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CASE STUDY:THE WIZARD OF OZ AND THE QUANTITY THEORY OF MONEY
Although the subject of some controversy, many economic historians believe that the Wizard of Oz is an allegory
on the bimetallist debate that occurred in the US at the end of the 19th century.
Historical Background
In the early 1890’s, the supply of gold began to dry up. As a result, the US money supply began to shrink and
prices to fall. At the same time, unemployment began to rise (Chapter 16 discusses the short term relationship
between inflation and output). See table below.
The US Economy 1890-1900
Year Price Level Money Stock Reserve money Real Income Unemployment Ratio of gold to
(1869=100) ($ bill.) ($ bill.) ($ bill, 1869 % of labour silver price
prices) force
1890 70 3.92 1.39 16.82 4.0 19.8
1891 69 4.08 1.461 17.506 5.4 20.9
1892 66 4.43 1.533 19.117 3.0 23.6
1893 68 4.26 1.561 18.373 11.7 26.4
1894 64 4.28 1.582 17.259 18.4 32.8
1895 63 4.43 1.499 19.248 13.7 31.7
1896 61 4.35 1.451 18.758 14.4 30.8
1897 61 4.64 1.554 20.563 14.5 34.6
1898 63 5.26 1.682 20.924 12.4 35.5
1899 65 6.09 1.812 23.353 6.5 39.6
1900 68 6.60 1.954 24.121 5.0 38.6
Source: Rockoff (1990)
As a result, a populist movement - led by the democratic presidential candidate William Jennings Bryan -
advocated the return to a bimetallic standard (silver dollars had been abolished in 1873) at the ratio of 16 to 1.
This meant that the currency could be backed by either gold or silver and that the official rate of exchange
between the two would be 16oz. of silver for 1oz. of gold. Since the prevailing market price of gold and silver
suggested a conversion rate closer to 30, this would have resulted in a huge inflow of silver into the US (as
people traded in their silver for a more valuable amount of gold) thus boosting the US money supply.
The tendency for the cheaper silver to drive out gold is an example of Gresham’s Law – bad money drives out
good. The law dates back to Henry VIII’s debasement of the currency (he ordered lead to be inserted into gold
coins and the gold so recovered given to him). Consequently, pure gold coins ceased circulating (and were
hoarded) and only debased coins were used as money.
Gresham’s Law meant that critics of bimetallism argued that a true bimetallic standard was almost impossible. If
gold was more valuable than the official conversion rate implied, only silver currency would circulate. If silver
were more valuable, only gold would circulate. Only if the bullion price and the conversion rate were identical
could both circulate together. Proponents countered by saying that the US was large enough to influence the
conversion rate (i.e.purchases of silver for US circulation would drive up the price and so validate the conversion
rate).
As it turned out, William Jennings Bryan lost the election and the bimetallic standard was not introduced.
However, the supply of gold began to increase independently and so ended the deflation.
What about the Wizard of Oz?
The Wizard of Oz is full of gold and silver images (the yellow brick road, Dorothy’s silver slippers – changed to
ruby in the film version in order show off the wonders of Technicolor). Economic historians have done an
impressive job of interpreting the cast of characters
Dramatis Personae
Dorothy – America
Toto – The Prohibition Party (teetotalers) supporters of the bimetallist cause
The Cowardly Lion – William Jennings Bryan (A great orator but cowardly because he dropped the bimetallist
cause after the election).
The Scarecrow – The Western Farmer
The Tin Man – The urban worker
The Wicked Witch of the West – President McKinley
The Wicked Witch of the East – Grover Cleveland (pro-gold democrat defeated by Bryan in the 1896 convention)
The Good Witches of the North and South – New England and Southern support for the bimetallists
The Wizard of Oz. – Marcus Hanna, a key adviser to McKinley
The Munchkins – Citizens of the East
Plot Summary
After acquiring the silver slippers from the dead wicked witch of the east, Dorothy sets off to the Emerald City
(Washington DC) down the yellow brick road. After meeting her new companions (The Cowardly Lion,
Scarecrow and Tin Man), they face various challenges that prove their worth - including the mysterious poppy
field in which the Cowardly Lion falls asleep - (Bryan was easily distracted onto the issue of anti-imperialism –
represented by the opium poppies). After arriving at the Emerald City, the Wizard of Oz enlists them to confront
the Wicked Witch of the West but they are captured.
The Wicked Witch of the West steals one of the silver slippers from Dorothy (McKinley did not rule out a
bimetallic standard completely but argued that it must occur through an international agreement – an agreement
that was very unlikely). Dorothy then pours a bucket of water over her which kills the witch (water to cure the
drought facing western farmers or, arguably, a symbol for inflation).
After discovering that the wizard cannot help her, Dorothy meets the Good Witch of the South who tells her she
need only click the heels of her silver slippers together three times in order to get home.
Source: Rockoff (1990) “The Wizard of Oz as a monetary allegory” Journal of Political Economy Vol. 98, no. 4,
pp 739-760
FURTHER DATA ON SEIGNIORAGE
Average Annual Rates of Seigniorage (1971-1990)
Country Seigniorage Seigniorage Country Seigniorage Seigniorage
% of GDP % Gov. Spending % of GDP % Gov. Spending
USA 0.43 1.96 Philippines 1.23 8.96
Canada 0.44 2.01 El Salvador 1.53 10.89
UK 0.47 1.28 Nigeria 1.57 11.12
France 0.55 1.39 India 1.72 11.82
Switzerland 0.62 6.74 Ecuador 2.17 15.81
Cameroon 0.64 3.38 Greece 3.13 10.51
S. Africa 0.65 2.53 Ghana 3.31 22.01
Germany 0.69 2.35 Turkey 3.58 15.20
Burundi 0.85 6.12 Bolivia 3.81 19.76
Japan 0.96 5.62 Peru 4.99 28.23
Thailand 1.09 6.30 Argentina 9.73 62.00
Source: Click (1990) "Seigniorage in a Cross-section of Countries" Journal of Money Credit and Banking: 30(2) pp 154-71
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