|The Crime of 1873
Summary of a presentation given the 16 April 1997 by François Micheloud
at the seminar of professor Charles Wyplosz at HEI in Geneva.
This presentation is centered around a paper Milton
Friedman published in 1990 (The Crime of 1873, namely, in the JPE) about the silver
agitation in the USA during the last quarter of the 19th century.
Bimetallism and how it worked
The dollar was defined as consisting of either 22.5
grains of gold or 270 grains of silver. This sets the legal price of silver
in terms of gold at 16:1.
Gold and silver had other uses besides from being coined, and
consequently there was also a market for metal bars. They exchange at a market price.
If the market price differs sufficiently (because of
arbitrage costs) of the legal price, a stabilizing arbitrage occurs, where people
buy the relatively cheaper metal in the bullion market and go to the mint to coin it. The
flow of the metal from monetary uses to non-monetary uses (and vice-versa) keeps the
market price in line with the legal price as long as the discrepancies are not too large,
or that the bimetallic countries as a whole are big enough.
If the market price differs too much from the legal price,
the metal that is the cheapest in the bullion market will drive the other out of the money
stock. This is a consequence of the generalized Greshams law which states
that the metal whose worth is less as a metal than as a legal-tender coin will be the only
one used to settle debts, while the other will be hoarded or used as jewelry.
The American monetary system 1792-1911
From 1792 on, the United States are on a gold/silver
bimetallic standard at a ratio of 15:1 and then 16:1, with the exception of the Greenback
period of fiduciary financing of the Civil War.
After the tremendous gold discoveries during the 50s,
gold became grossly overvalued as a legal tender and thus silver coins ceased to
circulate. The country was then on a (monometallic) de facto gold standard.
The 1873 Coinage Act lists all the coins to be minted,
omitting the silver dollar. This removed de jure the country from the bimetallic
regime it was on thus far. There was no effect on the money stock at this moment, because
silver was still more valuable in the market than at the mint.
Soon afterwards, many countries shifted from a bimetallic to
a gold standard, unloading tons of silver and increasing the demand for gold. The market
silver price of gold rose from 16:1 to 40:1.
Effects on the Money Stock, Output and Prices 1873-1896
Between 1873 and 1896 the strong worldwide deflation struck
especially hard in the US, with a 1% annual decline in the general CPI for the whole
The money stock could not keep pace with the tremendous rise
in output during that period (?? % a year) and the spreading monetization of the economy.
Even with a more efficient banking system, the total money stock could not be stretched
far enough on the currency base, the increase in the rate of increase of which had
declined, to avoid deflation.
Political agitation in favor of the free coinage of
Particularly hurt were the net debtors, and among them the
peasant class at most because they had to face a rising real value of their (generally
heavy) debts combined with a decline in agricultural prices of about 3% a year.
The silver producers, the Populist Party, the peasants and
other classes badly struck bad the new monetary regime united behind William Jennings
Bryan, candidate of the Democrats for the Presidential elections of 1896 on an
bimetallist (for inflations sake) and progressive platform which included women
vote, income tax, end of American imperialism.
The urban electorates, the net creditors (bondholders,
bankers and financiers) and other apostles of "sound money " joined the platform
of the Republicans led by their nominee William Mc Kinley.
Epilogue and Assessment
Bryan lost the 1896 election due to a swing of the
farm vote (following a rise in agricultural prices) and the following, but became
secretary of State.
A new gold extraction process using potassium cyanide led in
the 90s to a strong worldwide gold inflation which lasted until WW1.
Bryan himself agreed that what he sought to achieve with the
free coinage of silver (inflation, or at least stability of prices) had been made possible
with gold, and the main tenet of his platform was thus gone.
For Friedman, the free coinage of silver (that is,
bimetallism) would have been desirable in 1873, not in 1896. At the time when Bryan could
have established it, this regime would have been strongly inflationary and anyway gold
became a lot cheaper immediately afterwards. Bryan was trying to close the barn door
after the horse had been stolen. He was right, but 20 years too late.
The Wonderful Wizard of Oz, a children book written by
Frank Baum in 1900, seems actually to be an allegory of the battle for bimetallism, Hugh
Rockoff makes a good case for it in his 1990 paper.
Monetary policy and even monetary regimes can be
debated by non-specialists and can even be a crucial element of a political
Monetary policy is the object of deep interest struggles,
not a neutral variable affecting all people equally and better left to non-accountable
There can be a strong output growth even with secular