The Gilded Age and the Gold Standard

0:00Lew gave me the title, Lew always assigns the speaker's titles even without consulting us and he knows us well enough that he knows we'll figure something out and he gave me the title of the gold standard during the Gilded Age which was really in a lot of ways the high-water mark of the gold standard in the US and so I'm going to talk a little bit about the historical perspectives of something John Denson actually said, one of his remarks earlier, he said that a lot of American history It was one big struggle between the sound money people and the unsound money people. And that is certainly true. So I thought I'd start off by giving a little bit of background and also selling my latest book, Hamilton's Curse, on this. And I noticed there's some young students in the room who were taking notes.

0:49And you should write this down. I finally have come up with the scientific language to explain the opponents of sound money. So write this down, all you students out there, lying scoundrels, that's how I would describe it, it's a scientific phrase for this, but I don't want to, I'm not going to give my whole talk about Hamilton, you'll have to buy my book to hear all that, but the origins of central banking and the enemies of sound money really are with Hamilton, there's a publication by the Federal Reserve Board entitled A History of Central of Central Banking in America and they say Alexander Hamilton was the founding father of Central Banking in America and in one sentence they say he even sounded like a contemporary Fed Chairman.

1:39And when I heard that I'm thinking of these crazy sounding statements that Alan Greenspan used to make about irrational exuberance, whatever in the world that might be. I could never understand what the heck he was trying to say when I'd see him on television. And if Hamilton sounded like that, That's not very praiseworthy. But to see where this came from, at the very beginning of the American Republic, there was a group of men, Hamilton was their intellectual leader, who essentially wanted to bring the British mercantilist system to America. The Jeffersonians said, wait a minute, we just fought a revolution against that kind of system, why would we want to adopt it here? and the basic thinking upon the nationalists who were called federalists was that yes, it's a bad thing if you're on the paying end of a colonial mercantilist empire, but if you're on the tax collecting end, it's good, it's good to be the king as Mel Brooks said in one of his movies where he portrayed the king of France, he kept saying it's good to be the king and that was basically their philosophy and when Hamilton became the first treasury secretary under George Washington,

2:47Washington, he had no experience or reputation in finance. The way he got the job, and this is explained in this big biography of Alexander Hamilton by Ron Chernow, which is considered to be the biography nowadays, and during the Revolutionary War, while the war was still going on, Hamilton wrote a 30 page letter to Robert Morris, who was a very wealthy Philadelphia financier and businessman, he was in the shipping business, and he pledged his own personal to borrow millions of dollars to help finance the American Revolution. And so he was a hero to George Washington and a lot of other people. And of course, he was also a defense contractor during the war. So he was a hero to all the people who made money along with him, too, during the Revolutionary War.

3:36And so Hamilton, ever the, I don't want to use too much bad language, but he was very good at kissing up, apparently. And so he wrote, he wrote one of the wealthiest men in America, the financier of the revolution as he's been called, a letter 30 pages long, essentially saying, I agree with all your positions on economic policy. And since he didn't know anything about economic policy, he asked Senator Timothy Pickering, who was known to be well read on finance and economics, for some books to book up to help him write this letter, because he didn't know anything about it. and so he wrote the letter and then after the war is over Robert Morris is asked by George Washington who should be our first Treasury Secretary and he said Hamilton because you know what were these things that that Hamilton wrote about that he agreed with so vigorously protectionist tariffs corporate welfare and a central bank and a large public debt to pay for the corporate welfare

4:37That was it. That's what Robert Morris wanted. That was his position. Hamilton eventually would call this the American system and it was called that name by Henry Clay and the Whig Party decades later, but that was the origins of this whole thing and that's why Robert Morris wanted a central bank to help pay for this system of the American version of British mercantilism modeled after the Bank of England. And so in Cherno's book he talks about this and When George Washington heard from Robert Morris that he wanted Alexander Hamilton to be his Treasury Secretary, he told Hamilton, I didn't know you knew anything about finance. We never talked about this. And Hamilton was his aide de camp in the military, in the revolution.

5:23And so that's how he became the first Treasury Secretary. And of course, one of the first things he did was to agitate for the first central bank, the Bank of the United States, which of course he succeeded in getting, and I'll read you one little excerpt here from, I'll have to take this off, hopefully everybody's written down the title by now. But a lot of scholars over the years have understood what this was all about, what was going on here, and I'm going to get to the Gilded Age eventually. But one of the editors of the Federalist papers, a historian named Douglas Adair who understood what was going on with Hamilton.

