The History of Bimetallism in the United States
Part I, Chapter VI
The Gold Standard, 1853-1873
§ 1. At no time after the act of 1853 until the Civil War was the silver dollar of 412½ grains equal to less than 103 or 104 cents of our gold coins, and, consequently, it was never seen in circulation. The country had willingly acquiesced in the practical adoption of the single gold standard, and so well did the situation satisfy all demands that the question of gold and silver dropped out of the public mind. The subsidiary coinage of silver introduced by the act of 1853 served its purpose admirably. With gold as the medium of exchange for large payments, and an overvalued silver coinage for small payments, the business interests of the country were fully content, and no trouble need have arisen to this day from any disturbances in our system of metallic currency had we been saved from the evils of our Civil War. Until the passage of the Legal-Tender Act early in 1862 (specie payments were suspended December 31, 1861) our currency continued to be what it was intended it should be in 1853—a gold currency. Paper money, issued by the State banks, was, of course, in circulation; but I do not propose here to include the history of paper issues. Paper money acts to drive out either metal which is in use; and so its existence does not alter conclusions which are concerned only with the two metals. We can say, without hesitation, that our coinage system from 1853 to the Civil War worked admirably. There were evidently no longings to use the silver dollar piece when it was worth 3 or 4 per cent premium.
§ 2. The act of February 25, 1862, issued the first installment of United States legal-tender notes to the amount of $150,000,000. A similar amount was authorized by a second act passed July 11, 1862, but which was going through the preliminary stages of enactment in June. The result of the depreciation of the paper money which became manifest by a premium on gold in June to the extent of 5 per cent, and in July of 20 per cent, naturally brought Gresham's law into operation, by which the cheaper paper was substituted for the more valuable gold. Gold disappeared before the depreciating paper, and it was not until January 1, 1879, that it again appeared.
The displacing paper did even more than this. It drove out the subsidiary coinage in 1862. As early as July 2d the newspapers noted the disappearance of small coin, and its accompanying inconveniences. But in Congress there was very little conception of the causes at work. While the second legal-tender bill was under discussion in June, members seemed to be utterly unconscious of what was going on. On June 17th an amendment was introduced into Section 1 of the bill in regard to the small denominations of paper to this effect:
"Provided, That no note shall be issued for the fractional part of a dollar, and not more than thirty-five millions shall be of lower denominations than five dollars."
This measure was evidently intended to protect the small coins in circulation. It was believed, no doubt, that, if paper of small denominations were not issued, subsidiary coins would remain in circulation. The discussion and probable passage of an act authorizing this second issue of paper so depreciated its value that, before the five-dollar notes could have been issued from the printing-press, and even before the passage of this bill, the disappearance of the small coins was remarked upon (July 2d). This showed distinctly that ten-dollar notes, if depreciated, could drive out silver coins of denominations less than one dollar. There was, in truth, only a greater profit in dealing with larger sums. A large quantity of silver coins collected together and sold for depreciated legal-tender paper of large denominations gave the same proportional profit as if small notes had been used in the process.*75
The subsidiary silver, containing 345.6 grains of pure metal, circulated at its face value in exchange for gold coins; but, if a 412½-grain dollar, containing 371.25 grains of pure silver, were counted as par, 345.6 grains of subsidiary coinage would be worth relatively, so far as regards the pure silver it contained, only 93.09 cents (although its legal value in small payments was 100 cents). The market valve of a dollar containing 371.25 grains, in 1862, however, was 104.16 cents of our gold coins. But, inasmuch as the subsidiary coins would be melted, or exported, only on estimates of their intrinsic value, the market price of 345.6 grains of silver would be 96.96 cents of our gold coins. As soon, therefore, as the paper money depreciated below 96.96 cents, as compared with our gold coins, the movement of subsidiary silver out of circulation would begin. The operation can be easily seen by the adjoined diagram. As soon as the United States notes depreciated below 100, or par, there would be a profit in withdrawing our gold coins from use, according to Gresham's law. And when the depreciation had reached a point below 96.96, the silver coins must of necessity disappear. By June 1, 1862, the premium on gold was 5 per cent, which showed a depreciation of the United States notes to 95.23 cents in a dollar; by the 1st of July, the premium on gold was about 18 per cent, showing a depreciation to 84.7 cents in a dollar. In short, the subsidiary coins must have been withdrawn very soon after any effect on the gold coins was apparent. The paper money at 84.7 cents would very rapidly dislodge both kinds of coins.
