The Crime of 1873

What is known in Populist rhetoric of the late 19th century as The Crime of 1873 was the demonetization of silver enacted by the Coinage Act of 1873. Alexander Hamilton had set the United States on a bimetallic standard in 1792 and, with the notable exception of the Civil War, the country had not moved from this system. In practice this was a continuous switching from a gold standard to a silver standard. When the legal price of gold in term of silver, that is, how many pounds of silver you get for one pound of gold, which was set by the Coinage Act at 15 for 1, was greater than the market price, then nobody would bring gold to the mint and the country would be on a de facto monometallic silver standard.

The consequences of this technical decision were enormous, and it seems to be clear in the view of recent research that many people suffered from until the end of the century.

Immediately after the United States went for a gold standard regime in 1873, the market price of gold in term of silver began to rise, starting from about 15 in 1870 to reach a maximum of about 40 in 1900.

The demonetization of silver was accompanied by several circumstances which led to a strong secular deflationary trend of about 1.7 % a year in the general CPI from 1875 to 1896.

The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly. This deflationary effect was hindered to some extent by the spreading monetization of the American economy and a more efficient banking system that allowed to pile up more paper money on a given currency base (that is, gold).

We see between 1875 and 1896 a deflation of about 1% a year in the general CPI. A the same time the output rose by 6 % a year. Economists reader should not say, Gee what a growth even with those declining prices!>>. It’s precisely this growth that made the prices go down. With a fixed quantity of money if the number of transactions rises and the velocity cannot rise sufficiently, then prices have to fall.
All this led to a depression so great that you would have to wait for 1932 to see the same again. Unemployment peaked at 18 % in 1894. But some people suffered more than others more on this ).

On the monetary side, this deflation made many bank loans turn sour, as the debtors struggled to honor their obligations with rising real value of their debts. Some famous banking panics occurred (1892) , but globally the trust of the public in the banking system increased. The ratio of deposits to reserves rose from 2 to 4 at the end of the period.