America’s Adulteration of the Gold Standard

America’s Adulteration of the Gold Standard

Thomas Allen

    Between 1879, when the United States returned to the gold standard, and 1914, when World War I began, was the peak of the gold-coin standard. However, a pure gold coin standard did not exist. Perhaps the United States had the most adulterated gold standard among the major countries. The United States adulterated the gold standard with various forms of fiat money.
    In 1789, Congress adopted a silver standard with a bimetallic silver-gold system. It defined the dollar as 371.25 grains of fine silver. It fixed the silver-to-gold exchange rate at 15 to 1 (the value of 15 ounces of silver equaled the value of 1 ounce of gold).  This ratio overvalued silver relative to gold. Thus, gold coins did not circulate.
    To encourage the circulation of gold coins, Congress changed the silver-to-gold ratio from 15 to 1 to 16 to 1 in 1834. It did so by reducing the weight of gold in a dollar to 23.20 grains of fine gold from 24.75 grains. Three years later it changed the weight of gold in the dollar to 23.22 grains of fine gold. (Thus, a $10 gold coin with 232.2 grains of fine gold was equivalent as legal tender to 10 silver-dollar coins with a total of 3721.5 grains of fine silver.) These changes placed the United States on a de facto gold standard. As the dollar continued to be defined as 371.25 grains of silver, the United States remained on a de jure silver standard. (They remained of a de jure silver standard until 1900 when Congress changed the definition of the dollar to 23.22 grains of fine gold.)
    In 1837, Congress changed the gold content of the dollar to 23.22 grains. It remained at this weight until 1933 when the United States abandoned the gold standard.
    In 1863, Congress enacted the National Banking Act. A key part of the Act was requiring banks charted under the Act to secure their bank notes with U.S. government bonds. (Later bank notes of State-chartered banks were taxed out of existence.) Thus, the Act guaranteed a market for U.S. government bonds. As a result, bank notes represented U.S. government bonds instead of the gold value of goods on which real bills of exchange were drawn — the real bills doctrine. Bank notes did not increase or decrease in response to the market demand for them pursuant to the real bills doctrine. They increased and decreased in response to the expansion and contraction of U.S. government debt. (As hard as it is now to believe, there were times when the U.S. government’s debt actually decreased.)
    The first major adulteration came in 1862 when Congress authorized the issue of legal-tender government notes, called U.S. notes and nicknamed greenbacks. These notes immediately became undervalued relative to gold. Thus, the United States quickly converted to the U.S. note standard.  (The West Coast remained on the gold coin standard. In the East, gold traded at a premium to U.S. notes. In the West, U.S. notes were discounted against gold.)
    After reducing the quantity of U.S. notes during the late 1860s and early 1870s, Congress fixed the quantity of U.S. notes at $346,681,000. It required the Secretary of the Treasury to maintain this level.
    Pursuant to an 1875 law, U.S. notes became redeemable at par with gold on January 1, 1979. In anticipation of redemption, the U.S. government acquired enough gold to back about a third of the U.S. notes.
    After U.S. notes became redeemable in gold, U.S. notes remained a fiat currency for two reasons. First, the government instead of the markets determined the quantity issued. Second, they were never fully backed by gold.
    The next major adulteration came in the form of the silver dollar. With the Coinage Act of 1873, Congress ended the free coinage of silver. (This Act became known as the Crime of  ’73.) Ending the free coinage of silver ended bimetallism in the United States. However, under the Act, silver dollars continued to be full legal tender in unlimited amounts. (No rational person would have used silver dollars to pay a debt when this law was enacted. Then the silver content of a silver dollar was worth more than a dollar in gold, which was worth more than a U.S. note dollar.)
    Soon after the enactment of this law, the value of silver began to fall relative to gold. Thus, if the free coinage of silver had remained, the United States would have returned to the silver standard.
    Because of the fall in the value of silver, the sliver mining interest, greenbackers (people who wanted the country to remain on the irredeemable U.S. note standard), populists (most of whom came out of the greenbackers), and debtors agitated for the free coinage of silver at the 16 to 1 ratio. In response, Congress passed the Bland-Allison Act in 1878.
    The Bland-Allison Act ordered the Secretary of the Treasury to buy silver bullion and coin it into silver dollars. It declared the silver dollars legal tender. Moreover, they were not directly redeemable in gold. It required the Secretary to buy between $2 million and $4 million of silver bullion each month for coinage.
    Although each of these silver dollars contained 371.25 grains of silver, they were fiat money — albeit expensive fiat money. Instead of the markets deciding the quantity of silver dollars to issue, Congress and the Secretary of the Treasury decided. Furthermore, the monetary value of a silver dollar exceeded the value of its silver content. Unlike silver dollars coined under free coinage, these silver dollars were the property of the U.S. government. (Silver dollars coined under free coinage were the property of the person presenting the silver bullion for coinage.)
    In 1890, Congress revised the Bland-Allison Act with the Sherman Act, also called the Silver Purchasing Act of 1890. The Sherman Act created a new fiat money: legal-tender Treasury notes of 1890. It ordered the Secretary of the Treasury to buy 4.5 million ounces of silver bullion each month at the market price with Treasury notes until silver reached $1.29 per ounce. This was the price at which 16 ounces of silver had the same value as 1 ounce of gold, i.e., the 16 to 1 ratio. The purchased bullion was coined into silver dollars as necessary to redeem the Treasury notes. However, the Secretary had the discretion to redeem them in gold. In 1893, Congress repealed the silver purchasing provision of the Sherman Act and by that the issue of Treasury notes.
    With the enactment of the Gold Standard Act in 1900, Congress placed the United States formally and clearly on the gold standard. It defined the dollar as 23.22 grains of gold. It required the redemption of U.S. notes and Treasury notes of 1890 in gold only. Thus, it converted Treasury notes into government notes redeemable in gold. Treasury notes were to be replaced gradually with silver certificates. As silver dollars became convertible in gold on demand, the Act made the silver dollar a subsidiary coin like dimes, quarters, and half-dollars. However, silver dollars remained full legal tender. However, even with the enactment of the Gold Standard Act, the silver dollar because of its legal-tender status remained a fiat currency along with the U.S. note.
    The monetary system of the United States began as a bimetallic silver-gold system with the dollar defined as 371.25 grains of silver. Between 1862 and 1879, the United States were on the fiat U.S. note monetary standard. As long as the United States remained on the gold standard, the U.S. note and the silver dollar adulterated the gold standard. The United States never operated on a pure gold coin standard.

