Latest / Economy & Finance / In 1873 America ditched silver as money Then all hell broke loose _ The Story of Money

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In 1873 America ditched silver as money Then all hell broke loose _ The Story of Money · Economy & Finance

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  Speaker 1: And then in 1896, he delivered perhaps the most consequential
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  Speaker 1: speech at an American political convention. This was the famous
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  Speaker 1: Cross of Gold speech.
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  Speaker 2: If they dare to come out in the open field
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  Speaker 2: and defend the gold standard as a good thing, we
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  Speaker 2: will fight them to the uttermost. You shall not press
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  Speaker 2: down upon the brow of labor this crown of thorns.
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  Speaker 2: You shall not crucify mankind.
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  Speaker 1: Wow.
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  Speaker 3: Well, if anyone thinks that monetary policy is boring, think again.
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  Speaker 3: Today on the story of money, a seemingly innocuous monetary
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  Speaker 3: reform that inflamed American politics for a whole generation. And
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  Speaker 3: its unanticipated consequences were so disastrous that and caused such
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  Speaker 3: vitriol that it came to be known as the Crime
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  Speaker 3: of 1873. Now, Robin's away this week, sadly, but here
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  Speaker 3: to tell the story with me is Yakut Ahmed, an
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  Speaker 3: amazing author. So, Yakut, thanks for joining me.
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  Speaker 1: Thank you for having me, Julian.
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  Speaker 3: Now, your new book is called 1873. And it's about
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  Speaker 3: the many financial disasters that happened around the world in
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  Speaker 3: that pivotal year. And today we're looking at just one
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  Speaker 3: of those disasters, which at first glance appears to be
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  Speaker 3: rather boring. It's to do with a bit of financial
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  Speaker 3: legislation that was passed by U.S. Congress in February 1873.
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  Speaker 3: But this particular law would open up a vicious political
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  Speaker 3: divide in U.S. politics for decades afterwards. And you're going
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  Speaker 3: to tell us a story of the two politicians in
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  Speaker 3: particular whose careers were defined by this.
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  Speaker 1: Yes, that's right. These are two men with sharply contrasting personalities. One,
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  Speaker 1: an uncharismatic political insider. The other, a polarizing demagogue. They
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  Speaker 1: were on totally opposite sides of the divide. And each
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  Speaker 1: would prove to be right. But things did not work
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  Speaker 1: out the way that either of them expected and neither
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  Speaker 1: would achieve their objectives.
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  Speaker 3: Well, that's called a monetary policy cliffhanger. So listen on
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  Speaker 3: and hear about who those two people were and why
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  Speaker 3: their bitter fight matters enormously for the Federal Reserve and
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  Speaker 3: governments today. Particularly given that we're facing a lot of
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  Speaker 3: inflammatory debate around monetary politics all over again. It's all
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  Speaker 3: coming up here on The Story of Money from The
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  Speaker 3: Financial Times with me, Gillian Tett. What happens next in
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  Speaker 3: The Story of Money? Nuveen has spent over 125 years
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  Speaker 3: helping clients answer this question. So, Our story begins back
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  Speaker 3: in 1873 America. It's the Reconstruction era. The United States
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  Speaker 3: is still piecing itself back together after a bloody and
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  Speaker 3: destructive civil war. You have the venerated Union General Ulysses S. Grant,
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  Speaker 3: who's president. And in February of that year, Grant signs
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  Speaker 3: a bill into law called the Coinage Act. Now, it
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  Speaker 3: sounds pretty unassuming, if not rather boring. But it's actually
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  Speaker 3: a monetary time bomb. So, Liaka, tell us about this law.
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  Speaker 3: What exactly was the Coinage Act and why did no
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  Speaker 3: one really notice it or care about it initially?
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  Speaker 1: So let me give you a bit of background first.
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  Speaker 1: For most of the U.S. history, the country had a
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  Speaker 1: bimetallic standard, which meant the currency was backed by both
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  Speaker 1: silver and gold. That meant that notes issued by banks
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  Speaker 1: were matched by either gold or silver bullion held in
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  Speaker 1: the vaults of those banks. To fund the Civil War,
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  Speaker 1: the country had to start issuing money that wasn't backed
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  Speaker 1: by precious metals. This was paper money called greenbacks. After
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  Speaker 1: the Civil War, the government decided to return to having
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  Speaker 1: its currency backed by precious metals. So the Coinage Act
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  Speaker 1: was supposed to be about formalizing how the U.S. currency
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  Speaker 1: would be organized once the U.S. dollar became backed by
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  Speaker 1: metals again. And that is what people in Congress thought
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  Speaker 1: they were voting on. What people missed was that among
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  Speaker 1: the list of coins the U.S. mint would produce, the
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  Speaker 1: standard silver dollar which was the official unit of U.S.
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  Speaker 1: currency since 1792, was actually left off.
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  Speaker 3: So, Ljekerd, knocking silver out of the equation was incredibly important.
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  Speaker 3: And it's worth stressing that because today people tend to
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  Speaker 3: just talk about gold-backed currencies and gold and forget that
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  Speaker 3: silver was so important in American monetary history. So whose
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  Speaker 3: decision was it to knock silver out?
