The Golden Touch

Banker J. P. Morgan rescued the dollar and bailed out the nation
By John Steele Gordon

On February 5, 1895, the Jupiter of American banking, J. P. Morgan, took the train from New York to Washington to see the president. He had no appointment but came to discuss matters of grave national interest. The crash of 1893 had thrown the country into deep depression, exposed a schizophrenic monetary policy, and now the nation’s gold standard stood on the brink of collapse.

The origin of the crisis lay more than two decades earlier, when Congress had decreed a return to the gold standard, which had been abandoned during the Civil War. (The gold standard effectively restrains inflation by requiring that a nation anchors its currency to gold at a set price.) In 1878 Congress passed the Bland-Allison Act, which ordered the Treasury to buy the silver then pouring out of Western mines in ever increasing amounts, at market price and to coin it at a ratio to gold of 16 to 1.

In 1878 the market price of silver was indeed close to the 16-to-1 ratio. But as silver output continued to swell, it dropped to about 20 to 1 by 1890. In that year Congress passed the Sherman Silver Act, requiring the government to buy even more bullion, 4.5 million ounces a month, and coin it, still at 16 to 1. This policy guaranteed inflation, favored by the poorer areas of the country, such as the South and, of course, the silver-rich West.

Anyone who knew Gresham’s law (“bad money drives out good”) could have predicted what happened next. With silver worth one-twentieth the price of gold in the marketplace but declared to be 25 percent more when coined into money, people began to spend the silver and hoard the gold.

With the government running big surpluses in the prosperous late 1880s and early 1890s, the effect of this monetary policy was masked. But when the crash of 1893 rolled in, bringing deep depression, the trickle of gold out of the Treasury became a flood. By early 1895 bets were being taken on Wall Street as to exactly when the Treasury would run out of gold and default. Two bond issues were sold to replenish the Treasury’s gold supply, but the gold just cycled out again. Congress, with many free-coinage-of-silver members, refused to authorize another issue. That’s when the deeply alarmed Morgan traveled to Washington in early February.

President Grover Cleveland at first refused to see him, but Morgan replied, in his best imperial manner, “I have come down to see the president, and I am going to stay here until I see him.” Cleveland saw him the next morning.
By early 1895 bets were being taken on Wall Street as to exactly when the Treasury would run out of gold and default

Cleveland, his attorney general, and the secretary of the Treasury all still hoped that they could persuade Congress to float another bond issue and thus avoid the embarrassment of having the gold standard rescued by the very symbol of Wall Street. A telephone call from New York informed them that the New York Subtreasury had only $9 million worth of gold left in its vaults. Morgan informed them that he knew of $12 million in drafts that might be presented at any moment. Cleveland’s back was up against the wall.

“What suggestions have you to make, Mr. Morgan?” he asked.

Whereupon Morgan made an extraordinary offer: he and the Rothschilds, the two most powerful forces in international banking at that time, would purchase 3.5 million ounces of gold in Europe in exchange for 30-year gold bonds. (Morgan had uncovered a forgotten Civil War-era statute that allowed the Treasury to issue bonds in exchange for coin.) He also guaranteed that the gold would not flow back out of the Treasury, at least for a while.

In effect, Morgan was offering to act as the nation’s (otherwise nonexistent) central bank, insulating the Treasury from market forces. And it worked. The bonds sold easily in both Wall Street and London, and Morgan and the Rothschilds, using a full battery of foreign exchange techniques, bolstered the dollar, keeping the gold in the Treasury.

Morgan’s rescue of the dollar, despite intense criticism from the Left, changed the country’s economic mood, and a strong recovery from the depression began. The next year the 36-year-old William Jennings Bryan would win the Democratic nomination with a promise that the moneyed classes “shall not crucify mankind upon a cross of gold.” It was one of the most famous speeches in American history, but his far less eloquent opponent, William McKinley, trounced him by running on a slogan of “sound money, protection, and prosperity.”

The election proved to be the start of the revival of Republican dominance in American politics that would last until 1932.

—John Steele Gordon, author of An Empire of Wealth: The Epic History of American Economic Power (HarperCollins 2004), writes about economic history for the Wall Street Journal.