Copyright © 2015 by Thomas Coley Allen.

Poor on Ricardo

Poor on Ricardo

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on David Ricardo. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    David Ricardo (1772-1823) was a British economist. Included among his major works are The High Price of Bullion: A Proof of the Depression of Bank Notes (1809), Proposals for Economical and Secure Currency (1816), and Principles of Economy and Taxation (1817). When Parliament returned Great Britain to the gold standard after the Napoleonic Wars, it relied on his works. It also relied on his works when developing banking and monetary laws in the decades that followed.
    Ricardo argued that a currency without a specific standard was a chimera. He favored a monometallic silver standard. Also, he preferred the bullion standard to the coin standard. That is, banks redeemed their bank notes in standard bullion bars instead of coin. Thus, people would be forced to make small payments with paper money. Ricardo was a proponent of the quantity theory of money and believed that the value of money can be properly maintained by regulating its quantity.
    Ricardo believed “that value was not a necessary attribute of money. . . . [M]oney became such by virtue of the insignia of government; that its value was in ratio to its quantity, — that the most worthless pieces of paper, or the most debased coin, might be raised to the highest pitch of value simply by limiting their amount” (p. 221). That is, the government can declare anything to be the medium of exchange, give it a specific value, and maintain that value by properly regulating its quantity. [Menger proves the falsity of this notion. Gold and silver were used as purchasing media before any government insignia was stamped on it. Gold and silver have been used throughout history, and even today, as purchasing media without a government insignia stamped on it. When a government debased its coins, history shows that the value of the coin falls until it reaches the value of its gold or silver content. Therefore, the metal content, and not governmental decree, fixes the value of the coin.]
    Poor quotes from Ricardo’s Principle of Political Economy and Taxation:

        The quantity of money that can be employed in any country must depend upon its value. . . . A circulation can never be so abundant as to overflow; for, by diminishing its value, you will in the same proportion increase its quantity, and, by increasing its value, diminish its quantity. . . .
        While the State coins money, and charges no seigniorage, money will be of the same value as any other piece of the same metal of equal weight and fineness; but, if the State charges a seigniorage for coinage, the coined piece of money will generally exceed the value of the uncoined piece of metal by the whole seigniorage charged, because it will require a greater quantity of labor, or, which is the same thing, the value of the produce of a greater quantity of labor, to procure it.
        While the State alone coins, there can be no limit to this charge of seigniorage; for, by limiting the quantity of coin, it can be raised to any conceivable value.
        It is on this principle that paper money circulates: the whole charge for paper money may be considered as seigniorage. Though it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of coin or of bullion in that coin. On the same principle, too, namely, by a limitation of the quantity, a debased coin would circulate at the value it should bear if it were of the legal weight and fineness, not at the value of the quantity of metal which it actually contained. . . .
        [I]t will be seen that it is not necessary that paper money should be payable in specie to secure its value: it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be its standard. If the standard were gold of a given weight and fineness, paper might be increased with every fall in the value of gold, or, which is the same thing in its effects, with every rise in the price of goods. . . .

