To one who grasps the logic of monetary evolution — from less satisfactory to more satisfactory money commodities as technology advances and the scope of trade expands — the great question that inevitably arises is “How on Earth did we get here?”
It’s a good question that takes a fair amount of historical research to answer, especially in light of the massive catastrophes caused by unbacked currencies and the general knowledge thereof. As usual when human history takes a veering turn into irrationality, the answer is mired in politics and the drive for power.
The dominance of the American political landscape by two major parties goes all the way back to 1804 and the ratification of the Twelfth Amendment. That Amendment, by ending the older system of presidential balloting in which the second-place finisher became Vice-President, gave rise to party slates of candidates. Subsequently, the oppositional characteristics of a winner-take-all system elevated two parties to major status and relegated all others to the margins of electoral competition.
The Republican Party rose to majority status by displacing the Whigs, which had fallen into disrepair over slavery, tariffs, and other issues associated with the sectionalism of the pre-Civil War era. Unlike the other parties of the day, the Republicans were united on the two most contentious issues before the Republic: slavery and import tariffs. The Republicans were adamantly opposed to slavery and stood firmly against the addition of more “slave states” to the Union. They were also ultra-Hamiltonian on the subject of tariffs, wishing to set them unprecedentedly high as protection for domestic manufacturers.
After the Civil War, the Republicans enjoyed a long period of near-absolute dominance, electing huge majorities to Congress and occupying the White House through 1884. The rise to prominence of Democrat Grover Cleveland and the Democratic contingent that entered Congress with him can be attributed mainly to two factors. The first was the unusual frequency of lurid corruption scandals, in Washington and elsewhere, during the previous two decades, which tainted the Republican brand. The second was the steady emergence of a culture of religious liberality, buoyed upon the waves of immigrants from Europe, which contrasted sharply with the quasi-ascetic attitudes that had previously dominated American Christianity. Those factors sufficed to give Grover Cleveland and the Democrats the edge in the election of 1884.
Cleveland, an unusually honest and candid man, was true to his reputation as a strict Constitutionalist. He became known as a guaranteed veto for any bill the authority for which was not made explicit in the Constitution. Owing to the melioristic tendencies of the time, his vetoes undermined his popularity, a great part of the reason for the events that followed his second term. But most critical to this discussion, he was an ardent defender of the gold standard, the first president to countenance absolutely no departure from it. Partly in consequence thereof, he left the federal fiscal and budgetary house in better order than it had enjoyed since the days of Andrew Jackson.
In the years prior to the Cleveland Interregnum, the GOP became known as a firmly prohibitionist / inflationist / protectionist party. Several explanations have been advanced for Republican rigidity in these regards, though debate remains energetic. What’s undisputed is that owing to the immense improvement in the condition of the country during Cleveland’s years — particularly the reduction of clamor over corruption scandals, which dropped nearly to nothing — the GOP’s kingmakers began to fear reduction to permanent opposition status. They were seeking frantically for a way to recapture majority sentiment when the Democratic Schism arrived.
The Democrats had turned against Cleveland, their standard-bearer, owing to the unpopularity of his many vetoes. In his fine book Presidential Anecdotes, Paul Boller reports the following:
When Cleveland left the White House in 1897 he was one of the most unpopular men in the country. He retired to Princeton, New Jersey, deeply dejected over having lost the love and confidence of the American people. One day a friend came by for a visit; his setter dog, excluded at the door, found another entrance into the house. When the dog came trotting triumphantly into the drawing-room and put his cold muzzle on the former President’s hand, the friend rushed over to expel him. “No, let him stay,” cried Cleveland. “He at least likes me.”
…Once, when Cleveland was reminiscing with a friend about his White House days, he paused for a moment and then exclaimed, “Do you know that I ought to have a monument over me when I die?” “I am sure of that, Mr. President,” said the friend, “but for what particular service?” “Oh!” returned Cleveland, “not for anything I have ever done, but for the foolishness I have put a stop to. If you knew the absurd things proposed to me at various times while I have been in public life, and which I sat down — and sat down hard — upon, you would say so too!”
The rise of the Populist movement and the rejection of Clevelandist Constitutionalism made it possible for populist orator and dedicated inflationist William Jennings Bryan to capture the Democrats’ presidential nomination in 1896. The Cleveland Democrats were stunned, and conferred among themselves about what might be done.
Here’s what Ron Paul and Lewis Lehrman had to say about it in their 1982 book The Case For Gold:
…The South, by now a one-party Democratic region, was having its own pietism transformed by the 1890s. Quiet pietists were now becoming evangelical, and Southern Protestant organizations began to call for prohibition. Then the new, sparsely settled Mountain states, many of them with silver mines, were also largely pietist. Moreover, a power vacuum, which would ordinarily have been temporary, had been created in the national Democratic Party. Poor Grover Cleveland, a hard-money laissez-faire Democrat, was blamed for the Panic of 1893, and many leading Democrats lost their gubernatorial and senatorial posts in the 1894 elections. The Cleveland Democrats were temporarily weak, and the Southern-Mountain coalition was ready to hand. Seizing his opportunity, William Jennings Bryan and his pietist coalition seized control of the Democratic Party at the momentous convention of 1896. The Democratic Party was never to be the same again.
