a monetary nationalist; he saw no reason why foreign gold or silver should not circulate in competition with U.S. coins.
In his second term, Jackson struck a further blow against central banking by sending the Bank’s assets to state banks, dubbed “pet banks” by critics. He termed central banking “the scourge of the people,” and described gold coins as “a sound and portable currency.” In 1836, Jackson signed the Specie Circular, which increased gold coinage. That same year, he proposed suspension of all paper bank notes less than $20. “The attainment of such a result,” Jackson said, “will form an era in the history of our country which will be dwelt upon with delight by every true friend of its liberty and independence.”
Jackson was not a monetary nationalist; he saw no reason why foreign gold or silver should not circulate in competition with U.S. coins. In two separate measures, the Jacksonians legalized the circulation of all foreign gold and silver coins. In his farewell address, Jackson warned, “The paper system ... having of itself no intrinsic value ... is liable to great and sudden fluctuations, thereby rendering property insecure, and the wages of labor unsteady and uncertain.” He attacked fiat money and central banks as undermining free institutions.
Martin Van Buren (1837-1841) continued Jackson’s policies. One of his first acts was to address the Panic of 1837, a mini-depression. Van Buren’s solution: stand fast on gold and propose an independent Treasury to further wrest control of the federal government from central bank supporters. In 1840, Congress passed a bill establishing an independent Treasury, which Van Buren hailed as a “Second Declaration of Independence.”
Whig William Henry Harrison (1841), a hero of the War of 1812, was told by advisers to keep his lips “hermetically sealed” on the money issue during the 1840 campaign. Harrison died after one month in office. His successor, John Tyler (1841-1845), vetoed two bills creating a new Bank of the United States, terming them “unconstitutional.” After the second veto, Bank advocates demanded Tyler abide by the views of the Whig-controlled Congress and sign the bill, or resign the presidency. Tyler refused.
Democrat James Polk (1845-1849) resumed Jackson’s policies. As a congressman, Polk had fought the bank’s recharter as chairman of the House Ways and Means Committee. His successor, Whig Zachary Taylor (1849-1850), a hero of the Mexican-American War, had little to say on the issue. Whig Millard Fillmore (1850-1853) reversed Jacksonian policy, devising a monetary system that was the forerunner of the National Banking Act of 1863.
It was the next president who would alter the “hard money,” anti-central bank policies of the Jacksonians more than any other U.S. leader.
Gresham’s Law finally caught up with bimetallism in the early 1850s. Gold production exploded with the discovery of new mines in California and then burst, causing a fall in the price of gold relative to silver. Silver coins disappeared rapidly from the United States. In response, Democrat Franklin Pierce (1853-1857) supported a gold monometallic standard with silver coins circulating at weight. Silver was no longer drastically overvalued versus gold and remained in circulation. Pierce had opted for a temporary gold standard, but it was short-lived.
Part of the Jacksonian program was repealed under James Buchanan (1857-1861). In a show of monetary nationalism, the legal tender power of foreign coins was repealed, except for Spanish-American fractional silver. But it was the next president who would alter the “hard money,” anti-central bank policies of the Jacksonians more than any other U.S. leader.
To his admirers, Abraham Lincoln (1861-1865) is remembered as “the Father of the Union.” But the first Republican president was an inflationist in monetary affairs, and his policies led to consequences that are still visible today. To pay for the Civil War, Lincoln abandoned specie and launched a paper dollar (the “greenback”) that resulted in rampant price inflation.
The Civil War led to an enormous growth of federal spending, from $66 million in 1861 to $1.3 billion four years later. Lincoln tried to finance the war initially with government bonds, but public demand for specie payments led to their suspension at year’s end. Lincoln took advantage of the fact that the United States was on an inconvertible paper standard by signing the Legal Tender Act of 1862, which authorized greenbacks to pay for the war. Initially limited to $150 million, a second $150 million issue was approved in July and a third $150 million issue passed in early 1863. By mid-1864, greenbacks were worth 35 cents in gold. But at war’s end, they had risen to 69 cents on the prospects of future gold redemption. Prices rose 110.9 percent from 1860 to war’s end.
Another important consequence of Lincoln’s term was the creation of a new, quasi-centralized, fractional reserve banking system.
Not surprisingly, greenbacks depreciated against gold, leading Lincoln to scapegoat “gold speculators.” Failing to regulate the gold market, he tried to destroy it by passing a Gold Bill in mid-1864 that prohibited all gold futures contracts and imposed severe penalties. Public opposition, however, forced the bill’s repeal that year.
Another important consequence of Lincoln’s term was the creation of a new, quasi-centralized, fractional reserve banking system. This laid the groundwork for the Federal Reserve System, which was eventually established in 1913. The National Banking Act of 1863 forever ended the federal government’s separation from banking. Lincoln built upon the Federalist/Whig policy of central banking, implanting the soft-money tradition permanently in the United States.
