Wednesday, September 14, 2011

The Silver Dollar 1873–1900 – Part 4

Gold Standard Act and Conclusion
Thomas Allen

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

Gold Standard Act
With the enactment of the Gold Standard Act, the monetary system of the United States was formerly and clearly placed on the gold standard in 1900. This law declared that the gold dollar was the standard unit of value. It required the Secretary of the Treasury to maintain parity of all forms of money, which included the silver dollar and silver certificate. It provided for the redemption of U.S. notes and Treasury notes of 1890 in gold only and prohibited their reissue except in exchange for gold. Thus, it converted these Treasury notes, which had been used to buy silver, into government notes redeemable in gold. The law provided for silver certificates in small denominations to replace gradually the Treasury notes of 1890. Silver certificates were restricted to $10 and smaller. Also, it authorized the issuance of gold certificates, but unlike U.S. notes and gold coins, they were not made legal tender.

Although the Act did not affect the legal-tender status of the silver dollar (it remained full legal tender), it implied that by now the silver dollar had been reduced to credit money, a subsidiary coin for gold. It was no longer money in its own right. It had ceased being fiat money. The Secretary of the Treasury had to maintain the value of the silver dollar to equal a dollar in gold. He had to redeem silver dollars in gold if necessary to maintain parity.

As White notes, the silver dollar made an expensive fiat money.[1] However, it did limit the government’s ability to inflate much more than paper fiat money if the government decided not to maintain parity with gold. Its intrinsic value would be reached much sooner than paper. With silver, the government could only cut the value (purchasing power) of the currency by 25 to 50 percent. With paper, it could reduce the value to zero. At least the silver dollar gave the people some protection that the greenback never could.

Friedman and Schwartz sum up the silver dollar era:
The fear that silver would produce an inflation sufficient to force the United States off the gold standard made it necessary to have a severe deflation in order to stay on the gold standard. In retrospect, it seems clear that either acceptance of a silver standard at an early stage or an early commitment to gold would have been preferable to the uneasy compromise that was maintained, with the uncertainty about the ultimate outcome and the consequent wide fluctuations to which the currency was subjected.[2]
Although the last three decades of the nineteenth century were deflationary, this era was one of the greatest periods of economic growth for the United States.

A highly important question remains to be answered: Why did the gold value of silver decline so much after 1873?

Friedman and Schwartz assert that supply of and demand for silver explains its decline, “The reasons for the price decline seem fairly clear: on the supply side, rich new mines were opened in the American West, and there was a world wide increase in productivity; on the demand side, a number of European countries shifted from a silver or bimetallic to a gold standard and sharply reduced their monetary use of silver.”[3]

The monometallists, advocates of the single gold standard of this era, claim that the increase in the supply of silver caused its fall in value. However, the fall in value began before the world’s silver stock had greatly increased. Moreover, gold production was much greater than that of silver. To which the monometallists reply that the fall resulted from an anticipation of an increase in supply.

Even today, the supply argument seems weak. In recent years (decades), the increase in the supply of gold has been greater than that of silver. During this time, the demand for silver seems to have been much higher as its usages have been higher. Yet the value of silver generally lags that of gold.

Laughlin opines that the abundance of gold caused silver to lose value relative to gold.[4] With the discovery of gold in America, enough gold came available to supplant silver coins. People preferred gold to silver because it had more value per unit weight. As the demand for gold grew, so did its value. As the demand for silver fell, so did its value. Moreover, the supply of silver began increasing after 1872.

The bimetallists, advocates of the silver-gold system with a legally fixed exchange rate between the two, claim that “demonetization” caused silver’s fall in value. They point to Germany ending the free coinage of silver in 1871, which glutted the market with silver. This action forced France and the other members of the Latin Union to abandon the silver standard, i.e., to end the free coinage of silver. The United States ended the free coinage of silver in 1873. During the 1870s other European countries ended their silver standards or bimetallic silver-gold system and adopted the monometallic gold standard. To the bimetallists, ending the free coinage of silver and by that discontinuing the use of silver as standard money caused its decline in value.

One result in discarding the silver standard was an increase in demand for gold coins. This increase demand for gold coins would account for some of the decline in the value of silver in terms of gold. Not only were countries replacing the silver standard with the gold standard, they were also replacing fiat paper monetary standards with the gold standards.

Friedman and Schwartz opine that if the United States had reverted to the silver standard, the deflation of the 1880s and ’90s would have been avoided or at least moderated. Inflation would not have occurred. Prices would have remained stable.

The abandonment of the silver standard around the world reduced the demand for silver. As countries moved onto the gold standard, the demand for gold increased. Thus, the value of silver was pushed down and that of gold was pushed up.

If the United States had gone onto the silver standard, they would have abated much of the value change between the two metals. While reducing the demand for gold, they would have increased the demand for silver. If the United States were on the silver standard, other countries then on the silver standard might have remained on the silver standard instead of converting to the gold standard. Increasing the monetary demand for silver and decreasing it for gold would have greatly lessened the rise in the value of gold and fall in the gold-value of silver. Thus, the deflation during this era would have been significantly diminished if not eliminated.[5]

Although silver ceased to be used as standard money in most countries (China and some Latin American countries being notable exceptions), it was still used in subsidiary coins in most countries and as fiat money in the United States. If merely ending the use of silver as standard money caused its fall in value, why did gold soar in value (in terms of standard fiat currencies) when its last legal connection to money was severed in 1971? Whatever explanation used to explain silver decline in value after 1873 needs to be able to explain golds rise in value after 1971.

(Charles Rist offers this explanation for why silver’s value declined and gold’s value rose when their free coinage ended. When the free coinage of silver ended, people replaced silver with gold. Gold adequately performed all the basic functions of money. Silver was not needed to perform any of these functions. Therefore, the monetary demand for silver declined. As demand fell, so did its value. When the free coinage of gold ended, people replaced gold with irredeemable paper money. Irredeemable paper money does not perform all the basic functions of money. As it nearly always depreciates in value, it fails as a store of value. Gold continued to perform a monetary function as a store of value. Therefore, a monetary demand for gold remained after its free coinage ended. Thus, when gold replaced silver, it fulfilled all silver’s monetary functions. When irredeemable paper money replaced gold, it failed to fulfill all gold’s monetary functions.[6])

The pro-silver folks are not the sole blame for the deleterious effects of the silver dollar. For the most part, they did not want fiat silver money. They wanted commodity silver money. They wanted to open the mint to the free coinage of silver.

