CHAPTER III HISTORY OF UNITED STATES COINAGE 1 18. Adoption of a coinage system. The coinage system of the United States was established by Act of Congress in 1792, which followed closely the recommendations of Alexander Hamilton, first Secretary of the Treasury, in his report on the establishment of a mint. The principal features of this first coinage act were the adoption of the bimetallic system, of the decimal system of reckoning, and. of the dollar as the unit of value. The dollar 1 was adopted as the unit of value because in all the States people had become used to quoting prices in that unit and were already familiar with the Spanish milled dollar. The simplicity and convenience of the decimal system as compared with the awkward English system of reckoning in pounds, shillings and pence, led naturally to the adoption of the former. Bimetallism was adopted because that system was in use in European countries and it was believed that bimetallism would insure a larger supply of coin than would either silver or gold monometallism. 19. The silver period.-Under the coinage system thus adopted both gold and silver were made full legal tender and the mint was to be open to the free and unlimited coinage of both. At the market prices then existing a dollar would buy 3711 grains of pure silver or 243 grains of pure The word dollar is a corruption of the German Thaler, abbrevialed from Joachimthaler, a silver coin issued in Bohemia in the sixteenth century. gold, that is, gold was worth fifteen times as much as silver weight for weight. This ratio of 15 to 1 was therefore preserved in the coins. Before the mint had begun to manufacture the new coins, a change occurred in the relative value of gold and silver in the commercial market. Gold became worth more than fifteen times as much as silver, an ounce of gold exchanging as bullion for 15 ounces of silver.1 Under these circumstances very little gold was brought to the mint to be coined. Since an ounce of gold would buy 15 ounces of silver and the mint would give to 15 ounces of silver the same monetary power as to an ounce of gold, it was more profitable to sell gold as bullion and take only silver bullion to the mint to be coined. The little gold that was coined soon disappeared from circulation, being melted down or exported, and the country was reduced to the cheaper silver standard. Our early experience with the new silver coins was also disappointing. Realizing that it would be some time before a sufficient supply of new coins could be made to meet the needs of the country, Congress had authorized the use of the Spanish dollar and several other kinds of foreign coins which were in circulation throughout the country. The Spanish dollar in perfect condition contained a little more silver than the new American silver dollar, and under the operation of Gresham's Law the American dollar should have driven out the Spanish coin, since both were full legal tender. But in this case other influences interfered with the normal operation of the law. There was at this time a considerable trade between the United States and the West Indies, and in both countries both dollars were accepted at their face value. American merchants engaged in this trade found it profitable to ship American dollars to the West Indies, exchanging them there for the heavier Spanish dollars, and sending the latter to the mint to be recoined into a larger number of American dollars. This 1 In the new coinage system established by France in 1803 the mint ratio of 15 to 1 was adopted. practice became so flagrant that in 1806 President Jefferson directed the mint to suspend the coinage of silver dollars and no more were coined until 1834. As gold had been exported or hoarded, the circulating medium was composed of foreign and debased coin and paper money issued by the banks. Currency difficulties were aggravated by the liquidation of the first Bank of the United States in 1811, the war with England in 1812, and the resulting suspension of specie payments by most of the state banks. Though the second Bank of the United States, established in 1816, made a brave attempt to restore specie payments, the scarcity of coin made the task most difficult. 20. The gold period.