Part I, Chapter IV, Change of the Legal Ratio by the Act of 1834

§ 1. The condition of the currency of the United States from 1820 to 1830, arising from the disappearance of gold, from the extensive issue of paper money (a large part of it secured only by small reserves), and from the circulation of foreign coins, was confused in the extreme.
*1 At the adoption of the Constitution we possessed virtually a metallic currency of scanty amount. The first United States Bank (1791-1811) was conservatively managed, and did not issue its notes excessively, nor in denominations below ten dollars. “Bank-notes were rarely seen south of the Potomac or west of the mountains.” After the failure to renew the United States Bank charter in 1811, local banks multiplied and paper issues expanded without limit. The suspension of the banks in 1814, and the continued issue of paper, in denominations “from one sixteenth part of a dollar upward,” certainly did not aid in increasing the quantity of the precious metals in the country. The establishment of the second United States Bank (1817-1837) assisted in bringing about specie payments in the United States soon after its re-charter. But the bank reserves were almost entirely of silver.
*2 The silver coinage, however, was in a deplorable confusion, and requires some brief description.

There were few United States coins in circulation. The act of 1792 decreed that each dollar should “be of the value of a Spanish milled dollar as the same is now current.” In fact, the Spanish milled dollar formed the most important part of our silver currency, and, being heavier than the American dollar piece, commanded a premium. The tendency showed itself, consequently, to coin United States dollar pieces, and hoard foreign dollars. By exporting the lighter American dollars to the West Indies, and to any places where they were received for their face value equally with Spanish dollars, these latter were imported, sent to our Mint, and a profit realized. Foreign dollars, therefore, bore a premium
*3 of one quarter to one half per cent over United States dollars. The banks, therefore, paid out United States dollars when called upon for silver for exportation. This process kept the Mint busy, but without the effect of filling the circulation with our own coins. The Mint, therefore, was a useless expense to the nation, but a source of profit to the money-brokers. The coinage of dollar pieces was consequently suspended in 1805 by the President,
*4 and none were coined until 1836.

The legal value of foreign coins in the United States, moreover, was regulated by an act of 1793, and by its terms these foreign coins were made a legal tender. But these enactments were temporary, and ran only for short periods. Congress, however, “ceased to regulate the value of one description of foreign coins after another until finally, in 1827, none were recognized as legal tenders except our ancient money,
*5 the ‘Spanish milled dollar.’ ” Now, although the coinage of the United States silver dollar was discontinued in 1805, a profit was still realized by importing Spanish dollars, because two half-dollars served the same purpose as a dollar piece did before, containing, as they did, as much pure silver as the dollar piece. And our silver continued to be coined and exported,
*6 while foreign silver continued to flow in. So far had this gone that of $11,000,000 of silver coined in the five years preceding 1831, $8,000,000 had been coined
*7 from foreign dollars; and, of the specie in the United States Bank, only $2,000,000 out of $11,000,000 were in our own coins. These foreign coins, however, were now not all “Spanish milled dollars.” The Spanish countries of America had before this date established their independence of Spain and assumed new names, so that their coins could no longer strictly be termed “Spanish dollars,” and consequently these South American coins, although in circulation, were not thereafter a legal tender. The effect of this condition of affairs was quite considerable, as may be seen by statements of the currency. The amount of the metallic circulation in 1830 is thus estimated:
*8

There had been coined to this date $34,000,000 of silver coins by the United States Mint, of which only $14,000,000 remained in the country. These Spanish coins, which had displaced the American silver, moreover, became much worn and reduced in weight, and, being in practice current with other coins, without regard to weight, naturally acted to drive out our own coins.
*10 A memorial
*11 of the New York bankers, led by Mr. Gallatin, in 1834, represented

“that the dollar of Spain and the gold and silver coins of the United States constitute, at present, the only legal currency of the country; and that, from the commercial value of the Spanish dollar, and the intrinsic value of the gold coins of the United States, they have become mere articles of merchandise, and are no longer to be considered as forming any portion of the metallic currency.”