Most of the blame belongs to the pro-gold and antisilver folks. To thwart the pro-silver folks’ attempt to allow the free coinage of silver, the pro-gold faction compromised. These compromises resulted in the Bland-Allison Act and the Sherman Act. Thus, the pro-gold folks are mostly responsible for the detrimental effects of fiat silver money between 1878 and 1900.

Politics prevented them from completely abandoning silver as legal tender. To allow the free coinage of silver at the then legal ratio of 16 to 1 would have reverted the country to the silver standard. Ardently, they opposed the silver standard; they wanted the gold standard that most of the world was on or moving toward.

Instead of compromising by making silver fiat money, the pro-gold should have compromised by allowing the free coinage of silver and raising the legal ratio above the market ratio. That would have preserved the gold standard until the legal ratio fell below the market ratio. However, when amendments were offered to change the ratio, they were voted down. Even better than changing the ratio, would have been to eliminate it. Elimination of the ratio was never seriously considered.

Many politicians of this era suffered from the same false delusion that has inflicted politicians throughout the ages. The ancient myth that the king’s (Congress’) edict gives money its value enthralled many of these politicians. Congress’ decree could force both gold and silver coins to circulate together at the current ratio of 16 to 1. After all, Congress had declared them to have the equal value at this ratio.

Not all politicians suffered from this superstition. Many knew that free coinage of silver at the current legal ratio of 16 to 1 would cause overvalued silver to circulate and send gold into hiding or to Europe. Most inflationists and pro-gold folks knew this outcome. It is this outcome that the inflationists wanted. It is this outcome that the pro-gold folks did not want.

In Open Mints and Free Banking, William Brough gave the best solution to the silver problem. His solution was to eliminate the legal exchange ratio and open the mint to the free coinage of silver. Thus, the mint would coin all gold and silver brought to it for coinage. Eliminating the ratio and allowing the free coinage of silver would have allowed the people themselves to decide how many silver coins and gold coins that they want. Both coins could have circulated together without either driving the other out of circulation. Both could have circulated side-by-side without the inflation and following depression caused by the Treasury notes of 1890. If Congress had adopted Brough’s recommendation, it would have eliminated most of the problems associated with silver in the between 1878 and 1900. The most likely outcome would have been silver coins being used for day-to-day retail buying and selling and for wages. Gold would have been used for the export-import business, large purchases and investments, and long-term savings. The drain on the Treasury’s gold would have been significantly lessened. As no legal exchange rate existed between gold and silver, Gresham’s Law would not have been at work converting overvalued silver into gold for export as occurred under the Bland-Allison Act and especially under the Sherman Act. The money supply would have more closely matched the actual needs of the people.

Four other changes were also desirable. First, U.S. notes, greenbacks, should have been permanently removed from circulation as they were redeemed for gold or paid into the Treasury. Second, bank notes should have been issued based on and backed by real bills of exchange instead of U.S. governmental securities. Third, the U.S. government should have ceased issuing gold and silver certificates and should have retired those redeemed. Banks and other private institutions should have assumed the task of issuing gold and silver certificates. Fourth, all legal tender laws should have been repealed.

An argument used by the silverites was that the U.S. government should not discriminate against either metal. As long as it had a legal ratio, it would always discriminate against the undervalued metal in favor of the overvalued metal. At 16 to 1, silver was overvalued and gold was undervalued. At this ratio, silver coins would have quickly replaced gold coins in circulation. If the silverites really wanted to eliminate discrimination, they should have supported the elimination of the legal exchange ratio. Then the markets would have decided how many coins of each metal were needed. As they wanted to maintain the ratio of 16 to 1, they wanted the U.S. government to discriminate against gold. If the silverites wanted silver money for the sake of having silver money, they would have accepted an offer to eliminate the legal ratio. If it were currency depreciation that they wanted, they would have rejected the offer. As the offer seems never to have been made, we may never know for sure their preference. However, based on their comments and actions, they probably would have rejected the offer.

According to Rothbard, the silver movement destroyed the hard-money, limited government, laissez faire political party, the Democratic party of Jefferson, Jackson, and Cleveland.[7] It ushered in an era, which continues to this day, of statist control of both the Republican and Democratic parties. Until 1896, the Democratic party stood for limited government with minimal governmental intervention in economic and social affairs. For the Democrats, remaking man was not a function of government.

The Republican party was the party of the progressives, pietists, and Hamiltonians (advocates of central banking, governmental protection and promotion of big business, and protective tariffs). It sought to use government to mold man into perfection. It was the party of the greenback and inflation, prohibition of liquor, the public school system to remake mankind, blue laws, Protestantization of Catholics, and high tariffs. “. . . the Republicans glorified in calling themselves throughout this period [i.e., last half of the nineteenth century] ‘the party of great moral ideals,’ while the Democrats declared themselves to be ‘the party of personal liberty.’”[8]

After Cleveland won in a landside in 1892 and the Democrats captured both houses of Congress, the Republican party had to remake itself or remain a minority party. It remade itself. It abandoned the prohibitionists, modified its immigration policy, and move toward the center away from its extreme pietism.

Meanwhile, the Democratic party began to fractionalize. Pietism had come into the party in the South with a call for prohibition. In the West where the silver mines were, the Democrats adopted a pro-silver stance. Moreover, people blamed Cleveland for the Panic of 1893 although it resulted from the actions of the Republican Harrison administration. Seeing that the hard-money laissez-faire Cleveland faction was weak, the pietist faction in the South and the silverites in the West united under William Jennings Bryan to gain control of the Democratic party. Thus, the progressives, pietists, and Hamiltonians gained complete control of the Democratic party, which was once the party of liberty, and have never since loosened their grip.

