Money Mischief_ Episodes in Monetary History - Milton Friedman [26]
As Paul O'Leary summarized the evidence: "[I]t seems only reasonable to conclude that the failure to include provision for the standard silver dollar in the Coinage Act of 1873 was based not upon recognition of the existing economic facts but rather upon calculated hostility to silver as a part of the monetary standard. The Act anticipated the future. It was purposive and deliberate in the mind of the man [according to Nugent, "men"] who largely framed the legislation and saw it through the Congress. In this sense, the silver people are correct in holding that it was the result of 'malice aforethought.' It was expected to accomplish and did accomplish a result going far beyond a mere 'tidying up' of our coinage laws and procedures."
O'Leary went on to say: "For the next twenty-seven years the silver question bedeviled the politics and the finances of the United States. Silver never won back the place it would have enjoyed had the Act of 1873 not failed to include provision for the coinage of the standard silver dollar. The consequences of not striking down the free and unlimited coinage of the silver dollar could have been vast for subsequent American financial, economic, and political life. That is, however, another story" (1960, p. 392).*
A story to which we now turn.
The Consequences of the Coinage Act of 1873
Eliminating the free coinage of silver had major consequences because of one central fact cited by Linderman: the likely decline in the world price of silver relative to that of gold. Had there been no decline in the silver-gold price ratio—or, as it is more usually expressed, no rise in the gold-silver price ratio—it would have been irrelevant whether the fateful line was included or omitted in the act of 1873. In either event, the pre-Civil War situation of an effective gold standard would have continued when and if the United States resumed specie payments.
As it was, however, a rise in the gold-silver price ratio had started well before Congress passed the act of 1873 and was in full swing when the United States resumed specie payments in 1879. Resumption by the United States on the basis of gold was the final nail in the coffin of silver. The gold-silver price ratio, plotted in Figure 1, fluctuated around 15.5 (the mint ratio in France) for decades before the gold discoveries in California in 1848 and in Australia in 1851. It then fell to a low of nearly 15 by 1859, when it started an irregular but more or less steady rise.* The rise speeded up rapidly after 1870, as one European country after another shifted from a silver or bimetallic standard to a single gold standard—a tribute to the leadership of Britain, by then recognized as the dominant economic power. Germany shifted in 1871–73, after its defeat of France and imposition of a large war indemnity payable in funds convertible into gold. France, which had maintained a bimetallic standard since 1803, despite first major silver and then major gold discoveries, demonetized silver in 1873—74, along with the other members of the Latin Monetary Union (Italy, Belgium, and Switzerland). The Scandinavian Union (Denmark, Norway, and Sweden), the Netherlands, and Prussia followed suit in 1875-76, and Austria in 1879. By the late 1870s, India and China were the only major countries on an effective silver standard. The resulting increased demand for gold, along with the increased supply of silver for nonmonetary purposes, produced a dramatic rise in the