The only legal medium being United States silver coins, “of which there is not a sufficient quantity to answer the ordinary purposes of business,” commerce was obliged to use foreign coins which were then no longer a legal tender. Since United States silver dollars were no longer coined, and since it was more profitable to send the Spanish dollars to the Mint, not enough dollar pieces remained in circulation. They asked, therefore, that the silver “dollar of Mexico, Colombia, Chili, and Peru, which are equal in weight and fineness to the Spanish dollar, be likewise made a legal tender, if weighing not less than 415 grains.” It is clear that, however much some remedy might be needed, this step would only increase the difficulties. The bill would increase the means of driving out United States silver coins. It was enacted into law
*12 January 25, 1834, although Mr. Sanford had very properly shown
*13 that no foreign coins should be made a legal tender. The enactment, however, had no bad influence, because the coinage act of 1834 soon made it ineffective.

The confused state of the silver coinage as thus described, the absence of gold, and the existence of a paper currency, therefore, complicated the situation. It was thought by some that the disappearance of gold was due to the existence of paper money. “Paper
*14 was the antagonist of gold, and, our gold being at present undervalued, the paper had driven it out of circulation.” And naturally, during the war on the bank, the scarcity of specie was attributed to the action of this institution. Secretary Ingham,
*15 in 1830, reasoning
post hoc ergo hoc, observed that, “prior to the year 1821, gold and silver generally bore the same relation in the market of the United States which they did in the Mint regulation…. But, at no time since the general introduction of bank paper, has gold been found in general circulation.” While wrong, of course, as to the ratio, he had yet observed the disappearance of gold about the time of the extension of bank issues. This was probably true;
*16 but that the paper was the cause of the disappearance of gold is another question. In driving specie out of circulation, paper has no special hostility to the one metal, gold, and none whatever to the other metal, silver. Large denominations of paper would, of course, act to supersede the more valuable metal used in large transactions; but paper issues would have driven out silver equally well with gold. As a matter of fact, however, the paper had not driven out silver; indeed, the metallic circulation and the reserves behind the paper were in silver. For this use, gold, if in circulation, would have been equally employed. That is, whatever effect the paper had to supersede specie, it would have acted equally against silver or gold; and if only one metal had disappeared and the other had remained, this must unquestionably have been due to a force of a different nature than that supposed, and one which had the effect of leaving only one metal and driving out another. This may be made more clear by anticipating our story somewhat. After 1834, as we shall soon see, gold came into circulation. Why did not the paper drive out the gold after 1834, as it was thought to do before 1834? It certainly did not do it. We can not, therefore, believe that the paper, however much it may have helped in the process, was the cause of the disappearance of gold. What the cause was has been already fully explained.
*17

§ 2. Having seen the condition of our currency after Hamilton’s system had been tried twenty-five years, we must admit that this condition was much worse in 1820 than it was in 1800. It was not a cheerful prospect. But we now turn from this picture to see how the country proposed to deal with these difficulties, to see whether the true causes were understood, and whether experience had taught its lessons.

As early as 1818 the United States began to recognize that Hamilton’s ratio of 1:15 differed so much from the market ratio between gold and silver, that if it were still designed to maintain a double standard, a new adjustment of the legal relations of the two metals was necessary. While nominally possessing a double standard, the country really had only one, and that a silver standard. Owing to causes beyond the control of a legislature, and which could not have been foreseen, the value of silver was so affected in its relation to gold as to destroy the working of a bimetallic system. Here is to be found the inherent difficulty of such a scheme. Had Agassiz, when measuring the movement of the glaciers in the Alps, attempted to build an observatory resting partly on the bank of solid rock and partly on the surface of the slowly-moving stream of ice, his house might have hung together only on condition that the bank had sympathetically begun to move with the ice, but in no other way. Our Congress, however, did not yet realize the whole situation. Either they must give the double standard another trial at a new ratio corresponding with the change in the market ratio, or choose one of the two metals as a single standard. If they did the former, what assurances were there that, even if the legal ratio then were the same as the market ratio, the country should escape from future changes and not again see the same results as ensued from Hamilton’s auspicious experiment? There are evidences
*18 that this was distinctly seen by several writers. But there were other ideas as to the remedies.

The first proposition in Congress appeared in a resolution, worthy of Charles V of Spain, to inquire into the expediency of prohibiting the exportation of gold from the United States. The “exportation of specie of every description was rigidly prohibited by law” during the embargo in 1807-1808, and in 1812. But, as Talbot
*19 reported, “the Bank of the United States, and some of the State banks, made considerable efforts to import specie. The exportation of it during the same period has, it is believed, been equal, if not greater, than the importation by the banks and by individuals.”