    Poor argues against Ricardo’s assertion that the government can charge whatever seigniorage that it wants to. For example, if the government charged 9 ounces of gold to coin 1 ounce, Ricardo believes that people will still bring gold to be coined because they need coins, or money, in commerce. Poor argues that people will cease bringing their gold to be coined. Instead, the metal will be privately assayed and will pass by weight. “A person possessing bullion might wish to sell it for use in the arts, or for the purchase of foreign commodities; for which it would be received at its full value” (p. 223). Noting that a lack of coinage may cause inconveniences, he adds that “great commercial communities existed long before coinage was invented” (p. 223). Furthermore, “[t]he inconvenience resulting from the want of coinage, relative to the magnitude of the transactions taking place, would be much less now than before the invention or use of symbolic money; for the reserves necessary for the conversion of such currency may be in the form of bullion, nearly as well as in that of coin. They are now largely held in bullion” (p. 223). Disagreeing with Ricardo about the government’s insignia giving money value, Poor writes, “[G]overnment can no more create values by its insignia without an obligation, than the Alchemist could create gold out of curious and fanciful combinations of the baser metals” (p. 223). [Moreover, history shows that under the gold standard, bank notes without the government’s insignia circulated at par with gold coins as long as they were convertible in gold coin on demand.]
    Ricardo acknowledges that paper money has no intrinsic value. However, according to Ricardo, its value can be maintained by properly controlling its quantity. Poor argues that governments cannot be trusted with the issuance of paper money. As history shows, they will always abuse that power. Therefore, Poor argues that paper money should always be issued by private parties or bankers (p. 224). As long as bankers have to convert their paper money to species on demand, their issue of paper money will be regulated. Any excess issue of paper money, i.e., in excess of the real demand of the domestic markets, people will convert to gold for use in foreign markets. [A situation like this occurred in the United States in the early 1890s. In response to political pressures, the U.S. government had left a large quantity of U.S. notes, greenbacks, in circulation following Lincoln’s war to suppress Southern independence. Gold backed less than half these notes. Also, to satisfy the silver interest and the inflationists, i.e., the “easy money” folks, Congress enacted the Sherman Act. This Act required the U.S. government to buy large quantities of silver with legal tender Treasury notes of 1890. These notes were redeemable in gold or silver at the discretion of the Secretary of the Treasury. He chose to redeem them in gold. People began redeeming U.S. notes and Treasury notes of 1890 for gold, which they exported. The Secretary of the Treasury could retire Treasury notes when they were redeemed. However, the law required him to reissue U.S. notes that were redeemed. The reissued U.S. notes were redeemed for gold, thereby creating a vicious cycle draining the treasury of its gold. The crisis ended with the repeal of the silver purchase part of the Sherman Act and the sale of bonds for gold to European bankers to replenish the treasury’s gold stock. Nevertheless, this crisis helped to precipitate the depression of the 1890s.]
    “Convertibility of paper at all times into coin . . . [is] the only certain test of the propriety of its issues” (p. 224). Nevertheless, much more than convertibility is needed to ensure the propriety of issue. Poor writes that “convertibility of issue may have no relation whatever to propriety of issue. A person may be able to pay a bill he has uttered; but by doing so be may strip himself of every dollar he possesses. The question, therefore, far in advance of convertibility, and which is the only one important to be considered, is the manner in, or cost at which, convertibility is sought to be secured” (p. 224). The solution to the propriety of issue is the real bills doctrine: “Where bills are discounted, obligations are mutually created; and, so long as such bills represent merchandise entering into consumption, their payment is certain to return to the Bank its obligations, without the withdrawal of any considerable portion of its means. So long as such rule is followed, so long as a currency is issued only in the discount of bills representing merchandise, there can be no inflation; nor is there any danger that the Bank issuing it will be called upon for any considerable amount of coin” (p. 225).
    When a bank ceases discounting bills and uses its bank notes to buy government securities, the result is often bankruptcy and financial crisis. The only way to avoid this outcome is some provision to retire bank notes without any act of the issuer. With financial papers like government securities, no such mechanism exists. Poor states, “The only proper mode of issuing a currency is that which shall provide for its retirement automatically, by the operation of the laws of trade, — by the debtors of the Bank, instead of the Bank itself” (p. 225).
    About government notes, Poor declares, “A government currency, which may at first have a value in coin nearly equal to its nominal value, may become wholly valueless; but its price at any given time is to be accepted as its value. In other words, money will no more be taken but at its value than any other kind of merchandise or property” (p. 225). Yet, Ricardo “held value to be no attribute of money; but that it was an instrument of commerce precisely in the same manner that scales or balances are instruments of commerce, the value of both depending upon their quantity” (p. 226). Poor responds, “If Ricardo be correct, then provided there be but one shilling in the world, and that a debased one, its value might be equal to all the money in it at the present time. If he be correct, then the debasement of a currency, provided its nominal amount be not increased, is the wisest possible policy both for princes and people” (p. 226). As shown, Poor strongly disagrees with Ricardo.
    Ricardo preferred the government to issue the country’s paper money if it would not abuse this power. However, governments are more likely to abuse this power than a banker. Redemption of notes to gold would limit the ability of banks to expand the money supply. Governments are more likely to suspend the redemption of government notes than they are of bank notes. Nevertheless, he saw no problem with an independent government commission issuing the country’s currency as convertibility would not be suspended, so he believed (pp. 226-227) [Ricardo’s logic is flawed. First, no government body is truly independent. Like all government agencies, politics control it. The legislature can withdraw independence as quickly as it grants it. Furthermore, the French made similar arguments before they introduced the assignat, and that turned out to be a disaster.]
    Ricardo praised paper money and preferred not to see gold and silver coins circulated. Circulating coins were a waste of resources and much more expensive than paper. He restricted the conversion of paper to gold to large bars of gold. Redemption should be in bullion and not in coin (p. 230).
    Poor writes, “Ricardo would maintain the value of paper money by having it represent gold, but would prevent a resort to gold by throwing inconveniences in the way of its use. He assumed, of course, that only a small amount of gold would be required to meet occasional calls; for nothing would be gained, provided the amount of gold to be held in reserve equaled the amount of notes issued. But, if it were optional with the public whether or not they would receive the notes of the Bank, they would not receive them, if they could get nothing for them but bullion” (pp. 281-282). Thus, Ricardo based his monetary argument on the assumption that the public wanted currency, a medium of exchange, instead of capital. Also, he believed that if people were free to choose between coin and paper, they would choose the more expensive (to manufacture) coin over paper. Therefore, they should be denied the choice of coin. According to Ricardo, “a perfect currency would be realized; costing nothing in itself, yet always at the standard of coin” (p. 232)!
    Poor concludes his discussion of Ricardo with the following critique:

Ricardo possessed in an eminent degree the gift of money-making, and undoubtedly ranked high as a man of affairs. He, however, no sooner took up his pen than he seemed instantly discharged of all reasoning faculty. In the same sentence, he could affirm propositions exactly opposed the one to the other, without the least perception of their incongruity. Never was there a more striking instance of confident assumption on the one hand, and fatuity on the other. To add to the strangeness of the picture, he occupies the front rank among the Economists as an original and profound thinker, — one who exploded many of the radical errors, who placed on firm foundations some of the most important truths of Political Economy, and to whom it is more indebted than to any writer but Adam Smith. . . . From his example, it would seem that no mind is capable of discussing the subject of money, and of preserving, at the same time, its balance and integrity. (pp. 232-233).

    Poor adds that “in the matter of money, the most groundless and absurd theories are often found intimately associated with the greatest practical talent for its accumulation and administration. Life nowhere else presents an example of such complete disassociation between the practical and speculative sides of our nature” (p. 233).

Copyright © 2016 by Thomas Coley Allen.

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Should the Silver Standard Accompany the Gold Standard?

Should the Silver Standard Accompany the Gold Standard?

Thomas Allen

    Several important reasons exist to have the silver standard accompanying the gold standard. However, the old bimetallic standard with a legally fixed ratio or exchange rate between the two metals should not exist. The markets should determine the exchange rate between the two.
    A silver standard easily accomplishes what gold cannot. Precious metal coins should be in a convent denomination sufficiently small enough to pay the daily wage of a common labor or migrant field worker with one or more coins.
    The daily wage of a common laborer is less than a pennyweight of gold. Two pennyweights is about the practical limit of the minimum size of a gold coin. A two-pennyweight coin is about the size of a dime.
    Silver coins can easily fill this void. In silver, a day’s wage for a common laborer would be a little more than 20 pennyweights (one ounce) of silver.
    A common laborer should be paid in true, full-bodied, full-weight, money, and not in token coins or credit money, which is what he would receive under the gold standard. He should be able to carry true, full-bodied money in his pocket and have true money to spend if he so desires, and not just token coins or credit money. A silver standard provides him this service.
    Another advantage of having both standards is that one metal, silver, provides convent coins for small value. The other, gold, provides coins for large value. The tendency would be to price cheap items in silver and expensive items in gold. Sliver coins are likely to circulate more than gold coins.
    Historically, silver has been better suited for trade (buying and selling of goods and services), and gold, for commerce (large-scale exchanges of goods). Silver seems more suited for industrial and agricultural areas, and gold, for the commercial and financial arenas. However, the markets should determine which products and services are priced in terms of silver and which in terms of gold. To allow coins of both metals to circulate freely gives the people the advantage inherent in both metals.
    If only gold were money, then token and paper money would be needed to buy most items. Most common items are priced below two pennyweights of gold. Gold coins could not be used to buy these items individually, or if used, the change would not be in gold coins. However, if silver were money, silver coins (as silver money and not as subsidiary coins for gold) could be used to buy most of these items. Some items would be priced below two pennyweights of silver, and token coins would be needed to buy then individually.
    Perhaps the most important reason for having both the gold and silver standards is that together they make replacing commodity money with fiat money more difficult. When the silver standard accompanies the gold standard, it protects the gold standard from deteriorating into fiat currency. “Gold must be priced in something other than gold, otherwise every sale of gold would have to end up as exchange of amounts of gold. . . .”[1] To maintain an honest monetary system, this something has to be a monetary metal in its own right. Silver is the most appropriate commodity money for this purpose. When both metals are money, each metal in the form of bullion can be priced in terms of the other metal. Otherwise, under a monometallic standard, the monetary metal in bullion form is priced in paper notes or token coins, which introduces a fiat unit of accounts. The gold and silver standard is much more effective at protecting the integrity of the money than either standard alone.
    A historical example of a dual monetary system occurred in the United States between 1862 and 1879. During this era both U.S. note (greenback) dollars and gold dollars circulated as money. Both were used for purchases and wages. Because U.S. notes were not redeemable in gold, no fixed exchange rate existed between fiat U.S. notes and gold coins. However, in most of the United States, U.S. notes were used for the payment of debt because they had legal tender status and were less valuable than gold.
    Moreover, many third world countries operate with a dual monetary system. Many use the U.S. dollar and a local currency; sometimes a relatively strong regional currency is also used. They function with little difficulty going between currencies even without modern technology. Also, stores along the U.S.-Mexican border accept both Mexican pesos and U.S. dollars. With today’s technology, conversion between gold and silver should be without difficulty. If an item were priced in silver, it could easily be bought with gold and vice versa.
    To ensure that both full-weight silver and gold coins circulate and that one does not become subsidiary to the other, the government needs to undertake several actions. First, it should levy some taxes, fees, and fines in silver and others in gold. Furthermore, it should not accept the payment of gold for taxes, fees, and fines levied in silver and vice-versa. Also, it should not fix, either formally or informally, a ratio between gold and silver or even give the appearance of setting such a ratio.

