During this year the third century of American
independence will have begun and it is therefore appropriate to reflect
on an important aspect of American life, the monetary system which has
been so closely tied up with the successes and failures of the United
States during the first two centuries of its existence.
Prior to 1776 the money circulating in the colonies
consisted largely of silver and gold struck in Spanish mints, especially
those in Mexico City and Lima, as well as other coins struck in various
countries, such as England, France and the Netherlands. Foreign coins
were of such great importance to the commerce of the United States that
Congress continued to recognize their status as legal tender down to
1857.
During the years immediately before the Revolution
various colonies issued paper money and during the first years after the
Declaration of Independence the states issued large quantities of paper
money which rapidly deteriorated in value. The disillusionment with this
paper money and a recognition of the chaos which it had caused are
reflected in Article 1, Section 10 of the Constitution: "No state
shall.... make any Thing but gold and silver Coin a Tender in Payment of
Debts."
In defense of this provision, James Madison (The
Federalist Papers, No. 10) speaks of "A rage for paper money, for an
abolition of debts, for an equal division of property, or for any other
improper or wicked project." In No. 44 he continues in the same vein:
the pestilent effects of paper money on the necessary confidence between
man and man, on the necessary confidence in the public councils, on the
industry and morals of the people, and on the character of republican
government ......
By 1792 the first United States mint was established in
Philadelphia, but its production was at first quite modest. The first
regular production in 1793 consisted of cents and half cents, followed
in 1794 with a very modest introduction of dollars and half dollars
struck on the same standards as the Spanish denominations of eight and
four reales. (Whence the colloquial designation of "two bit's" for
quarter dollar, etc.) Although the weight of the dollar was immediately
of Spanish origin, its designation was of German origin (from Taler).
The first five and ten dollar gold pieces were struck in 1795 and the
first dimes, quarters and quarter eagles (2 1/2 dollar gold pieces) in
1796. If the production of the United States mint at Philadelphia during
its first few years seems quite modest, we must bear in mind that this
modest outflow of money was just beginning to displace and supplement
the large quantities of Spanish and other coins in circulation.
This reliable silver and gold money, both foreign and
domestic, was the basis of a sound economic expansion during the first
decades of the nineteenth century. Notes were issued by private banks,
especially during the 1850s, but this unreliable money seems to have
been of little importance in spite of the beautiful engraving work often
to be found on it. The federal government abstained from issuing paper
money until the Civil War. After this dire period the issuing of paper
money was continued by the federal government, but most of it consisted
of notes which were simply certificates for gold and silver payable on
demand.
Meanwhile, a large production of gold and silver
coinage continued to provide the basis of the sound economic growth of
the United States. A considerable quantity of silver trade dollars (for
foreign trade, especially in the Orient) with a weight of 420 grains
(27.20 grams) was struck between 1873 and 1878, while particularly large
quantities of dollars with a weight of 412 1/2 grains were struck for
domestic use during 1878-1904 and 1921-1928. Even far more significant
was the huge production of gold coinage, which totaled over
4,500,000,ooo dollars by 1933, a sum of reliable coinage of the precious
metal unprecedented in the history of the world. About three fourths of
this gold coinage was in the form of double eagles ($20 gold pieces)
struck, beginning with 1850, with a weight of 516 grains (33.436 grams)
and a fineness of 900/1000.
Beginning in 1933 one step after the other removed us
from the monetary traditions established with wisdom by our forefathers
in the eighteenth century, traditions which had had a wholesome effect
on the development of the American character and which had provided a
sound basis for economic development. The huge gold coinage was
demonetized in 1933 and the domestic monetary use of gold was
prohibited. These measures were impatiently undertaken on the assumption
that the resultant possibility of monetary expansion would cure an
economic crisis prevailing at the time, but their short range effects
were probably nil and their long-range effects seem to have been
distinctly negative.
