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There Is Nothing New In the World, Even Non-existent Recoveries

Joe Calhoun passed along the passage below of what now seems both like ancient history and yet stoically relevant.

From the preface to the second English edition of Emile Zola’s L’Argent (Money) published in 1894:

for the rottenness of our financial world has become such a crying scandal, and the inefficiency of our company laws has been so fully demonstrated, that the absolute urgency of reform can no longer be denied.
A work, therefore, which exposes the evils of “speculation,” which shows the company promoter on the war-path, and the “guinea-pig” basking at his ease, which demonstrates how the public is fooled and ruined by the brigands of Finance, is evidently a work for the times,

There is so much of the Gilded Age in our current system – the 1890’s were so much like the 1990’s and 2000’s. While discussions and uncertainties over the dollar and other “reserve” currencies are only now being processed, the decade of the 1890’s was rife with currency strife. The “brigands of Finance” are surely as cyclical (in long terms) as the impulse to inflate credit.

The 1890’s began as an age of money, as in money flowing heavily into the United States. As John Chapman likes to remind his colleagues quite often, our country was in a chronic state of current account deficits in the 19th century, meaning that foreign capital flows into this country were vital to the maintenance of economic proficiency and growth. By 1890, British banks formed the backbone of gold credit on Wall Street (which itself was the network hub for the movement of actual money inland), but were also heavily invested in overseas risk – the kinds of off balance sheet financial risks that became common again a hundred years on. When particular risky bets in Argentina blew up in the middle of 1890, a wave of British bank panic struck the global trade system. After the Baring Brothers crisis in 1890, British banks took to repatriating their gold stock holdings from New York as the UK became embroiled in a massive depression.

By early 1891, there was a wave of bank failures in the US, leading to a mild (by 19th century standards) recession in economic activity. After a large capital outflow of gold in the spring of 1891, the recession and price deflation was arrested by massive crop failures in Europe that summer. US harvests were particularly robust so that by the middle of 1892 US exports of grains and agricultural products were nearly 2.5 times as large as the previous year. That kept the dollar in good demand overseas and led to a counterflow of gold into the US to combat the sinking, but all-too-connected fortunes of the British banking system. It was a nice reflation as money stocks and prices in the US rose out of that mild recession, and it was believed that the country could and would “decouple”.

The dollar backdrop against this reflationary process was the famous age of silver agitation. The forces for bi-metallism had for two decades pursued the course of silver inclusion into the gold standard world of American money. As part of the fight over the McKinley Tariff Act of 1890, Republicans sought to throw a bone to the Western farmers that desperately sought the refuge of inflationary currency.

While the McKinley Act would raise import tariffs to benefit the industrial/export economy of the East, co-incident legislation in the form of the Sherman Silver Purchase Act (passed on July 4, 1890) nearly doubled the amount of silver the US government was obligated to purchase. Worse, the legislation called for the silver to be purchased with a new class of legal tender (called Treasury notes) that would be redeemable in either gold or silver. As with any artificial tinkering with currencies, Gresham’s Law shows that bad money pushes out good, and so it was that gold stocks at the US Treasury became endangered. The commitment (and even the ability) of the US to stay on the gold standard was questioned in foreign markets.

As the commodity reflation effort waned by 1893, the combination of British depression and uncertainty over the dollar led to a stubborn decline in American fortunes. Milton Friedman and Anna Schwartz estimate that the total money stock fell by an enormous 6% in the first half of 1893 (after averaging 3% per year for the eleven years prior), after a wave of American bank failures decimated monetary fortunes. The proximate cause of those failures was the building price deflation (in the financial economy) set about by the persistent outflow of gold due to Britain’s travails and concerns over the dollar’s ability to maintain gold convertibility. The contagion of asset prices began to imperil individual banks in the interior of the US; a preview of the early 1930’s.

By July 1893, another wave of bank failures set in, including banks in the East, as several high profile companies succumbed to financial pressures, and by August the country was in serious economic trouble. By the beginning of 1895, the US treasury’s gold reserve had fallen to a desperate low of $45 million and the monetary system was essentially paralyzed by foreign questions over the dollar. At the same time, politically speaking, silver forces had mobilized into the Democratic party leading ultimately to William Jennings Bryan’s “Cross of Gold” speech at the 1896 convention. The viability of the dollar was a significant issue in the recovery of the global economic system (though it was by no means the sole issue).

The growth of financial speculation in that Gilded Age, concurrent to the currency questions surrounding the dollar, led to almost a full decade of great instability that remains a part of cultural lore. The criticisms of that Victorian era of inequality largely remain unsolved by our own age of the aftermath of monetary inflation. What is most striking about both episodes of economic disturbance was the role money, especially rapid monetary growth, played as it eventually contributed to an age of instability that could not be conquered by any political means. Money income (economic output) in the US did not surpass the 1890 peak until 1898 – the recovery from collapse was as non-existent then as now.