Subsidies: Learning the Hard Way
"What the government giveth, it can sooner or later taketh away. That’s a lesson that Granite learned the hard way."
“The Lord giveth, and the Lord hath taken away,” says Job 1:21 in the Old Testament. The same can be said of government, especially regarding the once-bustling mining town of Granite, near Philipsburg in Granite County.
Granite is a ghost town, one of nearly 4,000 across America. In the early 1890s, it boasted more than 3,000 residents; today, no one lives there to boast about anything. According to the web page, Geotab.com/ghosttowns, it’s one of 106 ghost towns in Montana. Texas claims the most of any state, at 511.
As most Montanans know, the rise and fall of Granite is linked to the silver boom of the late 19th Century. Less well known is the federal legislation that fueled the bubble and the repeal that burst it. It’s a story of the damage and misdirection of resources that government subsidies usually produce.
During the Civil War, both North and South abandoned metallic money so they could print lots of depreciating paper (and thereby cheat their creditors through inflation). When Congress restored a gold standard in the 1870s, silver interests from Western states pushed for subsidies for silver. In 1878, Congress gave them the Bland-Allison Act, which required the Treasury to purchase upwards of $4 million dollars of silver every month. That was small change, though, compared to the Sherman Silver Purchase Act of 1890, which ordered the Treasury to buy 4.5 million ounces every month. That amounted to virtually the entire output of American silver mines.
The Sherman Act further required the Treasury to print paper money redeemable in silver dollars and to mint silver and gold at a ratio of 16 to 1. On world markets at the time, silver’s value was steadily depreciating. By 1893, the government was still offering anyone an ounce of gold for 16 ounces of silver but everywhere else, it took twice that much silver to fetch an ounce of gold. Montana’s two newly minted Republican senators, Wilbur F. Sanders and Thomas C. Power, both voted for this unsustainable nonsense.
By overvaluing silver and undervaluing gold, Washington encouraged a massive drain on the gold reserves of the Treasury and the nation’s banks. Nobody in his right mind would sell gold to the government and everybody who wanted to make a buck rushed to instead sell silver to the feds, who were paying twice what it was worth. Our trading partners overseas, particularly Britain, thought America was setting itself up for a financial bust, and they were exactly right.
Meantime, settlements near major silver lodes boomed. Almost overnight, some 18 saloons, several hotels, a two-story Miners’ Union Hall, multiple brothels and dozens of other structures went up in Granite’s downtown.
Enter Grover Cleveland, the 22nd and 24th U.S. president. A Democrat when Democrats were for small government, he championed sound money, low taxes, less spending and fiscal responsibility. He knew that massive silver subsidies and the consequent currency confusion had caused the Panic of 1893, so at the start of his second term he demanded the repeal of the Sherman Act.
In the weeks before Cleveland secured repeal, people in Granite saw the handwriting on the wall. They stampeded out of town in early August 1893. The excellent Granite County Museum in Philipsburg (a must-see when you’re in the area) cites A. J. Stone of Missoula, an eyewitness to the big skedaddle:
It was the most complete desertion I have ever seen. Down the roadway on August 1 came the queerest, most incongruous procession…Everyone was in a hurry and pushed and jostled to reach the bottom first. Some walked, carrying their hand luggage, frying pans or tea kettles. Wagons that hadn’t been used for ten years creaked and screeched down the incline. Bandboxes, babies and bulldogs brought up the rear, and so it kept up all day and all night—a continual stream of almost panic-stricken people, leaving perhaps forever their homes on the mountain.
What the government giveth, it can sooner or later taketh away. That’s a lesson that Granite learned the hard way.
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Lawrence W. Reed writes a monthly column for the Frontier Institute in Helena, on whose board he serves. He is president emeritus of the Foundation for Economic Education and blogs at www.lawrencewreed.com.