In 1964, a high school English teacher in Mount Vernon, New York, named Henry Littlefield published an article in American Quarterly magazine in which he offered an irresistible reading of the story as an allegory for the political and currency battles of the late nineteenth and early twentieth centuries. “In the form of a subtle parable,” Littlefield wrote, “Baum delineated a Midwesterner’s vibrant and ironic portrait of this country as it entered the twentieth century.”15
In Littlefield’s view, the symbolism in The Wonderful Wizard of Oz was remarkably specific and reproduced aspects of the worldview of Bryan and the prairie populists, if only to satirize them. For example, Littlefield notes that the Witch of the East had cast a spell on the Woodman that caused him to chop off his body parts with every swing of his axe, and eventually turned him through overwork to tin. “In this way Eastern witchcraft dehumanized a simple laborer so that the faster and better he worked the more quickly he became a kind of machine,” Littlefield wrote. “Here is a Populist view of evil Eastern influences on honest labor which could hardly be more pointed.”
Littlefield’s thesis set off a kind of multigenerational parlor game in which subsequent historians and economists extended the symbolism and analogies.16 In these readings, the Cowardly Lion is Bryan (Bryan rhymes with Lion, and both Bryan and the Populist Party were often depicted in political cartoons as lions in the 1890s); the cyclone is the free silver movement; the yellow brick road is a gold standard (remember that in the book version, the footwear that Dorothy inherits is not ruby slippers but “silver shoes with pointed toes”); Oz is the abbreviation for ounce, implying a metallic money; the scarecrow represents the unlettered farmers; the Wicked Witch of the East is most likely the banking industry; the Wicked Witch of the West could be the populist Mary Elizabeth Lease (or, alternatively, the Witch of the East was Grover Cleveland and the Witch of the West was McKinley); Dorothy’s dog Toto (a play on “teetotaler”) represents the Prohibitionist movement; et cetera. At some point the interpretations surely reach a level that Baum would not have sanctioned, but that is beside the point; as Littlefield himself said, “the relationships and analogies outlined above are admittedly theoretical.” The endurance of a debate about the correct monetary symbolism in The Wonderful Wizard of Oz well more than a century after its publication demonstrates that the passions and politics of the Populist period are still very much alive.
In the opening years of the twentieth century, the yellow brick road seemed like a prosperous place to be. The period saw dramatic consolidation and mergers in a number of major industries—including agricultural machines, automobiles, oil, and steel. This was followed by an unprecedented antimonopoly movement led by Theodore Roosevelt; it saw giants, including Northern Securities and Standard Oil, broken up. After some initial fright, the owners of large trusts, including Morgan and Rockefeller, made their peace with government regulation. The stock market applauded the moves; between the first quarters of 1904 and 1906 the Dow Jones average doubled. And thanks to healthy gold production in the United States and the end of the Boer War in South Africa, the world was comparatively swimming in gold. In June 1905, US treasurer Ellis Roberts proudly announced that approximately one-quarter of all the world’s gold now resided in the United States. The credit of the United States was excellent; for a nation that had to be bailed out by Morgan a decade before, this could be scored a vast improvement.
And yet nearly everyone who looked closely at the US monetary system could see that it was deeply flawed. The fundamental problem had not changed since the days of Black Friday, nor had the political fault lines changed much since the rise of agrarian populists. Breakneck expansion of farmland in the Midwest and West pushed the prices of crops downward, while making it hard for farmers to borrow money or meet mortgage payments. The bulk of the nation’s metallic wealth sat in eastern banks or in the big national banks. Each summer, large quantities of money needed to be shipped to the Midwest and West—usually in very small denominations—in order to get crops out of the field and dispersed. If, as often happened, there were hurdles in this predictable process, the credit market would tighten; at the end of 1905, interest rates as high as 125 percent were being charged for bank loans, because money was so tight. With the United States on a gold standard, there were strict limits on how much currency could be printed or even redeemed; the “inelastic” currency was widely criticized at the time. The agrarian populist response to this was to advocate expanding the money supply with silver and paper; the establishment hoped to muddle through with a gold standard and the virtues of “sound money.”
In early 1906, Jacob Schiff, a prominent German-born Wall Street financier who funded railroads and floated bonds for the Japanese government to fight Russia, delivered an assault on the nation’s monetary system, calling it “nothing less than a disgrace to any civilized country.” The problem, Schiff insisted, was not that the country was facing hard times. On the contrary; “wherever you look, there is prosperity—prosperity as we never had it before.” The problem was that there was not enough circulating money to meet the demands of legitimate businesses. Too much was being locked up in bank vaults or siphoned off by speculators. “If this condition of affairs is not changed, and changed soon, we will get a panic in this country compared with which the three which have preceded it would be only child’s play.”
Then in April came the calamitous San Francisco earthquake and fire, which leveled most of the city and killed thousands of residents. About half of all the city’s private and commercial insurance policies were underwritten by British firms, and within days massive amounts of gold were leaving London for San Francisco—first a shipment of $30 million in April and then $35 million in September. This represented a 14 percent decline in the amount of gold held by the Bank of England, the largest drop between 1900 and the outbreak of the Great War.17 Within the United States, too, the gold was flowing westward in desperately needed relief, and by winter the nation was facing a serious credit crunch.