J.P. Morgan and other financiers through Henry Cabot Lodge offered to support the Republican party if it supported the gold standard, which was Cleveland’s basic economic issue. Otherwise, they would support Bryan. William McKinley accepted the deal, and the Republican party abandoned its traditional easy money policy.

The pietist-silverite take over of the Democratic party caused many Democrats to sit out the election. Others voted for McKinley. Since the election of McKinley, both parties and all presidents have been statists and progressives in varying degrees. Voter turn out has trended down ever since.

The most devastating and long-lasting effect of the silver dollar fiat money was the utter destruction of a party of liberty in the United States. Since 1896, no party advocating laissez-faire economics, limited government, personal responsibility, and personal liberty has won the presidency or taken control of either house of Congress. Only a few such candidates have won congressional elections. State governors and legislatures have not fared any better.

[Editor’s note: The appendix, which contained eight tables of monetary statistics, and the list of references are omitted.]

1. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), p. 204.

2. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), pp. 133-134.

3. Ibid., p. 114.

4. J. Laurence Laughlin, The Elements of Political Economy (New York, New York: American Book Co., 1887), p. 311.

5. Friedman and Schwartz, p. 134.

6. Charles Rist, The Triumph of Gold, trans. Philip Cortney (New York, N.Y.: Philosophical Library, 1961, pp. 122-124, 151-153.

7. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), pp. 175-179.

8. Ibid., p. 174.

Copyright © 2010 by Thomas Coley Allen.

Part 3

More articles on money. 


Sunday, September 11, 2011

The Silver Dollar 1873–1900 – Part 3

Sherman Act
Thomas Allen

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

In 1890, Congress enacted the Sherman Act or the Silver Purchasing Act of 1890. It authorized the Department of the Treasury to issue notes (Treasury notes of 1890) to buy silver. They were full legal tender and redeemable in gold or silver at the discretion of the Secretary of the Treasury.

The law ordered the Secretary of the Treasury to buy silver at the market price with Treasury notes until silver reached $1.29 per ounce, the price of silver at which the ratio of silver to gold is 16 to 1. It required him to buy 4.5 million ounces of silver each month at the market price. This silver served as a reserve for the Treasury notes. Silver dollars were only minted when necessary to redeem Treasury notes. Under the Sherman Act, the U.S. government bought 168 million ounces of silver. Of this silver, 28 million ounces were coined into $36 million silver dollars. $156 million in Treasury note were issued.[1]

The Sherman Act sought to drive the price of silver up by having the U.S. government buy most of the silver produced in the United States. It failed in this objective. Silver continued to decline in terms of gold.

As a result of the Sherman Act, new legal tender notes, Treasury notes of 1890, flooded the markets. People began redeeming these notes in gold and exporting the gold. Large quantities of gold were shipped overseas, and the Treasury’s reserves of gold coins and bullion became dangerously low. People also substituted the new Treasury notes for gold coins in their daily commerce and exported the gold coins.

The Sherman Act differed significantly from the Bland-Allison Act in at least one important aspect. Under the Sherman Act, the Secretary of the Treasury bought a specific number of ounces of silver each month. The Bland-Allison Act required the Secretary to buy between $2 million and $4 million of silver each month. Thus, the Sherman Act was in terms of ounces of silver, and the Bland Allison Act, in terms of the cost of silver. Therefore, under the Sherman Act, “the annual additions to the currency would grow less if the price of silver fell, while by the Bland[-Allison] Act the annual additions grew larger as the price of silver fell.”[2]

Silver dollars issued under the Bland-Allison Act did not have the same effect as the Treasury notes of 1890. During the 1880s, banks contracted their bank notes because the supply of U.S. government securities was shrinking and their prices were rising. Banks had to use U.S. government securities as collateral for their bank notes. Thus, silver dollars issued in the 1880s approximated the contraction of bank notes and merely filled the void left by bank notes. By 1890, the quantity of bank notes stabilized. The Treasury notes of 1890 were an addition to the money supply and not a substitute of one form of money for another. Being an addition, people redeemed the Treasury notes in gold and exported the gold to countries where its monetary use was more valuable. Silver dollars and Treasury notes of 1890 were legally equal to gold in the United States in purchasing power. However, gold had a higher purchasing power in the world markets than silver dollars or the Treasury notes.

Silverite opponents of the Sherman Act identified several flaws in the Act. It was written in a way to cause large quantities of silver dollars to end up in the Treasury’s vault. It required the Secretary of the Treasury to buy silver bullion and then to coin an adequate supply of silver dollars to redeem outstanding Treasury notes. (Later, when President Cleveland convened Congress to repeal the purchasing provision of the Act, he pointed to the large quantity of silver coins and bullion in the Treasury as proof that the people did not want silver money. The major reason for this large hoard of silver coins was that the Secretary of the Treasury always redeemed Treasury notes in gold unless the person redeeming specifically asked for silver. Furthermore, most people preferred using paper money rather than coins.)

Another flaw was that it set a maximum price of one dollar per 371.25 ounces of fine silver that the Secretary of the Treasury could pay for silver. However, it did not set a minimum price. Opponents saw fixing a maximum price with no minimum price as a means to suppress the price of silver. Moreover, the Act fell far short of buying the annual production of U.S. silver mines.

The Act authorized the Secretary of the Treasury to redeem Treasury notes in gold or silver instead of gold and silver. Thus, the Act gave the Secretary too much discretion.

Furthermore, the parity clause was written such that it could be construed to require the U.S. government to guarantee the bullion value in the silver dollar should its value be less than a dollar in gold. This construct made the silver dollar credit money redeemable in gold. (This construct is exactly what the pro-gold antisilverites wanted.)

Supporters of the Sherman Act believed that it would stimulate business by increasing the money supply. Moreover, it would do so without inflation.

The Treasury notes of 1890 are commonly blamed for the Panic of 1893 and the depression that followed. As more notes were redeemed for gold and the gold exported, people in the United States and Europe began to lose confidence in the U.S. dollar. They feared that the U.S. government might not continue to redeem Treasury notes and greenbacks in gold.

