The US Presidents and the Money Issue; G. Kaza

The Republicans, with WilliamMcKinley as their candidate, defended the classical gold standard. The Democratic nominee, William Jennings Bryan, supported silver coinage at an above-market rate, and in spired inflationists with his now-famous "Cross of Gold" speech. McKinley won the 1896 election, but the money issue would be eclipsed by fiscal policy in the twentieth century. It is fasci nating, however, to consider that most U.S. presidents prior to McKinley discussed is sues· that have virtually disappeared from today's public discourse. Their opinions on gold, silver, and central banking were not only relevant then, but remain so today. Establish a Central Bank? There was no interest in paper money in the early United States after the inflationary experiences of the Revolutionary War. In stead, monetary discussions centered on whether or not to establish a central bank. Alexander Hamilton and the Federalists Greg Kaza is a Michigan state representative.

He has taught economics and history at North wood University, where he served as an adjunct professor. advocated a bank' through an expansive interpretation of the Constitution, which made no provision for chartering federal corporations. Thomas Jefferson and other Anti-Federalists urged "strict construc tionism" and opposed the bank. In 1791, both Hamilton and Jefferson gave Federalist George Washington (1789-1797) their inter pretations. Washington sided with Hamil ton, and signeda law creating the First Bank of the United States. Under FederalistJohn Adams (1797-1801), all foreign gold coins ceased to be legal tender. Adams also signed a proclamation exempting Spanish silver dollars from sim ilar silver legislation. The United States was on a bimetallic monetary standard of value at this time. Gold served in high-denomina tion coins, silver for smaller amounts. Adopting a bimetallic standard is one thing; maintaining it in the face of fluc tuating market values is another. Gresham's Law states that debased coins (those over valued by government) tend to remain in circulation, while undervalued coins are hoarded. Since silver was overvalued, gold began to disappear from circulation.

Thomas Jefferson (1801-1809) grappled with this problem even before assuming the presidency. Observing that Spanish silver dollars varied in their silver content, Jeffer son proposed they be assayed by the govern ment. This led to the Coinage Act of 1792. Part of Jefferson's opposition to the cen220 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com April 1996 Against the Stream W hen, fifty years ago, this Foundation embarked upon its great design, the most important factor was the battle between the creeds between Marxism and its various oppo nents. It divided the world into hostile camps which threatened to engulf mankind in yet another bloody confronta tion. While the Soviet Union was export ing communist dogma to all corners of the world, the West under u.S. leadership was barely holding its own. Here the general mood was one of despair about the failure of the old order and the lack of a creed of its own.

A few disillusioned socialists were tak ing their stand against the ruthless control of the lives of individuals by political tyrannies. Observing the inhuman conse quences of political doctrines and ideas, some writers expressed a sense of frustra tion and horror about the systems that crush and destroy human lives. George Orwell expressed it in his satirical novels, AnimalFarm (1946)and NineteenEighty-Four (1949),which is a prophetic story describ ing the dehumanization of man in a mech anistic totalitarian world. There was a remnant of old-fashioned liberal journalists who questioned the con tinuous growth of political power and con trol. John Chamberlain, William Henry Chamberlin, Frank Chodorov, John Davenport, John T. Flynn, Garet Garrett, and Albert J. Nock joined forces with the disillusioned socialists in presenting an intellectual opposition to the general trend. In the academic world, a few eminent scholars such as B. M. Anderson, H. J.

Davenport, F. R. Fairchild, F. H. Knight, and W. A. Paton scorned the New Deal which was holding sway in education and communication. They disputed and refut ed John Maynard Keynes' doctrines and theories which offered a new defense for old errors. Lord Keynes and his American disciples elevated deficit spending to a political virtue, popularizing an ancient economic fallacy, inflationism, as an appropriate road to full employment and economic prosperity. Throughout the world Keynesian doctrines were in great vogue with those governments that were not outrightly Marxian. The critics not only cried out against the inhumanity of a political command system but also reminded their readers of the great heritage of the West, the creed of individual liberty and the private property order. The old order had not failed" they contended, it had been smothered, expunged, and dismantled by political authority. It was not the old order of clas sicalliberalism that had foundered but the new mode of political supremacy in social and economic life. It was the surrender of freedom that provoked the return of autoc racy and tyranny.