A committee, of which Mr. Lowndes was chairman, reported,
*20 in 1819, in favor of a new legal
*21 ratio of 1:15.6, to correspond with the market ratio. The error was perpetuated of a subsidiary coinage containing proportional quantities of silver to the dollar piece; but it was suggested that coins less than half-dollars be limited in their legal-tender power to five dollars.

The most considerable contributions to the discussions on the coinage in the early part of this century were made in the three reports of Mr. Campbell P. White, of New York.
*22 In his first report of 1831 he expounds the following doctrine:
*23

“That there are inherent and incurable defects in the system which regulates the standard of value in both gold and silver; its instability as a measure of contracts, and mutability as the practical currency of a particular nation, are serious imperfections; while the impossibility of maintaining both metals in concurrent, simultaneous, or promiscuous circulation appears to be clearly ascertained.

“That the standard being fixed in one metal is the nearest approach to invariableness, and precludes the necessity of further legislative interference.”

In the report of 1832 he adds:

“If both metals are preferred, the like relative proportion of the aggregate amount of metallic currency will be possessed,
subject to frequent changes from gold to silver, and
vice versa, according to the variations in the relative value of these metals. The committee think that the
desideratum in the monetary system is the standard of uniform value; they can not ascertain that both metals have ever circulated simultaneously, concurrently, and indiscriminately in any country where there are banks or money-dealers; and they entertain the conviction that the nearest approach to an invariable standard is its establishment
in one metal, which metal shall compose exclusively the currency for large payments.”

The committee, therefore, recommended a single standard of silver
*24 alone. In short, our experience since 1792 had made a deep impression on the minds of the intelligent men of that time. Both Mr. C. P. White and Secretary Ingham
*25 began to see that, in the nature of things, a double standard, without constant changes of the legal ratio, could not exist for any length of time. Mr. Ingham saw no safety in bimetallism, because, in his opinion, it was impossible to keep the mint and the market ratios alike. In the best discussion of the subject there was a disposition shown to select a single standard, and that of silver. And, with this general review of the plans proposed, we may now go on to recount the choice of means actually adopted in 1834.

§ 3. When the matter finally came before Congress, the bill first proposed by Mr. White’s committee in the House contained a scheme for a double standard at a ratio of 1:15.6. But in the selection of a ratio there were various opinions at that time, thus tabulated,
*26 as to the weight of the gold coins (leaving the silver dollar unchanged):

Speaking of the failure of the two metals to circulate concurrently, and of the inaction on that subject since the death of Mr. Lowndes in 1822, Condy Raguet
*28 gives a reason for the presentation of this bill in 1834:

“We should possibly have for many years remained in that situation, had it not been for a fresh occurrence by which fancied private interest was brought to bear upon Congress. That occurrence was the discovery of gold in North Carolina and other Southern States…. This gradually increasing production of gold at the South engendered precisely the same spirit as the increased production of iron had done at the North. The owners of the gold-mines cried out for legislative protection, as the owners of the iron-mines had previously done, and laws were solicited to enable the former to get more for their gold, or rather for the rent of their land, than they could otherwise have obtained.”
*29

Political projects also entered, as we shall soon see, into the passage of this bill and the selection of a ratio. How they worked may be seen first by a reference to the actual ratios of gold to silver in these years. The quotations of silver since 1833 have been authoritatively given in the London tables of Pixley and Abell, and since that date are not disputed. We have consequently an exact knowledge of the market ratios of gold to silver at this time when a new adjustment was being made.
Chart VII has been constructed on the basis of these tables, and shows that the average ratio from 1825 to 1835 was a little more than 1:15.7. The only action which could be justified by monetary experience, or by the hope of maintaining a double standard, demanded that the United States in 1834 should adopt the market as the legal ratio. Did the statesmen in charge of the bill have a definite knowledge of the market ratio, even if they intended to follow it? There seems to be no doubt of it. Three of the plans given at the beginning of this section were based on a ratio of 1:15.6, which was generally supposed to be the market ratio in the United States (and it was very near the true ratio). The bill of the committee embodying a double standard based on the ratio of 1:15.6 was introduced into the House, and had passed through the Committee of the Whole,
*30 when it encountered the political breezes and was driven out of its course. Mr. C. P. White changed front, and, although in his previous elaborate reports he had strongly urged
*31 the ratio of 1:15.6, he himself proposed an amendment altering the ratio in the bill to 1:16, which was adopted and finally enacted. The bill proposed by Mr. White’s committee became significantly known as the “Gold Bill.” This move, which was of course at variance with any attempt to retain a double standard, had probably both a political and a monetary object. It will be remembered that Mr. White, in his reports, opposed a double standard and favored a single standard of silver. In my judgment, he was easily led by his preference for a single standard to join in establishing a ratio between gold and silver which must, in the nature of things, soon bring about a single standard, if not of silver, at least of gold; while, on the other hand, there was a strong political party waging war against the United States Bank, and desirous, as part of their warfare, to make a battle-cry of a gold currency, in distinction to the paper issues of the bank. Under the leadership of Benton, the anti-bank party made support of the “Gold bill” and the ratio of 1:16 a partisan shibboleth.