They saw the New York subtreasury settling its clearing house balances in greenbacks and Treasury notes instead of gold. When the Treasury began imposing a fee on exporting bars of gold taken from its vaults, which caused gold coins to be exported instead of gold bars, more confidence was lost. Banks began inserting clauses in loans and mortgages to require payment in gold.[3]

The new Secretary of the Treasury fed these doubts when he expressed concerns about being able to continue to redeem Treasury notes in gold. He stated the next day that Treasury notes would be redeemed in gold under all circumstances, but the damage done could not be undone.

Furthermore, the Treasury’s gold reserve fell below $100 million, which was considered the minimum backing for U.S. notes. When the Treasury’s gold reserve fell below $100 million, the Secretary of the Treasury, as required by law, stopped issuing gold certificates. This action fed the fear that Treasury notes of 1890 would not be redeemed in gold. This news was followed by India’s abandoning the silver standard, which sent the gold price of silver down sharply.

The Sherman Act had made a mockery of the silver dollar. Treasury notes were used to buy silver bullion, which backed the Treasury notes. This silver bullion was to be coined into silver dollars for redemption of Treasury notes. However, the Act gave the Secretary the discretion to redeem Treasury notes in gold or silver. Unless the person presenting the notes requested silver, the Secretary always redeemed them in gold. Most people expected that he would redeem them in gold.

If the Act had not given the Secretary the discretion to redeem Treasury notes in gold and had required him to redeem them in silver, the drain on the Treasury’s gold reserved would have been greatly lessened. Treasury notes would have been treated like silver certificates.

In short, people feared that the United States were going to leave the gold standard. This fear resulted in the Panic of 1893. To assuage this fear, Congress repealed the silver purchasing provisions of the Sherman Act in 1893.

Silverites saw the repeal of the purchasing provision of the Sherman Act as a deliberate attempt to eliminate silver as money in its own right. Walbert expresses the real motivation for the repeal, “It appears, therefore, that the sole object of repealing the purchasing clause of the Sherman law was for the express purpose of depriving silver of its only support, thus lowering its value, and thereby furnishing reasons against its use as money.”[4]

A year before the Panic of 1893, major New York City banks were lobbying rural banks to support them in getting the Sherman Act repealed. Coercion was used against the rural banks as the New York City banks refused to rediscount their bills unless they supported the repeal of the Sherman Act.[5] Opportunity came for the repeal when the Panic hit a year later. (How much involvement did these banks have in causing the Panic so that they could use it to get the silver purchasing requirement repealed? Some believe that the New York City bankers deliberately caused the Panic by creating a loss of confidence in their own banks. They also sent out circulars to banks and businesses forecasting economic doom if the Sherman Act was not repealed.[6])

After the Panic hit and President Cleveland convened Congress to repeal the silver purchasing provision, the New York City banks applied pressure on Southern and Western bankers to support the repeal. The New York City banks informed these bankers that they could expect no money from New York until the purchasing provision was repealed. Moreover, the New York City banks appeared to have conspired not to lend to merchants until the silver purchasing provision was repealed. They had plenty of money in their vaults for loans.[7]

The Panic of 1893 ended with the repeal of the silver purchasing provision of the Sherman Act. A depression which lasted until June 1894 followed. Another depression occurred from October-December 1895 to June 1897 (some place the end as early as October 1896). (Some economists consider the entire period 1893-1897 as a major depression.)

As a result of the Panic, business activity slackened, and the demand for money fell. Excess money accumulated in bank vaults. This excess money became available for speculation in the stock and commodity markets. This speculation led to a rise in commodity prices in the United States. Consequently, commodities were imported and gold was exported, which caused gold reserves to shrink even more. The Secretary of the Treasury was forced to pay out more currency than he received — thus, contributing to the inflation. He sought to raise the gold reserves of the U.S. government by selling bonds. However, this action created concerns that the Treasury might not be able to continue redeeming paper money in gold. People began redeeming their paper money at an accelerated rate because they feared that the U.S. government was on the verge of bankruptcy.

(The major argument for the repeal of the silver purchasing provision was to stop the drain of gold from the Treasury and the country. However, the drain continued unabated. About the repeal of the Sherman Act and the gold drain, Walbert states:
It was further stated that the repeal of the Sherman law was necessary to prevent the exportation of gold from the United States. This was another hypocritical plea to aid in the passage of the repeal, for, in a single year after that act was consummated, one hundred and twenty millions of dollars in gold were drawn out of the Treasury by that set of knaves who had urged repeal as a means to protect the gold reserve.[8])
Moreover, when the New York City banks bought the bonds, they did not buy them with their gold. They redeemed Treasury notes for gold and used that gold to buy bonds. “Therefore, while these banks were demanding issues of bonds to maintain the public credit, they utilized this very issue as a means to further deplete the Treasury of its gold.”[9]

Finally, in January 1895, the Secretary of the Treasury entered into an agreement with a syndicate of bankers led by J.P. Morgan and August Belmont, both of whom were associates of the Rothschilds. (Belmont was acting on behalf of N.M. Rothschild & Sons.) The bankers would buy $65,117,500 of bonds paid for with gold. (They bought $62,315,500.) Half of this gold was to come from Europe (this part of the agreement was later ignored, which caused a reduction in the U.S. money supply). The bankers were to use their influence to prevent the withdrawal of gold from the Treasury. These bankers made the exporting of gold unprofitable by controlling the rate of foreign exchange. This agreement improved the situation temporarily. However, the threat of war between Great Britain and Venezuela in 1895 led to more redemptions and exports of gold.[10] Finally in August 1896, the monetary system stabilized and the export of gold ceased. $33 million in gold had been withdrawn in excess of that needed for export.[11]

Were banks deliberately withdrawing gold from the Treasury to force the U.S. government to sell bonds to restock its gold reserves? An editorialist of the New York World, which was an advocate of the gold standard, believed that they were. He wrote:
The banks have no apparent use for gold.

