This piece was written by my father in December of 2003 - George W. Bush’s approval ratings were high following the successful invasion of Iraq and the capture of Saddam Hussein, the republican party controlled both the house and the senate and the main political concern was the ongoing war in Iraq. The US economy was recovering from the 2001 recession, unemployment was falling, the stock market was rising and the main economic issue was the budget deficit. The US was in a strong position.
It's hard for some to even imagine deflation in our current economic situation. All the fed has to do is just juice up the economy by lowering rates and presto - instant inflation.
Assuming of course that people are in a borrowing kind of mood. Remember that "velocity" is the other factor that must be considered when talking about deflation. Even if the Fed is giving it away for practically nothing, someone has to take it! When fear overcomes greed and the takers start to back off, even no-interest money cannot spark a borrower's interest in piling on more debt. This installment covers a part of American history when deflation was a relevant fear. There were even instances of railroad bonds being issued for 100 years at 1% interest during this time.
DEFLATION IN AMERICA:
Conditions rocked along after the war between the states and the country got back to the business of business. In the late 1800's a slight gold shortage was developing. The economy and population in America were growing faster than the gold supply. Through the law of supply and demand a very small amount of price deflation started to occur. Farmers hated deflation because they would borrow money to plant crops in the spring, but while they were growing the crops all summer the dollars would become stronger and the farmers would have to sell their crops in the fall for lower prices. Bank loans did not take into account that the dollars were growing stronger, which made loans more expensive for the farmers and more profitable for the bankers. A condition the bankers enjoyed and encouraged.
A great cry went up across the country for a bi-metallic system to include silver as well as gold to back the dollar. This system would create a fixed value ratio between the metals and allow both gold and silver to back the currency. The logic behind this was that there was no shortage of silver and that the addition of silver as an allowable dollar backing metal would allow more money to be created into circulation. These additional dollars could grow the money supply at the same growth rate as the population instead of being hampered by the gold shortage. On top of this, the farmers were hoping that the government would be tempted to print extra dollars and create some mild inflation, which would make it easier for them to repay their loans with cheaper money at harvest time.
The bimetallic plan called for silver to be valued at a ratio of 16:1 with gold. Since a great quantity of silver was being produced out west by the silver states, there was a big political push with the farm states and the mining states for the proposed new system. This became one of the two focuses of the presidential election of 1896, using silver to beat deflation and halting American imperialism.
During the election McKinley sat on his front porch in Ohio and lectured delegations from around the country while William Jennings Bryan stormed across Middle America. Bryan claimed that mankind was being crucified on a "cross of gold". Bryan said the existing gold standard was being forced upon the common man by the big Eastern bankers. Bryan campaigned vigorously for a bi-metallic monetary system (easy money) and against imperialism. Bryan was right on these points, but being right does not mean you can beat the bankers.
McKinley won the election and the gold standard held firm. The bankers were happy, but the US had just signed itself up for the philosophy of imperialism and all that comes with it. Shortly after the election these philosophies were brought forth in the Spanish-American war, which began in 1898 with the sinking of the Maine in Cuba and ended with the liberation of Cuba and the territorial possession of the Philippines by the United States. Two situations that still bring troubles to the U.S. to this day.
The story of this election was immortalized in 1900 in Frank L. Baun’s political satire, The Wizard of Oz. The book focuses on the “evil actions” of the big Eastern bankers in New York represented by the wizard of ounces “Oz,” the Eastern establishment represented by the Wicked Witch of the West and the oppressed commoners throughout the rest of the country. The Kansas Tornado was the troubles that had been forced on the American people. Dorthy Gale represented the US people that had been troubled and “just wanted to go home” and get back to normal. The farmers, were represented by the scarecrow who were struggling to make a living. The industrial workers that were losing their jobs were represented by the tin man, a man that was looking for a heart to lead him. The cowardly lion was represented by William Jennings Bryan and his indecisive ways. The munchkins were the duped population in the East that could not see things as they really were because they were forced to wear green colored glasses. And the yellow winkies, who didn't get much coverage in the movie, were the poor Filipinos who were the oppressed people as a result of the Eastern banker's imperialistic ambitions.
In the end Dorothy finally clicked her SILVER slippers together and everyone saw the light and lived happily ever after on the bimetallic system. However, someone in Hollywood thought ruby-colored slippers would show up better in tech-no-color so the world was never to see the silver slippers.
The flying monkeys are one of the most complex and debated characters in the story. Many consider them to be the oppressive and chaotic force that the establishment holds over the un-empowered. Some consider them to be the general forces of evil on a society. As a boy, I found them to be a truly terrifying nameless force, but as an adult I now think of them as the powers behind the FED.
At any rate gold was discovered in Alaska as well as South Africa shortly after 1900 and the "shortage" of gold was relieved. The gold standard remained intact until Nixon broke it in 1971, but World War I and the Bretton Woods agreement had already significantly weakened the gold backed dollar. More on that subject in another installment.
History through a monetary lens is often far more accurate than any other lens one can use. The farmers, the industrial workers and yellow winkies, all lost to the big Eastern Bankers and “the Flying Monkeys.”
In our prior article we saw that bankers can occasionally lose big, but remember that it takes extraordinary circumstances.
Written By: Larry LaBorde
Edited By: Christopher LaBorde
The Keyboard Chimp
Christopher LaBorde, his wife and their two children, live part time in the Middle East and part time in Louisiana. As a curious engineer and novice researcher that studies a multitude of topics, Christopher always welcomes feedback at Chris@silvertrading.net and www.TheSophisticatedChimp.com. All of Christopher’s writing is made possible by The Silver Trading Company www.SilverTrading.net, please allow us to help you with any of your precious metals needs domestically or abroad.