“What suggestions have you to make, Mr. Morgan?”
President Grover Cleveland asked the question with something of a resigned sigh as he engaged his guest across a table in the White House.
The man he was speaking to had not been invited. He held no office. He had never been elected to anything. Instead, the man was a private banker from New York, and he had arrived in Washington the day before without an appointment.
When John Pierpont Morgan first reached the White House, President Cleveland had refused to see him. But Morgan wouldn’t take no for an answer.
“I have come down to see the president,” Morgan had told the staffers bluntly. “And I am going to stay here until I see him.”
So Morgan had sat patiently in a corner room inside the White House, alongside his partner and his lawyer. Contemporary reports suggest that he said very little, but that he rolled an unlit cigar between his fingers reflexively.
Every so often a fresh report would arrive from New York, and each one was worse than the last. The US government’s gold reserves were being drained. Wall Street was placing bets as to the exact day the United States Treasury would default.
Given the urgency of the situation, and Morgan’s considerable power and connections, President Cleveland agreed to hear him out.
The date was February 5, 1895. And the meeting between President Cleveland and J.P. Morgan would reveal exactly who had come to hold power over the American financial system.
To understand how it got to that point, we have to go back to the fracturing of the American System and the monetary fight between the gold men and the silver populists.
The Gold Drain
When we closed our last essay, America was tearing itself apart over the monetary system.
We watched the integrated American System fracture, and we watched the productive credit pillar — the heart of Alexander Hamilton’s vision — vanish from the national debate entirely. What was left was a brawl over the money supply, with the gold men on one side and the silver populists on the other.
That fight had a consequence nobody fully anticipated. It nearly bankrupted the United States government.
Through the 1880s, Congress had passed a series of laws — the Bland-Allison Act, then the Sherman Silver Purchase Act of 1890 — that required the Treasury to buy silver and coin it at an official ratio of sixteen ounces of silver to one ounce of gold.
The problem was that the new silver discoveries out West had made the metal far more abundant than that ratio suggested. Thus, silver wasn’t worth as much as the legislation dictated. On the open market, the silver-to-gold ratio was closer to twenty-to-one.
Still, those laws forced the government to overvalue silver in relation to gold. And then Gresham’s Law kicked in.
The Gresham’s Law principle is straightforward. It states that bad money drives good money out of circulation… because people hoard the good money and spend the bad money.
So when the US government fixed the price of silver at an overvalued level relative to gold, Americans paid their debts and their taxes in silver, and they hoarded their gold. This served to gradually remove gold from circulation.
Then the Panic of 1893 hit as foreign investors started to get nervous about whether America would stay on the gold standard, and they began dumping their American securities. Then they converted the proceeds to gold and shipped it home.
As a result, gold began draining from the US Treasury’s coffers at a rapid rate. Between 1890 and 1894, some $300 million in gold left the country. That was a massive sum at the time.
By early 1895, the Treasury’s gold reserve had fallen to around $41 million… and it was draining at a rate of more than $2 million a day. And the New York Subtreasury, which handled the daily gold transactions, had only $9 million in gold left in its vaults.
Worse still, Morgan knew of $12 million in claims that could be presented to the New York Subtreasury at any moment — which would have emptied it completely.
So it reached the point where the US government was perhaps three weeks from being unable to pay its obligations in gold. That would have meant default and the collapse of the gold standard the country had fought two decades to maintain.
Cleveland had tried to fix the problem the old-fashioned way. He had the Treasury float two bond issues to raise gold. But both times the gold came in and then promptly drained right back out again.
That prompted Cleveland to go to Congress to get authority to issue more bonds. But Congress was full of silver populists who had no interest in propping up the gold standard, so it refused the president’s request.
So it was that the President of the United States had run out of legal, ordinary options. And that is when the man with the unlit cigar got on the train bound for Washington.
America’s Central Bank – The Private Bailout
When Cleveland’s government first reached out for help, it did not reach out to an American institution. There was no Federal Reserve — it would not exist for another eighteen years. Indeed, there was no central bank of any kind.
So Cleveland’s people reached across the Atlantic, to London, to the House of Rothschild. It was the most powerful banking dynasty in the world, and it was the very embodiment of the European financial system that Alexander Hamilton and Thomas Jefferson both endeavored to escape.
Nathan Rothschild in London took the request and made a call of his own — to a banker named Walter Hayes Burns. Burns happened to be J.P. Morgan’s brother-in-law.
So Burns sent a telegraph to Morgan in New York… and that is how the rescue of the United States Treasury came to run along a single chain: Washington to London, London to Rothschild, Rothschild to Burns, Burns to Morgan, and Morgan to Washington.