Benton
*32 said that 1:15 5/8 “was the ratio of nearly all who seemed best calculated, from their pursuits, to understand the subject. The thick array of speakers was on that side; and the eighteen banks of the city of New York, with Mr. Gallatin at their head, favored that proportion. The difficulty of adjusting this value, so that neither metal should expel the other, had been the stumbling-block for a great many years; and now this difficulty seemed to be as formidable as ever.”

It was urged that Spain, Portugal, Mexico, South America, and the West Indies (except Cuba, which had 17:1) rated silver to gold at 16:1; but it is quite likely that the ratio of 16:1 was favored as much because it gave a slight advantage to gold as that other countries had such a ratio. In the debates in the House, Mr. Cambreleng, of New York, openly admitted
*33 the object of the change: “By adopting a higher ratio we shall be more certain of accomplishing our object, which is to secure for our own country the permanent circulation of gold coins.” And the political considerations triumphed.
*34 Mr. Selden, of New York, moved as an amendment the adoption of a ratio of 1:5 5/8, but it was lost by a vote of 52 to 127; and Mr. Gorham’s amendment of a ratio of 1:15.825 was rejected, 69 to 112.
*35 In short, the majority were evidently aiming at a single gold standard,
*36 through the disguise of a ratio which overvalued gold in the legal proportions. In the market an ounce of gold bought 15.7 ounces of silver bullion; when coined at the Mint it exchanged for sixteen ounces of silver coin. Silver, therefore, could not long stay in circulation.

§ 4. The Coinage Act of 1834,
*37 therefore, in contradistinction to the policy of Hamilton in 1792, did not show the result of any attempt to select a mint ratio in accord with that of the market. It was very clearly pointed out in the debates that the ratio of 1:16 would drive out silver.

Mr. Gorham,
*38 of Massachusetts, “warned the House not to bring about, by its hasty legislation, the same state of things in relation to silver which had heretofore existed respecting gold…. If the law should make gold too cheap, the country would have no silver circulation…. We should soon have the same cry about the want of silver coin which there was now about gold. Then the next step would be to tamper with the value of the dollar.”

So long as the market ratio was 1:15.7 and the Mint ratio 1:16, there would certainly be a tendency to the disappearance of silver. But it was urged that, inasmuch as the value of silver relatively to gold had been steadily falling for many years, it was quite likely that it would continue to fall still more in the future. Not knowing the cause of the fall in silver, it was only natural that this error should have arisen. The ratio of 1:16 was therefore urged, because, as it was said, it would anticipate
*39 the change of the next few years in the market ratio. This, however, did not come, as may be seen by Chart VII.

