President Obama's decision to return the former Mount McKinley to its original name, Denali, has the McKinley administration of 1897 to 1901 back in the news for the first time in more than a century. William McKinley, according to House Speaker John Boehner, "led this nation to prosperity and victory in the Spanish-American War as the 25th President of the United States," a record that allegedly amounts to a "great" legacy.
The truth, however, is that pilfering Spanish colonies aside, McKinley was much more a lucky president than a great one — a case study in the heavy role of contingency in shaping political events. McKinley ran for office at a time when the country desperately needed a stimulative monetary policy, and he ran on a platform opposing the adoption of the kind of policy the country needed. Yet he arrived on the scene just in time for the country to experience exactly the kind of inflation burst he'd campaigned against — and he rode the benefits of that inflation to a landslide reelection.
The panic of 1893
The election of 1892 brought moderate Democrat Grover Cleveland, who had been elected in 1884 and who failed to secure reelection in 1888 despite winning the popular vote, back into office. Cleveland was almost immediately greeted with a gigantic financial crisis known as the Panic of 1893. In broad structural terms this crisis was somewhat similar to the housing meltdown of 2007-'08 except instead of loans to finance a housing price boom you had loans to finance a railroad construction boom. The railroad bankruptcies set off a downward spiral of bank failures, declining money supply, and falling commodity prices that made it harder for farmers to pay off old debts, which further worsened the banking situation.
According to Christina Romer's calculations, unemployment surged to 12 percent in 1894 and essentially stayed stuck there throughout Cleveland's term in office.
Under the circumstances, support for the mainstream Democratic Party began to collapse, and the GOP scored huge wins in the 1894 midterms. In response, Democrats turned toward coopting a key policy agenda item from the left-wing Populist Party and nominated William Jennings Bryan in 1896 on a platform of essentially devaluing the dollar by beginning to accept silver as well as gold as a basis for legal tender. The GOP turned to Ohio Gov. William McKinley, who earlier in his career had been a monetary moderate but who saw the massive fundraising potential in running as the candidate of the gold standard. Devaluing the currency was popular among Southern and Western farmers because it reduced the real value of their debts, but was anathema among bankers for much the same reason.
McKinley won, and then got lucky
The bad economy powered McKinley to victory on the strength of an electoral map that looks a lot like an opposite-day version of 21st-century politics. The unemployment rate averaged 12.4 in his first year in office, but it fell rapidly to 5 percent by the time he had to run for reelection in 1900, at which point he crushed Bryan in a rematch.
So McKinley really did deliver prosperity. But does he deserve credit? Not really. As Milton Friedman and Anna Schwartz explain in their landmark Monetary History of the United States, had the silver policy been adopted, the whole recession could have been greatly mitigated if not avoided altogether:
For the period before 1897, therefore, the choice between silver and gold hinged mainly on one's judgment about the desirable price trends. If one regards the deflationary price trend as an evil and a horizontal price trend as preferable, as we do, though with some doubts, silver would on this account and for that period have been preferable to gold. The only other effect of any importance for the period was on the system of international exchange rates. The adoption of silver by the US would have meant rigid exchange rates between it and the other silver countries, but flexible rates between that group and the gold-standard countries. This effect too we are inclined to regard as an advantage of silver rather than a disadvantage.
So what happened after 1897? Well, according to Friedman and Schwartz, the main factor was "the rapid expansion of the world's output of gold." Tying the value of the dollar to gold was intended to be an anti-inflationary policy, but a giant increase in the output of the world's gold mines meant that "world gold prices, represented by an index of British prices, reached their trough in 1896 and rose steadily thereafter."
This expansion in gold production had exactly the salutary economic effects that silver-backed currency would have had earlier.
Why inflation (sometimes) works
In sociological and political terms, the way the gold-versus-silver argument of 1896 worked was like a zero-sum conflict between creditors and debtors. Wealthy creditors backed McKinley, while debtors of more modest means backed Bryan. But when inflation arrived through dumb luck, both creditors and debtors prospered.
The reason is that a depressed economy is not a genuinely zero-sum situation.
When prices are expected to rise, people who have money on hand become more inclined to trade that money for physical objects that they expect will be useful and last a long time. They buy new houses or add additions or upgrades to existing ones. They purchase new equipment for their businesses, or new household appliances. And if they are inclined to save rather than buy things, they shift their investments to riskier, higher-yielding propositions, thus giving entrepreneurs more access to the money they need to invest in new hiring and new equipment.
Because many people were unemployed at the start of 1897, this trend toward higher prices and more spending created a lot of opportunities for people to shift back into work, and for the total output of the American economy to soar.
This inflationary trick doesn't always work, of course. If unemployment is low, then additional spending can't conjure up additional output, and all you get is a cycle of rising prices. But a country in the depths of a serious recession can improve living standards for almost everyone by adopting a more inflationary monetary policy.
Quantitative easing that worked
In effect, the gold mining boom that powered the McKinley economy was a form of quantitative easing. Rather than "print money," the major economic powers of the time let the gold mining industry print it for them. As money poured out of the ground at a faster pace, prices and spending rose, and the economy revived.
But there is one crucial difference between the metallic version of QE and the version the Federal Reserve implemented in recent years — the expansion in the gold supply was permanent.
In other words, when new gold was mined, people expected it to last more or less forever. That meant that surprising new gold discoveries changed long-term expectations about price trends.
Modern-day money printing is different. Central banks can destroy currency to fight inflation just as easily as they can create it. And the Fed has always been clear that it has an "exit strategy" to undo its QE when the time is right. The problem is that new money that's only temporary in nature doesn't do very much to change expectations about prices. The Fed has always maintained that it remains vigilant about inflation, and indeed seems primed to shift to tighter money at the soonest possible moment. This prevents the new money from shifting expectations and thus prevents us from enjoying the most rapid possible recovery.
One advantage of the modern fiat money system over the old gold standard is that we don't need good luck; we can start mining more virtual gold anytime we want to. But unlike McKinley, modern-day leaders can't be rescued from their own errors by a stroke of good luck.