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  Speaker 1: The person responsible for was a senator from Ohio called
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  Speaker 1: John Sherman. He was the eighth of 11 children. His
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  Speaker 1: older brother was, in fact, a famous Union Civil War hero,
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  Speaker 1: General William Tecumseh Sherman. John Sherman entered politics as one
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  Speaker 1: of the very early representatives of the newly formed Republican Party.
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  Speaker 1: In 1861, he was elected to the Senate, And there
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  Speaker 1: he established himself as a currency expert, eventually becoming chairman
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  Speaker 1: of the Senate Finance Committee. You know, he was not
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  Speaker 1: especially popular with his colleagues, and that may become significant later.
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  Speaker 1: In fact, he was nicknamed the Ohio Icicle by the press.
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  Speaker 1: because of his austere and charmless character.
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  Speaker 3: Well, these days, people tend to have much ruder words
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  Speaker 3: for different politicians. But I guess in those days, Ohio
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  Speaker 3: Icicle was quite an insult.
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  Speaker 1: But the big moment for him was in 1867 when
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  Speaker 1: he visited Europe and he was invited to the International
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  Speaker 1: Monetary Conference in France. And there he mixed with some
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  Speaker 1: of the great statesmen of the era, Bismarck, Napoleon III,
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  Speaker 1: and he was taken by a plan that was being
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  Speaker 1: touted by a French technocrat. And this plan involved unifying
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  Speaker 1: the world's currencies under a single standard linked exclusively to gold.
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  Speaker 1: The French and English government dismissed the idea, but Sherman
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  Speaker 1: loved it. So when he returned to the United States,
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  Speaker 1: he tried to pass legislation limiting the legal tender of silver.
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  Speaker 1: It doesn't actually go anywhere initially. And he keeps on
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  Speaker 1: submitting it, and it keeps on being debated in Congress.
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  Speaker 1: And finally, with the Coinage Act, he manages to include
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  Speaker 1: the clause that leaves out the silver dollar. which essentially
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  Speaker 1: locks America into a gold standard.
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  Speaker 3: Wow. So basically he's imported this French idea that not
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  Speaker 3: even the French or British government have actually adopted themselves
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  Speaker 3: and got this really quite momentous change through Congress. So
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  Speaker 3: when do people wake up and why does it matter
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  Speaker 3: so much for the overall monetary system in the US
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  Speaker 3: knocking silver out?
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  Speaker 1: So it was disastrously timed. The Coinage Act became law
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  Speaker 1: in February. That was immediately followed by a sequence of
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  Speaker 1: financial crises. In May, the Vienna Stock Exchange crashed, the Gründerkrach.
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  Speaker 1: In September, the US railroad bubble burst, sparking a US
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  Speaker 1: banking panic. In October, the Berlin market collapsed, spreading panic
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  Speaker 1: across Europe. So the US economy was being starved of
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  Speaker 1: liquidity when it most needed it. Because during economic panics,
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  Speaker 1: there's a rush into cash, meaning the economy desperately needs
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  Speaker 1: more liquidity. But instead of expanding the money supply to
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  Speaker 1: help banks, the demonetization of silver did the exact opposite,
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  Speaker 1: severely tightening the credit markets. Historically, bimetallism, that is currency
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  Speaker 1: backed by both gold and silver, had worked remarkably well
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  Speaker 1: in keeping prices stable because gold and silver acted as
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  Speaker 1: a buffer for the other. So when one metal was scarce,
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  Speaker 1: the other could stabilize the system and keep credit flowing.
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  Speaker 1: By removing silver, the availability of credit became completely dependent
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  Speaker 1: on the supply of gold. Now, that would not have
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  Speaker 1: been a problem in the 1850s and 60s, because gold
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  Speaker 1: was remarkably abundant thanks to new discoveries in California and Australia.
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  Speaker 1: But by the late 1860s, new discoveries of gold had plateaued.
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  Speaker 1: This made the U.S. highly vulnerable. If there was a
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  Speaker 1: shock and the government wanted to create more money to
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  Speaker 1: stabilize the financial system, it would only be able to
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  Speaker 1: use gold, not silver. Right.
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  Speaker 3: So it's a bit like, you know, because we learned
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  Speaker 3: about this after the 2008 financial crisis. And then again,
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  Speaker 3: in the early days of the COVID pandemic, when essentially
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  Speaker 3: the central banks flooded the market with liquidity to stop
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  Speaker 3: a crisis turning into depression. But from what you're saying,
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  Speaker 3: the very opposite happened as a result of this little
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  Speaker 3: noticed silver reduction or rather silver being knocked out of
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  Speaker 3: the monetary system.
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  Speaker 1: Yeah, I mean, the US had in effect surrendered the
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  Speaker 1: ability to use silver just months before the moment when
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  Speaker 1: it would most need it.
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  Speaker 3: So, Liekerd, at a time when gold was starting to
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  Speaker 3: be in short supply, was that the same case for silver?
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  Speaker 3: Was it also in short supply? Because that mattered in
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  Speaker 3: terms of its ability to act as a buffer or not.
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  Speaker 1: There was actually a glut of silver, thanks to events
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  Speaker 1: in Europe. Bismarck, the Chancellor of Germany... had just decided
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  Speaker 1: to take Germany off silver and switch to gold. That
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  Speaker 1: had been announced in July of 1871, after France's defeat
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  Speaker 1: in the Franco-Prussian War. He was trying to emulate Britain
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  Speaker 1: and undercut France's central role in the bimetallic system. Germany
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  Speaker 1: offloaded its unwanted silver onto the market, creating a glut.
