Saturday, September 10, 2011

The Silver Dollar 1873–1900 – Part 2

Bland-Allison Act
Thomas Allen

[Editor’s note: Footnotes in the original are omitted.]

With the Bland-Allison Act, in 1878, Congress authorized minting silver dollars. The law ordered the Secretary of the Treasury to buy silver bullion and coin it; it did not open the mint to the free coinage of silver. Silver dollars were declared standard dollars and legal tender and were not redeemable in gold. Also, for the first time, this law authorized the Secretary of the Treasury to issue silver certificates. The value silver in the standard silver dollar fluctuated in terms of gold between $0.89 (1878) and $0.46 (1897-1899). This law managed to confuse the definition of the dollar. The Sherman Act replaced it.

Silver certificates were originally issued in denominations of $10 and above. Although banks could count silver certificates as parts of their “lawful money” reserves, banks did not like them because they were not legal-tender. However, people could use them to pay all dues owed to the U.S. government. In 1886, Congress authorized the issuance of silver certificates in $1.00, $2.00, and $5.00 denominations. To encourage the use of silver certificates, banks were stripped of their ability to issue bank notes of these small denominations. Also, the Secretary of the Treasury began retaining U.S. notes of small denominations. Silver certificates were redeemable in silver dollars on demand. Deposits of silver dollars fully backed them. Most of the silver dollars coined under the Bland-Allison Act were used to back silver certificates.[1]

Silver dollars issued under the Bland-Allison Act were the property of the United States. It could sell them to individuals, pay debts, or make purchases with them. The difference between the value of silver in the coin and the coins monetary value was an apparent profit to the U.S. government although in reality, it was an obligation. (This apparent profit was used to defeat Bland’s free coinage provision. Congress wanted the U.S. government, not individuals, to reap the profit — not seeing that this difference was really a debt for the government.)

Silver coins issued under the Bland-Allison Act differed greatly from silver coins issued under free coinage. Under the Bland-Allison Act, the U.S. government had to buy the silver and coin it. Much (most) of this silver was bought with debt — bonds or U.S. notes. Thus, it was the property of the U.S. government and an obligation of the U.S. taxpayer, who had to pay the debt used to buy silver.

Under free coinage, the government incurred no expense unless it coined the silver gratis. Silver brought to the mint for coinage was private property. After the coining, it remained private property. The coins belonged to the person who brought the silver to the mint.

Moreover, the Bland-Allison Act placed a purchasing minimum limit of $2 million worth of silver per month and a maximum of $4 million per month. Under free coinage, no minimum or maximum limit was imposed.

Under the Bland-Allison Act, the U.S. government bought $308 million or 291 million ounces of silver bullion. This bullion it converted into $378 million in silver dollars. The $70 million difference was not a profit for the U.S. government. It was an obligation or debt. The U.S. government had an implied obligation to maintain the value of a silver dollar at par with the value of gold.[2] Thus, the difference between the value of silver in a silver dollar and the monetary value of a silver dollar was an implied debt of the U.S. government.

As introduced by Representative Bland, the bill opened the mint to the free coinage of silver. Thus, his bill, which the House past, restored silver as commodity money. When the bill arrived in the Senate, Senator Allison amended it. He replaced the provision for the free coinage of silver with the provision for the Secretary of the Treasury to buy silver bullion and coin it in silver dollars. Allison’s provisions converted the silver dollar into fiat money.

The silverites wanted free coinage of silver. They consisted primarily of four groups. They were the silver miners, debtors, true populists, and (for want of a better name) “academia,” who argued that silver had not declined in value but that gold had risen in value.

The silver miners wanted free coinage to increase demand for their product. They believed that free coinage of silver would drive the value of silver up such that 16 ounces of silver would have the value of one ounce of gold.

Debtors believed that free coinage would have expanded the money supply and cheapened the dollar. Whereas the silver miners thought that free coinage would raise the value of silver, the debtors thought that it would lower the value of gold.

As introduced by Bland, the Act would have benefitted both groups by returning the free coinage of silver. As finally adopted, the Act converted the silver dollar to fiat money and only benefitted the miners. It fell to benefit debtors because the silver dollar remained equivalent to a dollar in gold.

The true populists were not true silverites. They believed that governmental fiat gave money its value. The material of which it was made was irrelevant. If gold could provide an adequate supply, which they believed that it did not, gold was acceptable. Otherwise, they would add silver — thus, their opposition to repealing the silver purchasing provision of the Sherman Act (v.i.). If both failed, which they expected, the government should issue paper money, which is what they preferred. Populists supported the free coinage of silver primarily because they believed that it would show the country that gold and silver could not provide what they consider an adequate supply of money. “Thus the old-fashioned Populists apologized for free silver more than they advocated it, and they regretted to see less discerning students of the money question attach an importance to the doctrine quite out of proportion to the benefits that could possibly be obtained from it.”[3] Populists saw the silver question as a means to draw silverites from the Democratic and Republican parties into the Populist party.

