A Brief Monetary History Of The United States: Part IV

Today we bring you Part IV of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:

  • Part I – Colonial Money and the Coinage Act of 1792
  • Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
  • Part III – Government Begins to Monopolize Currency
  • Part IV – The Legal Tender Cases and the “Crime of ’73”
  • Part V – The Rise of the Fed
  • Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
  • Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
  • Part VIII – The 1980s to the Great Recession and on to the Future
  • Legal Tender Cases

    Supreme Court Justice William Strong, author of the majority opinion in Knox v. Lee.

    Supreme Court Justice William Strong, author of the majority opinion in Knox v. Lee.

    The government understood the need to return to specie redemption, but was loath to let go of its issue of greenbacks. After all, greenbacks were an interest-free form of debt that circulated as money and could be used to pay off creditors, thus saving the government from having to use its valuable gold and silver. However, from the very inception of the Legal Tender Act, the constitutionality of legal tender paper currency had been called into question. That question was finally resolved after the decisions handed down in a series of Supreme Court cases known as the Legal Tender Cases.

    In 1870 the Supreme Court ruled in Hepburn v. Griswold that Congress’ bestowal of legal tender status upon greenbacks was unconstitutional. In the Court’s opinion, the Constitution did not grant the Congress power to declare paper notes, the greenbacks, legal tender for all debts, although the case itself dealt specifically with debts pre-existing the passage of the Legal Tender Act. The following year, after two new pro-greenback Justices had been appointed, the Court in two separate cases, Knox v. Lee and Parker v. Davis, overturned the Hepburn decision and declared that Congress did in fact have the power to declare paper money to be legal tender for all debts. Relying heavily on Chief Justice Marshall’s arguments in McCulloch v. Maryland, the Court in Knox and Parker ruled that the federal government had broad implied powers to provide a national currency, including the right to make bills of credit legal tender. Finally, in 1884 the Court in Juilliard v. Greenman once again reaffirmed the constitutionality of fiat paper money, citing the precedents not only of Knox and Parker, but also of McCulloch.

    The Supreme Court had validated the federal government’s ability to issue legal tender paper money in the form of greenback notes. And with no pledge for immediate redemption, Congress essentially had given itself an interest-free loan for as long it wished. While the result of these cases was to ensure the continued existence of greenbacks, political pressure on Congress to resume specie redemption did prevent the supply of greenbacks from increasing.

    The “Crime of ’73”

    Due to a combination of European countries moving to the gold standard and new silver mines being discovered (e.g. the Comstock Lode), monetary demand for silver dropped during the late 1860s and early 1870s. This caused the market price of silver to drop rapidly relative to gold. With the government’s legal silver to gold ratio still at 16:1, gold began leaving the country and silver began pouring in. Congress responded to the symptom of the problem, gold outflows and silver inflows, rather than the actual problem, the bimetallic system.

    US Trade Dollar. Image: National Numismatic Collection, National Museum of American History.

    US Trade Dollar. Image: National Numismatic Collection, National Museum of American History.

    The Coinage Act of 1873 discontinued the minting of silver dollars—the original dollar and unit of account of the United States. In its place, the Act established a one-dollar gold coin as the “unit of value.” The Act suppressed the existing silver dollar and only granted legal tender status to silver subsidiary coinage (half dollars, quarters, and dimes) for sums up to five dollars. A new silver trade dollar was introduced that shared the same legal tender status as the subsidiary coinage, but it was intended primarily for use in commerce with China as opposed to domestic circulation. The Act also specified that silver deposited at the Mint could only be minted into trade dollars or into silver bars, and explicitly banned the free coinage of subsidiary silver coinage. Effectively, the Coinage Act demonetized silver and placed the country on a de facto gold standard.

    Because of the way in which the Act was passed and the fact that gold was made the basis for the currency with hardly any debate, it was referred to as the “Crime of ’73,” particularly by silver producers and supporters of silver as money. While true that had the United States not eliminated free coinage of silver, gold coins would have, in all likelihood, disappeared from circulation and been exported to Europe and massive amounts of legally overvalued silver coins would have flowed back into the United States, the real problem was not addressed. The existence of the government-mandated silver to gold ratio had once again caused a major upheaval in American monetary policy. Unfortunately, rather than allowing market prices to establish the relative values of gold and silver, the federal government acted with a heavy hand to defend its 16:1 legal bimetallic ratio by demonetizing silver.

    The debate among the supporters of gold, silver, and greenbacks over the country’s monetary direction colored much of the political debate of the late 19th century. Popular opinion supported the continued use of silver coinage and so in 1878 Congress passed the Bland-Allison Act, which required the federal government to purchase a minimum amount of silver every month and mint that silver into silver dollars. The Sherman Silver Purchase Act of 1890 mandated an increase in the amount of silver purchased. At the end of the 19th century, the fight amongst the supporters of gold, silver, and paper reached a fever pitch. Gold ultimately triumphed, as Congress passed the Gold Standard Act in 1900, officially placing the country on the gold standard with the dollar defined as 23.22 grains of pure gold. That victory, however, was short-lived.

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