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  Speaker 1: This sank the price of silver, triggering a chain reaction
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  Speaker 1: across Europe as all governments began to abandon silver before
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  Speaker 1: the price fell further. And all central banks began stocking
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  Speaker 1: up on gold reserves, which made monetary conditions even tighter
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  Speaker 1: after the financial crisis.
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  Speaker 4: Wow.
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  Speaker 3: What we're seeing illustrated here are two key points. One
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  Speaker 3: is the law of unintended consequences and people starting on
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  Speaker 3: one reform that brings about all kinds of unexpected implications.
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  Speaker 3: And then secondly, how all these markets are so tightly integrated,
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  Speaker 3: even back then. So you get these chain reactions occurring,
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  Speaker 3: which no one quite expected.
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  Speaker 1: Yes, very much so. And everyone had switched to gold.
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  Speaker 1: There wasn't enough gold to go around. which meant that
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  Speaker 1: there was a spike in the level of interest rates.
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  Speaker 3: So this sounds like a really nasty cocktail of unintended
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  Speaker 3: consequences and chain reactions around the world. And I'm curious,
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  Speaker 3: what did this actually mean for the U.S.
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  Speaker 2: Economy?
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  Speaker 3: Because suddenly having this monetary squeeze and shortage of credit
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  Speaker 3: cannot have been at all good for the U.S. economy
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  Speaker 3: in any way.
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  Speaker 1: No. In fact, it was terrible for the world economy.
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  Speaker 1: We got the longest recession in U.S. history, lasting six years,
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  Speaker 1: with the U.S. government unable to create new money. Lending
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  Speaker 1: dried up. Europe was also in a recession. And that
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  Speaker 1: lasted until the late 1870s. The effect was even more
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  Speaker 1: profound because without silver, the global economy got stuck into
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  Speaker 1: a 20-year deflationary spiral. Wholesale prices around the world fell
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  Speaker 1: by more than a third.
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  Speaker 3: So when did people actually realize the source of this disaster,
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  Speaker 3: if you like? Because, you know, as we discussed earlier,
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  Speaker 3: the Coinage Act attracted very little attention when it went through.
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  Speaker 3: When did the world wake up and realize what had
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  Speaker 3: gone wrong? And when did they start to blame the
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  Speaker 3: Coinage Act?
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  Speaker 1: The reaction began originally with the silk industry. The silver
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  Speaker 1: industry had actually expanded enormously during the late 1860s and 70s.
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  Speaker 1: And previously, the ability to mint silver dollars had provided
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  Speaker 1: a floor to silver prices. But the combination of all
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  Speaker 1: this new supply and no floor led to a collapse
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  Speaker 1: in the silver price. Before 1873, for 70 years the
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  Speaker 1: price had held steady for decades at $ 1. 32 an ounce.
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  Speaker 1: It then fell 15% over the next two years and
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  Speaker 1: more than 50% by the mid-1890s.
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  Speaker 3: Ouch.
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  Speaker 1: Yes, ouch.
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  Speaker 3: I mean, because we've just seen a small version of
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  Speaker 3: that and silver doesn't matter as much, but silver's fallen
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  Speaker 3: about 50% from its peak just this year and already
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  Speaker 3: people are squealing. I mean, given how central silver was,
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  Speaker 3: that must have been devastating.
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  Speaker 1: It was. What made it even more devastating was what
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  Speaker 1: happened to agricultural prices. Because as silver prices declined and
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  Speaker 1: the supply of money did not expand, agricultural commodity prices
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  Speaker 1: also collapsed. So they fell by 50%. And that put
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  Speaker 1: terrible pressure on farmers because their mortgage debts remained fixed,
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  Speaker 1: but their prices of their products had fallen by 50%.
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  Speaker 1: So the real burden of their debts had effectively doubled.
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  Speaker 1: So rural communities in the West remained stuck in a
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  Speaker 1: prolonged depression that lasted well into the 1890s. And to
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  Speaker 1: counter this, farmers began campaigning for an easing in monetary policy.
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  Speaker 1: And reinstating silver as a form of currency was the
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  Speaker 1: obvious route. So they joined hands with the free silver movement.
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  Speaker 3: Free silver movement. It sounds almost like a sort of
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  Speaker 3: campaign slogan or something like that. So when people were
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  Speaker 3: campaigning on this free silver movement, did they target John
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  Speaker 3: Sherman in particular? Was he blamed for this?
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  Speaker 1: Very much so. I mean, he became something of a
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  Speaker 1: hate figure. In Congress, most congressmen disavowed their votes for
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  Speaker 1: his famous bill, claiming that Sherman had tricked them by
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  Speaker 1: burying the silver dollar clause in the legislation. In 1876,
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  Speaker 1: this alleged subterfuge was being referred to in the papers
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  Speaker 1: as the Crime of 73. Sherman defended himself. He reminded
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  Speaker 1: everyone that a draft of the bill had been... front
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  Speaker 1: of Congress for three years, that it had consumed hours
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  Speaker 1: of debate on the floor of Congress. It didn't do
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  Speaker 1: any good. His reputation was badly damaged.