The Foundation for Economic Education (FEE) set out to reaffirm, expound, and shed fresh light on the phi losophy and movement of classical liberal ism which stresses not only the dignity of every individual but also the importance of property rights, natural rights, the need for constitutional limitations on govern ment, and, especially, the freedom of every individual from any kind of political restraint. Building on the writings of such men as John Locke, Adam Smith, David Ricardo, Jeremy Bentham, and John Stuart Mill, the writers affiliated with the Foundation offered a complete doctrine of individual freedom. In 1946, Henry Hazlitt, one of the seven founders of FEE, published a most popular and influential book, EconomicsIn One Lesson,which was to sell more than one million copies in just a few years and which continues to sell briskly. It is proba bly the best "little book" on the fallacies of popular economic notions and policies ever written.

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The politicians who managed to be elected subjected the American economy to severe stop-and-go manipulations. Whenever a presidential election approached, the Federal Reserve together with the Treasury would contrive a fever ish business boom, stimulating housing construction and consumer purchases through inflation and credit expansion; after each election they temporarily halted their inflationary policies, which brought in their wake a new economic crisis and the beginning of another recession. Three times in the 1950's the American economy fell into a deep recession. Thereafter, all administrations indulged in the pleasures of deficit spending which not only extend ed the stop-and-go system but also permit ted the spenders to buy votes and elec tions, and acquire great personal wealth. In time, they were to place a $5 trillion debt on the shoulders of their children and grandchildren.

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tral bank stemmed from his belief that it catered to commercial and financial inter ests, while hurting the agricultural sector. While critical of the Bank of the United States, Jefferson did not undermine it as president. But when the bank's charter expired in 1811, his interpretation of the Con stitutionswayed public opinion against the bank. His successor, James Madison (1809 1817), vetoed a bill rechartering the bank, although he believed in central banking. Unfortunately, the War of 1812 caused suspension of specie payments and state bank inflation. This led to creation of the Second Bank of the United States late in Madison's second term of office. Presidents James Monroe (1817-1825) and John Quincy Adams (1825-1829) supported the central bank during their terms of office. The Jacksonian .Democrats Andrew Jackson (1829-1837) had a pro found influence on monetary policy in the mid-nineteenth century. Jackson vetoed a bill rechartering the Second Bank of the United States, and signed the Specie Circu lar of 1836, which required gold payment of federal debt obligation.s.In his annual mes sages to Congress, Jackson discussed mon etary matters more than any other presi dent.

By this time, the money issue was more than an economics discussion; it grew out of regional and even class politics. Jackson believed the central bank created an alliance between ~ig Business and government that benefited a few while costing most Ameri cans. "[B]oth the constitutionality .and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens," Jackson said in 1829, "and it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency." He declared in 1830, "Nothing. has occurred to lessen in any degree, the dangers of which many of our citizens apprehend from that institution, as at present organized." In 1831, Congress rechartered the Bank, but Jackson vetoed the bill.1 "It is to be 221 Andrew Jackson was an ardent champion of the gold standard. regretted," Jackson said, "that the rich and powerful too often bend the acts of govern ment to their selfish purposes. . . . [W]hen the law undertakes to . . . make the rich richer and the potent more powerful, the humble members of society-the farmers, mechanics and laborers . . . have a right to complain of the injustice of their govern ment." Central bank abolition was a cor nerstone of Jackson's successful 1832 re election campaign. He confided to Charles Carroll, the last surviving signer of the Declaration of Independence, "No bank and Jackson-or bank and no Jackson."

Mter his re-election, Jackson attacked bank officers in 1833 for "actively engaging in attempting to influence the elections of the public officers by means of its money . . . [in] violation of its charter." In his second term, Jackson struck a further blow against central banking by sending the Bank's assets to state banks, dubbed "pet banks" by critics. He termed 222 THE FREEMAN • APRIL 1996 central banking "the scourge of the peo pIe," and described gold coins as "a sound and portable currency." In 1836, Jackson signed the Specie Circular, which increased gold coinage.2 That same year, he proposed suspension of all paper bank notes less than $20. "The attainment of such a result," Jackson said, "will form an era in the history of our country which willbe dwelt upon with . delight by every true friend of its liberty and independence. " Jackson was not a monetary nationalist; he saw no reason why foreign gold or silver should not circulate in competition with U.S. coins. In two separate measures, the Jacksonians legalized the circulation of all foreign gold and silver coins.3 In his farewell address, Jackson warned, "The paper sys tem . . . having of itself no intrinsic value . . . is liable to great and sudden fluctua tions, thereby rendering property insecure, and the wages of labor unsteady and uncer tain. " He attacked fiat money and central banks as undermining free institutions.

