The "Gilded Age"

In our last lecture we introduced the term the "Gilded Age," which was first coined by a popular writer from Missouri, Mark Twain (his real name was Samuel Clemens).

He described the era towards the end of the 1880s as "gilded" because it appeared golden, but beneath the shiny surface was greed, corruption and hardship. Mark Twain wrote a novel by that name in which Washington, D.C. was run by greedy businessmen and corrupt government officials. (Mark Twain wrote several other influential novels, including "The Adventures of Huckleberry Finn," describing a fictional journey on a raft on the Mississippi).

The Gilded Age featured "robber barons," who were people who became extremely wealthy through ruthless business practices. The worst "robber baron" was Jay Gould, a financier on Wall Street who committed rampant fraud by printing false stock certificates to defraud investors. He even tried to corner the gold market in 1869. That led to a financial panic known as Black Friday. After Gould drove up the price of gold by hoarding it, President Grant learned of the scheme and started selling the government gold reserves on the market to cause the price to fall. The price of gold then fell sharply, and many lost everything they had. Gould, however, had sold out at the highest price to make the biggest profit!

There were also phenomenal successes during this era. Andrew Carnegie immigrated from Scotland without any money and ended up with massive wealth from founding the Carnegie Steel Co. (later became U.S. Steel Co.). He amassed a fortune that he then donated to build structures like Carnegie Hall, Carnegie-Mellon University, and the enormous New York Public Library (plus 2800 other public libraries). He wrote the "Gospel of Wealth" in 1900 to describe his vision of capitalism.

Debate: it wasn't the "Gilded Age," it was the "Golden Age!" Agree? Debate: do you support "caveat emptor," or do you prefer government regulation of monopolies and robber barons?

Bimetallism

Under the Grant Administration, gold was the basis for money: debts were payable in gold, and paper money could be traded in at any time for a fixed amount of gold. This prevented inflation because the amount of gold in the world was small and nearly constant.

But from about 1878 to the end of the century there was strong pressure to return the nation's standard for money to Alexander Hamilton's "bimetallism", under which money and debts were based on two metals rather than one (gold and silver). With gold as the standard, advocating "bimetallism" meant adding a silver standard to the gold standard.

Two forces drove this pro-silver or "free silver" movement: Westerners had discovered silver mines so they wanted the silver to become more valuable, and farmers wanted to cause inflation to increase the prices for their goods and lower the real cost of their debts to the banks.

Westerns and Southerners arranged for passage of the Bland-Allison Act in 1878, which required the government to purchase $2-4 million worth of silver each month. In addition, a bill passed (over President Rutherford Hayes' veto) allowing for the free and unlimited coinage by the government of silver, such as silver dollars, at a ratio of 16 to 1 relative to gold. The government began minting silver dollars that are collectors' items today (and worth much more than one dollar now).

But the price of silver fell as more was mined, because more of something usually means it is less valuable. The monthly government purchases declined also. Deflation continued for the next ten years. $100 in 1878 was equivalent to only $84.43 in 1890. Imagine that! Deflation is devastating to farmers, as their income from milk and beef and other farm products decreases, while their debts grow higher in real value.

Westerners wanted more silver purchased, and the debtors and farmers wanted inflation. They forced passage of the Sherman Silver Purchase Act in 1890, which required even greater purchases by the government of silver. The Silver Purchase Act required the government to issue notes (like large-denomination dollar bills) to purchase 4.4 million ounces of silver each month, regardless of its value in dollars. The bill passed in a compromise with the Northerners, who obtained a high tariff at the same time through passage of the McKinley Tariff Bill.

The paper notes used to buy the silver each month were redeemable in gold, which was more valuable than the increasingly plentiful silver. So pretty soon the public was demanding gold from the government in return for these new notes. This created a "run" on the government's gold reserves of our nation, with its total supply falling below $100 million and headed quickly towards zero.

This became the Panic of 1893, and the Silver Purchase Act was repealed in order to stop the run on gold. An immensely wealthy Wall Street banker, J.P. Morgan, arranged for more gold to be imported from Europe to protect the government reserves. The "run" on the government's gold reserves then stopped.

There was a bestselling and influential pamphlet called "Coin's Financial School" which was published just after the panic and economic depression of 1893. In this fictional work, professor Coin lectures gold-standard advocates on the benefits of monetizing silver at a 16:1 ratio. The pamphlet swept the country, much as Thomas Paine's "Common Sense" had been so influential over a century earlier. Coin's pamphlet laid the foundation for William Jennings Bryan's "Free Silver" presidential campaign in 1896 against pro-gold Republican William McKinley. Bryan, one of the greatest orators in history, delivered his famous "Cross of Gold" speech to the Democratic National Convention in 1896:^[4]

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it. ...

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

Reporters wrote that Bryan's remarkable speaking style for this speech "came like one great burst of artillery" and that "some, like demented things, divested themselves of their coats and flung them high in the air." Bryan was then selected on the next day, by the delegates who heard his speech, as the Democratic nominee for president.^[4]