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  Speaker 3: So one lesson from all this is read the footnotes,
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  Speaker 3: read the small print, look at the details. Because of course,
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  Speaker 3: people in Congress are still doing this kind of game
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  Speaker 3: where they try and bury stuff deep in bills and
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  Speaker 3: people complain later on they didn't see it. But in
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  Speaker 3: practical terms, How did the political conflict then play out
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  Speaker 3: in the following years? I mean, did it sort of
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  Speaker 3: actually snowball, the sense of political crisis and the Free
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  Speaker 3: Silver Movement?
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  Speaker 1: Yes. I mean, the Free Silver Movement and the populist
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  Speaker 1: movement among farmers to get monetary policy eased led to
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  Speaker 1: an increasing number of conspiracy theories.
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  Speaker 3: That sounds familiar.
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  Speaker 1: Yes. And many people, particularly farmers, blamed foreign bankers, especially
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  Speaker 1: the Rothschilds. One particular conspiracy theory that was publicized in
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  Speaker 1: the papers claimed a British banker, Ernest Sade, had come
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  Speaker 1: to the United States armed with $ 500, 000 in cash, and
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  Speaker 1: he had used this cash to bribe congressmen to pass
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  Speaker 1: the bill. In reality, there was domestic opposition to reinstating silver.
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  Speaker 1: Bankers and bondholders in the financial centers of the Northeast,
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  Speaker 1: like Philadelphia, New York, and Boston, were absolutely against trying
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  Speaker 1: to ease monetary policy and reinstate silver. They took the
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  Speaker 1: moral hike around and accused their opponents of being loafers, gamblers,
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  Speaker 1: and bankrupts. And the main reason was they would be
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  Speaker 1: totally self-interested. Falling prices raised the real value of their
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  Speaker 1: bond holdings. And it was all at the expense of
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  Speaker 1: borrowers like the farmers.
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  Speaker 3: So it's a long established pattern that we've seen play
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  Speaker 3: out so many times that when there's a crunch, people
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  Speaker 3: often blame foreigners first and foremost, if in doubt, blame
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  Speaker 3: the Brits quite often. Sadly, by attacking the Rothschilds, I
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  Speaker 3: suspect there might have been some really ugly anti-Semitism there
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  Speaker 3: as well. But there was a real sense of finger
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  Speaker 3: pointing on outsiders, even though the people who were backing
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  Speaker 3: the original abandonment of the silver monetization system were actually
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  Speaker 3: domestic for the most part. But was there any attempt
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  Speaker 3: to kind of wiggle the way out of this with
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  Speaker 3: any compromises at all?
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  Speaker 1: There were a couple of compromises with the silverites.
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  Speaker 3: Silverites, I love that.
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  Speaker 1: Where Congress passed legislation to mint some silver coinage. In fact,
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  Speaker 1: Sherman was even involved. But the amounts of silver involved
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  Speaker 1: were woefully inadequate. And it never succeeded in easing monetary
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  Speaker 1: policy or raising prices.
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  Speaker 3: And if they had suddenly turned around at that point
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  Speaker 3: and said, right, let's just go backwards and reinstate silver.
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  Speaker 3: Could that have worked? Would that have been even an
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  Speaker 3: option at that point?
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  Speaker 1: No. The irony is that if the US had really
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  Speaker 1: tried to restore silver, it would have failed. There would
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  Speaker 1: have been a flood of investors from outside the country
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  Speaker 1: selling silver and buying up US gold reserves. The US
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  Speaker 1: would have been forced entirely onto silver and effectively had
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  Speaker 1: to devalue the way that China was devaluing the way
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  Speaker 1: that India was devaluing. So the falling silver prices were
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  Speaker 1: a consequence, ultimately, of Bismarck's decision to take Germany off silver.
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  Speaker 1: And the U.S. would have faced the same market pressures
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  Speaker 1: that forced all of Europe and France to abandon silver.
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  Speaker 1: It's an example of what is known as Gresham's Law.
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  Speaker 1: that bad money drives out good money.
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  Speaker 3: Absolutely. It's also an example of that infamous image of
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  Speaker 3: a flap of a butterfly's wing can cause a hurricane
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  Speaker 3: on the other side of the world in our sort
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  Speaker 3: of globally interconnected markets. It's worth remembering that, you know,
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  Speaker 3: you had a lot of financial globalization in the 19th
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  Speaker 3: century with all these chain reactions and unintended consequences. Okay,
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  Speaker 3: so to set the scene before we go to the
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  Speaker 3: second half of this episode, We have the U.S. stuck
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  Speaker 3: on the gold standard with disastrous consequences for farmers who
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  Speaker 3: are facing an economic depression. And as so often in
• 22:41
  Speaker 3: the world, when you have an economic pain playing out,
• 22:45
  Speaker 3: you end up with volatile, angry politics. So populism is rising,
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  Speaker 3: finger-pointing and xenophobia is arising. And out of this comes
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  Speaker 3: our second protagonist, who is a populist firebrand orator who
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  Speaker 3: comes out of nowhere. to suddenly dominate American politics, a
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  Speaker 3: bit like, dare I say it, President Trump in 2016.
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  Speaker 3: And we'll be talking about him and the parallels to
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  Speaker 3: today after the break. So listen on.
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  Speaker 4: Investors today are most worried about three key factors, interest rates,
• 23:24
  Speaker 4: the corporate credit cycle, and the impact of artificial intelligence.
