The situation had by no means reached its climax. In February, the Philadelphia & Reading Railway went into bankruptcy. In April, the Treasury's reserve slipped below $100 million. In May, National Cordage, the most widely held and actively traded industrial stock on the New York Stock Exchange, followed Philadelphia & Reading into bankruptcy; its stock fell from 147 in January to less than 10 in May, pulling the whole stock market down with it in a panic collapse. Now, the solvency of the banks appeared to be in jeopardy, provoking the public to rush to withdraw their bank deposits-even paper currency seemed preferable. The run on the banks added to the hysteria and drove the interest rate on the shortest-term loans in the New York money market up to 74 percent; time loans were unobtainable. 14 Subsequent railroad failures before the end of 1893 included the Erie, the Northern Pacific, and the Atchison, Topeka, & Santa Fe, to say nothing of fifteen thousand other companies and five hundred banks. In the face of these catastrophes, the only step the government took to relieve the situation was to repeal the Sherman Silver Purchase Act of 1890.
The aftermath of all these terrible events was extremely unpleasant. Unemployment in the United States exceeded 10 percent of the labor force during every year from 1893 to 1898, by far the worst experience of any era in our history aside from the depression of the 1930s.
In April 1894, a ragtag group of several thousand unemployed men organized themselves into what came to be known as Coxey's Army. Starting eastward from the Mississippi, they overran towns and seized railroad trains before appearing at the Capitol in Washington to demand relief. Troops had to be called out to disperse them. In the following month, downward pressure on wages provoked a strike at the Pullman Company (more formally, the Pullman Palace Car Company) that lasted for over two months before being terminated by a government injunction, the first use of the anti-trust laws against labor unions; the socialist leader Eugene Debs directed the strike and spent six months in jail for his efforts. In July, labor groups took possession of the railway system, converging on Chicago while their leaders opened formal headquarters there, from which they issued proclamations "with the assurance of military conquerors."15 The infantry had to be called out on that occasion. Nature decided to reverse her blessings and stunt crops in the United States in 1894 while providing bumper supplies to Europe. Matters were so bad that Civil Service Commissioner Theodore Roosevelt had to sell four acres at Sagamore Hill to keep his family solvent.16
Meanwhile, back in Washington, nothing hopeful was happening to the Treasury's financial position. The excess of expenditure over revenue only worsened. The difference had been covered in the beginning by paying out the legal tender notes, but when they were exhausted the Treasury had no choice but to start using gold to meet its current expenditures. As a result, the gold reserve was deteriorating rapidly. In February 1894, John Carlisle, the Secretary of the Treasury, decided to cover the deficit by selling a new issue of bonds that required payment in gold. His scheme failed, as the market gave the new issue a cold shoulder despite the high rate of interest that Carlisle placed on it to sweeten the deal.
Swallowing his pride, Carlisle traveled to New York himself and put intense pressure on the big banks to buy the government's bond issue, laying patriotism on the line and insisting that another panic must be averted at all costs. Reluctantly, the banks succumbed to his appeal for help. Shortly thereafter, $59 million in gold coin arrived at the Treasury in payment for the new bonds. That was the good news. The bad news was that $24 million of the gold the banks used to pay for the bonds had come from a like amount of legal-tender currency that they had redeemed at the Treasury for gold just a short time before. In actuality, nearly half of the payment for the bonds had been made in legal tenders rather than in the additional supply of gold that the Secretary so urgently required. The game had increased the gold reserve by only $35 million, not $59 million. After these shenanigans, the Treasury's reserve remained at only $107 million. The deficit for October 1894 soared to $13 million and the gold reserve sank to $52 million.
Carlisle turned once again to the New York banks. Once again, they responded to his urgent request for a loan. But once again, they redeemed legal tenders into gold to meet about half the money they had paid the Treasury for the bonds. A deeply distressed President Cleveland complained that "We have an endless chain in operation, constantly depleting the Treasury's gold and never near a final rest."" In January 1895, $26 million in gold was exported from the United States and $45 million in gold was withdrawn from the Treasury in redemption of legal tenders. The Treasury's gold reserve was approaching $40 million and sinking at a rate of $2 million a day.18
As Noyes describes the situation in the final week of January 1895, "Merchants and bankers now busied themselves putting their houses in order against the expected surrender of the Treasury.... [There was a] common feeling that a few days, and possibly a few hours, would settle the question finally.""
The five years from the passage of the Sherman Silver Act and the Barings crisis in early 1890 to the climax of January 1895 bracketed a series of gold-related disasters that slammed into the American economy with unparalleled magnitude and duration. The nature of both the causes and the effects of those events would reappear in identical form during the catastrophes and contagions that beset the emerging nations one hundred years later, from the Mexican crisis of 1994 to the Asian crisis of 1997-1998.
The difference between the two periods, however, was crucial. In the 1990s, the developed nations, and the United States in particular, joined with international organizations to extend generous credits that stemmed the tide and prepared the groundwork for recovery. In the 1890s, Europe watched while leaving the United States to suffer in isolation. Admittedly, the early 1890s were rough in Europe as well, but it was clear that the Bank of England, the Bank of France, and their counterparts across the Continent were not about to soil their coveted gold bricks by offering them in the form of credits to the untrustworthy Treasury of the United States.