Martin Van Buren (1837-1841)continued Jackson's policies. One of his first acts was to address the Panic of 1837, a mini depression. Van Buren's solution: stand fast on gold and propose an independent Trea sury to further wrest control of the federal government from central bank supporters. In 1840, Congress passed a bill establishing an independent Treasury, which Van Buren hailed as a "Second Declaration of Inde pendence. " Whig William Henry Harrison (1841), a hero of the War of 1812,was told by advisers to keep his lips' 'hermetically sealed" on the money issue during the 1840 campaign. Harrison died after one month in office. His successor, John Tyler (1841-1845), vetoed two bills creating a new Bank of the United States, terming them "unconstitutionaL" After the second veto, Bank advocates de manded Tyler abide by the views of the Whig-controlled Congress and sign the bill, or resign the presidency. Tyler refused.

Democrat James Polk (1845-1849) re sumed Jackson's policies. As a congress man, Polk had fought the bank's recharter as chairman of the House Ways and Means AbrahamLincoln's greenbackpoliciesled to widespread inflation. Committee. His successor, Whig Zachary Taylor (1849-1850), a hero of the Mexican American War, had little to say on the issue. WhigMillard Fillmore (1850-1853)reversed Jacksonian policy, devising a monetary sys tem that was the forerunner of the National Banking Act of 1863. Gresham's Law finally caught up with bimetallism in the early 1850s.Gold produc tion exploded with the discovery of new mines in California, and then burst, causing a fall in the price of gold relative to silver. Silver coins disappeared rapidly from the United States. In response, Democrat Franklin Pierce (1853-1857) supported a gold monometallic standard 4 with silver coins circulating at weight. Silver was no longer drastically overvalued versus gold, and remained in circulation. 5"Pierce had opted for a temporary gold standard, but it was shortlived.

Part of the Jacksonian program was re pealed under James Buchanan (1857-1861).

THE U.S. PRESIDENTS AND THE MONEY ISSUE 223 In a show of monetary nationalism, the legal tender power of foreign coins was repealed, except for Spanish-American fractional sil ver.6 But it was the next president who would alter the "hard money," anti-central bank policies of the Jacksonians more than any other U.S. leader. LincolnInflation To his admirers, Abraham Lincoln (1861 1865) is remembered as "the Father of the Union. " But the first Republican president was an inflationist in monetary affairs, and his policies led to consequences that are still visible today. To pay for the Civil War, Lincoln abandoned specie and launched a paper dollar (the" greenback' ') that resulted in rampant price inflation. The Civil War led to an enormous growth offederal spending, from $66 millionin 1861 to $1.3billionfour years later.7 Lincoln tried to finance the war initially with government bonds, but public demand for specie pay ments led to their suspension at year's end.

Lincoln took advantage of the fact that the United States was on an inconvertible paper standard by signingthe Legal Tender Act of 1862, which authorized greenbacks to pay for the war. Initially limited to $150 million, a second $150 million issue was approved in July and a third $150 million issue passed in early 1863.8 By mid-1864,greenbacks were worth 35 cents in gold. But at war's end, they had risen to 69 cents on the prospects offuture gold redemption. 9 Prices rose 110.9 percent from 1860 to war's end. Not surprisingly, greenbacks depreciated against gold, leading Lincoln to scapegoat "gold speculators." Failing to regulate the gold market, he tried to destroy it by passing a Gold Bill in mid-1864 that prohibited all gold futures contracts, and imposed severe penalties. Public opposition, however, forced the bill's repeal that year. to Another important consequence of Lin coin's term was the creation of anew, quasi-centralized, fractional reserve bank ing system. This laid the groundwork for the Federal Reserve System, which was even tually established in 1913. The National Banking Act of 1863 forever ended the federal government's separation from bank ing. Lincoln built upon the Federalist/Whig policy of central banking, implanting the soft-money tradition permanently in the United States. 11 Public support for gold specie resumption grew after the war. The Loan Bill of 1866, signed by Republican Andrew Johnson (1865-1869), provided for greenback con traction from the market. 12 But Johnson refused to sign a bill in 1869that would have provided for specie resumption. That task fell to Republican Civil War hero Ulysses S.

Grant (1869-1877) in his first act of office. The Panic of 1873did not shake Grant's fear of inflation;he vetoed a billproposing green back expansion. 13 In 1875, Grant signed another bill pledging specie resumption by decade's end. The Gold Standard Specie payment was finally resumed in 1879 under Republican Rutherford Hayes (1877-1881), but greenbacks could be re deemed in silver, along with gold, as a result of the Bland-Allison Act. In 1877, Repre sentative "Silver Dick" Bland of Missouri sponsored a bill providing for the free and unlimited coinage of silver. The measure was supported by the Democratic "silver bloc" emerging in the western United States, and called for overvaluing silver versus gold. The bill was modifiedin 1878by Senator William Allison of Iowa, who fash ioned a compromise between Democratic free silverites and conservative Republican business interests. The Bland-Allison Act permitted limited silver coinage and re quired the Treasury to purchase $2 to $4 million of silver each month. Hayes vetoed the legislation, but his veto was overridden.