• 23:28
  Speaker 4: Artificial intelligence is impacting the jobs market and corporate margins.
• 23:32
  Speaker 4: Interest rates are of concern because people are wondering when
• 23:35
  Speaker 4: will the Fed start to raise or lower interest rates again.
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  Speaker 4: And finally, the corporate credit cycle. If the economy is
• 23:41
  Speaker 4: to weaken, what does that mean for the ability of
• 23:44
  Speaker 4: corporate credit to hold up? We are thinking about the
• 23:47
  Speaker 4: next generation and constantly adapting our portfolios to meet their needs.
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  Speaker 3: So we're back. So, Ljekut, we're now in the 1890s,
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  Speaker 3: after the disasters of 1873 have gone on to create
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  Speaker 3: an economic depression and a lot of pain, a lot
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  Speaker 3: of populist anger. And none of the economic and monetary
• 24:14
  Speaker 3: policies problems that we've been talking about have actually been resolved.
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  Speaker 3: So at this point, a new politician pops up very dramatically.
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  Speaker 3: Tell us about him and where he came from.
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  Speaker 1: William Jennings Bryant. was a young and relatively unknown congressman
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  Speaker 1: from rural Nebraska who was first elected to Congress in
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  Speaker 1: 1890 at the age of 30. He was a messianic
• 24:41
  Speaker 1: orator and a religious zealot who loved to use biblical references.
• 24:47
  Speaker 1: And he positioned himself as a champion of the long-suffering
• 24:50
  Speaker 1: farming community and made the remonetization of silver his personal
• 24:56
  Speaker 1: crusade He called the cause of free silver a cause
• 25:02
  Speaker 1: as holy as the cause of liberty, the cause of humanity.
• 25:07
  Speaker 1: So you get a sense of his rhetoric. Now, there
• 25:13
  Speaker 1: was a dark side. He happily traded in xenophobic and
• 25:17
  Speaker 1: anti-Semitic conspiracy theories, blaming foreign bankers for America's woes.
• 25:24
  Speaker 3: Well, all of that sounds horribly familiar again today. And obviously,
• 25:29
  Speaker 3: he was a radically different character from Sanovit to John Sherman. Now,
• 25:34
  Speaker 3: as I understand it, in 1890, John Sherman was a
• 25:38
  Speaker 3: big name in US politics, never mind the criticism he'd
• 25:42
  Speaker 3: suffered around the silver issue before. But William Jennings Bryan
• 25:46
  Speaker 3: was still an absolute nobody. He was just a sort
• 25:49
  Speaker 3: of newly elected congressman from a rural backwater. How did
• 25:53
  Speaker 3: he end up having this meteoric political rise? Because in
• 25:57
  Speaker 3: those days, there was no cable TV or social media.
• 26:00
  Speaker 3: How did he suddenly burst on the scene?
• 26:03
  Speaker 1: Well, within six years of entering the House, he was
• 26:06
  Speaker 1: the Democratic nominee for president at the age of 36.
• 26:09
  Speaker 1: His rise can be largely attributed to a single issue, silver.
• 26:15
  Speaker 1: Here's what happened. In 1892, in a clean sweep, The
• 26:22
  Speaker 1: Democrats captured the presidency, the Senate, and the House. Now,
• 26:28
  Speaker 1: because the party had become excessively identified with the free
• 26:34
  Speaker 1: silver movement, it sparked the fear that the U.S. would
• 26:39
  Speaker 1: abandon the gold standard. Gold flooded out of the country.
• 26:44
  Speaker 1: The cost of money shot up, at one point hitting
• 26:48
  Speaker 1: 74% per annum. During the ensuing financial panic, the economy
• 26:55
  Speaker 1: was plunged into a deep recession, essentially because of the
• 27:01
  Speaker 1: run on the dollar. The newly elected Democratic president, Grover Cleveland,
• 27:06
  Speaker 1: now found himself in a terrible quandary. To prevent a
• 27:12
  Speaker 1: collapse of confidence in the dollar, he was forced to
• 27:16
  Speaker 1: disavow the free silver wing of the party, splitting the
• 27:21
  Speaker 1: Democrats down the middle. In 1894, as a consequence of
• 27:28
  Speaker 1: the deep recession, Democrats lost the House. Eventually, to stabilize
• 27:35
  Speaker 1: confidence in the dollar, Cleveland was forced to borrow gold
• 27:41
  Speaker 1: through J.P. Morgan and the Rothschilds. William Jennings Bryan by
• 27:48
  Speaker 1: then had made himself the face of free silver. He
• 27:52
  Speaker 1: was only 36 years old, untainted by the party's failures,
• 27:58
  Speaker 1: and had spent the last four years building a reputation
• 28:02
  Speaker 1: as a spellbinding orator on the silver question, and now
• 28:06
  Speaker 1: saw his opportunity. He famously attacked the gold deal by
• 28:12
  Speaker 1: comparing the Rothschilds to Shylock, demanding his power. pound of
• 28:18
  Speaker 1: flesh in the merchant of Venice. And then in 1896,
• 28:26
  Speaker 1: he delivered perhaps the most consequential speech at an American
• 28:32
  Speaker 1: political convention. This was the famous Cross of Gold speech.
