Can Rhetoric Create a Recession? It Has Before

Remembering 1896, when a William Jennings Bryan speech about monetary policy sparked a financial panic

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For the first time in a century, monetary policy stands at the center of our political debate. A number of leading contenders for the Republican presidential nomination are vying to persuade voters of the depth of their hostility to the Federal Reserve. Last month, Texas Governor Rick Perry suggested that further action from the Fed might be "treasonous," and that if it were pursued, "we would treat [Fed Chairman Ben Bernanke] pretty ugly down in Texas." Rick Santorum called for a "sound-money Federal Reserve," Newt Gingrich labeled the Fed "dangerous" and Michele Bachmann accused it of wielding "almost unlimited power over the economy." And then there's the Fed's most passionate critic, Ron Paul, who accuses it of being "a full time counterfeiting operation to sustain monopolistic financial cartels."

The idea that it is not merely mistaken, but positively immoral, for the federal government to manipulate the money supply is as old as the republic. It has found its greatest popularity during moments of economic crisis, as voters search for a single identifiable cause, and cure, to the tangled problems they face. That poses an almost-irresistible temptation to politicians hoping to win office by tapping popular frustrations. But they are playing with fire. The last time a major political party fused moral fervor and monetary policy in this fashion, it plunged a stalling economy back into recession and sentenced itself to two decades of political irrelevance.


The Depression of 1893 paralleled, in many ways, our current plight. It started as a financial panic, and soon deepened into the worst economic crisis the nation had ever faced. Confidence plummeted, banks failed, businesses went bankrupt, and unemployment soared.

The economic crisis struck amidst a simmering political insurgency. The People's Party, better known as the Populists, had enjoyed considerable success in the election of 1892, particularly in agricultural regions that were already suffering economically. To build on its triumphs, the party searched for a defining issue that could speak to the economic malaise. Out of the mass of proposals emerged a single, simple idea that almost all factions could back: bimetallism.

The persistent deflation of the previous decades had tipped the scales in favor of creditors, and the rigidity of the gold standard fed the era's boom-and-bust cycle. Populists of almost every stripe rallied to the idea that allowing currency to be convertible into silver as well as gold could expand the supply of cash and thereby inflate away their troubles. Silver coinage served both as a specific and concrete proposal around which to rally, and a symbolic issue capable of differentiating honest, common Americans from exploitative elites.

Like modern-day Fed bashers, advocates of silver reveled in their defiant rejection of economic orthodoxy, and delighted in mocking the academic consensus. They dismissed concerns that America, heavily reliant on European investment to finance its expanding economy, would watch that capital disappear and its economy contract should it embrace inflation. The most popular pamphlet on bimetallism featured a befuddled professor of political economy, his chair "endowed with the money of bankers," and his arguments unequal to the common-sense propositions of his opponents. It sold a half-million copies.

Into the fray stepped a young and ambitious Democratic Congressman from Nebraska, William Jennings Bryan. A gifted orator, Bryan styled himself a champion of the common people, giving voice to the long-simmering resentments of the farmers in his district who had been left behind by social and economic change. Although not himself a member of the People's Party, Bryan sought to tap into the passions it aroused, and to co-opt its signature proposal. In late 1893, he delivered a series of rousing speeches on the floor of the House, laced with passages from Job, Jeremiah and Joshua, and equating the struggle for silver coinage to the defense of "Christian civilization." Bryan found his defining issue, and the silverites found their champion.

By the summer of 1894, after eighteen long months, the economy showed the first signs of a fragile recovery. It remained well off the pre-recession highs at the end of 1895, when a financial crisis in Europe and tension with Britain sparked another minor panic. It hung in the balance in the spring of 1896, as the Democrats debated the choice of a successor to President Grover Cleveland.

At the Democratic Convention in July, Bryan took the rostrum, and delivered a riveting speech. He blasted the moneyed elites, and denounced the gold standard, building to a thunderous climax:

Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.

As he finished speaking, Bryan lowered his hands from his own brow and stretched them out to either side. For five long seconds, he hung suspended from the imagined cross before a silenced crowd. Then he descended from the stage, and the convention hall exploded.

Bryan's speech is well remembered. Its consequences are not. Wall Street panicked. For ten days after Bryan's nomination, capital fled across the Atlantic, halted only by the formation of an extraordinary consortium. Even in the months leading up to the convention, the likely ascendancy of silverite forces had spooked businessmen and investors. After Bryan's improbable triumph, the bottom fell out of the economy. The uncertain climate of the spring of 1896 gave way to a prolonged slump. Interest rates rose, investments fell, stock and bond issues dried up, building permits slumped, and new orders for capital goods failed to materialize. Industrial and commercial activity declined across the board.
Bryan secured not only the Democratic nomination, but also that of the Populists. He traveled across the country, rallying the faithful to his standard. He preached the gospel of silver and pressed the case of the common man. He was untroubled by the attacks of experts, finding in the sneers of coastal elites validation for his agenda.

The double-dip recession his campaign produced was a self-inflicted wound, a purely political event. Europe, itself emerging from recession, suffered no parallel collapse. The silver cloud casting its shadow over the economy had but a thin gold lining: Bryan seemed unlikely to win. Just the outside chance of Bryan in the White House, pursuing his economic fundamentalism, sent the economy into a tailspin. Had his triumph seemed possible, or even probable, the panic in financial markets would have been vastly worse.

Map the results of 1896, and you will produce a near photo-negative of more recent elections, with only the party labels reversed. Bryan prevailed in the South and the Mountain West; McKinley captured the Northeast, Midwest, and West Coast. The election revealed a divided nation, but McKinley triumphed decisively.

The first signs of a turnaround actually emerged in the weeks before the election, as business confidence increased in tandem with McKinley's prospects. Markets rallied on the eve of the election, and surged another 2 to 8 points on news of McKinley's victory. A hundred thousand workers, by one optimistic estimate, headed back to work within the week. "The best commentary upon the issues fought out in the election of Tuesday is the immediate and decided improvement in all business," gloated the New York Times.

By December, the initial euphoria had passed, leaving the economy to struggle with the aftermath of the summer's deep contraction. The situation actually worsened for a time, before settling on the path toward steady improvement by June. But most observers, then and later, fixed on the election as a key turning point.

The historical analogy is necessarily imprecise. Most notably, Bryan advocated an inflationary policy, precisely what the Republican field now attacks. The appeal of their shared strain of American populism, however, runs deeper than any specific set of policies. It is essentially cultural, pitting the hard-working heartland against the parasitic cosmopolitans on the coasts conspiring against them. Transforming monetary policy from a question of macroeconomics into a matter of morality serves to crystallize this divide.

As our own recovery appears to falter, and Europe may be tipping back into recession, Bryan's fate may give the presidential contenders some pause. His heated rhetoric galvanized his supporters and secured him the nomination, but in the process, scared away moderates and drove the economy back into recession. His defeat in 1896 left his supporters more fervent than ever, and they handed him the nomination twice more, only to watch Bryan go down to defeat by ever increasing margins. He found his greatest success lecturing on Chautauqua Circuit, and with the fees he raked in, the Great Commoner died a wealthy man.

Today, bashing the Fed may similarly serve to secure a lucrative career preaching to the faithful. It remains unlikely, though, to win over moderate voters, or to lead to the White House. And if such rhetoric is taken seriously, it runs the very real risk of tipping our stagnant economy back into recession. It has before.