Instructions: Read the following article and answer the questions at the end. Use copy and paste to paste the questions into a Word file. Fill in the blanks with the answers. Be sure to delete the blanks. Save the file with your answers on the diskette with a different file name. Return the disk to Ms. Adams.
DEMAND FOR CHEAP MONEY
If there was anything that farmers demanded in the late nineteenth century more than the regulation of natural monopolies or the reduction of middlemen’s profits, it was “cheap money.” To understand this, it is necessary to explore briefly the quantity theory of money, which was widely accepted at the time, although not thoroughly understood. According to the quantity theory, the value of money, like that of any other commodity, changes according to the supply. Raise the number of dollars in circulation—in other words, inflate the currency—and the dollar buys less; prices go up. Restrict the amount of money in circulation—in other words, deflate the currency—and the dollar buys more; prices go down. This can be expressed in a simple mathematical equation:
(1) Let P stand for prices.
(2) Let M stand for amount of money in circulation.
(3) Let T stand for the total amount of goods and personal services for sale.
Then P=M/T
If the amount of money (M) is increased faster than the total production (T), prices will go up. This is inflation.
If the total amount of goods and services (T) increase faster than the money supply (M), prices will go down. This is deflation.
Actually, this simple form of the quantity theory of money is so incomplete as to be misleading. It leaves out two other factors: velocity—how fast money passes from hand to hand, and credit—which affects prices just as money and which is more abundant. But the simple equation given above is what the inflationists believed to be true in the late nineteenth century. It accorded closely with the facts of agricultural life in the three decades after the Civil War. The production of agricultural staples such as wheat and cotton (a large factor in T) nearly quadrupled, while the supply of money (M) increased very little. The prices received by farmers (P) dropped by nearly two thirds.
Deflation and the Gold Standard
The three decades after the close of the Civil War were a period of deflation. In 1865, with the currency inflated by the wartime issuance of greenbacks, there were $31 in circulation for every person in the country. By 1895, per capita circulation had sunk to $20. This was partly the result of a world-wide movement related to wide-spread adoption of the gold standard. When a country went on the gold standard, it made all its currency convertible into gold.
Formerly most countries had been on a bi-metallic standard whereby the government coined both gold and silver and established the official value of each. In spite of official “mint prices” for gold and silver, their relative value often changed sharply. The California gold strike of 1849 so increased the amount of gold, for instance, that it became cheap in relation to silver. According to the tendency known as Gresham’s Law, whereby dear money is hoarded while cheap money remains in circulation, silver, went into hiding. This metal was so little used that the federal government issued 25-cent gold pieces and small bills, called “shinplasters” for denominations as low as 3 cents.
The difficulty with the gold standard in the late nineteenth century was that world production of gold did not increase as fast as the world production of goods. This restricted the currency supply and drove prices down.
Deflation was hard on farmers, who borrowed money more heavily than ever before. When a wheat farmer borrowed $1,000 in 1880, with wheat at $1 a bushel, the principal of his loan equaled 1,000 bushels of wheat. But in 1890, with wheat at 75 cents a bushel, his debt equaled 1,333 bushels. To use a homely phrase, there was “too much hog in the dollar.” This state of affairs meant that thousands of farm owners lost their land and became tenants or hired men.
Greenbacks and Free Sliver
As soon as greenbacks began to be called in during the late 1860’s and prices began to drop, farmers started to demand inflation. They protested that bankers and bondholders lent 50-cent dollars during the war, and now wanted to be repaid in 100-cent dollars. With the slogan, “The same currency for the plowholders and the bondholder,” western delegates to the Democratic Convention of 1868 were strong enough to force an inflationist plank into the party platform. In the mid-term election of 1878, a Greenback party polled over a million votes, electing fifteen congressmen.
The Greenback movement declined after 1880 as inflationists turned to free silver. In 1873, Congress decided to stop coining silver money and adopted the gold standard. Six years later, after building up a gold reserve of 200 million dollars, specie payments were resumed. These events caused a howl of protest from western silver miners because new mines, especially the famous Comstock Lode, produced a load of silver which would no longer be coined. Denouncing what they called “the Crime of 3,” silver miners demanded a policy of free silver, meaning that the government should coin silver brought to the mint. They were joined by debtor farmers of the West and South, who expected that free silver would mean a cheaper dollar and higher prices.
The strength of the silver movement was shown by the Bland-Allison Act of 1878, passed over President Hayes’ veto. Starting as a free silver bill in the House, this law was amended in the Senate to require that the treasury buy from $2,000,000 to $4,000,000 worth of silver a month and issue currency against it. Although adding to the money supply, the Bland-Allison Act did not halt deflation. The increase in business far exceeded that in currency. Agitation for cheap money therefore continued, reaching a peak in events to be described in the next chapter.
Questions:
Fill in the blank.
1. According to the quantity theory, the value of money, like that of any other commodity, changes according to the ____.
2. P=M/____
3. The ____ decades after the close of the Civil War were a period of deflation.
4. The California gold strike of 1849 so increased the amount of ____, for instance, that it became cheap in relation to silver.
5. In 1873, Congress decided to stop coining silver money and adopted the ____.
6. The strength of the silver movement was shown by the Bland-Allison Act of ____, passed over President Hayes’ veto.