-In order to bring gold back into circulation, Congress in 1834 reduced the weight of the gold eagle to 232 grains pure gold; in 1837 the fineness was changed to 9/10 for both gold and silver coins, thus making the weight of the gold eagle 232.2 grains of fine gold, and establishing the mint ratio of 16 to 1 between gold and silver.1 The actual commercial ratio in 1834, however, was about 15.73 to 1, so that the new coinage ratio undervalued silver just as the old ratio of 15 to 1 had overvalued it. Silver was now worth more as bullion than in the form of coins and so disappeared from circulation. Under the new ratio it became profitable to turn gold bullion into coin and after the discovery of gold in California in 1847 and in Australia a few years later, large quantities of gold came into circulation. The disappearance of silver coins left the country badly off for small change. To meet this difficulty, Congress passed the subsidiary coinage act in 1853, which abandoned the principle of free and unlimited coinage of the fractional silver coins and directed that they should be coined only from bullion bought by the Government at the market price. The new subsidiary coins were reduced about 7 per cent in weight so that it would not be profitable to melt them to be sold as bullion, and they were not to be legal tender for more than $5. By this device a fairly adequate 1 The exact ratio established was 15.988 to 1. supply of small silver came into circulation. The act of 1853 did not affect the silver dollar, but as it was worth from $1.01 to $1.05 as bullion, its coinage was not profitable. From 1834 down to the Civil War gold was the real standard of the country, and after the discovery of gold in California and Australia, gold coin came into circulation in large quantities. And though the silver dollar was not coined, the subsidiary coinage act of 1853 provided a fairly ample supply of small change. Thus for the first time the country possessed an adequate circulation of specie. During this period, however, the greater part of the circulating medium of the country was paper money issued by the state banks. 21. The paper standard period. To meet the tremendous expenses of the Civil War, Congress in 1862 authorized the issue of United States notes, and within a few months $400,000,000 of these notes were forced into circulation. They were made legal tender for all debts, public and private, hence the name "legal tenders."1 The injection of this enormous amount of money into the circulation caused gold to disappear and reduced the country to a paper standard. At one time the greenbacks depreciated in value to about 35 cents to the dollar and prices rose and fell with the fluctuating value of these notes. When the Government suspended specie payments in 1862, silver coins also disappeared from circulation. To meet the need for change, merchants and manufacturers issued tickets, due bills and other money substitutes. Congress tried various expedients to supply change: first, it authorized the use of postage stamps; then postal currency; and, finally, fractional paper currency in denominations corresponding to the subsidiary silver coins. At one time over $49,000,000 of this fractional paper currency was outstanding. Another financial expedient of the Civil War period was the establishment of the national banking system in 1863. Banks organizing under this system were required to pur 1 These notes came to be known also as "greenbacks" because of their distinctive color. chase government bonds against which they might issue their own circulating notes. In 1865 Congress passed a law imposing a tax of ten per cent on the circulating notes of state banks, which cleared the field for national bank notes. For a number of years after the war the circulating medium of the country was composed of greenbacks, national bank notes, and fractional paper currency. 22. Revision of coinage laws, 1873.-In 1873 Congress, anticipating the resumption of specie payments, made a general revision of the coinage laws in which the silver dollar was dropped from the list of authorized coins. This aroused no interest at the time, for under the ratio of 16 to 1 established in 1834 the silver dollar had become practically obsolete. In 1872 the silver bullion needed to coin a dollar was worth $1.02, so nobody thought of bringing it to the mint to be coined. Silver dollars, of which only about eight millions had been coined in the whole period since 1789, had not been in circulation for more than a generation. The act of 1873, which later came to be called by free silver advocates the "crime of '73," simply gave legal recognition to the fact that the silver dollar was no longer a part of the circulating medium. 23. Trade dollar. The coinage law of 1873 authorized the unlimited coinage of a silver coin, known as the "trade dollar," which it was supposed might be used as a substitute for the Mexican dollar in our trade with the Orient. It was legal tender in the United States only to the amount of $5. It contained 420 grains of standard silver, and so was slightly heavier than the standard silver dollar (412 grains), and was worth a trifle more than the gold dollar. Owing, however, to the decline in the gold price of silver, it became profitable to convert silver bullion into these trade dollars. In 1876 they were deprived of their legal tender quality and their coinage was restricted. In 1878 further coinage was prohibited except for "proof pieces," and in 1887 provision was made for the redemption of the outstanding coins at par in standard silver dollars or subsidiary silver. The total issue of trade dollars was $35, |