6:08Here's what he wrote. He wrote, with devious brilliance, he's talking about Hamilton's advocacy of public debt in central banking, Hamilton set out by a program of class legislation to unite the property interests of the Eastern Seaboard into a cohesive administration party, While at the same time he attempted to make the executive dominant over the Congress by a lavish use of the spoils system. In carrying out this scheme, Hamilton transformed every financial transaction of the Treasury Department into an orgy of speculation and graft in which selected senators, congressmen and certain of their richer constituents throughout the nation participated. And of course, it was the central bank, the Bank of the United States, that was intended to finance all this speculation and graft.

6:56That's why people like Andrew Jackson were so extremely opposed to the Bank of the United States, risking all of his political capital to get rid of it, which he certainly did. And that's why, as John Denson said earlier, the economic history of America is a history of this battle between sound money advocates and the unsound money advocates, or the lying scoundrels, as I said, which leads me to quote one of my Lincoln books. books. I'll put that back up there in case anyone just came into the room. But this mantle was picked up by the Whig Party and Henry Clay and then Abe Lincoln. I quoted, there's a history of the Whig Party. It's about 10 feet thick, a big heavy book of the American Whig Party. And the author of it is Professor Holt from the University of Virginia, Michael Holt. And he says that among the Whigs, No one was a more vigorous advocate of a national bank than Abraham Lincoln was, and you probably

8:04never learned that in school, the Americans in the room, but it's certainly true. And to give you just one example of what he's talking about here, in one of, there's one episode that in the state of Illinois when Lincoln was a leader of the Whig Party in the state of Illinois, there was a law that said that when the legislature adjourns at At the end of the year, on January 1st, currency will be redeemable in gold. And the Whig Party wanted to avoid having that go into effect. They had a law that didn't redeem currency in gold. And so it was the last day of the legislature. What can we do?

8:49How can we stop the adjournment from taking place? And so they bolted for the door. The Whig Party all tried to run out of the room so that they wouldn't have a quorum to vote to adjourn. There was a marshal there who locked the door. And so Abe Lincoln himself jumped out a second-story window, and all the other Whigs jumped out of the window after him. And the Democrats, the opposing party, started calling him Leaping Lincoln after that. And I gave a speech in Springfield, Illinois, two years ago, and I got a standing ovation. It was the Illinois Libertarian Party, but I went to the old Capitol building, it's still there, and so I wanted to look and see just how far that was, the second story window where he jumped out of it, but Lincoln Herndon law offices are still there, it's about 50 paces from the state capitol, which tells you what kind of lawyer he was, and so it was a big jump, it was not just a little,

9:49even though he was six foot five, he couldn't have hung by his hands and just let himself down, and one of his speeches, he made a long-winded speech, as most of his were, in defense of a national bank and criticizing sound money. Here's what he said, if we adopt backing money with gold or silver, he said, All people will suffer more or less and very many will lose everything that renders life desirable, if we have sound money. I just wanted to read that one quote that you probably never heard of from Abe Lincoln to show you how extreme he was as one of the lying scoundrels in favor of unsound money.

10:38And so there was episode after episode about, over this big battle, as John Denson mentioned earlier, Andrew Jackson defunded or vetoed the rechartering of the Bank of the United States during his term, and that was a great victory for the advocates of sounder money. But my main topic is the Gilded Age, the age roughly from 1870 to the turn of the 20th century. It was the high watermark of the Rockefeller Organization's Standard Oil, the high watermark of Cornelius Vanderbilt. James J. Hill was building the only privately funded transcontinental railroad in America without a dime of government subsidies.

11:23All those big mansions in Newport, Rhode Island that some of you have seen, that's when they were built with all the wealth. There was no income tax and the gold standard after 1879. So, in many ways, these are some of the best economic times ever in America in terms of economic prosperity and the burst of economic growth. But the lying scoundrels, they'll never give up. They never did give up. Of course, we did get the Fed in 1913. But one of the first things they did was, when it became apparent that there would be a resumption of species payment in 1879, eventually, is when it came online. There was the assertion that there was by historians now that there was a great depression during 1873 to 1879 and Murray Rothbard has written about this quite a bit and they were saying that somehow this great depression was caused by the anticipation of the gold standard and there was a monetary contraction that occurred prior to the resumption of specie payment and this monetary contract

12:32Contraction is what caused a Great Depression and so this is sort of an early version of the Friedman-Schwartz theory of the business cycle, isn't it, that under no circumstances should we ever contract the money supply, we should only expand the money supply. And so, well, Murray, of course, looked into this, and he found that, well, there was no Great Depression, and there wasn't even a monetary contraction. The data on monetary growth show 2.7% per year money growth, so there wasn't even a monetary contraction. But a lot of the history books now, the economic history books will say there was a monetary contraction, and there was a Great Depression. And if you look into, I did a little digging around myself on some measures of economic wellbeing that economists usually look at with regard to recessions and depressions.