They have absolutely no obligations of any kind, near or remote, which are payable in gold.

Nevertheless these banks are hoarding gold in large quantities, at a time when to do so is to subject the Government to heavy and needless expense.

Thus the clearing house banks of New York alone, hold over $81,000,000 in gold for which they have no use. . . .

If they should turn it into the Treasury and take greenbacks instead, they would be in every respect as well equipped as now to meet their obligations, while the Government would not have to issue another $100,000,000 of bonds, which it will cost the country $220,000.000 to pay, principal and interest.

Are they serious expecting gold to go to a premium?

Or are thy and the banks all over the country in a tacit “combine” to compel repeated bond issues for their speculative profit? These banks ought to answer these questions.[12]
As a result of the Sherman Act, between July 1890 and July 1893, $156 million in Treasury notes were issued, and $160 million in gold were exported. The gold reserve of the Treasury fell from $184 million to $84 million (October 1893). In 1893 the United States government held $150 million less gold than it would have if the Sherman Act had not been enacted. From 1890 to 1896, the net export of gold was $269 million.[13]

A criticism that the silverites hurled at President Cleveland was that the Treasury held $147,000,000 in silver dollars and bullion when he convened Congress to repeal the silver purchasing provision. At the same time money brokers and banks in New York City were buying silver dollars and silver certificates at a premium.[14] To the silverites this was proof that whatever the cause of the problem was, it was not too much silver money in circulation. This was proof that too little was in circulation. The real reason that the Treasury held so much silver was to back silver certificates and Treasury notes in circulation. (President Cleveland implied that the Treasury held this silver because people did not want silver money.)

The silverites opposed the Treasury selling bonds to replenish its gold reserve. They claimed that the Treasury had an abundantly available surplus of specie. In the Treasury was nearly $300 million in silver. The Secretary of the Treasury just needed to use silver.

Furthermore, failure to use silver violated the policy set out in the Sherman Act, which was “to maintain the two metals at a parity.”[15] It also violated the policy of the Act of 1893, which “‘declared that the efforts of the government should be steadily directed to the establishment of such a system of bimetallism as will maintain at all times the equal power of every dollar coined or issued by the United States in the markets in the payment of debts.’”[16]

The Sherman Act added a great deal of money to the U.S. economy that was not needed. It caused silver to be used domestically and gold to be exported. Without the Sherman Act, any shortage of money in the United States would have been overcome by the importation of gold.[17]

Most of the gold withdrawn from the Treasury came from the redemption of greenbacks. As the Treasury was short on gold, it was forced to payout these greenbacks as quickly as they were received. These greenbacks were soon redeemed again. Thus, the Treasury was in a cycle of having to redeem continuously the same greenbacks.

Although the greenback appeared to be the culprit causing the Treasury’s loss of gold, it was not. The real culprit was the inflation caused by the Treasury notes of 1890 and the U.S. government’s deficit.[18]

About the role of silver in the Panic of 1893, Fels writes:
How much difference did silver make? An element of speculation must enter into any judgment, but the following three statements seem justified, (1) The threat to the gold standard made the contraction more rapid and violent during the months of March through August. (2) If the silver problem had never entered the picture at all, the contraction after August would have been more rapid. This follows from the fact that money stringency bunched failures that would have occurred sooner or later anyway. (3) The silver situation probably resulted in deeper contraction by causing failures among firms and banks that could have survived if the kind of money market characteristic of cyclical contractions had prevailed. The evidence for this lies in the high ratio of assets to liabilities among the failures.

The preceding paragraph regards the silver problem as the variable, holding everything else constant. If one reverses the procedure, holding silver constant and inquiring how much difference the underlying business situation made, one might easily come to a different conclusion. The monetary and fiscal policies actually pursued, together with the banking structure, might have produced panic and severe depression in any event. The argument must be a bit arbitrary, since the result would have depended on how the President and Congress reacted to the emergency; but in the political situation of 1893 nothing short of disaster would probably have sufficed to make effective action possible. In this sense, one can assign the leading role to monetary factors, which would have caused strong firms to fail had there not been plenty of weak ones.[19]
The Sherman Act suffered the same constitutional flaws of the Bland-Allison Act. Under the Constitution, the U.S. government has no authority to issue paper money, to buy and coin silver on its own account, or to act as a deposit bank.

The silver dollars minted under the Bland-Allison Act and Sherman Act and the Treasury notes of 1890 were forms of fiat money. The silver content of the silver dollar was worth less than a dollar. The U.S. government bought silver on its own account and issued the silver coins. It decided how many to issue instead of the markets.

Opponents of silver blamed silver for the economic problems of the 1880s and especially the 1890s. They saw silver as a threat to the gold standard.

Friedman and Schwartz show that “until 1886, silver grew fairly slowly and the greater part of the increase in high-powered money consisted of gold. From then until 1893, silver grew rapidly, replacing gold almost entirely as a source of additional high-powered money. Thereafter, both silver and gold as well as total high-powered money fluctuated about a nearly constant level.”[20]

They continue:
From 1879 to 1893, the total of silver and Treasury notes of 1890 out-side the Treasury grew some $500 million, which is a measure of the strength of the silver forces. These purchases added to high-powered money and so contributed to an expansion of the stock of money. This is the effect that contemporaries pointed to as constituting a threat to the gold standard. But it is clear that the direct effect of the silver purchases on the stock of money did not, in fact, threaten the maintenance of the gold standard. In the first place, the growth in silver currency was offset to some extent by a reduction in national bank notes outstanding, a reduction enforced by debt retirement. In the second place, and more important, total high-powered money grew from 1879 to 1893 by $740 million or by $240 million more than the silver currency. In the absence of the silver purchases, the gold stock — or perhaps some other component of the money stock — would have risen more than it did.[21]
The threat to the gold standard came primarily from the actions of foreigners. Friedman and Schwartz note:
The threat to the gold standard came from the effects of the silver purchases on the willingness of foreigners to hold dollars. This evidence of the power of the silver forces discouraged the inflow of capital or produced speculative capital outflows of substantial magnitude and kept alive the possibility of very much larger outflows. The smaller inflows or actual outflows made for a lower rise in high-powered money than would otherwise have occurred, so that in their absence the growth in silver currency would have been a still smaller fraction of the total growth in high-powered money. Together with the measures taken in fear of potential outflows, they enforced monetary deflation to produce the requisite adjustments in the balance of payments. Paradoxically, therefore, the monetary damage done by silver agitation was almost the opposite of that attributed to it at the time. It kept the money stock from rising as much as it otherwise would have, rather than producing too rapid an increase in the money stock.[22]
After the 1896 election and the defeat of the silverites, the clamor for the free coinage of silver faded away as the economy improved. Prices rose as the world gold stock grew. In 1900, the free coinage of silver and the silver standard was finally killed with the Gold Standard Act.