New York was in no condition to fight the financial fire that was about to hit. Like Jim Fisk and Jay Gould a half-century before, the barrel-chested Fritz Heinze had made his name and fortune by taking on the established powers of the business world. Through creative exploitation of Montana’s mining regulations, he had managed to challenge the Rockefeller copper powerhouse, and he then turned his eyes to Wall Street. He bought a bank and made partnerships with some sharp New York financiers, spreading the stock of his copper company far and wide. One October morning in 1907 he discovered that there were more shares trading than actually existed. He and his associates attempted a squeeze and a corner on the copper market—again, akin to what Fisk and Gould tried with gold in 1869, minus the presidential manipulation, and with similarly grim results. Heinze’s brother’s brokerage house failed in late October, bringing down with it the Knickerbocker Trust, a novel type of financial institution, performing many of the same functions as a bank but regulated less strictly, and thus able to hold certain types of securities that most traditional banks could not.
The disease spread within days to smaller banks, then to the companies that relied on them, then to larger banks and eventually to the top of the country’s food chain—the point where Morgan and Carnegie needed to get involved. By the end of the month, New York City couldn’t pay its employees and needed at least $20 million to avoid insolvency. There was so little money to go around that a streetcar company in Omaha resorted to paying its employees with 600,000 nickels from the cars’ fare boxes.
The federal government was by turns ignorant of what was going on—President Theodore Roosevelt was hunting in Louisiana as the panic unfolded—and powerless to stop it. Less than a decade before, the United States had boasted that the country had built the largest stockpile of gold in the history of mankind; now it was clear that the supply was nowhere near what was needed. The country needed another gold bailout, and this time Morgan’s money and influence was not enough, because his
interests were too tied to the banks that were teetering or had already collapsed. On one Saturday night in early November, Morgan locked several bank presidents in his library and refused to let them leave until they signed an agreement to loan money to the Trust Company of America, a kind of firewall against further destruction.
In the meantime, emergency gold came in from Argentina, France, and Great Britain. On November 8, a shipment of $12.4 million arrived when the Cunard liner Lusitania landed on a Manhattan dock. The metal had traveled on a special train from London to Liverpool and took nearly a week to cross the ocean. This was, apparently, the single largest cargo of wealth ever to travel the Atlantic on one ship. The gold was removed—all 334 boxes of it—one container at a time, with two longshoremen carrying each box out of the ship’s steel-lined hull.18
Although the Panic of 1907 would, within a generation, be overshadowed by the Great Depression, it was one of the worst financial calamities in American history, by some measures worse than that in 1893 (though shorter-lived). It was obvious that whatever virtues a formal gold standard might have, they were insufficient to stave off rapid economic disaster. Something had to be done to make the American financial system more stable. During this time the United States had an absolute glut of commercial banks. In 1912, there were an estimated 80,000 banks in the United States, of which approximately 28,000 were partly or entirely commercial. This meant that the reserves were so scattered as to be ineffective in emergencies, as was demonstrated in the Panic; each bank wanted to hoard its meager supply of gold, making the aggregated gold of little use to anyone. In addition, thanks to the Jackson-era resistance to mixing government operations with banking, the Treasury’s own reserves were distributed in nine sub-treasuries and with as many as 1,500 national banks. The Panic of 1907 widely exposed the problems; as one historian has written, the Panic “crystallized reform sentiment and gave it a strong popular base, making a basic overhaul of currency and banking arrangements virtually inevitable.”19
The ensuing attempts to rationalize the system entailed an extremely delicate balance between banking interests, regional pressure, legislative prerogatives, and radical objections. A congressionally appointed committee produced a daunting twenty-three-volume study of banking. The chances of the whole effort turning into a logjam were high. Treasury Secretary William McAdoo later recalled, “As I look back on that ardent summer of 1913, I wonder how the Federal Reserve Act ever struggled into existence.”
Conservative Democrats had their own objections and pet projects; Carter Glass of Virginia referred to “that imperialistic scheme to seize the banking business of the United States.”20 Republican Elihu Root, who had been Teddy Roosevelt’s secretary of war and rarely addressed the Senate floor, delivered a tirade in which he predicted that the federal reserve system would create inflated money and drive gold out of the country. “Long before we wake up from our dream of prosperity upon inflated currency, the sources from which the gold will have to come to keep us from catastrophe will have lost their confidence, so that no rate of interest will bring the money but a rate so high as to ruin American business.”21 One of the biggest potential obstacles was the still-stinging opposition from populists, who were wary of concentrating central banking power, particularly on the East Coast. Yet William Jennings Bryan was no longer the ferocious force he had been in the previous century; the Democratic Party, which won the White House in 1912, had managed to tame him. Woodrow Wilson, having once been violently opposed to the Bryanite wing of the Democratic Party, had managed to skillfully cultivate them for his own gain. During the 1912 party convention, for example, the delegates had no candidate after forty-five ballots—until Bryan threw his support behind Wilson. As a reward, Wilson appointed Bryan as his secretary of state, although this didn’t guarantee his support for something as momentous as a national banking system. Bryan still symbolically led the populist faction, and he insisted on a prominent role for greenbacks. Eventually, however, Bryan produced a letter urging the pro-silver and inflationist Democrats “to stand by the president and assist him in securing the passage of this bill at the earliest possible moment.”
Throughout the debate, some in the Treasury and in banking circles watched anxiously as gold began to flee America’s vaults. The pending war in Europe caused those jittery nations who could afford it—including Argentina, Canada, France, and Germany—to stockpile gold; within the first few weeks of 1913, some $23 million in gold was drained from US coffers.
The Federal Reserve Act became law just before Christmas 1913. A new national currency—Federal Reserve notes, issued by the Reserve banks—was designed to adjust to trade, and thereby solve the issue of money’s “inelasticity.” That money in turn was to be backed by gold reserves worth no less than 40 percent of the value of currency in circulation. The act also gave the Reserve banks the authority to buy and sell gold in open markets, and envisioned for the Fed a role in maintaining the country’s gold supply (which had previously been the responsibility of the Treasury).
The Federal Reserve system left the gold-based dollar untouched, yet gave the United States for the first time a set of tools to manage an economic downturn. In its early years, the fledgling institution lacked political clout and was almost immediately overtaken by armed conflict in Europe. Nonetheless, the Fed board believed that it had greatly improved the flow of capital across the country, largely through the introduction of a “gold settlement fund,” which systematized and streamlined transactions between banks. Indeed, the Fed board was so pleased with its innovation that it foresaw a time in which a world at peace might establish an “international gold exchange fund.” The Fed’s 1918 annual report acknowledged that little could be accomplished until a stable peace was widespread. Still, an internationally shared fund could have benefits. “The gold deposited in a government bank or banks should be in the nature of a special or trust fund, and all nations participating should deposit their proper proportions of gold,” the report explained.22 And the “saving of loss and expense incident to abrasion and transportation charges and interest on gold transferred will be enormous, and the advantage to the commerce of the world will be incalculable,” the report gushed.
Alas, the monetary paradise was not to come about, at least not after the Great War. Nonetheless the war, like many major conflicts before and after it, brought a wholesale change in the world’s monetary system. The belligerent nations were forced to abandon a gold standard in order to pay their massive war bills; the United States, having only officially joined the war in 1917, remained on a gold standard, although for a time it restricted gold exports. Abandoned with that standard was the relative price stability and ease of foreign investment that the world’s prewar economy had enjoyed. Getting back to a gold standard was widely prescribed but difficult to accomplish. Wartime production created destructive bouts of inflation, particularly in Britain, and countries such as France and Italy found it politically difficult to cut the government spending that a return to gold required.
By the late 1920s, however, most of the world’s major economies had restored a gold standard. And throughout the period, the United States continued to increase the amount of gold it held, roughly in line with the growth in its economy. Over the same period, thanks in large part to Great War expenditures, the gold stockpiles of Britain, France, and Germany declined (the latter precipitously). Once again, the United States became the undisputed gold center of the world.
The late 1920s also saw the ascension to power of Herbert Hoover, one of the most ardent pro-gold presidents in modern times; he referred to the gold standard as “little short of a sacred formula.” Herbert Hoover has the peculiar distinction of being the only man to occupy the White House who had a deep, firsthand knowledge of the mining industry. Indeed, one of Hoover’s singular achievements was that he and his wife translated from Latin one of the most important books in gold mining, a sixteenth-century textbook written by Georgius Agricola called De Re Metallica. “Of a
ll ways whereby great wealth is acquired by good and honest means, none is more advantageous than mining,” Hoover’s translation of the book advises.
Hoover’s experience undoubtedly influenced his steadfast adherence to the ideal of a gold standard, with which his party had already been identified since the beginning of the century. But it did little to prepare him for the economic avalanche that hit the nation. By the summer of 1929, output and employment in the United States began to fall. When the stock market crashed in October, as two economists later put it, “the decline turned into a catastrophic rout.”
The bare economics of what became the Great Depression were dismal enough. Its effects were exaggerated by a withering succession of events, many beyond the influence of any president or government institution. In 1930 “the most severe drought in the climatological history of the United States” struck, devastating the farming areas of the South and West. Judge John Barton Payne, chairman of the American National Red Cross, said, “in all of its experience of more than a thousand emergencies the Red Cross has never been confronted by a disaster of larger proportions.” As crops died in the field, a financial chain of pain spread through the land; as one observer put it, “The farmer owes the merchant, unable to pay his obligations; the merchant owes the small bank, unable to pay his obligations; the small banks unhesitatingly state they were unable to meet their obligations to the City banks.”
Hoover’s fellow Republicans and the private sector’s “sound money” advocates were pushed into ideological irrelevance by tumbling prices and failing banks. Their worldview could barely incorporate the idea that such an economic catastrophe could happen in a country on the gold standard. Today, it is often understood that the gold standard was the problem. As two prominent economic historians have written: “There now exists agreement among most economists that the gold standard was a key element—if not the key element—in the collapse of the world economy.”23
One Nation Under Gold Page 9
