INTRODUCTION

Did you know that for most of our country’s early history, gold was used to represent money? In fact, you could go to a bank and trade in your paper money for gold!

To see some paper money that you could exchange for gold certificates, compare them to today's paper money and investigate the following questions.

  • Can you redeem (trade) the gold certificates for gold?
  • Can you redeem today's paper money for gold?
  • Who issued the gold certificates?
  • Who issues today's paper money?
  • What do you think the words THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE on today's paper money mean?


Today, we don’t use gold to represent money. To find out some of the reasons why, let’s learn about money’s function as a store of value, and how this function is threatened when prices change significantly.

To do this, we’ll take a step back into time to the 1890s. During this time in our country’s history, questions about gold, silver, and money were very important to people. In fact, people felt so strongly about these questions that it determined how they voted in the 1896 presidential election.

TASK

In this lesson, you will learn that one of the functions of money is to be a store of value over time. You will examine the gold and silver question of the 1890s to see how the money supply can change the value of money over time through inflation and deflation. Finally, you will understand the role of government in our country’s economy by predicting how people will vote in the 1896 presidential election and by looking at a political cartoon from 1895.

PROCESS

Before we go back in time to the 1890s, let's talk about a few ideas. These ideas were important then, and they are still important today.

Your money supply is the total of your coins, paper money, money you have in the bank, and any checks someone has written to you, like a birthday check. Our country’s money supply is the total of everyone’s coins, paper money, money in the bank, and checks.

The total of our country’s money supply is important. If the money supply increases, people have more money, and they can spend more money. Store owners notice this and can charge higher prices for the things that they sell. When prices increase over a period of time, it is called INFLATION.

If the money supply decreases, people have less money and spend less. Store owners start charging less to try to sell their things. When prices decrease over time, it is called DEFLATION.

Today, an organization called the Federal Reserve System controls our country’s money supply. The “Fed,” as the system is called, was created by our government in 1913 to be our main or central bank. One of the Fed’s jobs is to keep prices from increasing or decreasing too much, and it does this partly by controlling the supply of money.

 

  1. Define MONEY SUPPLY.
     
  2. Define STORE OF VALUE.

Visit the AmosWEB economics glossary and use the SEARCH the Gloss feature to find the definitions of Money Supply and Store of Value.

Back in 1896, the Fed was not around to control the money supply. So, how was the money supply controlled back then? In those days, our government used gold as one way to control the money supply. Money was based on something called the GOLD STANDARD. The gold standard meant that the money supply was limited by how much gold was available.

With the gold standard, our paper money was REPRESENTATIVE money. This means that it represented something that was valuable—gold. If you had paper money, you could go to your local bank and trade it in for a certain amount of gold. To see some paper money that you could exchange for gold, click the link National Gold Bank Notes .

We don’t use representative money any more in the United States. Instead, we use FIAT money. Fiat money, like a one-dollar bill that you might use today to buy a soda, does not represent anything of value. However, you know that you can use it today to buy something or save it and use it in the future. Our government and the Fed make sure that your money is accepted and stable—that it is a store of value over time.

One of the reasons our country no longer uses the gold standard is because it can cause the money supply and prices to change too much. A good example of this is the gold and silver issue in the 1890s. In those days, money was tight, meaning the money supply was low. Some people lost their jobs or were having a hard time making money. Other people had saved money and were able to keep their jobs.

To see what happens when money is tight, meaning the money supply is low, click the link to the Inflation Calculator . This calculator can help them compare how much things cost in different years, all the way back to the year 1800!

Now pretend that you are in the year 1866. In 1866 you could buy a nice coat for $10.00. In the first blank of the calculator enter 10.00. In the next blank 1866 for the starting year. To see what that coat would cost 30 years later in 1896, enter 1896 in the last blank. Now  click the Submit button. Look at the result, and then answer the questions below.

 

  1. A coat that cost $10.00 in 1866 would cost _______ in 1896.
     
  2. Is the price in 1896 lower or higher? __________
     
  3. What is the term economists use when prices are lower over time?
     
  4. If you were selling a coat in 1896, would you make more or less money than if you sold the coat in 1866?_______

During the 30 years after the end of the Civil War leading to 1896, the United States experienced deflation. Gold supplies were low and the government was decreasing the supply of money. By 1896, people who did not have much money wanted the government to increase the money supply. This was especially true for farmers, who were getting low prices for the crops they were selling. Because the supply was limited by the amount of gold available, they wanted the government to use both silver AND gold. This idea was called the Free Silver Movement. People who felt this way were called silver bugs or free silversides.

