By Charles Postel
The Federal Reserve is celebrating its 100th birthday trapped in a political bunker.
At few points since the Fed's founding in 1913 has it taken such sustained fire. It's taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.
Conservative or Tea Party Republicans have a different kind of criticism. They reject the notion that the Fed should even have the power to regulate the money supply and "debase" the dollar. They believe in hard money and a return to the gold standard.
These Republicans have taken a page from the book of conservative orthodoxies of the late 19th century. Conservatives are again fervently pushing gold as a means to protect the wealth and power of Wall Street financiers and the corporate elite. Conservatives are demanding hard money as part of the policy mix that enriches the top 1 percent. Now, as in the Gilded Age, the United States is a nation of savage inequality.
Hard money has often been linked to the conservative cause. But it has been more than 100 years since gold fever has so afflicted American politics.
The Federal Reserve Act of 1913 loosened the strings that bound U.S. currency to gold. Other ties were cut under President Franklin D. Roosevelt in 1933 and 1944. In 1971, President Richard M. Nixon severed the last tie between the dollar and the precious metal.
In the years after 1913, the need for a flexible and regulated money supply was widely accepted across the political spectrum. By mid-century, only a small band of right-wing ideologues clung firmly to the gold standard. In a 1990 paper, Milton Friedman, the 20th century's most influential conservative economist, aptly described such holdouts as "monetary monomaniacs."
But that was then. Today gold is king of conservative economic thinking.
Radio and TV personality Glenn Beck hawks gold coins as a business, and sells the gold standard as America's salvation. President Ronald Reagan's budget director, David Stockman, has written a 700-page jeremiad lamenting the departure from gold as the root of America's "great deformation." Financial magnate Steve Forbes has turned Forbes magazine into a tool of gold advocacy. And the conservative pundit William Kristol has now joined the chorus.
Meanwhile, Representatives Paul Broun (R-Ga.), Michele Bachmann (R-Minn.) and the congressional Tea Party Caucus are pushing to "audit the Fed" as the first step toward repeal of the Federal Reserve Act and restoring the gold standard. In the Senate, Senator Rand Paul (R-Ky.) is gaining support for a commission to study a return to a gold-backed currency. Republicans have also passed state laws in South Carolina and Utah, endorsing the use of gold as currency.
What explains this gold mania? The argument for gold is a tortured one. Supposedly it will save the country from the ravages of inflation. But inflation remains at historic lows, leaving many observers to note the dangers of a Japan-style deflation.
Supposedly, gold will provide an anchor of stability in a rough economic sea. But, like any other commodity, gold is subject to speculative bubbles. Over the last five years gold prices have been tossed high and low, more like froth in the wind than a sturdy anchor.
Supposedly, "ending the Fed" will return us to the firm ground of prosperity of the last gold standard era from 1873 to 1914. But claims that the old gold standard made for a more stable economy have no basis in the historical record. Those years witnessed the terrible depressions of the 1870s and 1890s, and some of the most severe financials busts and economic storms in U.S. history.
What the historical record does show is that the politics of gold and hard money bitterly divided the country and contributed to unprecedented levels of economic inequality. This experience helps make sense of the gold fever gripping conservatives today. Then, as now, hard money was the preferred policy of the corporate 1 percent.
Before the Civil War, state-chartered private banks issued paper bank notes. But these notes were notoriously unreliable. They were easy to counterfeit and often worth less than their face value. When issuing banks went belly-up, the holders of their notes were stuck with useless paper. Small wonder that working people favored hard coin.
During the Civil War the Union government printed paper dollars. They were known as "greenbacks" — for the color of the ink printed on the reverse side. The Treasury Department issued this paper or fiat money to pay soldiers and purchase supplies. Greenbacks would gain a wide acceptance — at least in the North — as the patriotic money that helped save the Union.
In the following years Congress took steps to put the U.S. currency on the gold standard. To replace greenbacks, silver coin and other currency, Congress favored gold-backed bank notes. These notes were issued by federally chartered private banks — most of which were clustered in the Northeast.
This move toward gold-based currency provoked a "battle of the standards." Gold had strong support among the wealthy, including banking executives and conservative Republicans and Democrats mainly from Northeastern districts.
But many workers and farmers equated hard money with hard times. This perception grew stronger the further one lived from the financial centers of New York and Philadelphia.
By the 1870s and ‘80s, anti-monopolist leagues, the farmers' Grange and the Knights of Labor fought back against the gold standard. Many of their members supported the Greenback Labor Party that stood for labor rights and greenback dollars.
This "battle of the standards" came to a head during the depression of the 1890s. A coalition of farm and labor groups had formed the Populist Party. Among other reforms, the Populists demanded an expansion of the money supply by minting silver and printing greenbacks.
William Jennings Bryan, a young former congressman from Nebraska, took up the cause of soft money at the 1896 Democratic National Convention in Chicago. Bryan, a powerful orator, was never a Populist — but he favored many of their reforms. He captured his party's presidential nomination after he had convention delegates leaping on to their chairs with a speech decrying the crucifixion of humanity "on a cross of gold."
Millions of hard-pressed farmers and workers passionately supported Bryan. Their experience with the gold standard helps explain why.