The American public had no idea any of these conversations were happening.
So when President Cleveland asked Morgan for suggestions on that winter day in 1895, Morgan was ready. He and the Rothschilds, he explained, would assemble a syndicate to purchase 3.5 million ounces of gold in Europe and deliver it to the United States Treasury.
In exchange, the government would issue them thirty-year gold bonds. And — this was the part that mattered most — Morgan personally guaranteed that the gold would stay put. He would use the syndicate’s command of international exchange markets to keep the gold from draining back out again.
“Okay, Mr. Morgan,” Cleveland replied as he nodded his head. “But there’s a big obstacle in the way. Congress has already refused to authorize new bonds.”
“That’s not as big a problem as you might think,” Morgan replied with a smug grin. He had done his homework.
In his research, Morgan had dug up an obscure statute left over from the Civil War — a forgotten 1862 law that authorized the Treasury to buy coin in exchange for bonds without any fresh approval from Congress. The legal authority had been sitting there, unused, for thirty-three years.
Morgan explained that statute to President Cleveland. Thinking it over for a few moments, the president took the deal. He saw no other alternative. So it was that J.P. Morgan and the House of Rothschild organized a bailout for the US Treasury.
The agreement was signed on February 8, 1895… and then the gold flowed in as promised. And this time, because the Morgan/Rothschild syndicate stood behind it with the full machinery of international finance, the gold stayed in the Treasury. Then the panic quickly abated.
While President Cleveland was concerned primarily with stopping the gold drain and ending the panic in the present, the long-term consequences of his deal were dire.
In effect, Cleveland allowed J.P. Morgan and the Rothschild banking dynasty to act as a private central bank for the United States. And when the American populace learned of what happened, they were horrified.
To much of the country, the private bailout looked like proof of everything the silver populists had been shouting about for years – that Wall Street and the European banking houses owned the government, that the gold standard was a rich man’s racket, that the farmer and the worker were being crucified so that Morgan and the Rothschilds could collect their fees and interest.
The criticism was fierce… and some of it was justified. A private syndicate with strong ties to Europe had just made a handsome profit by bailing out the US Treasury, and it had done so via a private deal without the public’s knowledge or consent.
Hamilton and Jefferson would have been horrified as well. But enough time had passed such that memory of their proposed solutions for American sovereignty had started to fade.
Instead of calling for Hamilton’s American System or Jefferson’s Empire of Liberty, the loudest public backlash fed straight back into the silver movement, which called for the free coinage of silver to expand the money supply and essentially inflate away the debt burden of farmers and the working class.
So rather than embrace a holistic system in response, the populists fixated on the idea that gold was a tool of the financialists and the elitists, and that silver was how the working class could fight back.
In this climate, the silver populists would find their loudest, most electrifying champion.
The Cross of Gold
In the summer of 1896, the Democratic Party gathered in Chicago to choose a nominee for president. It became clear early on that the silver men had taken control of the convention. The party of Grover Cleveland — a Democrat who favored the gold standard — was ready to go in the opposite direction.
In that climate, a thirty-six-year-old former congressman from Nebraska named William Jennings Bryan walked onto the stage. He had a voice that could fill a hall without amplification and a gift for oratory that few American politicians have ever matched. And he delivered a fiery speech that ended with one of the most famous sentences in American political history.
“You shall not press down upon the brow of labor this crown of thorns,” Bryan thundered. “You shall not crucify mankind upon a cross of gold!”
The hall erupted in cheers and Bryan won the nomination rather handily. And for a few months in 1896, it looked as though the silver movement might actually capture the White House.
Bryan went on an energetic, passionate campaign across the United States. He preached his message of populism far and wide – in the cities and in small towns off the beaten path.
Now, Bryan was the purest possible expression of the silver populist movement at that time. By all accounts, he was magnificent, he was sincere, and he spoke for millions of farmers and working people who genuinely felt like they were being subordinated by America’s burgeoning financial interests.
But Bryan’s entire program fixated on the money supply and nothing else. Free coinage of silver… more dollars in circulation… inflate the debts away. That was the bulk of it.
There was no talk of Hamilton’s American System, nor was there talk of any comprehensive system whatsoever. Bryan represented the silver movement at its most eloquent — and its most hollow.
Despite his fire and energy, Bryan lost the presidential race to a man who did vow to rekindle the American System… and it wasn’t particularly close.
The American System’s Last Breath
William McKinley was the Republican nominee in 1896, and he won the presidency decisively. The gold men backed McKinley because he favored the gold standard. But McKinley was more than that – he was the last genuine champion of the American System.