1. Richard T. Ely, An Introduction to Political Economy (Revised edition; New York, New York: Eaton & Mains, 1901), p. 188. White, p. 204.

2. Davis Rich Dewey, Financial History of the United States (1922; reprint. New York, New York: Logmans, Green and Co., 2005), p. 438.

3. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), p. 168.

4. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; reprint. Merlin, Oregon: Walter Publishing & Research, 1997), p. 288.

5. Ibid., p. 281.

6. Ibid., pp. 281-282, 285-286.

7. Ibid., pp. 300-301.

8. Ibid., p. 306.

9. Ibid., p. 335.

10. 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. 356-359. Walbert, pp. 337-340. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), pp. 211-212.

11. White, p. 211.

12. Walbert, pp. 333-334.

13. Johnson, pp. 358-359.

14. Walbert, p. 273.

15. Dewey, p. 452.

16. Ibid., p. 452.

17. White, p. 209.

18. Johnson, p. 359.

19. Rendigs Fels, American Business Cycles 1865-1897 (Chapel Hill, North Carolina: The University of North Carolina Press, 1959), p. 188.

20. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), pp. 128, 131.

21. Ibid., p. 128.

22. Ibid., pp. 131-132.

Copyright © 2010 by Thomas Coley Allen.

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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.

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.

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Monday, September 5, 2011

The Silver Dollar 1873–1900 – Part 1

Introduction and Coinage Act of 1873
Thomas Allen

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

Many people claim that sliver was demonetized in 1873 when Congress enacted the Coinage Act of 1873. This claim is not true. Congress did not demonetize silver. It ended the silver standard and took the first step in demonetizing the dollar.

Silver continued to be used as money until 1970. Silver was used as money in subsidiary coins (dimes, quarters, and halves) under the greenback standard between 1873 and 1879. It was used as subsidiary coins under the gold standard between 1879 and 1933. Under the federal-reserve-dollar standard, it was used between 1933 and 1964 for dimes and quarters and until 1970 for halves. In 1986 Congress again authorized silver as money when it ordered the mint to coin one-ounce silver eagles, which have a legal tender value of one dollar.

Between 1878 and 1900, silver was used as money in its own right in the form of the silver dollar. However, unlike the silver dollar before 1873, which was commodity money, the silver dollar between 1878 and 1900 was fiat money. Congress and the Secretary of the Treasury decided how many silver dollars to issue. Moreover, the value of silver in a silver dollar was less than its monetary value.

Under the silver commodity monetary standard, the people decide directly how many silver dollars are needed by the quantity of silver that they bring to the mint for coinage. Furthermore, the value of silver in the coin equals its monetary value. If the value of silver in coins rises above the coin’s monetary value, coins are melted until the coin’s monetary value equals the value of the silver that it contains. Conversely, if the value of silver in coins drops below the monetary value of the coin, people will bring silver to the mint for coinage until the two values are brought back into equilibrium.

Those who claim that Congress demonetized silver in 1873 agree with Plato, the German economist George Knapp, and the American Monetary Institute: Money is a legal fiction. Money is whatever the law declares to be money. It is an abstraction that has no value beyond what the law gives it. The material of which it is made is irrelevant and is whatever the government arbitrarily chooses for its own benefit. All this may be true for fiat money, which the government’s military might protects and forces on the people. It is definitely not true of genuine commodity money.

This notion that governmental decree gives money its value was illustrated during the debate on the Bland-Allison bill. Some Congressmen believed that Congress could by edict raise the value of silver. If Congress decreed that 371.25 grains of fine silver had the value of 23.22 grains of fine gold, the market value of silver would rise such that 16 ounces of silver would have the value of one ounce of gold. Senator Allison’s comment illustrates this ignorance or arrogance: “Legislation gives value to the precious metals, and the commercial value simply records the condition of Legislation with reference to the precious metals.”[1] Congress’ failed attempts to decree the value of 16 ounces of silver to equal one ounce of gold should be enough to convince anyone that the government cannot regulate the value of money by edict or otherwise. Unfortunately, it has not.

Those who claim that the law gives money its value believe that the U.S. government can issue an irredeemable aluminum disk with “Congress and the President of the United States decree that this coin is equal to and identical with one ounce of gold” stamped on it automatically has the value of one ounce of gold. A person can go to a gold bullion dealer and buy one ounce of gold with this aluminum coin. They actually believe that the bullion dealer would accept the aluminum coin in exchange for one ounce of gold without the government forcing him to accept it under the penalty of law. (If a governmental decree really does give money its value, then no force should be necessary for it to circulate at the decreed value. If force has to be used, then the government’s threat of death and not its proclamation makes the coin acceptable at the decreed value.)

Silver was not demonetized in 1873. The Coinage Act of 1873 was the first step toward demonetizing the dollar. In 1933, the second step occurred with the end of the gold-coin standard. The final step took place in 1971 when the gold exchange standard ended.

Constitutionally speaking, the United States is still on the silver standard though they statutorily abandoned that standard in 1873. The “dollar” as used in the Constitution means the weight of silver in the Spanish milled dollar. Without amendment of the Constitution, any other definition of the dollar is unconstitutional.