Endnote
1. J.N. Tlaga, “Gold Standard = Fiat in Disguise,” Jan. 19, 2002, http:// www.gold-eagle.com/editorials_02/tlaga011902pv.html, Aug. 8, 2007.

Copyright © 2011 by Thomas Coley Allen.

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Why Silver Fell in the 1870s and Gold Rose in the 1970s

Why Silver Fell in the 1870s and Gold Rose in the 1970s

Thomas Allen

    During the 1960s when the market price of gold began to rise above the official redemption rate of $35 per ounce of gold, economists and others began discussing the likelihood of the dollar no longer being redeemed in gold. When this event occurred, most expected the dollar price of gold to drop because the demand for gold as money would cease. Most expected a decline in the value in gold when redemption ended because of a decrease in demand.
    A similar discussion occurred in the late 1800s as the free coinage of silver ended and most of the world moved to the monometallic gold standard. Most argued that silver declined in value because of the demand for silver as money ceased except in subsidiary coins and its supply continued to rise. However, in 1971 when redemption in gold ceased, gold acted oppositely. Instead of falling in value, gold rose. Why?
    Several explanations have been offered to explain the decline of silver’s value (priced in gold). These explanations are mostly variations of the Quantity Theory of Money.
    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.”[1]
    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 relatively 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 relatively 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.[2] 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. (Laughlin incorporates quality with his explanation: Gold has a higher value, purchasing power, per unit of weight, which contributes to its quality as money.)
    The bimetallists, advocates of the silver-gold system with a legally fixed exchange rate or ratio 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 systems 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.
    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.
    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? Although the Quantity Theory of Money offers a reasonable explanation of silver’s fall in value, it fails to explain gold’s rise in value. Whatever explanation used to explain silver decline in value after 1873 needs to be able to explain golds rise in value after 1971.
    Rist offers this explanation for the decline of silver’s value and the rise of gold’s value when they ceased being standard money. (In the United States, silver ceased being standard money when the free coinage of silver ended in 1873. Gold ceased being standard money when the United States stopped converting the dollar to gold under the gold exchange standard, the Bretton Woods system.) 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 gold redemption 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, 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 redemption 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.[3]
    Thus, the Quality Theory of Money is needed to explain gold’s rise in price in terms of irredeemable paper money. Being low quality money, irredeemable paper money cannot store value over time. Being high quality money, gold stores value over time. Consequently, gold rose in price after its formal use as money ended because people still demanded a form of money that stored value.
    As shown above, the Quantity Theory of Money can explain the fall of silver’s value after 1873, but it fails to explain the rise of gold’s value after 1971. The Quality Theory of Money is needed to explain gold’s rise in value. It can explain both silver’s fall in value and gold’s rise in value.

Endnotes
1.  Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), p. 114.

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

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

Copyright © 2016 by Thomas Coley Allen.

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.

Conclusion
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 the 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 usage has 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 became 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 of discarding the silver standard was an increase in demand for gold coins. This increased 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, but they were also replacing fiat paper monetary standards with the gold standard.

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 the 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 gold's 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 of silver’s monetary functions. When irredeemable paper money replaced gold, it failed to fulfill all of 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 anti silver 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 were mostly responsible for the detrimental effects of fiat silver money between 1878 and 1900.