Did the Europeans fail to recognize that perhaps the United States had become "too big to fail"? Indeed, the linkages between the two sides of the Atlantic were developing so rapidly, both financially and in terms of trade, that economic chaos in the United States could only have made matters in Europe far more dangerous than they already were. Or was it the opposite-were the Europeans too focused on the competitive threat from America's looming transformation into the major industrial power of the age? Whatever the motivation, we shall see in the next chapter that that particular form of short-sightedness would reappear in more than one country, with deadly consequences, in the two decades that followed the end of the First World War.
Yet the United States did not go over the brink in January 1895. Indeed, on the very last day of the month, the stock market leaped upward, the dollar suddenly started to strengthen in the foreign exchange markets, and orders to export gold were abruptly canceled. Nine million dollars of gold on ships in the harbor were unloaded overnight.2'
What had happened? Lacking succor from the central banks of Europe and without any international organizations such as the International Monetary Fund, Americans had managed to concoct their own version of what would turn out to be the bailouts of the late twentieth century. They carried out the rescue operation with great skill by combining their genius for improvisation in the face of danger with their unabashed willingness to display raw power when required.
The power was deployed by none other than J. Pierpont Morgan, who would bring to bear all his unique authority and prestige on both sides of the Atlantic. Ron Chernow, biographer of the House of Morgan, refers to the scheme that Morgan engineered as his "most dazzling feat: he saved the gold standard." By lucky coincidence, President Grover Cleveland was a friend of the House of Morgan, having worked at a law firm right next door to the bank during the four years between his two presidential terms. The two were also neighbors in country homes in Princeton, New Jersey. Cleveland was the only Democrat for whom P
ierpont Morgan had ever voted.
There was nothing easy or simple in what took place. In light of the distressed economic situation, popular hatred for New York bankers was more intense and widespread than ever, leaving Cleveland unable to turn to them as Secretary Carlisle had done only a year earlier. Even if the bankers had been more cooperative, there just was not enough gold in the United States to restore solvency to the Treasury. There was no choice but to turn to European financiers, and here the leadership continued to be with the Rothschilds. The Rothschilds agreed to attempt a European bond issue, and their first step was to approach the European branch of the Morgan bank in New York J. S. Morgan & Co. J. S. Morgan, however, demurred, stipulating that they would participate only if Pierpont Morgan himself would handle the American side of the arrangements together with the Rothschild representative in New York, August Belmont, Jr.*
Even though the outflow of gold resumed in early February, the Cabinet in Washington was adamant in their opposition to any suggestion of a bond issue that would put the government of the United States in debt to a bunch of foreign bankers. Pierpont Morgan was apoplectic. He cabled his London partners that the United States was on "the brink of the abyss of financial chaos" and set off at once in a private railroad car for Washington, taking Belmont along with him.21 When he was informed that there was no point in his seeing Cleveland, Morgan declared, "I have come down to see the President and I am going to stay here until I see him." He won his point. He soon joined a meeting with Cleveland, Carlisle, and the Attorney General, during the course of which a clerk came in to inform the Secretary of the Treasury that only $9 million in gold coin remained in the government's vaults.22 Laconic as usual, Morgan stated, "It will be all over before three o'clock." Cleveland now realized he had no choices left. "What suggestions have you to make, Mr. Morgan?" he asked.21
Morgan presented an audacious scheme. He proposed to sell a Treasury bond issue of approximately $65 million to a European syndicate that Morgan and Rothschild would organize, payment to be made in some 3.5 million ounces of gold coin (about one hundred tons), at least half of which would be obtained in Europe. As an inducement to the European banks, the interest rate would be nearly a full percentage point higher than the New York banks had received in Carlisle's 1894 transaction.
Morgan's plan contained three critical elements. The first was in the text of the contract between the syndicate and the Treasury: "The parties of the second part, and their associates hereunder ... as far as lies in their power, will exert all financial influence and will make all legitimate efforts to protect the Treasury of the United States against the withdrawal of gold pending complete performance of this contract."24 In effect, the Morgan-Rothschild syndicate was going to rig the gold market. The second element was to use their own supplies of European currencies to lend to Americans who owed money to Europeans on trade or financial transactions, thereby stanching the demand for conversion of dollars into gold. Finally, the syndicate bound together in this undertaking every banking house in New York City with important European connections, cutting them in on the bond issue as part of the deal.