With this introduction, we will now investigate the use of silver as money between 1873 and 1900. Four major laws affecting silver as money were enacted between 1873 and 1900. They were the Coinage Act of 1873, the Bland-Allison Act in 1878, the Sherman Act or the Silver Purchasing Act of 1890, and the Gold Standard Act of 1900.

Coinage Act of 1873
With the Coinage Act of 1873, which has often been referred to as the “Crime of 1873,” Congress ended the free coinage of silver, which ended the silver standard. It changed the definition of the dollar, the unit of value, to 25.8 grains of standard gold or 23.22 grains of pure gold. Thus, Congress statutorily changed the definition of the dollar from its constitutional meaning of the average weight of silver in the Spanish milled dollar, which Congress found to be 371.25 grains of fine silver. Furthermore, the mint ceased coining silver dollars. (As the Act did not specifically authorize the coinage of silver dollars, it prohibited their coinage.) This action ended the bimetallic silver-gold system and placed the United States on a monometallic gold standard. (Many contend that the United States were on the fiat greenback-dollar standard between 1862 and 1879. So in 1873 the country was not on a gold or silver standard or a bimetallic gold-silver system. The country did not return to a specie standard until 1879 when U.S. notes, greenbacks, became redeemable in gold.) Moreover, this act confused monetary matters by retaining all monetary laws previously enacted even if they conflicted with the act. Gnazzo argues that because of this retention clause, the Coinage Act of 1873 did not demonetize silver. The United States were technically (statutorily) on the silver standard and practically (in usage) on the gold standard.[2]

Laughlin supports Gnazzo’s claim. Laughlin writes:
It is, moreover, possible that the silver dollar was not “demonetized” in 1873, in spite of the prevailing impression to that effect. The legal-tender power of the silver dollar was not taken away by this measure. The coinage laws had not been revised since 1837, and in the act of 1873 occasion was taken to drop out the silver dollar from the list of coins which were thereafter to be issued from the Mint.[3]
Under the Act, silver dollars minted before 1873 were full legal tender in unlimited amounts. The Act merely prohibited the minting of additional silver dollars. (In the Revised Statutes of 1874, all existing silver coins, including silver dollars, were limited to $5.00 as legal tender.[4] Thus, this law limited the legal tender power of existing silver dollars. It did not affect other silver coins as the Coinage Act of 1873 already restricted their legal tender power.)

John J. Knox, Comptroller of the Currency, originally drafted and sent the bill along with his report to Congress in 1870. His report noted that the proposed bill eliminated the silver dollar. He recommended replacing the silver dollar as the standard unit of account with the gold dollar.

Most Congressmen and the public consider the bill as merely a minor revision or recodification of the existing coinage laws. They did not view it as making any significant changes. For many years, the silver dollar had not been in general circulation and for most years only a small number (less than 200,000) were minted. When Congress enacted the Coinage Act of 1873, the metal in the silver dollar was worth slightly more than a dollar in gold.

At that time the fiat greenback (U.S. note) functioned as the monetary standard. Except on the West Coast, gold was not being used as money. Silver was used only in subsidiary coins. As the bill did not address the greenback, most people gave the bill little thought.

Although Congress gave the bill some debate, it had little interest in it. Both houses passed the bill with almost no opposition. Except the silver dollar, the bill limited the legal-tender value of silver coins to $5.00. It did not authorize the coinage of silver dollars. However, it did authorize the free coinage of trade dollars. A trade dollar contained 420 grains of standard silver and had a legal-tender limit of $5.00. It was intended to be used for trade with the Far East.

Because of a rise in the value of U.S. notes and a decline in the value of silver, trade dollars began circulating domestically. Thus, the silver standard was reestablishing itself. In 1876, Congress stripped the trade dollars of its legal tender status. Apparently, the money interest did not want any competition from silver. Congress ended the minting trade dollars in 1878 although a few were minted between 1879 and 1885.

Opponents of the Act asserted that the bankers and others who owned U.S. government bonds wanted to eliminate bimetallism and the silver standard to drive up the value of gold. Thus, the money that they received in payment of interest and for their bonds at maturity would have greater value.

Moreover, they claimed that the elimination of the silver standard reduced the money supply and caused prices to fall. Thus, an injustice had been imposed on farmers, whose crops had lost half their value.

Even if the free coinage of silver had remained, prices still would have fallen between 1873 and 1893 although probably not as much. In each year following 1873 until 1894, the purchasing power of silver was greater than it was in 1873 (see Table A-1 in the appendix [Editor's note: This table has not been reproduced.]). The repeal of the purchasing clause of the Sherman Act (v.i.) and India’s ending the free coinage of silver in 1893 probably account for the significant drop in the value of silver after 1893.[5]

An important factor to the decline in prices during this era was the great increases in productivity caused by technological advances. Increasing productivity may have been more important than changes in the monetary system.

The Act’s opponents blamed the panics and depressions between 1878 and 1896 on a lack of money caused by abandoning the free coinage of silver. In American Business Cycles 1865-1897, Rendigs Fels argues that things other than money supply contributed to these panics and depressions. Excessive credit expansion and unwise capital investments are two of them. Other causes of depressions are a lack of investment opportunities, too much inventory, and natural cycles (e.g., Kondratieff, Juglar, and Kitchen).

Some claim that this Act was passed in secret. Several Congressmen who voted for this law claimed that they did not know for what they voted; they were deceived. Even President Grant, who signed it into law, claimed that he did not know what he was signing.

As for the secret enactment, Congress discussed the bill for three years. The proceedings were published in the Congressional Globe. The bill was printed 13 times. Congress discussed the omission of the silver dollar. Also, debated was replacing the silver standard with the gold standard,[6] that is ending the free coinage of silver and changing the definition of the dollar from 371.25 grains of fine silver to 23.22 grains of fine gold or from 412.5 grains of standard silver to 25.8 grains of standard gold.

