Understanding the Silver Crisis of the Late 1800s and Its Economic Impact

The Cutting Room Floor: Free Silver

The Panic of 1893

One of the most interesting and pivotal times in American life was occurring around 1893. The main event in Bud's story at that point was the imminent opening of the Cherokee Strip, and as big as that was for the whole country it wasn't everything. Not even close. One of the worst depressions to strike America, even by today's standards, was about to begin and it would ultimately form much of the America we see today.

I spent a lot of research time on the Panic of '93 and was sorely disappointed when all my test readers and my editor insisted it be removed from The Unassigned Lands. The Panic was nearly a book of its own and was a distraction from Bud, Oklahoma and the gold. As interesting as I thought it was, it had to go. But I can write about it here. So, congratulations.

The Historical Context

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I need to be careful, here, or I'm going to transport everyone back to the high-school history class that everyone hated more than anything...so I'll give you the interesting version.

The problem, like in Bud's universe, was a precious metal. Silver in this case. The mines in the west, particularly in Nevada, had produced so much that its value was down and nearly not worth the trouble to mine it. What would make silver more interesting and drive up demand for it? Make it become money, like gold was. Then everyone would want lots of silver.

That was in the late 1870s, and America was, as usual at its own throat. The country was industrializing, moving from an agriculture-based economy to an industrial one. Railroads were vital to transportation and were at the center of the economy. They were responsible for hundreds of thousands of jobs - they directly used the output of America's steel foundries and transported goods to literally every part of the country. People no longer had to be farmers.

But a lot of people WERE still farmers, and prices were down. They were down because all the money was being gobbled up by the eastern industrialists and bankers who were building railroads, tall buildings, ships, and everything else eastern industrialists liked to build. The farmers in the west wanted prices up, and the easiest way to raise prices was, even back then, inflation. The best way to get inflation was (and still is... ) to add lots of money into the economy. Thus, the notion of using silver as money found an enthusiastic audience, and that audience voted. The politicians noticed.

Thus, the 1870's version of "them and us". The agricultural west wanted silver to be used as money, the industrial east wanted to remain on the gold standard. Everyone had an argument for why the other side was wrong, but at the end of the day it was personal. A compromise was reached that obligated the Federal Government to purchase silver, thus raising its price and making the silver producers happy. The silver was only used to mint the ubiquitous silver dollar, thought, and that made the farmers very unhappy because it didn't move the needle at all. Prices remained low. (For the tiny handful of you that might be interested, Google "The Crime of 1873" and The Bland-Allison Act for the gory details.)

The deflation bomb

That unhappiness lasted all the way to 1890 when the mistakes got serious. Still greedy, the silver miners wanted more. They pressed, the angry farmers still wanted silver money, and the government obliged with the Sherman Silver Purchase Act. Now the Feds would purchase millions of ounces of silver and...do nothing with it. Well, that's not true. They printed paper certificates that could be redeemed for physical currency, ostensibly silver dollars. Noone was paying attention to the fine print, though. We'll get back to the silver certificates.

The idea was to drive up the price of silver, but the exact opposite actually happened. By the time 1893 rolled around, silver prices had fallen by half and most of the silver miners were going bankrupt. Prices were still down, farmers were still in debt, silver was not money, and there was no relief in sight. There was nothing obvious to bother the industrialists, though, so that half of "them and us" wasn't too concerned. They should have been.

In January of 1893, an odd thing happened. An eastern railroad abruptly went bankrupt. The Reading was over-extended, that was true, and they'd guessed wrong about freight rates, which meant they couldn't cover their expenses. Bad business, bummer for them, right? Not so fast. What no one was seeing was those low prices that were killing the farmers had turned into actual deflation for everyone. The railroad went bankrupt because the value of every asset it possessed was suddenly less than the amount of debt it owed.

The Reading's failure was briefly filed under the heading of "Strange bad luck." Three months later that heading was edited to "The beginning of the end." That edit was caused by National Cordage's bankruptcy.

National Cordage manufactured cords, cable, twine, and rope of every imaginable type - from the heavy cables that held ship's anchors to the twine that farmers used to tie hay bales. It was the most actively traded stock on the Stock Market, their products were literally everywhere, and they were larger than any railroad. They were the Amazon or the Google of the day.

They were also incredibly aggressive from a business standpoint, most notably by attempting to corner the entire hemp market (hemp is a major raw ingredient in rope and twine). They would pay competitors to keep their mills idle and (insanely) offered a 100% dividend on one of their stock offerings. They were highly leveraged, and why not? They were National Cordage, way too big to fail, and money was their primary tool.

But money wasn't what it had been just months earlier. Like the Reading, National Cordage owed many, many banks and making those loan payments was suddenly a problem. They had to take more loans to pay the current ones and it finally caught up with them when they couldn't come up with 50 thousand dollars.

Panic and free-fall

Bankers suddenly wanted their money back and it turned out that no one actually had any. All the railroads were over-extended and they folded one after another. Now it was the bank's turn to go bankrupt because no one was paying them back. Trust in paper currency dropped to almost nothing, everyone wanted hard, physical, currency: Silver and gold.

And then the unintended consequences began to bloom. Remember the Silver Certificates from the Sherman Act? The fine print said those were actually redeemable for either silver or gold. Silver was still way down, but gold was way up. No one with a brain stem would trade for silver, so the Treasury was suddenly handing out physical gold for the hundreds of millions they'd issued against the silver they'd purchased. Those who understood such things were becoming alarmed...if the gold reserves fell too far, the currency would fail.

