It's hard for some to even imagine deflation in our current economic situation. All the Fed has to do is just juice up the economy by lowering rates and presto - instant inflation. Assuming of course that people are in a borrowing kind of mood. Remember that "velocity" is the other factor that must be considered when talking about deflation. Even if the Fed is giving it away for practically nothing, someone has to take it! When fear overcomes greed and the takers start to back off, even no-interest money cannot spark a borrower's interest in piling on more debt. This installment covers a part of American history when deflation actually did hold sway. There were even instances of railroad bonds being issued for 100 years at one percent interest during this time.
Deflation in American:
Conditions rocked along after the Civil War between the States (or the War of Northern Aggression as we in the South still refer to it) and the country got back to the business of business. In the late 1800's, a slight gold shortage was developing. The economy and population in America were growing faster than the gold supply. Through the law of supply and demand a very small amount of price deflation started to occur. Farmer's hated deflation because they borrowed expensive money in the Spring and had to pay back the money with commodities that were worth less in the Fall. This made their crop loans more difficult to pay back over the period of a growing season. A great cry went up across the country for a bi-metalic system calling for both gold and silver to back the currency. The logic behind this was the additional silver would allow more money into circulation and would therefore increase the money supply and might even cause a little mild inflation (good for the farmers since they could repay their loans with cheaper money at harvest).
The "Bi-Metallic Plan" called for silver to be valued at a ratio of 16:1 with gold. Since much silver was being produced out west by the silver states, there was a big political push with both the farm states and the silver states together lobbying for the proposed bi-metallic system. The presidential election of 1896 was about two main issues; silver and American imperialism. During the election, McKinley sat on his front porch in Ohio and lectured delegations from around the country, while William Jennings Bryan stormed across Middle America. Bryan claimed that mankind was being crucified on a "cross of gold." Bryan said the existing gold standard was being forced upon the common man by the big Eastern bankers. Bryan campaigned vigorously for a bi-metallic monetary system (easy money) and against imperialism. McKinley won the election and the gold standard held firm. Imperialism, however, was another matter with the Spanish-American War, which began in 1898 with the sinking of the Maine in Cuba and ended with the liberation of Cuba and the territorial possession of the Philippines by the United States.
The "Wizard of Oz" was a political satire, written by Frank Baun during this time period. It is about the big Eastern bankers in New York, represented by the wizard of ounces (gold ounces abbreviated oz.), the Kansas Tornado (Dorothy) who was a fiery orator pushing for the bi-metallic system; the Farmer, represented by the Scarecrow; the industrial worker, represented by the Tin Man and the Cowardly Lion represented by William Jennings Bryan. The munchkins were the duped population in the East that could not see things as they really were because they were forced to wear green colored glasses. The yellow winkies (they didn't get much coverage in the movie) were the poor Filipinos who were the oppressed people as a result of the Eastern banker's imperialistic ambitions.
At the end of the story, Dorothy finally clicked her SILVER slippers together, and everyone saw the light and lived happily ever after, on the bi-metallic system. (Someone in Hollywood thought ruby-colored slippers would show up better in Technicolor). I never did figure out exactly how the flying monkeys fit into the political satire - I suppose you just had to be there.
At any rate, gold was discovered in Alaska, as well as South Africa, shortly after that time period and the "shortage" of gold was relieved. The gold standard remained intact for a while longer. It took World War I to finally break the gold standard. More on that subject in another installment at a later date.
Larry LaBorde, Silver Trading Company