Public support for gold specie resumption grew after the war. The Loan Bill of 1866, signed by Republican Andrew Johnson (1865-1869), provided for greenback contraction from the market. But Johnson refused to sign a bill in 1869 that would have provided for specie resumption. That task fell to Republican Civil War hero Ulysses S. Grant (1869-1877) in his first act of office. The Panic of 1873 did not shake Grant’s fear of inflation; he vetoed a bill proposing greenback expansion. In 1875, Grant signed another bill pledging specie resumption by decade’s end.
The Gold Standard
Specie payment was finally resumed in 1879 under Republican Rutherford Hayes (1877-1881), but greenbacks could be redeemed in silver, along with gold, as a result of the Bland-Allison Act. In 1877, Representative “Silver Dick” Bland of Missouri sponsored a bill providing for the free and unlimited coinage of silver. The measure was supported by the Democratic “silver bloc” emerging in the western United States and called for overvaluing silver versus gold. The bill was modified in 1878 by Senator William Allison of Iowa, who fashioned a compromise between Democratic free silverites and conservative Republican business interests. The Bland-Allison Act permitted limited silver coinage and required the Treasury to purchase $2 to $4 million of silver each month. Hayes vetoed the legislation, but his veto was overridden.
Republican James Garfield (1881) urged government debt payments in gold. Although he opposed free silver, Garfield expressed interest in a bimetallic standard before his assassination. Republican Chester Arthur (1881-1885), called for the repeal of Bland-Allison. “They [paper silver] form an unnecessary addition to the paper currency,” Arthur declared in 1881. “In respect to the coinage of silver dollars and the retirement of silver certificates,” Arthur said in 1882, “I have seen nothing to alter but much to confirm [these] sentiments.”
Cleveland was the last Democratic president to support gold.
Democrat Grover Cleveland (1885-1889, 1893-1897) may have been the greatest gold standard advocate ever to serve as president. In his first term, Cleveland singlehandedly preserved the gold standard at a time when the Democrats split bitterly over the money issue and populism. However, his opposition to tariffs cost him the 1888 election.
When Cleveland left office after his first term, the Treasury had a large gold reserve, but it was depleted by Republican Benjamin Harrison (1889-1893). In 1890, Harrison signed the Sherman Silver Purchase Act, requiring the Treasury to buy 4.5 million ounces of silver monthly. To buy the silver, Treasury was to issue a new type of paper money known as Treasury notes. The act was a victory for the Populists, who held that deflation, which hurt farmers, could be reversed by free silver policies. Deflation continued, the gold reserve dropped, private banking tightened, and the Panic of 1893 ensued.
Re-elected and back in the White House, Cleveland attacked the Silver Purchase Act as a “dangerous and reckless experiment.” He called for its repeal to restore confidence in the dollar. Cleveland knew Gresham’s Law and defended gold against inflationists in his own Democratic Party. Congress tried to compromise, but Cleveland would not yield and the act was repealed. Cleveland was the last Democratic president to support gold. The Populists, whose presidential candidate won more than a million votes in 1892, returned to the Democrats four years later as supporters of William Jennings Bryan.
Lessons for Today
McKinley’s victory in 1896 also contained the seeds of central banking and political manipulation that has led to the rampant inflation of the 20th century. The Democratic Party was no longer the great laissez-faire, hard-money party of Jefferson, Jackson, and Cleveland, and the Republicans soon emerged as the party of the corporate State.
Republican Theodore Roosevelt called for additional legislation and elasticity in the monetary system. By 1906, he was calling for “a considerable increase in bills of small denominations.” William Howard Taft (1909-1913) went even further, declaring in his inaugural address,
“One of the reforms to be carried out ... is a change of our monetary and banking laws, so as to secure greater elasticity ... and to prevent the limitations of law from operating to increase the embarrassment of a financial panic.”
By this time, the Federal Reserve’s establishment was a forgone conclusion and America was soon to be saddled with the inflationary, fractional-reserve system that sets American monetary policy to this day.
There is a glorious tradition of hard-money advocates in the history of the United States. Reviving that heritage is essential to our economic well-being. Further, the decline of the dollar after it was severed from its last links to gold in 1971 has affected all Americans, even if it has been ignored by most elected officials. Economic law cannot be repealed. Easy money leads to inflation in any century. The truths about hard money recognized by many of our best presidents need to be brought back into the public square.
4. Under a gold monometallic standard, the dollar is defined only as a weight of gold, with silver circulating by weight. This is an example of “free metallism,” in which two or more metal coins are allowed to fluctuate freely in the same range.
Andrew Jackson was an ardent champion of the gold standard.
Abraham Lincoln’s greenback policies led to widespread inflation.