The Catholics, Lutherans, and the laissez-faire Cleveland Democrats were in mortal shock. “The party of our fathers” was lost. The Republicans, who had been moderating their stance anyway, saw the opportunity of a lifetime. At the Republican convention, Rep. Henry Cabot Lodge, representing the Morgans and the pro-gold-standard Boston financial interests, told [William] McKinley and [Mark] Hanna: Pledge yourself to the gold standard — the basic Cleveland economic issue — and drop your silverite and greenback tendencies, and we will all back you. Refuse, and we will support Bryan or a third party. McKinley struck the deal, and from then on, in 19th Century terms, the Republicans were a centrist party. Their principles were now high tariffs and the gold standard, and prohibition was quietly forgotten.
That alliance cemented the GOP into the White House, and effective control of Congress, for sixteen years. Not until Woodrow Wilson and his cadre came to power in 1913, greatly assisted by the Theodore Roosevelt schism among Republicans, did prohibition and inflationism return to the national discourse. The path to the latter required two things: a politically managed currency and the abandonment of the gold standard. The first was prerequisite to the second, and Wilson saw to it.
Woodrow Wilson was possibly the worst man to occupy the White House until Barack Hussein Obama. He was openly arrogant about his “destiny” to be president, dictatorial in temperament, and accepted advice from only one person: Colonel Edwin House, who never deigned to conceal his own totalitarian bent. The Wilson Administration ended in near disgrace, owing to the nation’s repugnance over Wilson’s war fascism, including unprecedented levels of direct taxation, the re-enactment of military conscription, the arrest and detention of prominent war dissenters, and the suppression of press criticism of federal policies, and its rejection of Wilson’s internationalist project. The GOP entered another twelve-year period of dominance.
Unfortunately, the seeds of disaster had already been sown, in three ways: the income tax; the Federal Reserve Bank; and the rise to national prominence of “the Great Engineer,” Herbert Hoover. Hoover was as fascist as Wilson, essentially a pre-1896 Republican who saw the entire national economy as “a public-private partnership.” When the sudden degradation of the economy struck in 1929 and 1930, Hoover’s response was increased economic meddling, increased federal spending, and ever higher protective tariffs. Hearken to Dr. Benjamin M. Anderson, the great economic historian of the early Twentieth Century, from his landmark book Economics And The Public Welfare:
[T]he administration at Washington was dead set against any such readjustment. It turned instead to frantic governmental economic planning….
Even while the stock market crash was going on, President Hoover called together in Washington the leaders in business, in railroads, and others, to urge upon them the policies of not cutting prices, not cutting wages, increasing capital outlay, and the like. This was the personal conduct of business by the back seat driver which is the essence of the New Deal and of governmental economic planning. Municipalities and states were also called upon to increase their borrowing for public works….
But there came another folly of governmental intervention in 1930 transcending all the rest in its significance and in its baleful consequences. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of 1930 was the crowning financial folly of the whole period from 1920 to 1933.
Thus, the “New Deal” of the FDR years was not an entirely new development. It was in large measure a continuation of the policies of the Hoover years — and the destruction of the gold standard, begun under Wilson with the creation of the Federal Reserve system, was integral to it.
It should be obvious to any reasonably intelligent person that an indefinitely expansible currency, which the Fed was created to bring about, is utterly incompatible with a specie standard of any sort. Currency and credit can be created by fiat; no physical commodity can. Thus, the Hoover / FDR attempts to reinflate the economy, by pumping extra currency and credit into it via federal borrowing and spending, could only go to the lengths those administrations demanded by ending the redeemability of the dollar in gold.
Never in the history of Man has a currency once “set free” from specie backing returned to it at any subsequent time.
I’ve presented only a summary. The history of our departure from money and our descent to a fiat currency with no ability to store value is far more detailed and variegated than I could present in a brief essay here at Liberty’s Torch. Yet the most salient points are covered above. More, if one studies the lineaments of the subsequent period, with particular attention to FDR’s war fascism, the North Atlantic Charter, the rise of persistent federal deficit finance, and America’s assumption of a “world policeman” role, one can easily see the progression to Richard Nixon’s 1971 decision to slam the gold window down upon the fingers of foreign holders of dollars: the last persons entitled under American law to redeem their holdings in gold.
Yes, before you ask: Every last step was morally and fiscally indefensible. Neither can the perpetrators be pardoned for not knowing what they were doing. Ample evidence exists to the opposite effect.
There is no path back to sound money through politics. The political elite would never accept it, and they’re too firmly entrenched to be dislodged by anything short of an armed uprising. Unsound money facilitates vote buying, cronyism, and the indefinite expansion of federal power — and as I’ve said more than once, he who goes into politics desires power above all other things.
If there is a path back to sound money, we must seek it in the origins of money: the adoption by ordinary persons of gold and silver as their preferred media of exchange. Such a phenomenon is already under way. Whether it can continue to the desired end remains uncertain, for its enemies are many and powerful, and they will stint no effort to suppress it.