Even after 1933, however, the gold backing of the
dollar continued until that watershed Sunday, August 15, 1971, by virtue
of the fact that a huge gold reserve existed that supported the value of
the dollar in a very real way by being available to foreign governments
with dollar assets. On August 15, 1971, this last remaining connection
between the United States gold reserve (by this time depleted to less
than half its maximal size) and the dollar was finally severed by
President Nixon. In the meantime, the expansion of currency had been so
great that the price of silver in terms of paper money had increased to
such an extent that the huge amount of silver coins in circulation was
beginning to be hoarded. In 1965 the first copper dimes and quarters
appeared as a sad substitute for the 900/1000 silver coins which had
been struck with nearly the same weights for seventeen decades. In the
same year the fineness of the half dollar was reduced from 900/1000 to
400/1000 and in 1971 the first half dollars entirely without silver
appeared. The silver certificates (blue seal notes) remaining in
circulation were repudiated in 1969.
Less obvious to the average citizen than these visible
changes in the coinage and paper money was the huge and insidious
increase in currency that was taking place, especially beginning after
1961. According to data recently furnished by Secretary of the Treasury
William E. Simon, the currency in circulation (including that held by
commercial banks) increased from $7,848 million on June 30, 1940, to
$73,833 million on June 30, 1974. When we plot out the annual increases
during this period we obtain the following revealing graph:
The failure of paper money and copper-nickel tokens as
a reliable store of value is vividly demonstrated by this simple graph.
Each horizontal unit represents one thousand million dollars in
circulation, including those held by commercial banks, on June 30 each
year from 1940 to 1974. Wholesale prices rose from a base of 100 in 1967
to approximately 168 in 1974, an increase almost exactly proportional to
the amount of money in circulation as given above. The really
frightening aspect of this curve is its almost smoothly exponential
shape beginning especially after 1961, indicating the cynically planned
nature of the inflation which has been debilitating the American private
economy and unjustly expropriating the real value of monetary savings of
individual citizens. Note that the period 1946 to 1960 was one of
relatively modest monetary expansion and also one of relatively little
unemployment on the whole. This refutes the nonsense so frequently heard
nowadays that we are faced with a choice between inflation and high
rates of unemployment. The shape of the curve since 1961 is also a
bone-chilling indication of the probable future decline of the
purchasing power of individual dollars.
The motivations for the great expansion of currency,
especially during the last fifteen years, are by no means difficult to
understand. They are tied in with the complexities of a tax structure
which includes a sharply graduated income tax, as well as taxes on
"capital gains" and "interest," even when such putative capital gains
and interest represent no income whatsoever in real terms. By its
deliberate expansion of the money supply (inflation) the government
takes an ever-increasing percentage of the earnings of its citizens in
taxes. These motivations also explain the doctrinaire abhorrence which
officials of the Treasury Department now have for the monetary use of
the precious metals, both domestically and internationally.
Unless foresighted, unselfishly courageous political
forces gain the power to put a stop to the trend shown on the graph,
monetary chaos and its usual concomitants, economic and social
deterioration, will almost certainly be our fate during our third
century as a national state. To visualize our own future if present
trends are not stopped we need only recall the tragic developments in
Germany, France, Russia, China, Hungary and Chile (just to mention a few
examples) when the amounts of their currencies in circulation shot up
into astronomical figures.
Dreary as this picture of our future might seem, there
is one note of optimism on which we can end. The rapid monetary
expansion of the last 15 years, which now threatens to evolve into a
hyperinflation, has resulted in a decline of purchasing power, injustice
to the holders of paper money and bonds, economic dislocations and other
evils. However, this monetary expansion and its results have not been a
catastrophe of nature or an act of God, but rather simply human action.
What human action has brought about, human action can also rectify if
the will to the action exists.
Dr. Weber earned his Ph.D. from the University of
Cincinnati in 1954, at the time of the original publication, he had
taught in universities in Ohio. Missouri, Louisiana and Oklahoma. And
a member of the Faculty of Letters of the University of Tulsa, he is
the author of numerous articles on literature, history and monetary
questions.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
August 1976, Vol. 26, No.8.
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