Back in the regular world, the condition of the gold reserves wasn't even on the radar. Millions were unemployed, the unemployment rate would eventually hit 20%. Furthermore, all those people were concentrated in the east and mid-west, the unemployment there was much higher and within a year starvation was a real concern. Caravans of people would migrate westward on the slightest rumor of work and a large population migration began.

The divides deepened for conflicting reasons. Democrats and Republicans were (mostly) divided along the agrarian vs industrial divide, and thus opinions on silver's status generally followed the same lines. The push to make silver coinage part of the economy was still strong and that that group was called "Silverites" and advocated for "Free Silver" which would re-include silver as legal tender, just as gold was. On the other hand, there were the "Gold-bugs" that insisted that deviating from the gold standard would be a catastrophe for everyone and the current crisis was all the proof anyone needed.

(Related to the Panic was a corresponding rise in unionization efforts. As the railroads struggled to survive, their employees were low-hanging fruit for union organizers. Strikes were called and often became violent, as were any number of riots that broke out organically. See the Cleveland Flats Riots, Eugene Debs and the Pullman/railroad strikes of 1894, Coxley's Army, etc. Definitely pertinent to American society at the time but not the focus here.)

The Gold Reserves

J.P. Morgan was very agitated over the condition of the federal gold reserves. The out-flow of gold for the worthless Silver Certificates was threatening to deplete the reserves to the point that the currency was at risk. Grover Cleveland had been sworn in just months before and was hesitant to take action, so the situation became increasingly dangerous. Refusing to just watch from the sidelines, Morgan bullied his way into a personal meeting with Cleveland.

Morgan indelicately explained to Cleveland that he was about to preside over the death of the American economy. When the gold reserves could not back the currency, paper money would become worthless and commerce could not occur. Furthermore, the U.S. Government would not be credit-worthy to any of its trading partners, most notably England who required to be paid in gold. That moment, the moment that the reserves would fail, Morgan shouted, was possibly hours away.

Cleveland understood that but his hands were tied. He had no mechanism to take any action at all, even if Congress could react that quickly. Morgan was having none of that. There most certainly was a legislative mechanism and Morgan explained it to the President: A civil-war era law allowed the president, without congressional approval, to issue bonds in exchange for war-related services. The war was over but the law remained and it was the loop-hole that Cleveland needed to wiggle through.

Morgan and the Rothschilds were standing by to provide the Federal Reserve the gold necessary to back the currency and President Cleveland would issue bonds against it. Morgan and the Rothchilds would eventually make millions off the deal, but the Federal Reserves would survive and the country would, eventually, get through depression. Cleveland had everything he needed, Morgan pressed, he just needed to pull the trigger. Cleveland did.

The Politics of Free Silver

The immediate crisis had been averted and Cleveland was the hero. The root cause of everything, though, was still at large: What should silver's role be? Noone's position had changed but the severity of the depression was causing the arguments to become more strident. It wasn't just farmers who needed help, now, everyone needed help. Free Silver was being pitched as the way to end the depression.

Some of the Silverites had split from the general Democratic Party and created their own, the Populist Party.  They believed that the de-monetizing of silver way back in ’73 was an actual, tangible, conspiracy by eastern bankers, the Rothschilds in particular, and industrialists like Morgan to decrease the money supply in order increase their wealth...which was mostly in gold.  Who used a lot of silver? Farmers and working men, that’s who.  The accusation that the current depression was not an accident, that it was a planned outcome, rang true to the unemployed throughout the country.

Both the Democrats and the Populists agreed that Free Silver was the best way to end the depression, and at first glance the two parties were a match made in heaven. But the Populists were not Democrats.  They wanted their own nominee to run against both the Republicans and the Democrats. 

Why?  Because Grover Cleveland was a Democrat, but he was a Gold Man.  Plus, Cleveland had just made a deal with the devil and that was unforgivable. Thus, as the 1896 election approached and the depression plowed ahead, unchecked, Free Silver would be the deciding issue. Cleveland realized he probably could not secure the nomination, now, and declined to be nominated. That opened the door for a Silverite to run the Democratic party and guaranteed drama at the Democratic Convention.

The Republicans had their convention and nominated William McKinley. The Democrats convened in July, divided from the beginning. The Goldbugs and the Silverites had been undermining each other for months but would resolve Free Silver once and for all.

William Jennings Bryan stole the show with an impassioned speach for Free Silver that ended with the lines "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.”

The speech, naturally dubbed the “Cross of Gold”, was printed in newspapers across the country. Depending on the editor’s position on Free Silver, it was either brilliant or rubbish.  The speech galvanized support for Bryan in the Free Silver camps, though, and was obvious candidate for the Democrats.

But not in all the Democrats.  Bryan had won the nomination with no votes from the Gold Men.  They subsequently split from the Democrats, formed yet another party, and nominated their own candidate whose platform was very similar to all the other Democrat’s, simply without Free Silver. 

The Populists held a convention of their own, and also nominated Bryan, which was nearly a relief to the Free Silver Democrats. But nothing could be easy, and the Populists, sticking with their philosophy of absolute unpredictability, had mysteriously disliked Bryan’s Democratic nominee for Vice President. Thus, they went ahead and nominated their own Vice President, a Congressman from Georgia, that would be Bryan’s running mate on the Populist ticket.  Bryan would appear on ballots twice, with different running mates.  No one was sure if that was good or bad.

It was bad. By the time the election was held the Free Silver argument had won - the country wanted Free Silver. Unfortunately, all the versions of the Democratic tickets split the vote and McKinley won easily. There would never be Free Silver.