• 28:37
  Speaker 2: If they dare to come out in the open field
• 28:39
  Speaker 2: and defend the gold standard as a good thing, we
• 28:42
  Speaker 2: will fight them to the uttermost. having behind us the
• 28:46
  Speaker 2: producing masses of this nation and the world, supported by
• 28:50
  Speaker 2: the commercial interests, the labouring interests, and the toilers everywhere,
• 28:55
  Speaker 2: we will answer their demand for a gold standard by
• 28:58
  Speaker 2: saying to them, you shall not press down upon the
• 29:02
  Speaker 2: brow of labour this crown of thorns. You shall not
• 29:07
  Speaker 2: crucify mankind upon a cross of gold.
• 29:11
  Speaker 1: Wow.
• 29:12
  Speaker 3: Well, if anyone thinks that monetary policy is boring... think again,
• 29:16
  Speaker 3: because we're showing just how explosive it can be sometimes.
• 29:19
  Speaker 3: But a bit of a spoiler alert here. On that
• 29:23
  Speaker 3: background we've just heard about, you might have presumed that
• 29:27
  Speaker 3: he then rocketed up with his populist message to become
• 29:29
  Speaker 3: president of the United States. And yet he didn't. So
• 29:34
  Speaker 3: what happened to deny him the presidency?
• 29:36
  Speaker 1: Well, he lost decisively, first of all. The Republican candidate,
• 29:41
  Speaker 1: William McKinley, became president for two reasons. One is the
• 29:48
  Speaker 1: entire Northeastern financial establishment rallied against him. Bankers, industrialists, you know,
• 29:57
  Speaker 1: all the money men. The New York Times said of
• 30:00
  Speaker 1: him at the time of his Cross and Gold speech
• 30:03
  Speaker 1: that he's an irresponsible, unregulated, ignorant, prejudiced, pathetically honest and
• 30:10
  Speaker 1: enthusiastic crack.
• 30:13
  Speaker 3: So tell us what you really think. I mean, again,
• 30:16
  Speaker 3: it makes some of the language thrown around the Twittersphere
• 30:18
  Speaker 3: today seem almost mild by comparison, you know, but there
• 30:22
  Speaker 3: you go.
• 30:23
  Speaker 1: The other dilemma was that his time had come and gone.
• 30:28
  Speaker 1: In 1886, two prospectors in South Africa stumbled across the
• 30:35
  Speaker 1: largest gold field in the world on a farm at
• 30:39
  Speaker 1: the Witwatersrand. It ended a 20-year gold drought. And by
• 30:45
  Speaker 1: the time of the 1896 election, the U.S. had finally
• 30:51
  Speaker 1: escaped its post-1873 deflation. And prices had started going up.
• 30:57
  Speaker 1: The Free Silver Movement was never able to recover as
• 31:02
  Speaker 1: a political force.
• 31:03
  Speaker 3: Fascinating. Was there any aspect of the shifting power of
• 31:08
  Speaker 3: the farmers within the political structure of the U.S. as
• 31:10
  Speaker 3: well that mattered? Because I'd imagine that urban voters probably
• 31:16
  Speaker 3: had a different perspective on it.
• 31:17
  Speaker 1: Yes. The U.S. was becoming increasingly urbanized, and Brian's silver
• 31:23
  Speaker 1: campaign offered little to the urban poor. who were not
• 31:27
  Speaker 1: like farmers, heavily indebted.
• 31:29
  Speaker 3: So we have a situation where Brian's had a meteoric rise.
• 31:34
  Speaker 3: It's looked for a while like he might become president
• 31:36
  Speaker 3: on the back of the Free Silver Movement. And then
• 31:40
  Speaker 3: he loses the election. And perhaps we shouldn't be unsurprised
• 31:43
  Speaker 3: that actually the moneyed class, Wall Street, then goes out
• 31:48
  Speaker 3: and celebrates. So what that meant was, you know, you'd
• 31:50
  Speaker 3: had this dramatic political fire around the Coinage Acts of
• 31:53
  Speaker 3: 1873 that had flared up and then finally burned itself out.
• 31:59
  Speaker 3: And I guess one of the questions or one of
• 32:01
  Speaker 3: the lessons is that William Jennings Bryan was maybe right
• 32:05
  Speaker 3: that it's not a good idea to nail your currency
• 32:09
  Speaker 3: and your economy to golden cross. The gold standard presumably
• 32:13
  Speaker 3: did actually prolong the recessions of the 1970s and 1890s
• 32:16
  Speaker 3: and cause deflation, which was very unfair for borrowers like
• 32:20
  Speaker 3: the farmers. So I guess the question is, why did
• 32:23
  Speaker 3: the US government then continue to insist on sticking to gold?
• 32:27
  Speaker 3: Why didn't they just go back to silver or print
• 32:30
  Speaker 3: greenbacks a bit like Ben Bernanke did after the 2008 crisis?
• 32:35
  Speaker 1: Well, there were two constraints. One is they didn't really
• 32:38
  Speaker 1: understand the way the system worked. I mean, it took
• 32:42
  Speaker 1: decades for them to finally cotton on to the constraints
• 32:47
  Speaker 1: imposed by the gold standard. The second is that every
• 32:53
  Speaker 1: time the US looked as if it might soften the
• 32:59
  Speaker 1: gold standard, there would be a run on the dollar.
• 33:02
  Speaker 1: That was at the heart of the 1893 financial crisis.