Nevertheless, deception and parliamentary maneuvering appeared to have been used to get the bill enacted. Its supporters presented it as a minor bill that just recodified and cleaned up the monetary laws. It did not make any real change in the monetary system. It was presented in a way that a new silver dollar would be minted with reduced weight. The impression was given that the weight was to be reduced so that it would circulate. The real purpose of reducing the weight was to make it a subsidiary coin. (Later versions of the bill omitted the silver dollar altogether.) Parliamentary maneuvering was used to prevent the bill to be voted on from being read.

Although the Coinage Act of 1873 was not enacted secretly, deception was used in its passage. Apparently, a group of powerful men expected the price of silver to fall because European countries were beginning to move from the silver standard to the gold standard or to abandon bimetallism in favor of the monometallic gold standard. They also saw the supply of silver increasing from the newly discovered silver in the West. Senator Sherman, an ardent foe of silver, was their point man in the Senate. He was instrumental in getting this bill through Congress before the gold price of silver fell. Without the Coinage Act of 1873, the United States would have reverted to silver money.

About this law, Rothbard, who favors the monometallic gold standard that it brought about, writes:
It should be recognized that the silverites had a case. The demonetization of silver was a “crime” in the sense that it was done shiftily, deceptively, by men who knew that they wanted to demonetize silver before it was too late and have silver replace gold. The case for gold over silver was a strong one, particularly in an era of rapidly falling value of silver, but it should have been made openly and honestly. The furtive method of demonetizing silver, the “crime against silver,” was in part responsible for the vehemence of the silver agitation for the remainder of the century.[7]
Except the silver miners, most of the silverites were originally greenbackers. They favored low quality depreciating money. Originally, the inflation movement was urban. Only later in the 1890s did the agriculturalists join it.

When greenbacks were obviously going to be redeemed in gold at par (one dollar in greenbacks is redeemed in one dollar of gold), they turned to silver. By the mid 1870s, silver had fallen in value in terms of gold. The market ratio had fallen to around 18 to 1 (18 ounces of silver had the value of 1 ounce of gold). If free coinage of silver were allowed at the legal ratio of 16 to 1, silver coins would have driven gold coins out of circulation. More important, the dollar would have less purchasing power. This depreciation was for the benefit of debtors. It allowed debtors to pay their debts with cheap money.

An argument that the proponents of the Coinage Act of 1873 used was that the silver dollar had not circulated since 1853 when the market value of silver in a silver dollar became worth more than a dollar. Perhaps only a few silver dollars did circulate between 1853 and 1873, but a large quantity, 5,413,249 silver dollars, was coined. Many of these coins still exist today.

Another argument that the proponents used (after the fact), was that without the Coinage Act of 1873, the United States would have been on the silver standard by the time redemption of the greenback began in 1879. This is true. According to Laughlin, “15 percent of all our contracts and existing obligations would have been repudiated.”[8] This is questionable. Laughlin seems to be using the gold value (price) of silver to derive his number. However, excluding contracts requiring payment in gold, most of these debts were made with the greenback and not gold. Many were made at a time when a greenback dollar was worth less than 90 cents in gold.[9] Thus, he greatly overstates the repudiation.

The opponents of the Act used the opposite argument to support their opposition. Debtors paid loans, many of which had not been made in gold, in gold that had more value when the loan was paid than when the loan was made. (Between 1862 and 1875 when the Resumption Act was enacted, the gold price of greenbacks averaged between 49 and 90 cents. Thus, using Laughlin’s reasoning creditors received a 13 percent bonus above what was due.)

If Congress had not ended the free coinage of silver in 1873, the country would have been on the silver standard in 1879. Greenbacks would then have been redeemable in silver instead of gold. Instead of rising in value toward gold after the greenback would obviously be redeemable in specie, it would have approached the value of silver.

Following Laughlin’s reasoning, almost no repudiation of debt would have occurred if the country were on the silver standard. From 1874 to 1877, the greenback was closer in value to silver than to gold.

In 1873, the gold price of the greenback was 88 cents as compared to the gold price of the silver dollar of $1.01. In 1874, the greenback was 90 cents, and the silver dollar was 99 cents. When the Resumption Act passed in 1875, the greenback stood at 87 cents and the silver dollar at 96 cents. For 1876, 1877, and 1878, the respective prices were 90 cents, 95 cents, and 99 cents for the greenback and 90 cents, 93 cents and 89 cents for silver. The noticeable disparity between the greenback and the silver dollar in 1878 results from the greenback becoming redeemable in gold at par on January 1, 1879. If the country were returning to the silver standard instead of the gold standard in 1879, the gold price of the greenback would have been at or below 93 cents in 1877 and 89 cents in 1878.

When Congress ceased the free coinage of silver, it defied the Constitution. The Constitution perceived the dollar to be the same as the Spanish milled dollar. The dollar contained the weight of silver of the average Spanish milled dollar.

Abandoning the silver standard with a bimetallic gold-silver system for a monometallic gold standard made the concentration and centralization of metallic money into the hands of the government and banks easier. This goal was fully achieved when President Franklin Roosevelt stole the people’s gold in 1933.

With the depression following the Panic of 1873, debtors began clamoring for a cheap dollar. Congress refused to increase the supply of greenbacks. Silver miners discovered that they could no longer get their silver coined, which was a major market for their product. Silver miners, debtors, greenbackers, and populists united in agitating for the free coinage of silver. Out of this agitation came the Bland-Allison Act.

1. J. Laurence Laughlin, The History of Bimetallism in the United States (New York, New York: D. Appleton and Company, 1886), p. 197.

2. Douglas V. Gnazzo, “Gold & Silver: The Story Behind the Story,” July 2006,, July 3, 2006.

3. Laughlin, p. 93.

4. Ibid., p. 94.

5. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest (Revised edition; Boston, Massachusetts: Ginn and Company, 1905), p. 252.

6. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), pp. 213-218.

7. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), p. 158.

8. Laughlin, p. 93.

9. Thomas Allen, “Analysis of Charles Norburn’s Monetary Reforms as Presented in Honest Money” (Franklinton, North Carolina: TC Allen Company, 2009), pp. 6-7. Johnson, p. 279.

Copyright © 2010 by Thomas Coley Allen.

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