Although, on the 17th of June, in the second legal-tender act, any paper issues of denominations less than a dollar had been forbidden, Congress was forced, by the events we have just described, to pass a bill authorizing the issue of a paper fractional currency on July 17, 1862. The absence of small silver had brought into existence tokens, tickets, checks, and substitutes of every description, issued by merchants and shopkeepers; and Congress was obliged hastily to authorize a currency, originally based on the likeness of postage-stamps, but which finally resulted in simple exercise of the function of note-issues for small denominations. Congress was unwilling to admit the necessity for such issues of paper, and the first act was entitled "An Act to authorize payments in stamps."*76
§ 3. The paper-money period continued until the resumption of specie payments, January 1, 1879. Meanwhile no gold was in circulation. The fractional paper notes continued in use in spite of an ill-judged and ridiculous attempt of the Secretary*77 of the Treasury to redeem them, with but a small reserve of silver, in October, 1873. This incident is an evidence of a extraordinary ignorance in a finance minister. Very soon after the commercial crisis of September, 1873, the exceptional condition of the exchanges and the arrival of gold caused a fall in the premium on gold in October from 11 to 6 per cent. But with a gold dollar worth 106 cents in paper, the paper was worth only about 94 cents in gold, while, as it will be remembered, the 345.6 grains of silver in the subsidiary coinage were equivalent to 96.9 cents in gold.*78 Not until gold had fallen to 104, at least, could it be hoped that silver would remain in circulation. But Secretary Richardson announced that silver had fallen so low that he proposed to resume payments in that metal. He had in the Treasury not more than half a million*79 in silver; gold was selling at not less than 106, and a profit still existed in exchanging paper for subsidiary silver. On the 27th of October, 1873, "Secretary Richardson issued a circular letter to the several sub-treasury officers, directing them to pay out silver coin to public creditors, should they desire it, in sums not to exceed five dollars in any one payment."*80 In practice, the silver was paid out in sums of a few hundred dollars a day, for, of course, every creditor demanded his share of silver. The silver was not given in exchange for paper currency. The silver, when paid out, disappeared, and would have done so had the Secretary issued millions, instead of hundreds, of dollars of it.*81
While discussing the subject of subsidiary coinage, it may be best to anticipate our story slightly and narrate here the means by which resumption of silver payments was finally achieved in 1877-1878. The Resumption Act, passed January 14, 1875, enacted (Sec. 1):
"That the Secretary of the Treasury is hereby authorized and required, as rapidly as practicable, to cause to be coined at the mints of the United States silver coins of the denominations of ten, twenty-five, and fifty cents, of standard value, and to issue them in redemption of an equal number and amount of fractional currency of similar denominations; or, at his discretion, he may issue such silver coins through the mints, the sub-treasuries, public depositaries, and post-offices of the United States; and upon such issue he is hereby authorized and required to redeem an equal amount of such fractional currency until the whole amount of such fractional currency outstanding shall be redeemed."
Not until 1877, however, did the premium on gold fall so low that, by the corresponding rise in the value of paper, it warranted an attempt at resumption of silver payments. The following table*82 will show the value of a paper dollar in gold since 1865:
Secretary Bristow felt some doubts*83 as to his authority to pay out silver coins for notes under the provision of the Resumption Act just quoted, and a subsequent bill*84 was passed April 17, 1876. The amount of fractional currency outstanding was about $42,000,000, and the pressure for redemption at first was very strong.*85 All but $16,000,000 of the fractional paper notes had at once come in for redemption; but since then about $1,000,000 more have been redeemed, leaving $15,000,000 yet outstanding, or, more probably, destroyed. After the first severe pressure due to the redemption of the fractional paper-money had ceased, the demand for silver coins at the Mint still continued in order to satisfy the needs of trade; whereon Congress permitted an additional issue of $10,000,000 in exchange for legal-tender notes.*86
Notes for this chapter
There had been good authority for the belief that coin would continue to circulate prodded no paper of a corresponding denomination were issued. See J. S. Mill's "Political Economy" (Laughlin's edition), p. 348.
Sec. 12, "Statutes at Large," 592. The twenty-five cent note, for example, contained a copy of five five-cent postage-stamps.
Cf. also a broker's table giving purchasing prices of silver coins in paper for exportation, in the "Financial and Commercial Chronicle," November 1, 1873, p. 590.
Upton, "Money in Politics," p. 146, says he had "only a few thousands."
Upton, ibid., p. 146.
The Secretary said he could have resumed silver payments if the newspapers had not discovered his plan and discussed it!
Taken from Upton, "'Money in Politics," p. 145.
Upton, ibid., p. 148.
See Appendix III, A, ix.
Secretary Bristow sold $17,594,150 of 5-per-cent bonds to aid in purchasing the silver bullion for the subsidiary coinage, which was subsequently met out of the surplus revenue.
See Appendix III, A, x, July 22, 1876.
Part I, Chapter VII
End of Notes
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