I’m studying US history with my daughter, and there’s a section which discusses “soft money” backed by silver and “hard money” backed by gold. The book seems to presume that the reader understands how one or the other is preferred by either farmers (borrowers) or bankers (lenders.) Their presumption is incorrect, as I certainly do not understand it! If the paper money represents the value of a certain numeric quantity of a precious metal, then what difference does it make what kind of metal it is?
So, could one of you fine scholars out there explain it like I’m five and not approximately ten times older than that? Thanks in advance!
In: Economics
There is an important relationship between debt and inflation that underlies the thinking here. Debt represents a fixed number of dollars. No matter how high inflation goes, the amount you have to repay never changes. But if the currency inflates, a bushel of corn becomes worth more dollars. For farmers, inflation means more dollars coming in to cover the same debt.
Bankers are on the opposite side of that trade. They get the same repayment, even though the dollars they are receiving are worth less. So their staff, rent, and other expenses are going up but their income stays fixed. In extreme cases, this can make banks more prone to failure which is bad.
Farmers wanted soft money backed by silver because it would create more inflation. Bankers wanted hard money backed by gold because there would be less inflation.
Silver was considered soft money because it was relatively plentiful and actively being mined in large quantity. Even today you can see this disparity with silver trading at $28 an ounce while gold is north of $2500 an ounce. At the time in the 19th century, there were very active mines in Nevada which were pumping out silver. This caused the price of silver to decrease on the market. The so called “free silver” movement were people who were in favor of fixing the price of silver dollars at a fixed rate against gold dollars, at 16:1, which was more favorable than the actual market traded rate. This would cause an inflationary monetary policy, agreed upon by everyone at the time (and likely correct, even though never implemented). The question was whether or not this inflation would be beneficial for the society. The farmers, borrowers, obviously wanted inflation, as it would make the value of their debts smaller, they could their newly grown crops for more dollars and pay back their old debt at a smaller real cost. The bankers, or lenders, did not want this inflation and did not want to allow the coinage of silver and only stick with gold.
There is much more that can be said here, but I think this is a good intro. See free silver, bimetallism, William Jennings Bryan Cross of Gold speech for more. At the time, the Democratic party had been captured by the “populist” free silver movement, while the more business friendly Republican party was in favor of hard money and gold.
There is/was a much more limited supply of gold than silver so if you’re going to use the gold standard that is going to limit the supply of money far more than if you base it on silver.
Limiting the money supply, frankly, benefits those who already have it. Creating new money, by basing it on a more abundant metal like silver, would lower the value of existing currency which was obviously a threat to those who had already created vast fortunes for themselves. It would, however, allow those without large reserves of cash to establish themselves more advantageously in the growing money economy of the 1800s. It should be remembered that for a long time many people in crop production had relied heavily on barter as money was in short supply. This obviously put farmers at a huge disadvantage against wealthy people who were threatening to buy up land and control the agricultural industry.
Under the Classical Gold Standard (1870s – 1910s), paper money in most rich economies was backed by gold. That’s “hard money.” The trick with hard money is that it has the ability to enter and leave a system fairly easily, and you don’t have a lot of tools to control it. That system can be an economy, or a sector, or a business. Either way, on its way out, hard money induces deflation: prices fall as everyone has less money to throw at their purchases. Conversely, it forces inflation on the way in: everyone has more money with which to buy the same things. Central banks were created to help regulate this flow, interfering in the market for bank loans to help control interest rates and either release more money into the system or suck it out of the system as needed. The USA at this time had no central bank, and was thus at the mercy of the Bank of England, plus the natural inflows and outflows of gold due to imports and exports of goods and capital investments.
This was a problem for farmers. Deflation is bad for almost everyone: as prices fall, employment declines. This is why one of the killing blows dealt to the Classical Gold Standard was the expansion of the voting franchise to include most working people. Before then, unemployment was not a valid concern for economic and monetary authorities. But deflation is also particularly bad for debtors, as it steadily increases the real resource value of their loan principal. Instead of selling 400 bushels of corn per year to pay off your debt, you now need to sell 600, because corn prices have declined with the falling quantity of money. Inflation is the opposite: the value of the loan principal falls in relation to resources (real value). So now you need to sell 300 bushels of corn per year to pay off your loan, because the increased quantity of money has allowed you to raise corn prices. Farmers are natural debtors: they make all their money at once, so they tend to rely on loans to operate in the lead-up to selling off their crops. They also take out long mortgages on their land.
So what does this all have to do with silver? An alliance of Western silver miners, who needed customers to prop up the price of their product, and farmers with their debts, petitioned the government relentlessly to add money to the system with large purchases of silver. This would induce inflation, and provide some relief for farmers buffeted by international gold flows caused by the business cycle and the activities of the Bank of England. It was “soft” money because they were deliberately trying to dilute the metallic backing of the paper money.
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