How Pierpont Morgan Saved the Gold Standard

By John Steele Gordon

Debtors like inflation—they can pay their debts in cheaper dollars. Creditors, for precisely the same reason, do not. After the Civil War, the prosperous Northeast and Upper Midwest wanted a return to the gold standard, which requires the government to buy or sell unlimited quantities of gold for its currency at a fixed price, effectively preventing inflation. But the impoverished South and developing West wanted the free coinage of silver, which would increase the money supply, a sure recipe for inflation. Congress tried to accommodate both sides, with predictable results.

The country returned to the gold standard on Jan. 1, 1879, and Congress required that the Treasury keep $100 million in gold on hand to meet any demand to redeem dollars. But it also passed the Bland-Allison Act, which required the Treasury to buy between $2 and $4 million in silver on the open market every month and coin it at the ratio of 16-to-1. In other words, Congress fixed the price of silver at 1/16th the price of gold.

That was approximately the free market price of silver when the act passed. But as the great silver strikes in the West such as the Comstock Lode came into production, the price of silver began to drop.

In the prosperous 1880s, the government ran very large surpluses, and this masked the schizophrenic monetary policy. In 1890 Congress made things worse by passing the Sherman Silver Act , which required the government to buy $4.5 million ounces of silver a month and coin it at 16-to-1, even though the price of silver at that point was about 20-to-1. Gresham’s Law inevitably kicked in and people began to spend the silver and hoard the gold, which trickled out of the Treasury.

With the crash of 1893, the trickle became a flood, although Congress repealed the Sherman Silver Act. President Grover Cleveland was a strong supporter of the gold standard, but his fellow Democrats in Congress were strongly in favor of the free coinage of silver. When the Treasury gold supply dropped below $100 million, Congress authorized a bond issue to replenish it. But when it again dipped below the required level, they refused another bond issue. It looked like the United States would be forced off the gold standard at any moment.

J.P. Morgan, the country’s leading banker, hurried to Washington to find a solution. But at first Cleveland refused to see him, fearing the political reaction if he was perceived as kowtowing to Wall Street.

But the next morning, with the Treasury nearly out of gold, he had no choice. “Have you anything to suggest?” the president asked the banker. Indeed he did. Morgan said that a new bond issue, even if Congress allowed it, would not work, as the gold would just flow out again.

But his lawyers had noticed an obscure Civil War-era law allowing bonds to be issued without congressional authorization to buy coin. Morgan said he, along with August Belmont Jr., who headed the Rothschilds’ American interests, would use the bonds to buy gold in Europe. And even more importantly, they would guarantee—using sophisticated foreign exchange techniques—that the gold would stay in the Treasury. It was a breathtaking display of self-confidence.

But Morgan was as good as his word. Within a couple of months the Treasury had $107.5 million in gold on hand. With the economy by then recovering, the gold standard was safe.

The next year, William Jennings Bryan won the Democratic nomination for president with his anti-gold standard “Cross of Gold” speech. He lost badly to William McKinley, and the gold standard remained secure until the depths of the Great Depression nearly four decades later.


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