Republican James Garfield (1881) urged government debt payments in gold. Al though he opposed free silver, Garfield ex pressed interest in a bimetallic standard before his assassination. Republican Chester Arthur (1881-1885) called for re peal of Bland-Allison. "They [paper silver] form an unnecessary addition to the paper 224 THE FREEMAN • APRIL 1996 currency, " Arthur declared in 1881. "In respect to the coinage of silver dollars and the retirement of silver certificates, " Arthur said in 1882, "I have seen nothing to alter but much to confirm [these] sentiments." Democrat Grover Cleveland (1885-1889, 1893-1897) may have been the greatest gold standard advocate ever to serve as presi dent. In his first term, Cleveland singlehand edly preserved the gold standard at a time when the Democrats split bitterly over the money issue and populism. However, his opposition to tariffs cost him the 1888 elec tion.

When Cleveland left office after his first term, the Treasury had a large gold reserve, but it was depleted by Republican Benjamin Harrison (1889-1893). In 1890, Harrison signed the Sherman Silver Purchase Act, requiring the Treasury to buy 4.5 million ounces of silver monthly. To buy the silver, Treasury was to issue a new type of paper money known as Treasury notes. The act was a victory for the Populists, who held that deflation, which hurt farmers, could be reversed by free silver policies. Deflation continued, the gold reserve dropped, pri vate banking tightened, and the Panic of 1893 ensued. Reelected and back in the White House, Cleveland attacked the Silver Purchase Act as a "dangerous and reckless experiment. . . ." He called for its repeal to restore confidence in the dollar. Cleveland knew Gresham's Law and defended gold against inflationists in his own Democratic Party. Congress tried to compromise, but Cleve land would not yield and the act was re pealed. Cleveland was the last Democratic president to support gold. The Populists, whose presidential candidate won more than a million votes in 1892, returned to the Democrats four years later as supporters of William Jennings Bryan.

Lessons for Today McKinley's victory in 1896also contained the seeds of central banking and political manipulation that has led to the rampant inflationof the twentieth century. The Democratic Party was no longer the great laissez faire, hard-money party of Jefferson, Jack son, and Cleveland, and the Republicans soon emerged as the party of the corporate State. 14 Republican Theodore Roosevelt called for additional legislationand elasticity in the monetary system.- By 1906, he was calling for' 'a considerabl~ increase in bills of small denominations." William Howard Taft (1909-1913) went even further, declaring in his inaugural, "One of the reforms to be carried out. . . is a change of our monetary and banking laws, so as to secure greater elasticity . . . and to prevent the limitations of law from operating to increase the em barrassment of a financial panic." By this time, the Federal Reserve's establishment was a forgone conclusion and America was soon to be saddled with the inflationary, fractional-reserve system that sets Ameri can monetary policy to this day.

There is a glorious tradition of hard money advocates in the history of the United States. Reviving that heritage is essential to our economic wellbeing. Fur ther, the decline of the dollar after it was severed from its last links to gold in 1971 has affected all Americans, even if it has been ignored by most elected officials.Economic law cannot be repealed. Easy money leads to inflationin any century. The truths about hard money recognized by many of our best presidents need to be brought back into the public square. D 1. Jackson's veto was more than 7,500 words in length. 2. The Specie Circular's author, U.s. Senator Thomas Hart Benton of Missouri, was nicknamed "Old Bullion" for his pro-gold views. 3. Ron Paul and Lewis Lehrman, The Case for Gold (Washington: The Cato Institute, 1982), p. 62. 4. Under a gold monometallic standard, the dollar is defined only as a weight of gold, with silver circulating by weight. This is an example of "free metallism," in which two or more metal coins are allowed to fluctuate freely in the same range.

5. Paul and Lehrman, ibid., pp. 63-65. 6. Ibid., p. 66. 7. Ibid., p. 74. 8. Ibid., p. 75. 9. Wesley Clair Mitchell, A History of the Greenbacks (Chicago: University of Chicago Press, 1903), pp. 232-38, 423-28. 10. Paul and Lehrman, ibid., pp. 76-77. 11. Ibid., p. 74. 12. Ibid., p. 96. 13. Ibid., p. 96. 14. Ibid., pp. 117-18.