• 33:08
  Speaker 1: And presidents who tried to experiment or talk about moving
• 33:15
  Speaker 1: away from gold would end up paying a heavy political price.
• 33:23
  Speaker 1: The kowtowing to sort of foreign bankers and markets also
• 33:29
  Speaker 1: fuel populist anger at foreign bankers.
• 33:33
  Speaker 3: So I guess one of the big lessons from all
• 33:35
  Speaker 3: of this, which is incredibly relevant for where we are today,
• 33:39
  Speaker 3: is that it's not a great idea to tie your
• 33:42
  Speaker 3: currency's value to a random precious metal, whether it's gold
• 33:46
  Speaker 3: or silver or anything else. And the reason I say
• 33:48
  Speaker 3: that's so relevant for today is there's a lot of
• 33:50
  Speaker 3: concern expressed among some investors about the future of fiat currency,
• 33:55
  Speaker 3: given that we have exploding debt burdens in the US,
• 33:58
  Speaker 3: given that it's unclear whether the government wants to maintain
• 34:02
  Speaker 3: the independence of the Fed, and given the risk of inflation.
• 34:06
  Speaker 3: So some people are saying, well, we need something other
• 34:08
  Speaker 3: than fiat currency to guarantee sound money in the future.
• 34:12
  Speaker 3: And inevitably, there are a few calls for a return
• 34:15
  Speaker 3: to the gold standard. But from what you're saying, this
• 34:18
  Speaker 3: whole story shows that actually, that is not an automatic panacea.
• 34:22
  Speaker 3: or magic wand to fix your problems at all?
• 34:25
  Speaker 1: Yeah, absolutely not. Even during this period, it would spark
• 34:29
  Speaker 1: runs on the currency. The link to gold in the
• 34:34
  Speaker 1: Great Depression of the 1930s was even more pernicious. It
• 34:40
  Speaker 1: prevented countries from responding to mass unemployment by easing their
• 34:47
  Speaker 1: monetary policy. And in effect, led to the rise of fascism.
• 34:54
  Speaker 3: Right. I mean, of course, some people ironically saying that
• 34:58
  Speaker 3: using a currency that's constrained in its supply like Bitcoin
• 35:02
  Speaker 3: is another option for today instead. But that would have
• 35:05
  Speaker 3: the same problem as tying yourself to gold or silver
• 35:07
  Speaker 3: or anything else with capacity constraint.
• 35:09
  Speaker 1: Absolutely. So, no, I think we have to accept that
• 35:16
  Speaker 1: fiat currency, like democracy, may be a terrible thing, but
• 35:20
  Speaker 1: it's the best thing we have.
• 35:23
  Speaker 3: Or the least bad option we have, perhaps, if I
• 35:25
  Speaker 3: were to put it.
• 35:25
  Speaker 1: Yeah.
• 35:26
  Speaker 3: Which, of course, is another reason why we have to
• 35:28
  Speaker 3: hope that our central bankers and governors, governments, will be
• 35:32
  Speaker 3: really scrupulous and responsible in how they actually handle it,
• 35:38
  Speaker 3: which right now, of course, is a great concern. But,
• 35:40
  Speaker 3: of course, the other great lesson from all this is
• 35:42
  Speaker 3: that what issues that start off seeming incredibly geeky and obscure...
• 35:48
  Speaker 3: and deeply linked to financial concepts that no one normally
• 35:52
  Speaker 3: cares about or monetary abstract ideas can end up being
• 35:56
  Speaker 3: politically explosive. And so I'm curious, what ended up happening
• 36:02
  Speaker 3: to the two key characters here who were so different
• 36:06
  Speaker 3: in nature, but ended up being entwined with each other?
• 36:09
  Speaker 1: Well, take John Sherman. I mean, he was right on
• 36:14
  Speaker 1: the finance side, but wrong on the economics and dead
• 36:19
  Speaker 1: wrong on the politics. I mean, he correctly foresaw that
• 36:24
  Speaker 1: the days of silver were numbered, that after Bismarck had
• 36:29
  Speaker 1: caused Europe to abandon silver, the U.S. had no hope
• 36:35
  Speaker 1: of remaining on silver. But by preempting the end of silver,
• 36:40
  Speaker 1: Sherman made himself the lightning rod for two decades of
• 36:45
  Speaker 1: political ill will and damage the Republican Party's brand. William
• 36:51
  Speaker 1: Jennings Bryan, on the other hand, may have been right
• 36:55
  Speaker 1: on the economics. He understood the gold standard was a
• 36:59
  Speaker 1: giant burden on farmers, but he was wrong on the politics,
• 37:05
  Speaker 1: and he was wrong on the finance. The fact that
• 37:09
  Speaker 1: he failed to understand the international financial constraints that the U.S.
• 37:15
  Speaker 1: was operating on. and lived under the illusion that the
• 37:21
  Speaker 1: US could go back to silver without any long-run consequences
• 37:28
  Speaker 1: undermined his stance.
• 37:31
  Speaker 3: And he also ended up having quite a mixed political
• 37:35
  Speaker 3: career in subsequent years, didn't he? Both in terms of
• 37:38
  Speaker 3: religious fundamentalism and in other aspects to do with World
• 37:42
  Speaker 3: War I.
