Commentary Magazine


Re: What’s the Plan?

John’s post reminds me of the time when the man with the plan rode to the rescue from Wall Street.

The United States has had the world’s largest economy for so long (at least 125 years) that no one now alive remembers when we didn’t. You’d have to be well  0ver ninety to remember a time when the center of the financial world was somewhere other than New York. The dollar has been the world’s reserve currency for more than 60 years. So few remember when the “almighty dollar” wasn’t so almighty or when the country’s credit rating was less than triple A. But such a time did indeed once exist.

In 1895, gold was flowing out of the Treasury so fast the country was nearly forced off the gold standard, under which countries promised to redeem their currency on demand, in unlimited amounts, for gold at a set price. For the United States to have gone off the gold standard would have been a huge national  embarrassment and would have raised interest rates on all dollar-denominated securities. But Democrats in Congress were wedded to the doctrine of the “free coinage of silver at the ratio of 16-to-1,” basically a scheme to ensure inflation and thus help debtors. The gold standard, however, makes inflation effectively  impossible. Because the free-market ratio for silver to gold was more like 22-to-1 at that time, people were turning in silver for gold, which flowed relentlessly  out of the Treasury (a beautiful example of “Gresham’s Law” at work). Wall Streeters were making bets on exactly when default would take place.

But one Wall Streeter, J. P. Morgan, took the train to Washington and insisted on seeing President Grover Cleveland. Cleveland was a Democrat, but a sound-money man through and through. However much he hated the idea of asking Wall Street’s ultimate symbol for help, he didn’t have a choice. Default was  possibly only hours away, and Congress wouldn’t cooperate. Morgan’s attorneys dredged up a forgotten Civil-War-era statute that allowed the issuance of bonds without congressional approval in order to purchase coin. He, acting for the Morgan bank and the Rothschilds, offered to buy 3.5 million ounces of gold for the Treasury’s benefit and to insulate the Treasury from market forces so the gold would stay there. In effect, Morgan was offering to act as the central bank the United States lacked.

It worked. The market trusted Morgan more than the government. The American economy, in deep recession since 1893, began to turn around, and gold began to flow back into the Treasury.

So where is J. P. Morgan when we need him?