Free Silver or Free Silver or Cross of GoldCross of Gold

(Activity 27)(Activity 27)

MysteryFrom 1870 to 1900, prices for goods and services purchased by American consumers generally declined. For Farmers, this meant lower costs, since prices for supplies and equipment declined. Yet many farmers supported the Greenback and Free Silver movements--movements committed to increasing the money supply in order to raise prices.

Why would farmers support policies that would increase the prices they would have to pay for tools, clothing, household goods and all the other things needed by their families.

VOCABULARY

Greenbacks: paper money not backed by gold.

Deflation: decrease in the overall price level-- the purchasing power of money increases.

Inflation: increase in the overall price level-- the purchasing power of money decreases.

Gold Standard: bank notes exchanged for gold.

Bimetallic Standard: bank notes could be exchanged for gold or silver

Index Numbers: takes average of prices for large number of goods and compares it to a base year (such as 1880) and comparing it to prices in other years. (ie CPI)

CONCEPT

A decrease in the money supply normally causes prices to go down, UNLESS the quantity of goods and services available for sale decreases even more.

ECONOMIC HISTORY•1870s-1900s: time of great deflation•During Civil War, the US government greatly increased the money supply by issuing greenbacks•After the war, the government gradually withdrew greenbacks from circulation, reducing the amount of money available to consumers (see concept)•After the war, production of goods increased dramatically due to improvements in technology and mass-production techniques.•Farm production also increased dramatically

--These factors --These factors caused prices to caused prices to

fall.fall.

Farmers position:•Farmers did not want to see prices fall . . . felt they were being cheated

•Farmers were in debt to buy land, seed, and machinery et.al.

•Farmers borrowed in gold notes and had to repay their debts in gold notes, but the price of gold increased over the course of the century as the price of their commodities dropped.

Farmers tended to support inflationist movements such as Greenback movement and Free Silver movement. (western and southern part of the country)

Banks/business position:•Before Civil War, the US was on bimetallic standard

•Silver is overvalued, so producers of silver objects (jewelry, tableware) will pay more to silver miners than the government would pay for silver to make coins.•CAUSED people to not want to exchange banknotes for silver

•Silver coins could be melted down and sold to producers of silver objects for profit•After the gold rush of 1849, gold was plentiful and people were exchanging bank notes for gold.

Banks and business people tended to support money backed by gold. (Eastern part of country --also much of Europe)

CURRENCY SITUATION:•Coinage Act of 1873 made no provision for minting silver coins (Crime of 1873)•Price of silver began to fall as the supply of silver increased

•rich silver strikes were discovered in the west

•More silver sold in international markets by European nations that were adopting gold standard

•Farmers and silver producers, “the SILVERITES” pressed for free silver (the unlimited purchase and coinage of silver by government)•Only in the 1890s did price of silver rise (because the supply of gold increased)

•Major gold strikes in Alaska and South Africa

•New technology (cyanide) made gold mining easier and cheaper

•Increase of US exports causing gold to come into the US

Visual 27.4

PRICES FOR FARM PRODUCTS 1864-1896

Prices for farm products fell by 60 percent from 1864 to 1896 and by an additional 20 percent between 1886 and 1896.

WHEAT: $3.00 a bushel in 1866

56 cents a bushel in 1894

COTTON: 40 cents a pound in 1866

7 cents a pound in 1894

U.S. WHOLESALE PRICE INDEX, 1870-1890(BASE YEAR 1880)

1870 1875 1880 1885 1890

135 118 100 85 82

1. WHAT HAPPENS TO BORROWERS DURING DEFLATION? Year One Year Two Year Three Price Index = 100 Price Index = 90 Price Index = 81Total Income $1,200 $1,080 $972Farm Supplies, - 550 - 495 - 455.50Living Expenses Loan Payments - 500 - 500 - 500Net Income _____ _____ _____

2. WHAT HAPPENS TO BORROWERS DURING INFLATION? Year One Year Two Year Three Price Index=100 Price Index=110 Price Index=121Total Income $1,200 $1,320 $1,452Farm Supplies, - 550 - 605 - 665.50Living Expenses Loan Payments - 500 - 500 - 500Net Income _____ _____ _____

Visual 27.8

WHAT IS A GOLD STANDARD?•Government guarantees to exchange gold for its national currency at a fixed rate.•Both domestic and foreign holders of that currency can redeem the currency in gold

•When a nation imports more than it exports, it pays the difference in gold

•The money supply of a nation on the gold standard is limited by the amount of gold available. Banks must be prepared to pay out gold in exchange for checks written against the accounts of their customers. This limits the number of loans bankers can prudently write.•Advantage of gold standard is that it tends to prevent inflation.•Disadvantage is that the money supply may not be able to grow as the economy grows.

FISCAL POLICYGovernment policies to stabilize the economy

METHODS:•Raise/lower taxes•Raise/lower spending

TODAYMONETARY POLICYFederal Reserve (1913) policies to control the money supply which helps stabilize the economy

METHODS:•Increase/decrease interest rates•Increase/decrease reserve requirement•Buy/sell T-bills

ConclusionsFarmers believed that an increase in the money supply would cause prices of farm products to rise. (probably not true as farm prices are determined by worldwide forces of supply and demand)

With free silver, farmers believed those who had taken out loans could pay them back in cheaper dollars. (True. When inflation occurs money is worth less and the borrower is paying back less in terms of goods and services than when he/she originally borrowed)

When the quantity of available goods and services increases faster than the amount of money in circulation, prices tend to fall.

Disaster at the Disaster at the Teller’s Window: Teller’s Window: A Banking TragedyA Banking Tragedy

(Activity 28)(Activity 28)

MysteryMost people today have no recent memory of banks failing. Yet, for people in the nineteenth century, bank failures were common events. Why did so many banks fail in the nineteenth century? Why is it very rare for a bank to fail today?

FISCAL POLICYGovernment policies to stabilize the economy

METHODS:•Raise/lower taxes•Raise/lower spending

TODAYMONETARY POLICYFederal Reserve (1913) policies to control the money supply which helps stabilize the economy

METHODS:•Increase/decrease interest rates•Increase/decrease reserve requirement•Buy/sell T-bills

ConclusionsMoney panics and bank runs occurred in the nineteenth century because banks whose customers made too many withdrawals had no reliable source from which to borrow new reserves.

The discount rate is the interest paid by member banks on the reserves that they have borrowed. If the Federal Reserve district bank wanted to encourage business activity within its district, it could lower the discount rate (interest rate) which would tend to increase the amount of money in circulation.