Innocent, your honour – The Panic of 1873, pt. 2

Allrik Birch,

I wrote yesterday about a leading cited cause of the Panic of 1873 and the possible relation to a contraction in the money supply. However, this claim, largely made some time after the panic (and the 1873 Coinage Act that constituted the “crime”) and is demonstrably false.

Whilst for some the “crime of 1873” was the cause of panic, this view was openly mocked by others, such as the pamphleteer Stilwell, who characterises those who favour silver monetisation as nothing other than greedy silver mine owners who want to take from the public purse as well as heavily indebted farmers who wanted inflation.[1] Indeed, Bryan’s position was a major problem for the Democratic party in 1896, causing the Bourbon Democrats (the classical liberal grouping) to run their own candidate.

Those who argued that the problem was down to to demonetisation of silver didn’t factor in the fact that the Greenbacks (essentially fiat money) had been in operation since the civil war.[2] Moreover, those other nations that did demonetise silver did not suffer the same fate as the United States, it is unlikely that this caused a panic, although this act could have caused the high debt speculations to collapse (which I’ll talk more about tomorrow). Another problem in timing was that it was in February 1873 that the United States government demonetised silver, making the price of gold rise, although, in contrast to the blame this policy was given (as “the crime of 1873”), it is reported that the mood in the country was still in buoyant mood, as Stedman reports, the stock market was strong through the summer.[3]

silver coins

It seems that the politicians may have been somewhat out of touch on this, as many people were simply unaware that silver had been demonetised.[4] The day after the passing of the said Coinage Act, the New York Tribune did begin with a story about a Congress Scandal, but it had nothing to do with monetary policy but rather to an ongoing trial.[5] The Weekly Kansas Chief made no reference to the passing of the act, despite a reasonably large political section,[6] the same was true of the Memphis Daily Appeal.[7] The truth must be then, that this issue was a minor relevance at the time, part of the bureaucratic minutia, only later becoming a political issue (and a major one as time wore on).

Demonetisation of silver should probably not have been an issue in 1873, had it not been for the panic, the issue would likely have been ignored as a minor change as silver had already been partly demonetised in 1853, leaving silver as subsidiary coinage in part of a de facto gold standard.[8] The final demonetisation of silver in 1873 became a good political tool for some, an easy target, whilst in reality, most silver coins had already left circulation in the 1850s.[9] It was only in 1876 that the issue became prominent, as inflationists found the new low price of silver, if remonetised would greatly expand the money in circulation, it is this then, that was the cause of the political movement. Up to 1876 no major complaints seemed to be forthcoming over the issue, and no evidence of secret deals is to be found. There was no crime.[10] ‘Ten years before this act was passed [silver] had sunk entirely out of sight under paper-money inflation.’[11] The Coinage Act of 1873 was simply a clearing up exercise, with no real impact on the issues of the day. Silver had become a new political tool for the supporters of inflation who wished to cancel out debts, instead of using Greenbacks, silver became a panacea (although, if successful, you would assume it to be a temporary one).[12]

An often found blame for the Panic of 1873 is the supposed demonetisation of silver, the “crime of 1873” as many political types chose to call it later. The claim being that the amount of money in circulation dropped, leading to deflation which in turn made debts larger and caused the collapses of various concerns. As we have seen, this is nonsense, very little silver was even in circulation by 1873 and had been partially demonetisation twenty years earlier. The Coinage Act of 1873 was a largely innocuous piece of legislation that sought to clean up various monetary issues, of which demonetisation of silver was a minor point. To blame this then, is a ridiculous assertion (and one typically found at least a few years after the event once the price of silver had changed).

Tomorrow I’ll explain what actually happened in 1873.

Part 1: The Crime of 1873 – The Panic of 1873, pt. 1

[1]    LSE selected Pamphlets, ‘Stilwells Political Fables: The demonetization of the mule.’ pp. 5-9.

[2]    Sumner, William Graham, A History of Banking in all the Leading Nations, vol. 1 (U.S.A.), p.420.

[3]    Stedman, Edmund Clarence (Eds.), The New York Stock Exchange: Volume I, p. 264.

[4]    Weinstein, Allan, ‘Was There a “Crime of 1873”?: The Case of the Demonetized Dollar’ in The Journal of American History, p. 308.

[5]    New York Tribune, 13 February 1873.

[6]    Weekly Kansas Chief, 13 February 1873.

[7]    Memphis Daily Appeal, 13 February 1873.

[8]    Martin, David A., ‘1853: The End of Bimetallism in the United States’ in The Journal of Economic History, p. 825.

[9]    Ibid., p. 826.

[10]  Weinstein, Allan, ‘Was There a “Crime of 1873”?: The Case of the Demonetized Dollar’ in The Journal of American History, p. 308.

[11]  Sumner, William Graham, The Forgotten Man and Other Essays, ed. Albert Galloway Keller, p. 92.

[12]  Ibid.


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