• 37:43
  Speaker 1: Yeah, I mean he was a you know, ultimately he
• 37:47
  Speaker 1: was a total failure. He ran again twice in 1900
• 37:53
  Speaker 1: and 1908. In 1908, he dropped silver as a major
• 37:58
  Speaker 1: plank of his campaign. But he also served as Secretary
• 38:05
  Speaker 1: of State under Woodrow Wilson and tried unsuccessfully to keep
• 38:09
  Speaker 1: the U.S. out of World War I. But I suppose
• 38:13
  Speaker 1: he's best remembered today for a quixotic crusade against Darwin's
• 38:20
  Speaker 1: theory of evolution.
• 38:22
  Speaker 3: Wow.
• 38:23
  Speaker 1: I mean, he was a religious fanatic. He believed in
• 38:27
  Speaker 1: the literal word of the Bible. So he testified as
• 38:31
  Speaker 1: a witness in the Scopes trial of 1925, where a
• 38:36
  Speaker 1: school teacher was accused of breaking Tennessee law by teaching evolution.
• 38:43
  Speaker 1: So he never really adjusted to the modern world.
• 38:47
  Speaker 4: Wow.
• 38:48
  Speaker 3: So I guess, you know, one of the other lessons
• 38:50
  Speaker 3: is there's nothing new under the sun because here we
• 38:52
  Speaker 3: are today in America with the rise of the Christian right,
• 38:57
  Speaker 3: where we have a lot of xenophobia bubbling again. We
• 39:00
  Speaker 3: have a lot of populism, a lot of finger pointing
• 39:02
  Speaker 3: and blaming. We have the rise of the gold bugs. Again,
• 39:06
  Speaker 3: people calling for a return to the gold standard. You know,
• 39:09
  Speaker 3: I'm constantly getting research in my inbox from people talking
• 39:13
  Speaker 3: about that. And I used to joke when I was
• 39:16
  Speaker 3: overseeing the US editorial part of the FT that gold,
• 39:21
  Speaker 3: the word gold was a bit like Kim Kardashian for
• 39:23
  Speaker 3: Financial Times readers. The minute you put in a headline,
• 39:26
  Speaker 3: the readership would soar because people were so obsessed about it.
• 39:29
  Speaker 3: So you've got all these currents swirling together and you've
• 39:33
  Speaker 3: got President Trump having attacked the Federal Reserve for its
• 39:38
  Speaker 3: monetary policy and putting monetary politics on the front page
• 39:41
  Speaker 3: of newspapers again. So what lessons do you think we
• 39:45
  Speaker 3: can learn from all this about where we are today?
• 39:48
  Speaker 3: Not just in America, but across the modern world.
• 39:51
  Speaker 1: Well, I think two things one is that Monetary policy
• 39:57
  Speaker 1: is incredibly important That and it's not just simply a
• 40:03
  Speaker 1: matter of what happens in financial markets Whether we have
• 40:07
  Speaker 1: tight money or easy money has a direct impact on
• 40:12
  Speaker 1: the average person secondly Monetary policy is best taken out
• 40:18
  Speaker 1: of the political sphere. The politicians are unable to resolve
• 40:26
  Speaker 1: the issues in the national interest. And that is why
• 40:32
  Speaker 1: we've ended up with independent central banks where experts can
• 40:39
  Speaker 1: debate the issues and try and act as best as
• 40:44
  Speaker 1: they can. in the national interest.
• 40:46
  Speaker 3: Absolutely. Well, I hope that President Trump is listening. I
• 40:49
  Speaker 3: hope that the new Fed Chair Kevin Walsh is also
• 40:52
  Speaker 3: listening to that. And I take away two extra lessons.
• 40:55
  Speaker 3: One is that politicians tend not to do the right
• 40:58
  Speaker 3: thing until there's a crisis. Let's hope we avoid one now.
• 41:02
  Speaker 3: And the fourth thing I take away, which is perhaps
• 41:05
  Speaker 3: the center of the Story of Money podcast, is that
• 41:08
  Speaker 3: history matters. We have to look back at the past
• 41:10
  Speaker 3: sometimes to make sense of the present and see where
• 41:14
  Speaker 3: the future might be going as well. So on that note,
• 41:18
  Speaker 3: thank you very much indeed, Liakat, for joining us. I
• 41:20
  Speaker 3: loved your book, The Lords of Finance. I love this
• 41:24
  Speaker 3: one arguably even more. And it's great to have your perspective.
• 41:27
  Speaker 3: So thank you.
• 41:28
  Speaker 1: Thank you, Julian. And thank you for having me on.
• 41:31
  Speaker 3: That's it for this week's episode of The Story of Money.
• 41:34
  Speaker 3: If you liked this episode, make sure you subscribe and
• 41:38
  Speaker 3: review the show and leave us a comment if you
• 41:40
  Speaker 3: have time. But before I go, there's one other thing
• 41:43
  Speaker 3: to tell you about, which is that this September, Robin
• 41:46
  Speaker 3: and I will be recording an episode of The Story
• 41:48
  Speaker 3: of Money in front of a live audience, which could
• 41:51
  Speaker 3: include you at the FT Weekend Festival in London. So
• 41:55
  Speaker 3: if you want to see how we make this show,
• 41:57
  Speaker 3: how the podcast Sausage is made, then you too can
• 42:01
  Speaker 3: come and join in and listen. So I'm Gillian Tett,
• 42:04
  Speaker 3: and we'll see you again next week.