by Liberty Street Economics
— this post authored by James Narron and Don Morgan
On the crisp morning of January 24, 1848, James Marshall, a carpenter in the employ of John Sutter, traveled up the American River to inspect a lumber mill that Sutter had ordered constructed close to timber sources. Marshall arrived to find that overnight rains had washed away some of the tailrace the crew had been digging. But as Marshall examined the channel, something shiny caught his eye, and as he bent over to retrieve the object, his heart began to pound. Gold! Marshall and Sutter tried to contain the secret, but rumors soon spread to Monterey, San Francisco, and beyond – and the rush was on. In this edition of Crisis Chronicles, we describe the excitement of the California Gold Rush and explain how it constituted an inflationary shock because the United States was tied to the gold standard at the time.
And the Rush Was On
As rumors of a gold discovery spread, an enterprising merchant named Samuel Brannan saw an even better opportunity than prospecting for gold and set up shop near Sutter’s Mill to supply what he anticipated would be a flood of miners needing picks, shovels, and pans. Carrying a small amount of gold in a glass vial, Brannan strode up and down Montgomery Street in San Francisco, then just a sleepy hamlet, extolling the great wealth that could be readily plucked from the foothills outside Sacramento. A kind of madness seized the 850 residents of the city, and as the San Francisco Chronicle noted on May 29, “the field is left half plowed, the house half built, and everything neglected but the manufacture of shovels and pickaxes” (David Lavender, California: A Bicentennial History).
By May 1848, the stampede had begun. Miners from Mexico, Chile, and Peru, woodsmen from Oregon, prospectors from Australia, and merchants from the Hawaiian Islands all flooded into the Sierra foothills (Charles Ross Parke, Dreams to Dust). Monterey Mayor Walter Colton famously described the mania that gripped the region: “The blacksmith dropped his hammer, the carpenter his plane, the mason his trowel, the farmer his sickle, the baker his loaf, and the tapster his bottle. All were off for the mines.” At least half of the male population of Oregon poured south. By August 1848, an estimated four thousand prospectors poured into the California gold fields.
Even President James Polk felt the excitement. On December 5, 1848, he reported to Congress that if official reports had not confirmed the existence of vast quantities of gold in California, it would be difficult to believe the fantastic stories then in circulation. With the President’s seeming endorsement, gold fever gripped the nation, and a second, even larger wave of fortune seekers prepared for the journey west. Although prospectors continued to pour in from the Pacific Rim, including a wave of Chinese immigrants, this second wave from east of the Mississippi was made up of relatively well-educated and well-off young people, eager to seek their fortunes in the West. An estimated eighty thousand of them arrived in 1849 through a variety of routes – by boat around Cape Horn or to Panama, then across land, and back aboard another passing ship, or overland by a southern route through New Mexico and Arizona or across the Great Plains.
“Fabulously Rich Diggings”
It is largely from this articulate wave of immigrants – the self-described “49ers” – that we learn about the hardships of the journey and life in the mining camps. “Arrived at Bidwell’s Bar this evening. Here we found saint and sinner – especially the latter – rich and poor, educated and ignorant, well-disposed and vicious. In short, all sorts of people, and no law but that of the miner to govern them” (Parke, Dreams to Dust).
The first wave of fortune seekers – the 48ers – often had great success in extracting gold from what Lavender describes as “fabulously rich diggings.” But by the time the 49ers arrived, many of them not until late 1849, a number of the most profitable claims had been staked, and the “diggings” were more difficult and less fruitful. By the 1850s, fewer of the gold seekers prospered as they struggled to find a few ounces every day just to re-supply themselves with food and tools at exorbitant prices. In one of the most outrageous twists of fortune, laundry became so expensive that it was cheaper to ship dirty clothes to Hawaii for laundering. Not surprisingly, many of those who supplied the miners – like Sam Brannan, the Gold Rush’s first millionaire – did make a fortune.
Parke, like many of his fellow 49ers, became discouraged: “Yesterday we left the City of Sacramento and arrived here today (San Francisco) bound for home. This bay is full of craft of all kinds deserted by their crews almost as soon as they cast anchor. And here they lie rotting.” While Parke returned home, others elected to stay; by 1852, women were arriving and many immigrants were settling in.
More Monetary Shock Than Crisis
The gold rush constituted a positive monetary supply shock because the United States was on the gold standard at the time. The nation had switched from a bimetallic (gold and silver) standard to a de facto gold standard in 1834. Under the latter, the U.S. government stood ready to buy gold for $20.67 per ounce, a parity that prevailed until 1933. That commitment anchored prices, but the large gold discovery functioned like a monetary easing by a central bank, with more gold chasing the same amount of goods and services. The increase in spending ultimately led to higher prices because nothing real had changed except the availability of a shiny yellow metal.
In his excellent essay on gold standards, the economic historian Michael Bordo documents that the average annual U.S. inflation rate was many times lower under the gold standard (between 1880 and 1914) than in the subsequent 1946-2003 period. However, he shows that the gold standard led to more volatile short-term prices (including bouts of pernicious deflation) and more volatile real economic activity (because a gold standard limits the governments’ discretion to offset aggregate demand shock). Bordo documents that short-run prices and real output were many times less volatile after the United States left the gold standard than before. Apart from their macroeconomic disadvantages, gold standards are also expensive; Milton Friedman estimated the cost of mining the gold to maintain a gold standard for the United States in 1960 at 2.5 percent of GDP ($442 billion in today’s terms).
Despite the demonstrable disadvantages of a gold standard, and notwithstanding that the U.S. inflation rate has remained at moderate levels for decades without one, some observers still call for the United States to return to a classical gold standard. Should we? Let us know what you think.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
About the Authors
James Narron is a senior vice president in the Federal Reserve Bank of San Francisco’s Cash Product Office.
Don Morgan is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.