The decision to remove the American dollar from bimetallism in 1873 did not have immediate consequences, for, as we've seen before, silver was undervalued at the legal ratio and nobody used it anyway. But as one country after the other switched to the Gold Standard at the end of the century, the demand for gold rose tremendously and a flow of silver was freed from monetary purposes in France, England, Germany and most other big countries. (More on this).
The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly. This deflationary effect was hindered to some extent by the spreading monetization of the American economy and a more efficient banking system that allowed to pile up more paper money on a given currency base (that is, gold). (more on this)
We see between 1875 and 1896 a deflation of about 1% a year in the general CPI. A the same time the output rose by 6 % a year. Economists reader should not say, <<Gee what a growth even with those declining prices!>>. It's precisely this growth that made the prices go down. With a fixed quantity of money if the number of transactions rises and the velocity cannot rise sufficiently, then prices have to fall.
All this led to a depression so great that you would have to wait for 1932 to see the same again. Unemployment peaked at 18 % in 1894. But some people suffered more than others (more on this).
On the monetary side, this deflation made many bank loans turn sour, as the debtors struggled to honor their obligations with rising real value of their debts. Some famous banking panics occurred (1892) , but globally the trust of the public in the banking system increased. The ratio of deposits to reserves rose from 2 to 4 at the end of the period.
Political Groups and their Backers
From 1879 to the end of the century a constant agitation for the expansion of the money stock raged in the USA. Political parties like the Inflationnist Party were founded whose sole purpose was to make, by one mean or another, the total money supply rise. Some favored the issue of paper money, like the extremist Greenbackers, some the return to the Bimetallic Standard. Farmers were the most cruelly struck of all by the deflation. In rural areas, as the wholesale price of agricultural commodities fell at at a greater rate of about 3 % a year. As many farmers, especially in the West, were deeply indebted, this meant that the real value of their debts increased every year. Sellers of goods whose price fall have a stronger political influence than buyers of rising prices commodities, because they are concentrated in an industry. Farmers were thus powerful backers of Bryan and the inflationnist cause.
Silver producers, of course, advocated a silver or bimetallic standard, "for the good of the country". Furthermore, the silver producing states had a overrepresentation in the US Senate in term of population. Farmers being generally net monetary debtors, the real burden of their debts was rising with deflation.
The country was split in two before the Presidential elections of 1896, with about one half backing Bryan and his progressive platform (with the free coinage of silver as its main tenet), and the other for the Republican Mc Kinley, who advocated a Gold Standard. The will show you in a simple way what were the characteristics of both parties, platforms, arguments and backers.
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