William McKinley, the Gold Standard and Republican Realignment
Since its inception in the 1850s, the Republican Party (a.k.a. the Grand Old Party, or GOP) has periodically shifted its alignment between the privileged and working classes. Whatever the party line, Republicans’ relationship with the gold standard has remained a barometer for their party’s stock price. From McKinley’s Gold Standard Act of 1900 to Nixon’s unilateral abandonment of the standard in 1971, this map explores U.S. monetary policy and its effect on Republican success.
William McKinley won the presidency on a platform of protectionist monetary policy. His aim was to embolden the American economy by guarding it from negative influence: Tariffs on foreign trade partners would stimulate the growing industrial marketplace by keeping money in the country, and legal establishment of the gold standard would stabilize the U.S. dollar. Financial stability was a key issue of the time, given the recent Panic of 1893—a major U.S. economic crisis brought on in part by a declining federal gold reserve and the collapse of several major railroads—which sent people running to the banks to trade in their cash for gold.
Many historians agree that the election of 1896 represents a significant realignment within the Republican Party. McKinley’s democratic opponent, William Jennings Bryan, tried unsuccessfully to marshal the “Silverites”—advocates of a silver standard who variously belonged to the Populist, Silver Republican and Democratic parties, among others. While the disparate parties struggled to unify under Bryan, McKinley, a dyed-in-the-wool Republican, presented himself as the candidate who best understood the economy. McKinley made the financial platform a winning one, effectively labeling the GOP as the pro-business party.
A major pillar of William McKinley’s success in the 1896 presidential election was his commitment to the gold standard, a monetary policy in which a country’s currency is backed by its supply of gold. There were also, at the time, proponents of a silver standard and of bimetallism, a split silver-and-gold standard. A caveat of all these policies: A government can print only as much money as it can redeem with its reserves of precious metals. In 1862 the U.S. government needed more gold than it possessed to finance the Civil War, so it temporarily switched to a system of fiat currency (currency that is not convertible into gold or silver, thus allowing the government to print more money in times of need). After the war, in 1879, the gold standard was unofficially reestablished. But McKinley maintained that only a legal return to the gold standard would stanch inflation and level the playing field for all Americans.
As president, McKinley signed the Gold Standard Act into law in 1900. The act effectively tied the value of the U.S. dollar to the nation’s gold holdings, until 1933, when the American economy struggled under yet another financial crisis.
Although many factors led to the Wall Street Crash of 1929 and subsequent Great Depression of the 1930s, overspeculation was a primary root cause. During the Roaring Twenties, credit was easier to come by than capital. Banks were lending at more than two thirds over the face value of a stock, allowing market speculators to purchase more shares than they could really afford. By October 29, 1929, “Black Tuesday,” Americans’ debts had climbed higher than the total value of U.S. dollars in circulation.
When the Great Depression hit the country, President Franklin Delano Roosevelt (a Democrat) made the difficult decision to abandon the gold standard. Americans were ordered to turn in the majority of their gold coinage in exchange for paper currency at a set price. This allowed the government to print more money, which FDR used to create jobs and programs to jump-start the economy. World War II provided the further stimulus necessary to bring the country out of depression. Under FDR’s stewardship, Democrats scored points with both the business sector and the average American by reversing the economy’s devastating downturn.
Published during the 2008 primary season, Rick Perlstein’s Nixonland paints a portrait of Richard Nixon as a man who would do and say anything to get elected. After playing nice and losing to John F. Kennedy in 1960, Nixon came down hard on so-called elitist liberals in 1968 and cast himself as the candidate who would stick up for the little guy. Similarly in 1896 William McKinley convinced voters that he, unlike his Democratic opponent, would look out for the common man.
In 1971, the final year of Nixon’s first term as president, inflation and budget deficits—due in part to Vietnam war spending—were crippling the U.S. economy. Concerned for his reelection chances, Nixon announced the U.S. would abandon the Bretton Woods unified system of monetary management that had been shared by 44 Allied nations since World War II. (In this system, other countries’ currencies were linked to the U.S. dollar, which was in turn linked to gold at a fixed price.) Nixon instituted a fiat system and started printing money. The gold standard, or indeed any quantifiable monetary standard, was no more. The U.S. continues to run by this system today.
The similarities between the American economic climates of 1929 and 2008 are chilling. In both cases traders used borrowed money to invest in unstable stocks in massive quantities; the average household debt soared, exceeding 100 percent of total gross domestic product; and nobody believed any real economic trouble would come to Main Street. Yet even the financial regulations instituted after the 1929 crash couldn’t keep history from repeating itself.
In 1933 the Glass-Stegall Act introduced regulation that forced commercial banks to operate either as traditional lenders or as brokerage firms that underwrote securities. The act also called for the creation of the Federal Deposit Insurance Corporation, to insure bank holdings and regulate credit. But in the intervening years, banks grew “too big to fail.” In October 2008 outgoing Republican president George W. Bush signed into law the Emergency Economic Stabilization Act, which allowed the government to spend up to $700 billion in financial bailouts. The FDIC was named conservator for several failing banks. The Federal Reserve Bank bought out public-private financial giants Fannie Mae and Freddie Mac, and it authorized lines of credit to the private firms AIG, CitiGroup and Bear Sterns to prevent their ultimate failure.
Texas congressional representative Ron Paul has long been a vocal supporter of the gold standard, insisting that a solid currency, not ever-increasing credit, is the way to return financial stability to the U.S. He’s not alone among conservatives: Former Speaker of the House Newt Gingrich called for a return to the gold standard, and other pro-business Republicans toyed with the idea on the 2012 campaign trail. But in recent history many pro-business Republicans have supported the fiat system, which allows the federal government to print money and lend freely. Bailout efforts by the U.S. Federal Reserve (the Fed) at the beginning of the 2008 financial crisis would have been nearly impossible without the fiat system. Paul is staunchly opposed to government interventions such as bailouts and has called the Fed “the creature that destroys value.” Paul said in a November 2011 speech to his supporters, “I connect the economic problems along with our monetary system, because government grows and we can get away with it, but this idea that government can create money, this is why I have talked so much about the Federal Reserve, this is why I have worked so hard on auditing the Federal Reserve.”
Ron Paul is thought of as the intellectual godfather of the Tea Party movement, an offshoot of the Republican Party that emerged in the late 2000s. Tea Partiers came to feel the Republican Party had gone soft and no longer represented their interests, so they decided to strike out on their own. The Tea Party defines itself as strongly committed to “limited federal government, personal responsibility…and free markets.” The implied rebuke to a GOP grown too moderate is reminiscent of Richard Nixon’s overhaul of his then-tame Republican Party, as described by Rick Perlstein in his book Nixonland. But whereas Nixon’s approach to politics polarized the Democratic and Republican parties, Ron Paul and the Tea Party represent an alternative to what they consider an overly centrist two-party system. Nixon, who was twice elected President, spent his career in a constant state of flux—what Perlstein describes as the old and new Nixons battling for approval. Paul, in contrast, has stayed true to his libertarian principles even when it cost him support from conservative constituents. He has unsuccessfully run for president three times; after a failed bid on the Libertarian ticket, Paul twice pursued the Republican presidential nomination.