13:23And just looking at employment data alone, historical employment data, during this time, 1873 to 1879, I got data on manufacturing employment from 1870 to 1880, the same time increased by about 33% manufacturing employment from 2.47 million 3.3 million agricultural employment increased by about 40% during that decade so this is supposedly a great depression although you have a third increase in employment and you also had an increase in GDP and you did have falling prices but primarily because there was a moderate growth in the money Money Supply, 2.7% per year, but also there was a production and output was growing faster.

14:13The supply in the economy was growing much faster. So of course prices are going to fall, that was a good thing and nothing wrong with that. When I talk about this sort of thing with my students, the way I tell them is, in fact I just gave a lecture on Thursday comparing the Friedman-Schwarz theory of the Great Depression with the Austrian Theory and try to relate it to what's going on today and I told them that Ben Bernanke's greatest fear, and these are college students, is that when you graduate from college and you get a job and you want to buy a new car, that you will have to pay $5,000 less for that new car when you graduate and that should be avoided at all costs. We cannot allow that to happen. What a terrible thing that would be and it's because he believes in a false theory of the The Great Depression and a false theory of today's economy too, not enough credit and so this was one myth that the lying scoundrels came up with about this, even before we had the gold standard resumption, it caused problems but if you look, you know, once the resumption took place, if you look at the 1879 to the 1900 period in the US economy and most of you have heard stories about

15:29The great entrepreneurs of Vanderbilt and Rockefeller, and Rockefeller made his money by selling really, really cheap, refined kerosene. He dropped the price precipitously for decades, and that's how he gained, that's essentially how he gained his market share. And the same with all the other, Vanderbilt too, he started out in the steamship business, and he cut the fares from something like $10 to $1 between New York and Boston, and made money selling food on his boats and, you know, a lot of money. But to look at some of the statistics of what actually happened during that period, there was 3.7% per year real growth and real GNP, that was a great thing. Price deflation occurred, prices fell.

16:15They didn't fall quite as rapidly as they had in the preceding seven or eight years, but they fell. Foreigners were more willing to hold U.S. dollars backed by gold and that was a good thing, that helped increase exports because they held these dollars and they bought things with these dollars. Real wages increased pretty significantly during this time, of course. There was a huge increase in savings and capital accumulation for a long time, there was double-digit rates of return on long-term investments for a while. Friedman and Schwartz, in their book, they talk about the 1879 to 1889 period as, quote, the most productive decade in U.S. history. That's Friedman and Schwartz, the most productive decade in U.S. history, once we went back on the gold standard. Because of the stability of the dollar, capital investment was 500% more than it was during the previous decade. It increased 500% over the previous decade and of course with huge capital investment like that that was the the main driving factor for the rapid increase in wages because the productivity of labor grew very rapidly because of all this capital investment that made the labor that was used in combination with the capital very valuable that much more valuable to employers and employers competing for workers had to offer them higher wages to keep the workers using all this capital that they had invested so heavily in and so the number

17:47The number of businesses during the previous decade before the resumption of species payment in 1879, business creation was pretty flat, a very little increase, but it increased by 40% during that decade also. Farmers even prospered despite very high tariffs. Farmers are pretty much tortured by the Republican Party in the late part of the 19th century with extremely high tariffs. The Lincoln administration put in 45% to 47% tariffs during the war to prevent southern independence, as I call it. And they stayed at that level until 1913, until the income tax came in. And the farmers suffered a lot because the tariffs impoverished our European trading partners, primarily European trading partners, and therefore they had less money with which to buy American exports, which were primarily agricultural exports.

18:40and so a tax on imports turns into a tax on exports eventually and American farmers were especially hard hit with this but even so after the gold standard was it was resurrected in 1879 they did pretty well despite despite this and one of the really evil effects of the protectionism of the late 19th century is that it caused the American farmers to form a powerful political block in in favor of income taxation because they thought the income tax would take the heat off of them because at the time the majority of U.S. tax revenues came from tariffs and they were being disproportionately harmed by the tariffs and so it was relatively easy for the pro-income tax politicians to get farmers on their side eventually by when we got the income tax.

19:32But after a while, like I said, the lying scoundrels never give up, never have, and they were always working diligently to do away with the gold standard and coming up with all sorts of arguments of all kinds to do away with it and foreign investors and foreign business people began to doubt the viability of the gold standard by the time you get to the mid-1880s, they were paying attention to what was going on in American politics and that caused an outflow of gold and eventually the panic of 1884 which was caused by this outflow of gold instigated by the enemies of sound money, really. And so the last thing I'd like to say in the time I have is, I have written in my notes, enter Grover Cleveland, who was an American president in two terms, and he was the Ron Paul of his day.

