On This Date in History: Once upon a time, most currencies were based on the gold standard. The US operated on the gold standard until 1971 when President Nixon took the nation off the gold standard. Since then, the US and most other nations operate under the fiat money system. Basically, the gold standard calls for a particular currency to be backed by an equal amount of gold pegged at a standard price set by a particular government. Under a fiat system, a currency is not really supported by any commodity at all but instead the value is established through supply and demand market forces as well as the full faith and credit of the issuing entity. One of the problems with a fiat system is that, since it is not based on any commodity, governments can simply print money to inject into the currency supply and that can lead to inflation because it is often an aritificial increase in supply versus the market based demand. That is a concern involved in today’s financial and ecnomic crisis around the world.
But, at the end of the 19th century, the US was still on the gold standard and the underlying commodity backing the US currency was the concern. There was a severe economic depression beginning with the Panic of 1893. The economy became stifled and large financial institutions were fearful that there would be a devaluation in paper money. So, they began trading in their greenbacks for gold. By January 1895, gold reserves in the United States were flowing out at a rate of $3 million a day. That led to a fear that the public would lose confidence in the dollar and the paper money would be worthless. So, the solution would be to replentish the gold supply. It wasn’t really practical for the government to quickly go to public lands and start mining for gold so they needed to find another solution. President Grover Cleveland looked into the political crystal ball and decided it was best to push Congress to act with a bill that would authorize a sale of bonds. In other words, the president thought that governmental borrowing was the answer. Sound familiar? The money borrowed would then used to buy gold. Now, the financial expert of the day was not the President of the United States but instead was John Pierpont Morgan and he wasn’t so sure that publically announcing that the government was going to borrow money for the purpose of replentishing the gold supply in the treasury was a great idea . He reasoned that an announcement of such a bond sale would signal that the treasury was weak and only intensify the rush to cash in dollars for gold. In other words, the government solution would make a bad situation worse.
So, J.P. Morgan decided to meet with President Cleveland to try and show him the error of his ways even though Cleveland continued to be convinced that his plan was the way to go to save the nation’s financial system. While in that meeting, the president and Morgan learned at noon on this date in 1895 that the New York subtreasury only had $9 million of gold left and Morgan knew of at least one man who could present a draft for $10 million in gold that day that would send the system into collapse. So, Morgan used the opportunity to present the president with a better idea. For some reason, no one else knew of a law that was already on the books, thus making any announcement of governmental borrowing necessary. But information is a key ingredient to success so it is not really surprising that J.P. Morgan knew of a Civil War era law that allowed the US Treasury to acquire gold coins directly through the issuance of bonds. In essence, it was still governmental borrowing to buy bonds but the law would allow Cleveland to buy his gold the way he wanted but to do so privately and not with an act of Congress that might panic the public. But, surely the saavy financial institutions would know what was going on and what was to keep them from going ahead and cashing in their greenbacks for the same gold that Uncle Sam would acquire. Enter the power of persuasion of John Pierpont Morgan.
It is rather amazing but in order for this scheme to work, President Cleveland needed one man, J.P. Morgan to assume control of the entire international financial community in order to maintain support of American paper currency. Morgan had to convince large financial institutions to stop converting their currency to gold. Perhaps no one else in American history could do what Morgan could do; Morgan promised that there would be no further drain from the financial community. The bond gold currency exchange took place and no further drain of gold from the treasury took place due almost entirely to Morgan’s power of persuasion. Now, at this point, it may be common to think that Morgan must have had a dog in this fight; he had to profit from this. He did in the sense that the system that had made him wealthy and powerful was saved but as to the transaction and the effort, Morgan’s company made less than a one percent profit. This little story tells us a few things. One is that the US has been in severe crisis situations many times in the past. This 2009 fiasco was not the first time that we have been “on the brink.” Another is that government alone is rarely the solution; it usually takes cooperation between public and private policy and action to solve a complex problem.
Now, J.P. Morgan bailed out the US government on many occasions and he is often labled as one of the “robber barons.” But, while these men of great wealth did have tremendous power on a large scale, they used their power for the general good of the public. John D. Rockefeller argued that a monopoly was the most efficient way to bring products to the public at the lowest price. You know what? He’s right and he generally did that, though he did run competitors into financial ruin to gain that monopoly. But, the trouble is that it is impossible to expect everyone who is in charge of a monopoly, including any government, to actually deliver products to the public at the lowest rate. Rockefeller is often demonized for his fortune that pushed toward $1 billion in 1912 yet, he established education systems in the South specifically to bring education to minorities, though this researcher trys to denegrate his Calvinist intention to aid Blacks with ulterior motives. Even if he’s right about the motives, the fact remains that Rockefeller was instrumental in helping to bring equality of education to America. He established the Rockefeller Institute for Medical Research, the University of Chicago and provided so much philanthropic funding that when he died, his worth had dwindled to about $26 million. He gave most it away and his son used his inhertitance to revive Colonial Williamsburg.
Then there is Andrew Carnegie who has a tremendous rags to riches story and he left a legacy of the free public library system across the United States and other parts of the world when he donated over $56 million for that cause. He believed that his gift of attaining wealth should be used for the benefit of all. But, early 20th century labor issues were often tumultuous and Andrew Carnegie is associated by many for the brutal response to the Homestead Strike. I suppose that the point I am trying to make is that wealthy people aren’t necessarily bad simply due to their wealth. They do good for society, if nothing else, they provide incomes and opportunity to people. Same is true of corporations. And historically, it is been shown repeatedly that cooperation between the public and private sector most often provides the best solutions to problems that face the nation and society as a whole…but we tend to forget that. Perhaps a few more “robber barons” today may be a better alternative to many who currently call Wall Street home.
Weather Bottom Line: Okay, it’s here. Rain all day then turning to snow overnight. Daytime temps mainly in the upper 30’s will be the rule and as the upper low swings around, the air column will chill down from above and so there will be no risk of icing except on roadways and I think that is somewhat of a concern. The wet roads will probably still be wet when we eventually get to freezing and since there was no opportunity to treat the roads, Saturday morning drive will be problematic areawide. I’m still thinking something like 2 inches of snow with areas north of the river with higher amounts. I still think that afternoon temperatures on Saturday will be in the upper 20s for most people.
The next system for Tuesday still looks interesting but there are so many potential solutions that I don’t want to deal with it right now. There are some machines claiming a fair amount of rain, others call for a huge amount of snow while others have a some of both with a popular idea being snow, rain, snow. I don’t like that last solution because I don’t want it. It does appear though that it will be more of a Tuesday/Wednesday event and not Monday. We’ll look at it closer when there is something more concrete to deal with. I wouldn’t totally pooh pooh the risk of decent snow just yet but the trend in the models has been for a track of the storm to not support the giant event that one bucket of bolts still is looking for.