Did JP Morgan Save the Dollar?

In the 1890s, the ability of the US to maintain a fixed exchange rate came into question and it was threatened by an international financial crisis similar to those experienced in recent decades by many "emerging markets." In this instance, the exchange rate peg was to the gold standard, which meant grinding deflation as money growth, limited by the pace of gold production, failed to keep pace with output. This hit debtors particularly hard as it raised real interest rates - imagine a farmer facing fixed interest payments while the price of his crops falls year after year. Populists and silver mining interests campaigned for the monetization - "free coinage" - of silver, which would have led to inflation and devaluation.

With the commitment to gold under threat in the 1890s, the Treasury faced a drain on gold reserves and US bonds carried a risk premium over UK gilts. Nowadays, a country in such a predicament might seek the aid of the International Monetary Fund. Since the IMF did not exist at the time, the US instead turned to JP Morgan.

At the American Heritage website, John Steele Gordon has an interesting description of JP Morgan's 1895 "bailout" of the US Government. He concludes:

Morgan’s rescue of the dollar, despite intense criticism from the Left, changed the country’s economic mood, and a strong recovery from the depression began. The next year the 36-year-old William Jennings Bryan would win the Democratic nomination with a promise that the moneyed classes “shall not crucify mankind upon a cross of gold.” It was one of the most famous speeches in American history, but his far less eloquent opponent, William McKinley, trounced him by running on a slogan of “sound money, protection, and prosperity.”

The election proved to be the start of the revival of Republican dominance in American politics that would last until 1932.

While the Morgan loan did give the Treasury some breathing space, if deflation had continued, no doubt populism would have continued to gain strength. What really did in the "free silver" movement was the end of deflation due to an increase in world gold supplies:

For academic studies, see Milton Friedman, "The Crime of 1873" (Journal of Political Economy, 1990 [JSTOR]) and Hallwood, MacDonald and Marsh, "Realignment Expectations and the US Dollar, 1890-1897: Was There a 'Peso Problem'?" (Journal of Monetary Economics, 2000).