Politics prevented them from completely abandoning silver as legal tender. Allowing 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 an 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 wanted. 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 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 landslide 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 moved 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 takeover 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 turnout 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.]

Endnotes
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 United 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. 

 

The Silver Dollar 1873–1900 – Part 1

Introduction and Coinage Act of 1873
Thomas Allen

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

Introduction
Many people claim that silver 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’s 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 to 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 fully 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 for 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 in 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 the 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 for 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 circulated 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.

Endnotes
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, http://www.gold-eagle.com/editorials_05/gnasso070206pv.html, 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.

Part 2

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Do We Really Need to Return to Hamilton?

Do We Really Need to Return to Hamilton?
Thomas Allen

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

Two contrasting articles appear in the December 2010 issue of Chronicles. They are “Back to Hamilton” by William J. Quirk and “Prosperity” by Clyde Wilson. Quirk’s article reviews Paul Craig Roberts’ book How the Economy Was Lost: The War of the Worlds. Quirk focuses on Roberts’ promotion of protective tariffs as the means to revitalize America’s economy and increase the standard of living standard of middle-class Americans. Quirk seems to agree with Roberts.

Quirk does observe that when the dollar was connected with gold, prices remained fairly stable over time. However, under the true gold standard, general prices should decline over time because productivity rises faster than the money supply. Quirk also notes that gold disciplines politicians and checks governmental expenditures much more effectively than the supposedly independent Federal Reserve. (Where Roberts stands on the gold standard, I do not know. Based on some comments that he has made in his columns and in radio interviews, he does not appear to be an adherent of the gold standard.)

Roberts blames “globalization” for America’s economic problem. He is probably right. However, globalization has nothing to do with free trade. Trade as administered through the World Trade Organization (WTO) and other trade agreements is managed trade. An international bureaucracy answerable to no government manages world trade, which extends to local trade, for the benefit of the international corporations.

That people call these agreements free trade is a travesty. They prevent free trade instead of allowing it. The Thought Police are living and operating. To call WTO, NAFTA, and the like free trade agreements is like calling war, peace; freedom, slavery; and ignorance, strength.

Based on his paraphrase of Pat Buchanan’s statement, Roberts is aware that these agreements are not trade agreements — much less free trade agreements. Their objective is to strip the American worker of his wealth and transfer it to the elite, who control the international corporations.

Quirk shows that the median income rose from 1947 to 1973 and declined from 1998 to 2008. Actually, median income has been declining since 1973. This decline has much more to do with severing gold’s last hold on the dollar in 1971 than with trade agreements.

The common myth that big industry and especially big banks (because they supposedly control the world’s gold) love the gold standard is false. They abhor it because it inhibits their unbridled greed. They love fiat money, especially paper fiat money and its electronic equivalent.

Bankers can create fiat paper money and its electronic equivalent out of nothing. They cannot create gold out of nothing. That is why the gold standard was abandoned.

Big business likes fiat money because they are first in line to get it. Thus, they are first to spend the new money, so they use it before it loses its value. Then they use it to repay their loans after it has lost its value and with that cheat their creditors.

Roberts does not object to managed trade. He objects to who is managing it and how they are managing it. Roberts does not want to replace the current system of managed trade with free trade. He wants to replace it with another system of managed trade.

Quirk (or Roberts, the article is not clear about whom) points to Hamilton’s arguments. Hamilton offered two arguments, which are still used, to promote protective tariffs. (1) They are necessary to build and maintain the industrial base for war. Hence, adherents of protective tariffs fear that the military-industrial complex will not develop and mature unless protective tariffs are imposed. (2) Capital used in industry produces more wealth than that used in agriculture. Today’s proponents also claim that it produces more wealth than that used in services.

If the proponents of protective tariffs want to impose tariffs to protect the military-industrial complex, they should prohibit the importation of strategic metals and rare earths. These materials are essential to modern warfare. Therefore, the country should not depend on foreign sources. The prohibition of their importation, which is the ultimate objective of a protective tariff, would force the extraction of these metals from the oceans and land sources where their concentrations may be as high as micrograms per megaton. Consumer goods that used these materials would no longer exist because no one could afford them. Inferior products would replace items that used these materials. The computer age in America except for the U.S. government, which can manufacture and steal all the money that it needs, and multinationals, which can move their computer work to other countries, may die. No sacrifice is too great for the benefit of the military-industrial complex.

If the purpose of tariffs is to build and maintain a war machine, wouldn’t it be better to subsidize these industries directly from the Defense Department’s budget? Unlike direct subsidies, tariffs do not guarantee that these industries will be built or maintained. Furthermore, direct subsidies reveal the real cost of building and maintaining these industries. Knowing the real cost, the people can then decide if these industries are worth the cost. (A major reason for using trade restrictions like protective tariffs instead of direct subsidies is to conceal the real cost.)

Hamilton was an agent of the bankers and major industrialists. He was himself a banker and helped to found the Bank of New York. He wanted protective tariffs to transfer wealth from the common American, most of whom were farmers at that time, to his rich northern friends.

Wilson reveals the truth of this objective in his article when he writes, “When tariffs were beneficial to the Northern rich and burdensome on everyone else, the United States had tariffs; when ‘free trade’ is beneficial to the Northern rich and a burden to everyone else, we have ‘free trade.’” (Wilson argues that when discussing issues, such as free trade versus protective tariffs, one must look beneath the surface. One must find out who benefits. One will usually find that the ruling elite, and not the people, is the primary beneficiary. Consequently, the power of government needs to be severely restricted to limit the ability of the ruling elite to use it for its benefit.)

According to Quirk, Hamilton intended tariffs to provide temporary protection for America’s manufacturing. How long is “temporary?” The country has had protective tariffs of some sort ever since Congress adopted Hamilton’s proposal. (Yes, the United States still have some protective tariffs and other import restrictions even today with all these so-called “free trade” agreements.)

Do Quirk, Roberts, and other promoters of protective tariffs really believe that Lincoln was right when he sent 600,000 men to their deaths to impose his protective tariff on the South? Protective tariffs, which enriched the North at the expense of the South, were the major reason for the Southern States seceding. If they do not believe that Lincoln was justified in his actions, why? If he were, why? Lincoln was merely doing what they advocated: imposing protective tariffs.

Quirk, Roberts, and other proponents of protective tariffs are victims of Bastiat’s broken window syndrome. They see people being paid to repair the broken window and people selling the material for the repair. They wrongly conclude that breaking the window is good for the economy. They see only the work and selling that it causes. (This mentality misleads people to believe that the massive destruction of capital and labor in war is good for the economy.)

What they fail to see is what Bastiat and any good economist see. A good economist sees the lost of revenue to the people who would have received the window’s owner’s money if he had not had to pay for the broken window. For example, if the owner had wanted a new pair of shoes, a shoe store and manufacturer have suffered a loss. The country as a whole has lost. If the window had not been broken, the owner and the country would have had both a window and a new pair of shoes. After the window is broken, the owner and the country have only a new window. A new pair of shoes has been lost.

Protective tariffs work the same way. They divert money from where the consumer prefers to spend it to pay the tariff or a higher price. Thus, consumers buy less. The economy and country have less wealth.

Hamiltonians like Roberts point to protective tariffs and the economic growth, primarily industrial growth, in America’s history. They conclude that this growth resulted from the tariffs. Without the tariffs, growth would have been much lower — or at least they imply this conclusion. Protective tariff promoters treat “sequences as consequences.”

Wilson notes that treating sequences as consequences is a flawed way of thinking. He writes, “If B follows A, then A was the cause of B. In fact, in understanding the wealth of nations, that is a bad assumption — because there are always multiple variables, some of them unknown, unpredictable, too deep to be observed, and even spirited and unmeasurable.” Because Congress imposed a tariff and the industrial economy of the country grew does not mean that the tariff caused this growth.

Historical examples exist that suggest that the imposition of protective tariffs causes or at least contributes to depressions. Congress enacted the McKinley Tariff Act in 1890. This tariff raised rates and made circumvention more difficult. The country suffered a severe panic in 1893 and a depression that lasted until 1896 or 1897, depending on whose criteria are considered. Did the tariff cause the depression? If everything else is ignored, which the Hamiltonians seem to want to do in promoting tariffs, the answer is yes. Most likely the tariffs were a contributing factor. However, the primary cause was the fiat silver dollar primarily as the Treasury note of 1890.

If protective tariffs really do invigorate the economy as a whole, then apparently it lacks to power to overcome the negative effects of fiat money. If true, then imposing protective tariffs without first eliminating fiat money will not solve the country’s economic problems. It may even make the problems worse.

Quirk begins his article with a discussion of Ben Bernanke and the Federal Reserve. Quirk fails to mention that the Federal Reserve is a child of Hamilton. Hamilton was an advocate of centralized banking. As the United States already have centralized banking, no need exists to go back to Hamilton for that.

Although Roberts disagrees with Bernanke on many issues, the two do agree on one thing. They agree that higher prices are preferable to lower prices. Gasoline at $5 per gallon is better than gasoline at $1 per gallon. Bernanke wants to achieve higher prices through currency depreciation. Roberts wants to achieve them through protective tariffs.

Roberts complains, and rightly so, about the United States “financing its trade and budget deficits by turning over the ownership of existing U.S. assets” and by getting foreigners to buy U.S. Treasury debt with their trade surplus dollars. He claims that dependency on foreigners to finance budget and trade deficits is “beyond the reach of monetary and fiscal policies.” This is not exactly true. If the U.S. government cuts its expenditures to match, or preferably to be below, its revenue, it would not need foreigners to buy its debt. Moreover, reducing the size of the government to match its income would lessen the burden that the economy is currently forced to carry. It would diminish the distortions of the economy that the government’s expenditures cause. It would eliminate agencies whose purpose is to interfere with and thwart economic activity. Or at least it would significantly decrease their intervention. Elimination of debt is a fiscal policy that the U.S. government can undertake to halt the adverse effects described by Roberts.

Once America’s number one export, federal debt, is eliminated, the trade balance becomes self-correcting. If Say’s Law is still valid, and it is, the concern about the trade deficit and the lack of industrial productivity vanishes. If Americans do not produce anything with which to buy imports, foreigners will cease trading with them. Imports will fade away until Americans begin to produce something with which to buy imports. Trade balances automatically correct without governmental intervention. Governmental intervention only leads to more distortion and imbalance.

Based on Quirk’s review of Roberts’ book, Roberts does an excellent job of describing America’s economic problems and much of what has caused these problems. Unfortunately, he offers a false solution.

On the other hand, Wilson identifies the primary cause of America’s economic problems: too much governmental intervention. To solve America’s economic problems, this intervention needs to be drastically reduced.

Wilson begins by giving a good description of a prosperous society. A prosperous society has minimal debt, and its debt is temporary. Only a few people are very rich or very poor. Nearly everyone falls around the middle. Society’s wealth distribution is a narrow bell-shaped curve: It has a small standard deviation. Almost everyone “has an abundance of necessities and access to some small luxuries and leisure.” It has small, unobtrusive governments with the local governments being the most noticeable and important, and the national government, the least. Private patronage supports religion, charity, education, and the arts. Cultural cohesion flourishes.

America has lost most of these aspects of prosperity. Protective tariffs will not bring them back. On the contrary, they concentrate more power in Washington. They concentrate more wealth in the bank accounts of the politically powerful.

Protective tariffs may drive wages up, but this is not a given. However, the increase in prices that protective tariffs cause will nullify much, if not all, of the wage increase. Americans may be worse off after the imposition of protective tariffs. Their real income may decline, and they can afford fewer luxuries and probably fewer necessities. (The gold and silver standards are what drove real wages up during the nineteenth century and not tariffs.)

Wilson asserts, and correctly so, that hard work and merit resulting in an appropriate reward has largely vanished in today’s America. Conniving, scheming, and, most importantly, political connections and being a member of a politically promoted group reward people today. (In turn, the rich and powerful, i.e., the ruling elite, globalists, control most of these people.) After the ruling elite, these are the people who will benefit most from protective tariffs. The ruling elite will use them to control the tariffs and direct the tariffs to protect their interest.
Wilson concludes his article with the following:

Nobody can understand or completely manage a large economy. Surely, there are not many “lessons of history” more obvious and certain than that. But economics is a matter of human thought and action. Human thought and action can be applied to such matters as trade, labor, the money supply, in ways that are better or worse. But better or worse for whom! We need to remember what prosperity is supposed to feel like. But first we must find out who “we” are.

Thus, if improving the prosperity of the people is the objective, America is obviously going in the wrong direction. Ever more government has improved the prosperity of the ruling elite. However, it has diminished it for everyone else. If the people want to regain their lost prosperity, they need to do something different. They need a massive dismantlement of government.

The first step to take toward solving America’s economic problems is to withdraw from WTO, NAFTA, and similar agreements and organizations. (Withdrawal from the United Nations and all its subordinate organizations would also be beneficial.) Next is ending subsidizing off-shoring and oversea relocating along with all other corporate welfare. Closely related to this action is the elimination of the military-industrial complex by immediately ending all undeclared wars and closing all bases in foreign countries. An armed force necessary to deter attacks on the United States is much smaller than that needed to maintain a world empire. The gold and silver coin standards need to be reintroduced to operate parallel with the current federal reserve note standard with the intention of ending the latter. Abolishing the Federal Reserve and centralized banking is one of the most important elements toward long-term recovery. Eliminating the overly burdensome regulatory environment in which businesses are forced to operate is another necessary component. (This highly regulated environment exists primarily for the benefit of big businesses as it greatly reduces their competition.) Regulatory agencies that have no constitutional foundation, such as the Environmental Protection Agency (the States are perfectly capable of taking care of their environmental problems), should be immediately eliminated. Most important is a return to constitutional government, which would reduce the size of the U.S. government by 90 percent.

Roberts’ and Quirk’s solution differs significantly from the above. They believe that the solution to the economic problems caused by governmental intervention is more governmental intervention. The correct solution is to remove the governmental intervention that caused the problems.

Jefferson was right when he “objected to using government to encourage manufacturing.” The government should leave the economy alone and let manufacturing develop in its own way and at its own pace. Jefferson said, “[It] can hardly be wise in a government to attempt to give a direction to the industry of its citizens.”

Does the county really need to return to Hamilton? Hamilton supported the concentration of political and economic power into the hands of a few. The country has been operating under his philosophy since 1860. His philosophy has led it to where it is today. Has not the time long past to abandon Hamilton’s philosophy? Has not the time come to adopt Jefferson’s philosophy of decentralizing and dispersing political and economic power?

Copyright © 2010 by Thomas Coley Allen.

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