When news of this unorthodox transaction broke, the public clamor was deafening against what appeared to be a sellout to the foreign bankers. The New York World described the syndicate as "bloodsucking Jews and aliens." In Congress, William Jennings Bryan asked the clerk to read Shylock's bond from The Merchant of Venice.25 The President was unmoved. In his annual message of December 2, 1895, Cleveland observed that he had "never had the slightest misgiving concerning the wisdom of this arrangement."26
The actual daily execution of the plan was watched with skepticism in both London and New York, but it worked. It worked in part because of the mechanics of the plan, but the market's understanding that Europe was providing that kind of support was sufficient to soothe the bankers and investors. The pound sterling, which had been commanding a price of $4.89 in New York, promptly dropped back to its par value of $4.86, facilitating the syndicate's extension of foreign exchange credits to American importers. Soon gold was arriving at the Treasury from Europe at $5 million a month; on July 8, the Treasury reserve was back up to $108 million.27 A virtual buying panic in American securities broke loose on all the European markets. During the spring, every outbound steamer carried piles of American stocks and bonds consigned to European houses.
Although the syndicate did not succeed in holding the pieces together indefinitely, and further weakness appeared later in 1895, the worst was over. The worst was over in many ways, as 1896 would turn out to be the low point for business activity after so many years of recession. Prices would be up by more than 10 percent by the end of the decade. In February 1896, when the U.S. Treasury floated a loan issue of $100 million in the public markets, it received bids amounting to the extraordinary sum of $568 million, inspiring the New York Chamber of Commerce to pass a resolution declaring that "The success of this loan should dispel every doubt as to the ability and intention of the United States Government to redeem all its obligations in the best money in the world. "2s The Treasury's gold reserve would never again fall below $100 million."
Despite these dramatic victories, the silver enthusiasts in 1896 mounted the most powerful of all their attacks on the gold standard. In a convention held in tents in open fields in Chicago, near the present location of the University of Chicago (and what Milton Friedman informs us was known as "Sin Corner" in the 1930s),29 they persuaded the Democratic Party to nominate William Jennings Bryan of Nebraska, only 36 years old, to oppose the 53-year-old Republican William McKinley in the presidential election of 1896.
This was the only election in American history in which the nature of the nation's monetary system came to occupy the central focus; such an issue today would probably lead the voters' eyes to glaze over. This feature of the campaign was not apparent at the beginning. Bryan enthusiastically attacked monopoly, high prices (!), corruption in government, and governmental neglect of the mass of the people. McKinley had been a silver advocate, had voted to authorize free coinage of silver dollars in 1877, and had also voted for the Silver Purchase Act of 1890. But he was convinced that he could win the day by concentrating on the virtues of the high-tariff legislation he so enthusiastically endorsed. McKinley soon found out he would attract no votes from the Democrats on an issue that they considered anathema. He knew, however, that many Democrats were vacillating over Bryan's unqualified support for the demand in their party's platform for "free and unlimited coinage of both silver and gold at the present legal ratio of 16 to 1, without waiting for the aid or consent of any other nation." In fact, eastern Democrats had bolted the party to form the Gold Democrats.
McKinley decided to say less and less about tariffs and more and more about the superiority of gold over bimetallism; on July 30, he came out flatly in favor of the monometallic gold standard. From that moment, the issue was joined and other topics fell by the wayside. As the campaign rolled on, both parties published voluminous quantities of campaign literature on the complex matter of monetary standards, exhorting their followers to instruct themselves on the issues. The electoral contest of 1896 turned out to be unique in history for the educational process in which the voters were invited to participate.
Despite his youth, Bryan was a formidable opponent who was known as "the boy orator from the Platte," "the silver-tongued orator," and "the Great Commoner." He was a man who always knew where he stood, with no words wasted. On one occasion, when he heard that J. P. Morgan had commented that "America is good enough for me," Bryan quipped, "Whenever he doesn't like it, he can give it back."3' His view of economic matters was equally direct: "Money is to be the servant of man, and I protest all theories that enthrone money and debase mankind."31 As one of Bryan's most vocal supporters put it in speaking to a group of farmers, "Raise less corn and more Hell.... Wall Street owns the country.... Money rules and our Vice President is a London Banker. "32
Bryan's famous speech at the Democratic Party conv
ention on July 9, 1896, was in defense of the declaration for bimetallism in the party's platform. The address deserves reading in full-it must have been a marvel to hear. The simplicity of the language, the eloquence of the phrasing, the indisputable confidence in the theme, the powerful organization of the arguments, and the alternation between a soaring sense of idealism and hard-headed political analysis are rare achievements, not just for a political oration but for the poetic quality of Bryan's prose.
Bryan began by claiming to speak "in defense of a cause as holy as the cause of liberty-the cause of humanity."33 He went on,
Ali, my friends, we say not one word against those who live upon the Atlantic coast, but the hardy pioneers who have braved all the dangers of the wilderness, who made the desert to blossom as the rosethe pioneers away out there who rear their children near to Nature's heart, where they can mingle their voices with the voices of the birds ... these people ... are as deserving of the consideration of our party as any people in this country. It is for these that we speak.
Then he takes up the cudgel against the gold standard:
If protection [protective tariffs] has slain its thousands, the gold standard has slain tens of thousands.... When we have restored the money of the Constitution all other necessary reforms will be possible; but until this is done there is no other reform that can be accomplished. ... No personal popularity, however great, can protect from the avenging wrath of an indignant people a man who is ... willing to place the legislative control of our affairs in the hands of foreign potentates and powers.
The Power of Gold: The History of an Obsession Page 32