The effects of the undervaluation of silver, and the overvaluation of gold, in the legal ratio of 1:16, as compared with a market ratio of 1:15.7, were soon manifest. Gresham’s law was brought into play, but its operation in this period was exactly the reverse of that in the preceding period (1792-1834). In the latter, the depreciated silver drove out gold; in the former, the overvalued gold began to drive out silver. It is evident that there would be a gain in putting gold into the form of coin, instead of, as heretofore, regarding it as merchandise. A man could buy for $15,700 an amount of gold bullion, which, when coined for its owner at the United States Mint, possessed a legal tender coin value of $16,000. A debtor, therefore, would gain $300 by paying his creditor in gold, the overvalued metal. And as there was such a premium on the use of gold, so there was a corresponding premium on the disuse of silver. If a debtor had $16,000 of silver coin, he need take of it only $15,700, melt it into bullion, and in the bullion market buy gold bullion, which, when coined at the Mint into gold coins, would have a debt-paying power of $16,000. There was a profit of $300 in not using silver as a medium of exchange, and in treating it as merchandise. The act was passed in June; and in the fall
*40 of 1834 gold began to move toward the United States in such quantities that for a time some alarm was created in London as to the amount of reserves in the Bank of England. It then became very difficult to get silver
*41 in the United States, and there began a displacement of silver by gold, irrespective of the issues of paper money, which at last culminated, when the discoveries of gold in 1848 had lowered the value of gold, in the entire disappearance of silver. It can not be said, then, that the act of 1834 was properly a part of a bimetallic scheme. For certainly we did not long enjoy the use of both metals in our circulation. The very process by which gold began to come in, carried silver out of use.
*42 “It would probably be safe to assert that… one half of the citizens of our country, born since 1840, had never seen a United States silver dollar. If we should be mistaken in this; if it should be shown that one half of our people had seen a silver dollar some time in their lives, we could still fall back on the well-known historic fact that the dollar in question was rarely used as money after 1840.”
*43

It is quite clear, however, that had the ratio of 1:15.6 been adopted in 1834, instead of a counterfeit bimetallism at a ratio of 1:16, the same results would have ensued in the former case as in the latter. The gold discoveries so altered the relative value of gold to silver—exactly reversing the situation in 1780-1820—that the system would again have been left on one leg, and that a gold one. A glance at Chart VII will show that after 1850 the ratio of gold to silver moved in the opposite direction, and, instead of approaching 1:15.6, it fell to between 1:15½ and 1:15. In short, a purely bimetallic scheme in 1834 could not have succeeded in retaining both metals in concurrent circulation, owing to the impossibility of forecasting the future supplies of the precious metals, to say nothing of anticipating the changes in the future demand for them. In attempting to settle upon a legal ratio which will correspond with the market ratio for any length of time, a problem of the nature of perpetual motion is encountered. Calculation must be made not merely as to the future value of silver, but also as to the future value of gold. Neither of these things is possible. The value of each metal depends on its own demand and supply; so that for the two metals there are four independent factors to be considered. It is absurd to suppose that, if there should be a change in one of these factors, there should
ipso facto be changes in the three other factors of such a character as to neutralize the change in one. The situation is like a table resting on four legs. Two of these legs at one end may represent the demand and supply of silver, and the two at the other end the demand and supply of gold. The first two fix the height of the table at one end relatively to the height at the other end; moreover, a change in one leg will cause a destruction of the general level of the table, not to be counterbalanced except by an accommodating change in each of the other three. But it is impossible that these changes should be either in a direction or extent that should exactly offset the effect of an interfering change in but one factor. It is well worth notice, too, that changes of this description were going on in the values of both gold and silver in the years when there was no complaint that discrimination
*44 was exercised against one metal or another.

We can see, then, that the ratio of 1:16 resulted in a movement of silver out of, and of gold into, the circulation, somewhat earlier than it would have come about had the ratio of 1:15.6 been adopted; but the movement, operating with no great force for a few years, received an unexpected momentum from the gold discoveries, which, by lowering the market value of gold toward 1:15, made the overvaluation of gold in the legal ratio of 1:16 still more evident, and so still further increased the profit in coining gold and melting silver into bullion. We should expect, therefore, to find a confirmation of this explanation in the movement of gold and silver to the Mint of the United States. In the preceding period of 1780-1834, we saw by
Chart II that the coinage of silver, the cheaper metal, preponderated; and now we can see, in
Chart VIII, a similar movement, but very much more marked,
*45 in the opposite direction. The coinage of the overvalued gold soon preponderated over that of silver. A comparison of Chart VIII with Chart II will show the force and opposing direction of the influences at work in the two periods in a very distinct manner. It will be remembered that the silver coinage was chiefly of denominations below a dollar. Of silver dollar pieces, not a single one was coined from 1806 to 1836, and thereafter only in very small quantities. But, so far as the Mint figures tell the story, a very considerable movement of gold to the Mint did not begin until 1843; for the Russian mines began by that time to sensibly increase the supply of gold.