Lessons From the U.S. Past on Monetary Policy | Financial Times | 08.07.03

Sir: Bill O’Rahilly (“ Goodbye, yellow brick road”, August 5) makes several mistakes about US economic history in the McKinley-Bryan period and its meaning for today.

He suggests that the issue of the time was deflation and stagnation (McKinley and the gold standard) versus easy money and renewed growth (Bryan and free silver). This was Bryan’s view, but to McKinley it was a battle to stay linked to European capital markets versus the US going its own monetary way.

Bryan focused largely on agriculture, where the biggest factor was wheat farming, but he did not see the source of farmers’ troubles. Wheat prices had been dropping throughout the world, not just in the US, as new producing regions (Argentina and Australia) entered the global marketplace. Efficient and highly productive, the US farm economy remained comparatively healthy until the first half of the 1890s when a series of poor harvests depressed volume and created a crisis in farm incomes.

While, as Milton Friedman has demonstrated, expansion of the global as well as US money supply following the adoption of the cyanide process for refining gold helped revive the US economy, also of importance was the 1897 bumper crop that restored farm incomes and revived cashflows for the railroads and other agriculture-dependent industries.

McKinley’s victory in the 1896 election confirmed that the highest priority of US economic policy would remain – as it had been since the end of the Civil War – industrial diversification. Protecting the link to London’s capital markets – that is, staying on the gold standard so long as the UK remained on it – was essential to that policy.

It ensured that rising US industries could attract ample investment funds without paying currency or country risk premiums. In the early 1930s, as O’Rahilly notes, Roosevelt devalued the dollar against gold, but by then the US had changed from a net consumer of investment capital to the world’s largest supplier.

The lesson for today? Monetary policy must be global as well as local. By his recent efforts to organise a common interest rate strategy among the industrial nations, Fed chairman Alan Greenspan demonstrated he has noted this epochal lesson.