Money Mischief_ Episodes in Monetary History - Milton Friedman [28]
Though this silver was purchased at market prices, it was valued for monetary purposes at the higher legal price, the difference being treated as seignorage. The silver was mostly coined into standard silver dollars. However, most of the coins were stockpiled in the Treasury as reserves for pieces of paper called silver certificates, or, after 1890, treasury notes of 1890. These were nominally convertible into silver, but they were also legal tender effectively convertible into gold. Hence, it was cheaper to get silver by using the paper money to buy it on the market, rather than convert the paper money into silver at the fictional legal price. In effect, the silver certificates were fiat money, differing from the greenbacks only because the historic role of silver as money made it more acceptable for the government to increase the money supply by buying silver rather than by openly issuing fiat money. Increasing the money supply in that way also had the political effect of harnessing the silver interests to the populist cause of inflation. The stock of silver in the Treasury was the counterpart to the stock of wheat the U.S. government currently holds as a result of its attempt to prop up the price of wheat.
A 1.7 percent per year decline in prices may seem too mild to generate the kind of agitation that bedeviled the country in the two decades from resumption to the end of the century. But several considerations argue otherwise. First, the 1.7 percent is for a price index that covers all goods and services (the implicit price deflator). The wholesale prices of agricultural and other basic commodities doubtless fell at a greater rate (3.0 percent a year by one index). At least as important is the fact that we all want the prices of the things we sell to go up, not down; sellers of goods and services are almost invariably inflationists. True, we want the prices of the things we buy to go down. But as consumers we buy many things, whose prices are moving in different directions, and this makes us far less acutely aware of what is happening to the overall price level than of what is happening to the specific prices of the things we sell. And that was much truer in the nineteenth century, when data on the economy as a whole were few and far between, than it is now. Moreover, at all times, sellers tend to be relatively few in numbers and to be organized, so that they have more political clout than the dispersed consumers who benefit from declining prices. That was particularly true of the producers of silver, who clearly had much to gain by the adoption of a silver standard. Though few in number, they were politically influential because the sparsely populated silver states had the same representation in the U.S. Senate as the densely populated urban states did. (For a much later manifestation of their political clout, see chapter 7.)
An additional factor was that farmers are generally net monetary debtors. As such, they are harmed by a fall in prices, which raises the real value of their debt, and are benefited by a rise in prices, which reduces the real value of their debt. As debtors, they were particularly susceptible to the propaganda representing "the crime of 1873" as the evil machinations of a cabal of eastern and foreign capitalists: Wall Street versus Main Street.*
One paradoxical result of the agitation for inflation via silver was that it explains why deflation was more severe in the United States than in the rest of the gold-standard world (1.7 percent versus 0.8 percent). As Anna Schwartz and I concluded (1963, [>]): "This entire silver episode is a fascinating example of how important what people think about money can sometimes be. The fear that silver would produce