Hard Vs Soft Money In American History


The United States’ money supply is based on neither gold nor silver– nor anything else tangible.  So why are people willing to accept such a currency?  For one reason and one reason alone– because their neighbors do.

And of course, it doesn’t hurt that dollars are lightweight and don’t rot quickly, and that  they keep their value relatively well… thus, as long as everyone is willing to keep pretending that they’re worth something– dollars make for a good currency.

However, for most of the two-centuries-plus existence of the U.S., our currency was actually backed by more than good faith…

At the birth of the country, the U.S. was bi-metallic, it’s currency based on both gold and silver.  The exchange rate between the two metals was set by law so that one ounce of gold was worth precisely fifteen ounces of silver.  But no sooner had the founding fathers set this reasonable rate then vast new silver mines in South America and Mexico started pumping tons of silver into the world.  This infusion of silver made silver suddenly less “precious.”  Soon, the real price of silver– what people would pay for it in silver markets– was declining relative to gold.  Where it used to take 15 silver pieces to buy a gold one, gold-sellers were now demanding 15-and-a-half.

However, the U.S. continued to coin silver for folks as if 15 ounces was still equivalent to one ounce of gold.  This effectively undervalued an ounce of gold (which the world market was saying was now worth 15.5 ounces of silver).  Thus, Americans gladly coined their over-valued silver to use it for money, but they held on to their gold, or else shipped it abroad for selling.  This had the effect of driving gold coins out circulation in America during the early 1800s and placing the country on a de facto silver standard.

With the Coinage Act of 1834, the U.S. finally raised the coining-value ratio of silver-to-gold to 16-to-1 in an attempt to put gold coins back in circulation.

But soon, the bi-metallic pendulum was swinging the other way.  Instead of new silver mines, huge new gold discoveries began to mined in California and Australia.  Taken together with Russia’s ongoing mining of its great gold reserves, it was now gold’s turn to flood the market.  With gold worth less, Americans now had it coined for money, and kept back their silver for savings or for selling on the silver market.  Thus, by the mid-1800s, the United States was effectively on a gold standard… on which it would remain until the outbreak of the Civil War caused the federal government to suspend the convertibility of money for specie.

During the War Between The States, the federal government went to paper currency (the “Greenback”) which was NOT convertible for either gold or silver.  During the years of the Greenback Era, money was printed freely and prices more than doubled.  When the Civil War ended, the U.S. Treasury Department dutifully began shrinking the money supply in preparation for a return to a specie-backed currency.

However, as less money circulated, the scarcer dollar began to grow more valuable.  This had the effect of reducing domestic prices.  Farmers and other domestic industries did not like seeing the prices of their goods begin to fall, and so they weren’t very happy at the prospect of leaving behind the days of unbacked paper currency.

Frieden tells us thatthe Greenback Movement first developed as a response among the iron and steel manufacturers of Pennsylvania.”  These interest groups wanted more– not less– money printed… in order to reverse the price-decline of their products.  Frieden states that railroad companies also favored an inflationary economy (presumably feeling that whatever was good for the manufacturers who were shipping stuff on their lines was good for them, too).  And with many U.S. banks (or bank boardmembers) heavily invested or otherwise connected to the railroad business, a large portion of the American financial world at that time also in favor of “Soft Money” (a currency with a value relatively easy to move).

Farmers and other domestic economy manufacturers wanted Soft or “Easy” Money– in other words, a monetary policy which had a pro-inflation bias.  Why?  Because– though they might not have understood all the subtleties and long-term and big-picture effects of inflation– farmers knew that when the value of money fell, the price of their crops rose.  Also, many farmers were convinced that crop prices would rise FASTER than other prices… thus making farmers the relative gainers in an inflationary environment.  [Personally, I’m not convinced of this theory, that farm prices will rise faster than other prices, but the main point here is that’s what some of the farmers, themselves, believed].

Another group, not surprisingly, who made common league for a return to silver-money were the silver mining companies.  Some of those in the silver business even dreamed of a return to the old 16-to-1 convertibility ratio between silver and gold– which at that time would have over-valued silver relative to gold, and would have driven gold out of circulation– giving silver producers the entire American economy to currency-ify.

Today we might be perplexed to learn that intelligent businessmen could so easily shrug off the risks and consequences of inflation and a dampened export economy.  But in those days, as Frieden explains to us, “Soft Money advocates worried little about the international credibility that gold might bring, for they bought and sold next to nothing abroad.  For them, the world economy was a threat from which to be protected.”

Opposed to the Soft Money interests were those in favor of a stable international exchange rate.  These people were said to be in favor of Hard Money.  Hard Money advocates included bankers, exporters, and international traders and investors… people whose financial well-being depended upon an (at least fairly) stable exchange rates between the world’s major currencies.   For instance, why should a manufacturer in Germany risk making and shipping over millions of dollars of product if– by the time his returns finally crawled back to him across the Atlantic– the value of his American profits had dropped substantially due to a large and swift change in the value of the dollar?  It was felt by most global traders and financiers that nothing could provide a stable international currency regime better than the worldwide adoption of the Gold Standard.

Additionally, there was a geographical dimension to the money question in the United States.  Many of America’s international traders and investors were located in the Northeast, making that part of the country Hard Money.  Opposed to the Northeast was much of the rest of the country, which was more oriented to the domestic economy.  A 1874 Congressional bill which would have mandated the expansion of the money supply was, Frieden tells us, opposed by “over 95 percent of Northeaster congressmen,” whereas “over three-quarters of Congressmen from the agrarian South and the agrarian and industrial West (including Pennsylvania) supported it.”

In 1879, in spite of interest group pressures, the U.S. restored gold convertibility for the dollar.  This put the U.S. on the Gold Standard, since America had in 1873 already de-monetized silver, removing it from circulation [I don’t have in front of me any information about which came first– the de-monetization of silver or the Panic of 1873, but that would be interesting, and probably quite relevant, to know].

In moving to the Gold Standard, the U.S. was following the lead of Europe, which was now almost completely on gold.

Immediately, Soft Money interests began agitating for a return of SILVER convertibility, presumably feeling that a bi-metal system would be more flexible and more amendable to whatever political pressure they could muster.

As the American economy grew by leaps and bounds in the last quarter century of the 1800s, the outlook of manufacturers began to change…  From being domestically oriented, they were more and more becoming part of the global economy.  By 1896, manufacturers were more than willing to accept Hard Money in exchange for high tariffs (which would protect them from being under-priced by imports)– and this combo was precisely what Republicans offered the American electorate with the platform of presidential candidate William McKinley.  Against McKinley and his Hard-Money/High-Tariff coalition, the Democrats ran William Jennings Bryant (famously and vehemently against a single-metal gold standard).

In the end, McKinley’s “peculiar coalition” of tariff-seeking manufacturers and Hard-Money-advocating Northeastern international traders won the day.  As Frieden points out, “once the [1896] election became a referendum on money, the Republicans became the conduit for millions of dollars in Eastern business contributions to ensure the victory of gold.”


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