People who had money wanted to keep the gold standard and not increase the money supply. If silver was also used, they thought that inflation would happen. They thought their money would be worth less and that they would not be able to buy as much. They were called gold bugs.

To see what happens to money when inflation happens, lets go back to the Inflation Calculator . Now the year is 1896. In 1896 you could buy a new bicycle for $10.00. In the first blank of the calculator enter 10.00. In the next blank enter 1896 for the starting year. To see what that bicycle would cost 30 years later in 1926, enter 1926 in the last blank. Now click the Submit button. Look at the result, and then answer the questions below:

 

  1. A bicycle that cost $10.00 in 1896 would cost how much in 1926?
     
  2. Is the price in 1926 lower or higher?
     
  3. When prices are higher over time, the term economists use to describe this is called ___________.
     
  4. If you had $10.00 in 1896, could you buy more things or fewer things with it in 1926? 


During the 30 years from 1896 to 1926, prices increased and inflation happened partly because of large discoveries of gold in Alaska. When inflation happens, prices go up and the money you have is not worth as much, because you can’t buy as much with it. Because one of the functions of money is to serve as a store of value over time, it is important that our government keeps our money’s value from changing too much.

In the 1890s,people felt so strongly about gold and silver, it determined how they voted for president. Because the president is the head of our country’s government, he or she helps make decisions about money.

To understand more about what happened in the 1890s, let’s learn about a man named William Jennings Bryan. He ran for president and wanted the government to use silver to back money. The other person who ran for president was William McKinley, and he wanted the gold standard. Access the William Jennings Bryan and the Free Silver Movement page. Be sure to look at the cartoons on the second and third pages.

Activity:

1. Pretend you are a Nebraska farmer. Your corn crop is selling at a very low price. You are not making enough money to buy what you need for your farm and your family. You need more money and you want your crops to sell at a higher price. Who would you vote for in the 1896 election?

2. Now pretend you are a businessperson in New York. Your business is doing well and you have a lot of money in the bank. Who would you vote for in the 1896 election?

Political cartoons show how people feel about important ideas and events. Newspapers printed many cartoons about the question of gold and silver in the 1896 election. Let’s look at one of the cartoons and think about what it might mean.  Let’s look at these cartoons and think about what they might mean:
The Silver Dog With the Golden Tail
It Won't Work Without a New Wheel

As you look at the cartoon, try to answer the questions.

CONCLUSION

We learned that the money supply is the total amount of money in our country. The size of the money supply is so important that our government now controls it through the Federal Reserve System, which is our country’s main or central bank.

One of the Fed’s jobs is to prevent prices from increasing too much (inflation), or decreasing too much (deflation), which it does partially by controlling the money supply. This is important because one of the functions of money is to serve as a store of value over time. When our country used the gold standard and representative money, it was hard for our government to control the money supply and keep the value of money stable.

Finally, we learned that how people feel about money is important in our country’s history. Understanding how money works can help you make important decisions when you are ready to vote!

ASSESSMENT ACTIVITY

Complete the following interactive activity on inflation.


  1. List the following items that are part of our country’s basic money supply today: Quarter, One-dollar bill, Gold, Checking account, Credit card, Savings bonds.
     
  2. With the gold standard, money in the United States was called __________________ money because it represented a certain amount of gold.
     
  3. Today, money in the United States is called ______________________money. It does not represent anything of value.


The following are topics for discussion. Answer them on your own. Divide into small groups, in class, and discuss your answers using supporting details.

1. You want to buy a car in a few years, but you do not have enough money. You can earn money by raising vegetables in the summer and selling them at the local farmer’s market. Why would it be easier to sell the vegetables and save the money you earn than to save the vegetables to trade for a car in a few years?

2. What if you thought the money you save would be worth a lot less in a few years from now when you are ready to buy a car?. Would it make it easier or harder for you to save for and buy a car?

3. Why do you think it’s important for the Federal Reserve to control inflation, deflation, and the money supply?

4. When gold production was low in the 1870s and 1880s, the money supply grew slowly, leading to deflation. This changed with the discovery of gold in Alaska in the 1890s. The result was rapid money growth and inflation. Why did the gold standard make it hard for our government to control the money supply?

EXTENSION ACTIVITY

Look at some of the campaign pins that people wore to show how they felt about gold and silver in the 1896 election.

Listen to  William Jennings Bryan famous Cross of Gold speech .

Look at more political cartoons about the gold and silver question , access this link and go to the bottom of the page.