Hard money meant a general deflation of prices in relation to the dollar. Each year from 1875 to 1896, farm prices fell 3 percent. Georgia farmers saw the price of a pound of cotton fall from 10 cents to 5 cents. The price of Illinois wheat dropped even further. Corn prices fell so low that Nebraska farmers decided to burn it for fuel rather than spend money and time shipping it to market to sell it.
At the same time crop prices fell, the cost of mortgages and loans soared. Farmers needed credit for machinery and other supplies. But an unregulated credit market meant that in some regions loans were either sky high or not available.
If farmers could get a loan or a mortgage, hard money made it more expensive to pay off. When the real value of the dollar rose, the real value of their debts rose with it. Farmers had to sell a lot more wheat or corn to meet those debts.
Scarce credit combined with scarce dollars. Because the Eastern banks had a monopoly on issuing bank notes, farmers in the West and South often lacked access to currency. The lack of dollars in rural America became particularly acute after the growing season, when there was insufficient currency to move the harvest to market.
Farmers were not alone when it came to the burdens of hard money. During the long economic depressions of the 1870s and 1890s, workers and manufacturers felt the weight of the same deflationary price cycle. They asked why anyone would invest in an iron mill, for example, when the price per ton of iron stagnated or fell.
The gold standard alone could not explain the extent of farm poverty, or the depth of industrial crises. But many Americans understood that gold produced winners and losers.
Gold made losers of farmers and other working people selling goods at deflated prices. It made losers of people who paid mortgages and owed debts. And it made losers of those who lacked access to credit and currency.
But gold was good for those who controlled the currency, held gold or issued loans. It was good for the banking corporations, Wall Street financiers and other creditors. As a result, the gold standard shifted resources from the poor to the rich, and from the Midwest, West and South to the financial centers of the Northeast.
For millions of Americans, gold symbolized the power of wealth over the rest of the country. Along with corporate subsidies, regressive taxes and suppression of labor rights, the gold standard tilted the economy in favor of the top 1 percent, and opened a chasm between the rich and poor the likes of which the United States had never seen.
In the 1870s, anti-monopolists described the gold standard as a "relic of barbarism." This was 50 years before the economist John Maynard Keynes said the same thing. What they meant was that the corporate elites who made such a fetish of gold relied on superstition and myth.
For the anti-monopolists, the gold standard was relic of a pre-modern age, unsuitable for a dynamic and expanding economy. Gold supplies, they noted, were limited by the random luck of the mining industry — and the even more random schemes of hoarders and speculators.
A modern economy, the anti-monopolists argued, required a more reliable currency. It also needed a more flexible money supply aligned to the growing needs of industry, agriculture and trade. This reliability and flexibility could only be assured by the powerful backing of the national government.
During the depression of the 1890s, the Populists were able to push their arguments into the center of national politics. They demanded a more flexible and reliable national currency — whether paper or silver, or a combination of the two — as a means to aid distressed farmers, stimulate commerce and create a more equitable and prosperous country. This demand for soft money found a voice in Bryan's 1896 presidential campaign.
Conservatives from business, politics and academia rallied to the gold standard. They were known as gold bugs because of the militant faith that they placed on this precious metal as the key to preserve their wealth, power and way of life.
For Republican industrialist Mark Hanna, the political kingmaker behind President William McKinley, the danger lay in the "communistic spirit" of soft money. For Harvard economist Francis A. Walker, paper money would lead to "effeminacy" — weakening the control fathers and husbands had over their wives and children. For the journalist William Allen White, Bryan's attack on the gold standard amounted to "riot, destruction and carnage."
Bryan lost the 1896 election to McKinley. The Klondike gold strike that same year temporarily relieved the pressure of deflation. But the financial panic of 1907 unleashed renewed demands for monetary reform. Under President Woodrow Wilson, this led to the Federal Reserve Act of 1913 providing for financial regulation and a more flexible money supply.
Today, all modern economies have paper or fiat money backed by the power of government. And the possibility that the U.S. will revert to a gold-backed currency is little to none. The gold standard is a relic of history.
Yet, the cries of the "monetary monomaniacs" grow louder. Paul, Bachmann, Forbes, Beck and other conservatives now warn that it is either gold or the abyss.
They do so because today's gold bugs share the same goals as their conservative ancestors. They, too, understand that hard money serves power and wealth.
Conservatives have put the Fed in their crosshairs. They are demanding hard money because it tilts the economic table in the direction of the haves and away from the have-nots. It favors banking corporations and Wall Street financiers. It squeezes homeowners paying mortgages and students with loans. And hard money is used as a justification for cuts in education, healthcare and other needs.
The Federal Reserve will be celebrating its 100th birthday with few friends and many enemies. It gained many of these enemies with its deregulatory policies that fueled speculation, enriched banking corporations and contributed to the financial meltdown. And it continues to make enemies with policies that favor Wall Street over Main Street.
But gold will not fix what is wrong with the Fed. Quite the opposite. Hard money is part of the conservative policy mix that has opened a chasm between the rich and poor the likes of which has not been seen since soon after the passage of the Federal Reserve Act a hundred years ago.