The smallest group supporting the free coinage of silver was “academia.” This group argued that silver had not fallen in value. To the contrary, gold had risen in value. This group may not have been far from the truth as Table A-1 in the appendix shows. Between 1873 and 1878, gold was rising more than silver was falling. (Between 1873 and 1892, silver appears to have been more stable in purchasing power than gold, whose purchasing power increased significantly during this time.)

Opponents of the Bland-Allison Act claimed that it would cause inflation, gold exports, panics, and revert the country to the silver standard. It did none of these. The Act came along at a time when the country was leaving a depression, and the demand for money was growing. Most of the silver dollars added to the money supply were offset by the quantity of national bank notes removed from the money supply. Contrary to what its promoters wanted, it did little to increase the money supply. Excess money as gold was removed and exported. If these silver dollars had not been minted, gold would have been imported to meet monetary demand.[4]

Most banks, especially the New York City banks, despised silver dollars and silver certificates and strove to prevent their circulation. Clearinghouses prohibited payment of balances in silver between its members. Congress retaliated by forbidding the renewal of the charter of any bank who was a member of such a clearinghouse. Thus, clearinghouses dropped their antisilver rules. However, banks informally continued to discriminate against silver.

Silver dollars were not popular with the public. Under the greenback standard, they had become accustom to paper money. They were not use to handling coins that weighed about 0.85 ounces.

About the silver dollar issued under the Bland-Allison Act, Johnson writes:
The Bland-Allison silver dollar was a monetary anomaly. Although called a standard silver dollar to propitiate the friends of silver, it was in no sense standard money; nor was it recognized as credit money, for no provision whatever was made for its redemption in gold. Its status was very much like that of the Indian rupee after 1898, — theoretically and legally fiat money, susceptible of depreciation if issued to excess; but practically credit money, the people having confidence that somehow it would be kept at par with gold. Inasmuch as the law made it legal tender, the people certainly had a right to expect that the government would keep it equal in value to gold. There was no direct promise to pay gold, but the implied obligation was tantamount to an explicit declaration. Two things were essential to the maintenance of its value: first, limitation of the supply; and second, confidence among the people in the purpose and ability of the government to prevent its depreciation. These two conditions were necessarily intertwined. Theoretically the supply of silver dollars might increase until all the country’s gold had been displaced, and no depreciation result, for there would be no increase in the supply of currency; but such an increase would have destroyed confidence in the ability of the government to redeem silver dollars, and so would have led to depreciation, the country thereby passing from a gold standard to a fiat standard.[5]
If silver had not fallen in value, most likely there would have been no Bland-Allison Act or Sherman Act. Inflationists had lost their battle to flood the economy with greenbacks. Now they sought to flood the economy with silver dollars. They did not care about silver coins per se. They only wanted cheap money to liquidate debt, and silver was now available to serve that purpose. To many silver coinage was a way to bring back governmentally issued notes.

The Bland-Allison Act conflicted with the Constitution. Under the Constitution, silver is money. Any private person could bring silver to the mint for coinage, and all silver brought for coinage was to be coined. The person bringing the silver for coinage retained ownership of the coins. This act failed to reinstate the free coinage of silver. Thus, the U.S. government acquired ownership of silver coins minted as it minted silver from its own account. This act took control of the quantity of silver money from the people and gave it to the Secretary of the Treasury.

Furthermore, the issue of silver certificates violated the Constitution. The Constitution grants the U.S. government no authority to act as a deposit bank or to issue paper money. By receiving and holding deposits of silver dollars and issuing silver certificates to the depositors, the U.S. government assumed the role of a deposit bank.

Although the silverites were displeased with the Bland-Allison Act because it did not allow free coinage of silver, it was the best that they could get. They continued to agitate for the free coinage of silver. The next important silver law, which also failed to satisfy their demand for free coinage, was the Sherman Act.

Endnotes
1. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest (Revised edition; Boston, Massachusetts: Ginn and Company, 1905), pp. 351-352.

2. Ibid., pp. 352-353.

3. John D. Hicks, The Populist Revolt: A History of the Farmers’ Alliance and the People’s Party (University of Nebraska Press, 1961), p. 318.

4. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), p. 201.

5. Johnson, pp 348-349.

Copyright © 2010 by Thomas Coley Allen.

Part 1 Part 3

More articles on money.  

1 comment:

  1. You say here that, under the Bland-Allison act, "Much (most) of this silver was bought with debt — bonds or U.S. notes." What was your source for this? I'm having a hard time finding out how the mechanics of silver purchases under the act actually worked. I'd appreciate your help.

    ReplyDelete