Money Mischief_ Episodes in Monetary History - Milton Friedman [43]
The price decline of the 1870s that is recorded in Figure 1 affected silver as well as other commodities. By 1876, the dollar price of silver was lower than the official legal price. As explained in chapter 3, if provision for the free coinage of silver had not been omitted from the Coinage Act of 1873, the United States would have resumed specie payments in 1876 on the basis of silver, not gold. Dollar prices would have ceased to decline or would have declined at a lower rate, and most of the monetary agitation of the following decades would not have occurred.* As it was, the price level continued to fall and the agitation to increase. The result was a number of bills in the late 1870s, culminating in the Bland-Allison Act of 1878, which provided for the government's purchase of a limited amount of silver each month as a sop to the silver interests. A brief price rise after the enactment of resumption quieted the agitation for a time, but when prices again started to fall, the agitation again mounted. It produced the Sherman Silver Purchase Act, passed in July 1890 "by a Republican Congress as a purported concession to the West for the support of the protectionist McKinley Tariff Act of 1890, sought by the industrial East" (Friedman and Schwartz 1963, p. 106). By comparison with the Bland-Allison Act, the Sherman Act roughly doubled the amount of silver the government was required to purchase. "The year 1890 [also] produced a great number of free-coinage planks in state political platforms.... After 1890 the silver movement began to sweep into flood tide" (Barnes 1947, p. 372). The rising tide of agitation explains why prices in the United States fell so much more sharply after 1888 than they did in Britain. "The disastrous panic year of 1893 ... was fruitful in stirring the demand for free silver over the stricken nation" (Barnes 1947, p. 372). By 1896, it was a foregone conclusion that the Democrats would embrace free silver—and would split in two, with the eastern Gold Democrats in revolt.
Was 16 to I a Crackpot Idea?
The price of silver fell throughout the 1870s, '80s, and '90s. The price of gold was fixed under the gold standard at $20.67. Accordingly, the gold-silver price ratio rose from about 16 to 1 in 1873, when the fateful line was omitted from the Coinage Act, to 30 to 1 at the time of Bryan's nomination. However plausible 16 to 1 might have seemed as a legal ratio in 1873, by 1896 it seemed to the financial community a recipe for disaster. Its adoption would, they believed, produce an outrageous inflation. Bryan and his followers were proposing to nearly double the nominal price of silver, from the then prevailing market price of 68 cents an ounce to the legal price still on the books of $1.29. It seemed plain to the financial community that other prices would have to rise in proportion, in particular the price of gold. But that would break the monetary link between the U.S. dollar and gold-standard currencies, would produce a major depreciation in the exchange rate between the U.S. dollar and the gold-standard currencies, and, in the financial community's view, would devastate the channels of international trade. What a crackpot idea!
This conclusion, though not necessarily the precise reasoning, has become the conventional wisdom among both economic and other historians, as has the related view that the termination of the free coinage of silver by the Coinage Act of 1873 was, as James Laurence Laughlin put it in 1886, "a piece of good fortune, which saved our financial credit and protected the honor of the State. It is a work of legislation for which we can not now be too thankful" (1895, p. 93).
In chapter 3, I concluded that Laughlin was wrong, that the act, far from being "a piece of good fortune," "was the opposite—a mistake that had highly adverse consequences" for both the United States and the world. I concluded that the retention of bimetallism at 16 to