If we remember, the American System called for protective tariffs to encourage domestic manufacturing to build a secure supply chain, federal spending on domestic infrastructure, and it endeavored to direct domestic credit towards productive activity rather than speculation or extraction via a national banking system.
And while it wasn’t stated explicitly, the system’s proponents assumed it would have sound money as well. They knew it would be impossible to maintain a system of productive credit if the money could be created ex nihilo.
I know many of us may reflexively object to the idea of the federal government being used to achieve these ends. And with good reason. We have centuries of data at our disposal which suggests that governments corrupt most everything they touch.
Not to mention, for a government to fund anything, it must first extract money from the populace via taxation… which isn’t exactly aligned with the Golden Rule version of morality that most of us in the Western world understand intuitively.
All that’s true. But if we look at the actual tenets of the American System, I think they are largely desirable.
Having nice, modern infrastructure is certainly a good thing. I think having a banking system that directs credit towards producers rather than cronies is also a good thing.
And while I don’t think it’s terribly important to manufacture trivial items like clothes and trinkets domestically, there probably is merit to building out the productive capacity for critical items like semiconductors and electrical transformers, even if manufacturing those items domestically is less efficient than importing them.
No government is needed to accomplish any of these things. Private actors could certainly choose to engage in infrastructure projects and manufacturing ventures of their own volition. And private banks in a sound money system would almost certainly favor the principle of productive credit in those instances where the risk/reward was favorable.
So if a given society found these ideas desirable, it wouldn’t need to use the political means to implement them. I don’t want to suggest otherwise.
But if we look at it from the historical context here in America, those vying for control over the government were going to use it one way or another – to the benefit of what they favored and to the detriment of what they opposed. And so it was that the American System’s ideals won out for the last time in the election of 1896.
On the campaign trail, McKinley made it clear that he believed, exactly as Hamilton and Clay had believed, that American industry needed protection to grow, that economic strength was the foundation of national strength, and that the country should build its own productive capacity rather than depend on foreign imports.
So McKinley’s victory in 1896 was not simply the triumph of gold over silver. It was the last time the American System’s industrial tradition won a national election with a true believer at the head of the ticket.
Hamilton’s vision had been fractured and hollowed for thirty years, but one man still carried it into the White House. McKinley was the system’s last breath.
That said, the men who bankrolled McKinley’s campaign were not Hamiltonians. They were gold men who wanted to put the silver movement to rest once and for all. And McKinley delivered for them.
In 1900, he signed the Gold Standard Act, which formally placed the United States on a single gold standard and defeated the silver movement.
McKinley had plans to begin rebuilding the American System from there. And indeed, he did sign a tariff package into law that raised duties to some of the highest levels in American history with the explicit intent of nurturing domestic industry.
But McKinley would not be able to institute the full system. He was shot at the Pan-American Exposition in Buffalo on September 6, 1901. He died eight days later. At that point the presidency passed to his vice president — a young, restless, reform-minded New Yorker named Theodore Roosevelt.
If we’re assessing history honestly here, we can see a clear pattern emerging. Maybe it’s just coincidence… but it’s a pattern nonetheless.
In 1865, the American System lost its champion in President Lincoln to an assassin’s bullet at the very moment of the system’s triumph. Then it lost McKinley in 1901 in the same way — just as America was entering a new and decisive era.
In between them, President James Garfield was also assassinated in 1881. He was more moderate as compared to Lincoln and McKinley, but he was also a proponent of Hamilton’s American System.
These were the only three instances where a sitting US president was assassinated prior to John F. Kennedy in 1963.
So I have to ask – is it a coincidence that only the American System presidents were shot? Or was there a power structure in place that was willing to kill to stop Hamilton’s vision from being propagated through time?
Whatever the case, that bullet in Buffalo took the American System’s last champion off the game board. With McKinley’s death, the field was clear for another kind of system to take root in America – the same one that Hamilton and Jefferson warned us against.
Stay tuned…
-Joe Withrow
P.S. In this week’s episode of The Phoenician League podcast, we walk through a modern blueprint for personal finance and investing… and it stands in direct contrast to the “financial planning” model that Retirement Incorporated has preached for over 40 years now.
You can find the podcast at: https://phoenicianleague.com/podcast-episode-10-financially-bulletproof-the-five-pillar-blueprint-for-the-new-financial-era/
And if you would like to explore these ideas more deeply, we have scheduled our next public-facing strategy session for Wednesday, July 22 at 7:00 pm Eastern. Please mark your calendar for that – I’ll follow-up with additional information a little closer to date.
P.P.S. I took the family to Emerald Isle, NC this week. Here’s a shot of the kids playing on the beach with the pier in the background:
