Why the Gold Cartel Will Fail to Prevent a Primary Gold Bull Market

Marx wrote the Communist Manifesto before the California Gold Rush. Until then Mexican silver was still the dominant and most stable currency in the Americas, and it was legal and common tender in the U.S. You are correct that Westerners wanted flexible money, but it is not true that they backed the Federal Reserve for this reason. Let's step back a few years:

The Gold Rush split the political strains of money from hard vs. soft money to hard, less hard, soft, and softer.

Certainly common Westerners wanted soft money, but the new input of gold satisfied the needs of large movers of the growing Western economy (railroads, etc.). Southern Democrats stuck to the old Jacksonian line on the central bank; besides, cotton converted readily into gold. Whigs were kept happy with expanded industry that was fed by all the above. The principle group that still demanded paper money was midwestern farmers who prefered to borrow gold and pay in paper, as it were.

Let's just say that the Civil War caused a slight interruption to this whole scheme. Picking up afterwards, we find the South in debt and suddenly finding refuge in soft money, northerners wanting to retire their own obligations as cheaply as possible, yet pick up on everyone else's in the new gold that was arriving from Alaska and overseas, and midwestern & western farmers (and their populist politicos) demanding more paper than ever as they learned how to mortgage themselves to New York banks and crop prices sucked wind.

While the Greenbackers failed in politics, with the opening of massive silver mines in the latter 19th century, Westerners turned to silver as the cureall. Silver's backers, then, are soft money advocates and political opportunists -- and the mining industry. It all comes to a head in the 1890s, when even the Republicans are compelled to compromise on silver to satisfy its Western contingents. (During this period William McKinley is a bimetalist, btw.) Advocating soft money, the Populist Party ran one of the most successful third party runs in American history.

All this is mixed in with a few panics (1873 and 1894 being the worst), which were a result of unruly and fast economic expansion, speculation, and various toying with the money supply. 1894 was exasperated by a high tariff, whose goal was to run down a government revenue surplus -- it did, mightily, and which along with Congressionally-mandated silver purchases depleted the government's supply of gold. Both schemes were Republican. JP Morgan and Grover Cleveland saved the day.

Next, WJ Bryan destroys the Democratic party by coopting the Free Silver and Populist movements, thus tossing the election to McKinley, who only advocated for gold under duress. The Party platform called for gold and silver, but only if the rest of the world agreed to parity in the price of silver and gold (knowing this wouldn't happen).

After the Spanish American War, and under the leadership of one of the greatest ever Speakers of the House, Thomas Reed, the Republicans completely control Congress and, thus, monetary policy. John Sherman's party was back, only without his politically-weak panties, which made him squeal whenever a populist movement squeezed too hard. McKinley is re-elected, Reed and Hanna control Congress, and gold finally wins.

Gold is now the status quo, so opposition to the status quo becomes opposition to gold. But the economy is smokin', so it's to no effect. Farmers and populists still want silver, or paper, or whatever they can get to lower the cost of money. They did not advocate, however, a central bank. That hated word had no place in Wyoming or Nebraska. All they really wanted was Greenbacks. There's enough discontent around to fuel another WJ Bryan run. He is trounced by Taft.

The need for a softer currency became apparant to Wall Street only after it nearly choked itself in 1907 over a busted speculation (Morgan to the rescue again). Henceforth, Wall Street's biggest voice, the dominant force in the Senate, Nelson Aldrich, dedicates himself to the creation of a national reserve system. Aldrich wanted it to be regional and private, and had it gotten through a Republican Congress it might have followed his model. Instead, a Democratic House was able to block Aldrich's Republican Senate, and the issue was passed on to whoever would win in 1912. Thus Wilson is credited with creation of the Federal Reserve. Even under the Democrats, the plan for the Fed roughly followed Aldrich's model, which is why it so mystifies the conspiracists with its formulation as a corporation, not an Executive Dept.

Please let me know where I've strayed in the above, and thanks for your thoughts from yesterday.

[Can we agree, anyway, that late 19th Century politics were messy?]

Thanks for good comments, as well.

LS, did you see R. Samuelson's column today? He's not one to exagerate (bah!), is he? He's afraid of deflation now.

Like others, Samuelson wants the dollar to come down. There's a lot of hope out there for a buck-twenty-three for the Euro. Maybe, during the war. Not afterwards.

I didn't see the column. Can you post a link?

Hold your nose and go here.

For a touch on our subjects here see also his column on J.P. Morgan.

The first agitation for a National bank was in the western states during the 1880s it was opposed by Eastern bankers.

The C.M. was written in 1848 and the gold rush occured the next year. The Gold Rush made the gold standard more feasible since it inflated the money supply and aliviated the chronic shortage incident to a gold standard.

Western currency agitation occurred many yrs. after the Whig party was history. At the time that the government was forcing the nation back onto the G.S. after the C.W. prices were declining so the farmers had to pay back loans in more expensive currency earned in spite of falling agricultural prices.

Alaskan gold was not a feature until the end of the 1800s long after the height of the currency debate.

Your timeline in your discussion is not accurate and thus the causal relationships not accurate. And there is no way an increase of the tariff will lower a federal surplus. It will increase the surplus. Only a lower tariff would decrease the surplus.

The adoption of the idea of a central bank after the Panic of 1907 was picking up the ideas of the western populists and progressive from almost 30 yrs. before. Read Secrets of the Temple for more on this.

Actually, I did read this. Today's report from the government has revised productivity stats UPWARD from 2d quarter. I didn't catch how much, but yet another indicator that we are in deflation. Money flat, but produtivity up. They should go up in concert.

Thanks for looking this over. Some thoughts & replies:

My point about Marx & silver was, as was LS's comment about Lenin, sarcastic. See Pehlam's #43 for a good clarification.

I think we got into it about silver because you objected to the notion of the importance of Spain (your #58). I meant only that Spanish coin was in the early days the dominate currency, especially since early American coinage efforts failed. The Jacksonians killed the use of silver with laws of 1834 and 1837 that devalued it. These acts, btw, were intended to support gold mining operations in Georgia and North Carolina, as much as to halt the use of Spanish silver. Jackson wasn't too keen on the Latins, you know...

Moving on. You noted,

Western currency agitation occurred many yrs. after the Whig party was history. At the time that the government was forcing the nation back onto the G.S. after the C.W. prices were declining so the farmers had to pay back loans in more expensive currency earned in spite of falling agricultural prices.

In that I implied that the greenback movement preceded the Civil War, I did not intend to. I did say that problems with farmer debt had already commenced prior to the War. Following the Jacksonian period there was great dissatisfaction in the West over banking practices involving the convertibility of notes issued between branches, banks, and specie, as well as bank failures. There followed a demand for renewed use of silver coin, relief to which Congress gestured in 1857.

The first agitation for a National bank was in the western states during the 1880s it was opposed by Eastern bankers... The adoption of the idea of a central bank after the Panic of 1907 was picking up the ideas of the western populists and progressive from almost 30 yrs. before. Read Secrets of the Temple for more on this.

I have not read Greider's book, but I cannot fathom what popular western movement for a "central bank" he may have discussed. There was no articulated movement for a national bank during this period. In that a central bank was the subject of his study, he likely culled western post-Civil War agitation for greenbacks as a call for a central bank. The agitation was for paper money not for a bank. That is, they wanted the bank to get the money, not the other way around. To farmers, especially, the word "bank" was vile. To good Democrats, add the word "central" and it was downright evil. American populism was anti-city, anti-British and anti-semetic, based in large part upon associations made of all three with banks.

To point to an 1870s populist origin of the 1913 Federal Reserve Act ignores the distinction between the Wall Street goal for elasticity and the populist demands for inflation.

Onward. Your:

Alaskan gold was not a feature until the end of the 1800s long after the height of the currency debate.

Although I was unclear on when Alaskan gold was introduced, its importance to the monetary debate cannot be ignored. First showing in the 1880s, huge finds in the late 1890s gave important impetus to the 1900 formalization of the gold standard. Meanwhile Australian and South African mines had huge impact on world markets.

Your timeline in your discussion is not accurate and thus the causal relationships not accurate.

Think it over, especially the general populist trends. The largest lesson here is that money is politics, and, like politics, it's a mess. Starting with the Jacksonian movement against paper, the populist monetary program went from gold to paper to silver to paper. Quite remarkable. Just follow the arrows.

The post-Civil War is a turbulent crazy period. Look at the turnover of Congressional control, the various third parties, and the wild assortment of reform movements. The Greenback Party got representation from just about every area of the country except California (think gold production). Just as quickly it dissapeared, shredded into a thousand reform movements that its leades tried to coopt, and by the adoption of some of its demands by the major parties. Its successors, the Populists, were almost as successful, and they, too, got lost in the politics of the day. The Democrats and Republicans, meanwhile, are tossed about like a life raft, clinging to the latest rage, hoping not to flip completely. There's so much going on in this period its impossible to draw a straight line.

When considering this period, one must never forget the extent to which the silver interests manipulated national politics. To my estimation, they pulled at least as many levers as did the House of Morgan.

And there is no way an increase of the tariff will lower a federal surplus. It will increase the surplus. Only a lower tariff would decrease the surplus.

As for the 1890 McKinley tariff act, it very deliberately raised duties in order to stifle government revenue. It's official title was, "An Act to Reduce the Revenue." This is called supply-side economics in reverse, and it worked like a charm: higher duties suppressed importation, which lowered government revenue.

What's it all say for real estate?

Well, this is what is odd. If the "bad economy" guys are right and we are in INFLATION, then real estate prices should be going up. But they aren't. They are flat.

We have seen housing prices and new starts up in the past few months, though the latest report had this somewhat flat---I personally was surprised that new home starts CONTINUED to be up, because I thought that the mild weather had accounted for much of the home boom earlier in the year.

Where I would expect to see productivity have an impact is in manufacturing and service sectors. Those are still pretty slow. We'll see.

Just wanted to add that you were correct to say that some of the timeline of my #61 was muddy, and I'm glad you pointed it out. I do not think, however that this means the "causal relationships," as you say, that I pointed to, or my conclusions are at all inaccurate, especially that to which you pointed, the western populist calls for a central bank.

I just ran across the 1896 Populist Party platform. It demonstrates the agrarian and populist mindset on the question most clearly:

"We demand a National money, safe and sound, issued by the General Government only, without the intervention of banks of issue, to be a full legal tender for all debts, public and private; a just, equitable, and efficient means of distribution, direct to the people, and through the lawful disbursements of the Government."

The closest they came to the word "bank" was "postal bank," which was anti- private banks. A "Central Bank," much less the Federal Reserve, was way beyond them, no matter how necessary it would be for the issuance of paper money.

Hope that helps.

Worth rereading since these folks pretty well nailed the future (at least the past several months). We will see if their scenario continues to play out as a genuine bull market for gold!!