20:26I call him that. I won't call Ron Paul the Grover Cleveland of his day. I'll call Cleveland the Ron Paul of his day. And so, Cleveland, he served two terms, 1885 to 1889 and 1893 to 1897 as president, so he wasn't re-elected, but then he ran again and got back in office. And he was the mayor of Buffalo, New York, he was known as the veto mayor, he vetoed spending bills. He became governor of New York and they called him the veto governor. I don't mean like the Italian name, veto, it's V-E-T-O, V-E-T-O, it's not like Vito Corleone or anything like that, V-E-T-O. And so when he became president, guess what they called him? The veto president.

21:13And so he vetoed hundreds of pension bills, the Army veterans from the US Army from the War to Prevent Southern Independence became a powerful political bloc. and during the previous 20 years before he took office, military pensions had increased by 500 percent and he thought that was a little excessive because the vast majority of these people never even saw combat or anything. They were just enrolled in the army for a little while and wore the uniform for a few months and the war is over and they get a big pension for the rest of their life. And so he campaigned vigorously, I'll explain why I call him the Ron Paul of his day. He campaigned vigorously for a reduction in the tariffs, which was the keystone of the Republican Party policy during that time.

22:01He called tariffs, quote, indefensible extortion and a vicious, inequitable and illogical source of unnecessary taxation, end quote. You know, find a politician today to say something like that, once he's in office anyway. And he was also a crusader for the gold standard. Here's what Grover Cleveland said about the gold standard. The people of the United States are entitled to a sound and stable currency, and to money recognized as such on every exchange and in every market of the world. The gold standard only could guarantee such a stable currency. And so he was obviously a very strong proponent of the gold standard as well. And on his last day in office, the veto president, what's the number here, I think he vetoed 40 bills, he spent his last day in office just, you know, veto, veto, veto, veto, vetoing everything, vetoing everything.

22:57So he must have had a lot of fun doing that. Now he wasn't a perfect human being, and I have people watching this on the internet, I'll get emails saying, but what about this, you know, I'm not making the argument that Grover, if you look up in the dictionary, perfect libertarian god, you will not see Grover Cleveland. I always get cranks writing me letters, if I say anything nice about any politician who does anything good, I always say, well, he did something bad 30 years before that, and So therefore, we shouldn't pay any attention to the good things he did. Well, that's stupid, but I'll get a lot of those stupid emails in about 10 minutes, I'm sure. But also, at the same time, you know, the inflationists, the lying scoundrels, they wanted to flood the country with silver as a way of expanding the money supply, to pay for patronage, to pay for the spoils system that they wanted, to keep themselves in power, to expand their power, and to have executive power be over

23:56and above the congressional power of the government. The old Hamiltonian Robert Morris system, it's always been all about that. And Grover Cleveland, and they succeeded for a while. They passed the Sherman Silver Purchase Act under the evil Senator Sherman, who was the brother of the evil General Sherman, as far as that goes. Grover Cleveland called a special session of Congress to repeal the Sherman Silver Purchase Act and he signed it into law on November 1, so he was trying to save the gold standard from the inflationists and he decided on a plan to save it and here's our friend Robert Higgs has a nice passage explaining what he did and I'll read you part of this passage by Bob Higgs Cleveland and the Treasury Secretary, John Carlyle, entered into secret negotiations with the Titans of Wall Street, J.P. Morgan and August Belmont.

24:48A way had to be found to restore the gold reserve without draining part of the Treasury's initial gold stock in the process. The government also needed to diminish public fears and to discourage the gold hoarding and short-term capital exports of speculators against the dollar. The syndicate headed by Morgan and Belmont promised to achieve these goals by, in effect, controlling the foreign exchange market. In February 1895, the Treasury and the syndicate signed a contract that pledged the government to issue $62 million in 30-year bonds priced to yield 3.75% in exchange for about $65 million in gold and the banker's commitment to protect the Treasury from withdrawals of gold. And it worked. For the next five months, no gold was withdrawn from the Treasury and confidence in the government's ability to maintain the gold standard was restored.

25:40Now this, I'm going to end with a shocker. You're all going to be shocked at this. Even Murray Rothbard praised the U.S. Treasury Secretary for doing this. Here's what Rothbard said. He referred to this as, quote, The Heroic Acts of the Treasury, which Restored Confidence in the Gold Standard

26:23and then burn in effigy the secretary of the treasury that would be what Murray would would recommend doing and the matter of fact who needs Murray we can do that anyway right I think my time is up