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Saturday, September 7, 2013

Impact & Consequences of the Original Silver to Gold 15-to-1 Ratio used for US Coinage

 Gold Weight Reduction Did the Trick

By R.W. Julian, Numismatic News
September 05, 2013

Today, in the age of fiat money we are far removed from the early 19th century when coins of gold and silver circulated freely in the marketplace. In those days the average citizen looked carefully at the coins that were used, making certain that they were genuine and of full weight and value.

When the basic mint law was passed by Congress in 1792 it was decided that the monetary system of the United States would be bimetallic, an arrangement by which gold and silver would be of equal importance in the coinage. The relationship between the two metals was set at 15 ounces of silver to one ounce of gold, usually referred to as a 15-to-1 ratio.

The 15-to-1 ratio had been carefully worked out by Treasury Secretary Alexander Hamilton in a masterful report presented to Congress in January 1791. At first Congress did little but after prodding from President George Washington in late 1791 the legislators finally stirred and the result was the mint law of April 1792.

Hamilton had set the ratio at 15 to 1 because the international financial markets used that number. The problem with market ratios, however, is that they change over time with new discoveries of bullion or wars that disrupt normal commerce. This is what happened after 1799, but unfortunately the new law did not have a built-in mechanism for change.
Although silver coinage began at the Philadelphia Mint in the fall of 1794 it was not until 1795 that operations got fully under way for this metal. In July the silver was joined by the gold coinage and now the nation had a fully operational mint in all three metals, including the copper whose coinage had begun in 1793.

Because there was no serious change in the international markets during the waning years of the 1790s, gold and silver coinage in the United States continued on their appointed ways. The two precious metals did circulate although gold of course was more or less restricted to the merchant and banking classes and used for large transactions.

It must also be noted that, while the Philadelphia Mint was busily turning out coins in all three metals, coins of other countries provided the bulk of precious metal coins used in American marketplaces. In particular Spanish gold and silver coins were found practically everywhere in this country where money changed hands; the new United States coins at first were seen only in Philadelphia but later were to slowly arrive in other major cities, such as New York and Baltimore.

As early as 1800 the shift in the ratio of gold to silver was a matter of concern. It reached 15.5 to 1, meaning that it now took fifteen and one-half ounces of silver to equal an ounce of gold. This in turn indicated that gold coins of the United States were now undervalued and they began to be exported to Europe, especially Britain and France. The change was not at first particularly severe, as Spanish gold, especially the doubloon of 8 escudos (worth about $16), was more often than not the choice of merchants to send abroad.

As if the growing difficulty with gold was not enough, there arose a similar problem with the American silver coins. It was standard practice for American merchants, when buying goods from India or China, to send Spanish dollars (pieces of eight) in exchange for the products needed in this country. In times of scarcity of the Spanish dollars, however, United States dollars were sometimes sent, having been accepted by Indian and Chinese merchants as having the same value.

The twin problems of both gold and silver leaving the country were well known to the Bank of the United States as well as Mint Director Elias Boudinot. The latter, who was wealthy in his own right, was also a director of the Bank of the United States and used his influence to create roadblocks for American gold and silver coins leaving the country.

The result of Boudinot’s intervention was a request by the Bank of the United States in late 1803 to President Thomas Jefferson to end the coinage of $10 gold coins (eagles) and silver dollars. Having been assured privately by the Treasury that the new policy could be implemented, the striking of these two denominations ended in 1804.

The suspension of eagle coinage did not really end the problem of American gold leaving the country. The $5 pieces, or half eagles, were just as prone to export although this was still masked at first because the Spanish doubloons were still the coin of choice to ship abroad. On the other hand the suspension of dollar coinage did partially stem the flow of silver leaving the country. Half dollars were exported to a limited degree but mostly to the Caribbean and Canada where they were used as local currency.

One of the myths about United States half dollars is that they were primarily used by banks as backing for their issues of paper money. The coins were in fact used for this purpose but half dollars were also in widespread use throughout the country. These coins were used to make treaty payments to Indians, for example, which meant that half dollars reached the frontier in relatively large numbers.

Despite the 1792 law creating a bimetallic currency, in effect the United States was headed towards a single silver standard because of the defective legal ratio of 15 to 1. After 1804 increasing amounts of American gold were shipped to Europe though the Spanish gold was still readily available to send and usually was.

The War of 1812 with Great Britain, which broke out in June of that year, was to force changes in the American monetary system. In 1811 Congress, in an act that defied common sense, refused to renew the charter of the Bank of the United States. This hobbled the government in funding the necessary war expenses, leaving the nation with a massive debt; the conflict also caused the widespread hoarding of gold and silver coins.

There was a temporary recovery of a functioning bimetallic monetary system beginning in 1817 when the Philadelphia Mint struck silver coins once more on a large scale. This was followed by gold in 1818 but the improvement was short-lived. By the end of 1819 gold coins, both American and Spanish, had virtually vanished from the banks. Some remained in private hoards, accounting for the coins available to collectors today, but most went to Europe.

To stem the flow of gold from this country, in January 1819 Representative William Lowndes of South Carolina introduced a measure to reduce the weight of gold coins and at the same time limit legal tender for silver coins to $5. He also planned to reduce the weight of the silver coins, which meant that his stated ratio of 15.6 to 1 was actually about 15 to 1. The draft legislation, had it become law, would have achieved almost nothing but did call attention to the ongoing monetary situation.

The imports of foreign gold masked the virtual absence of American pieces. The vault of one of the branches of the Bank of the United States was examined in 1820 to determine the amount of gold on hand. There was more than $700,000 in specie but only $1,200 of this was in gold; the American part of the latter was but $100.

On several occasions during the years 1819 through 1822 Congress held hearings and produced draft legislation to correct the imbalance between the 15 to 1 ratio and the international market. A considerable number of people well understood the problem and offered reasonable alternatives but a larger number did not and the Congressional proposals of this period all went nowhere.

In one instance the Bank of the United States, which had been re-chartered for 20 years in 1817, imported $2 million in coined money from Britain in 1820. Half was to be in gold if possible but the result was almost predictable, with only silver being shipped.

The disappearance of the gold coinage meant that the United States, for practical purposes, was on the single silver standard. Gold had become merely a commodity even though the Mint continued to strike gold coins. The year 1820, for example, saw more than a quarter million half eagles struck but practically the entire issue went to Europe within a short time after being struck.

As early as 1821 Mint officials realized that the gold coins being made for depositors were not staying in the United States. On occasion even the Mint director would comment that the Mint had become little better than an assay institution, creating ingots in the form of half eagles.

During the 1820s the situation for American gold coinage went from bad to worse. Not only were the mintages small but the results were the same, the gold being exported almost immediately to Europe. There is a report of 40,000 half eagles being melted in Paris in just one such event but there would have been numerous other times that left no mark in the permanent records.

In an odd change of pace, the Mint began striking quarter eagles in 1821, the first time since 1808. One would think that these small gold coins were meant for circulation in some of the more remote areas of the country but such was not the case. They were in fact struck to pay certain Congressmen who demanded their salaries in gold; once paid the coins were usually sold to a bullion dealer at a premium, thus increasing their salaries with the help of the Mint.

In the latter part of 1829 there was a sudden increase in gold coinage at the Philadelphia Mint but appearances were deceiving. This extra coinage, which became much stronger in 1830 and succeeding years, was the result of several major gold rushes in the South. Mines in North Carolina had provided a small but steady amount of gold in the 1820s but the additional discoveries, especially in Georgia, provided a considerable amount of gold to coin.

It is little known but even states such as Virginia and South Carolina provided significant amounts of gold for coinage. Lesser amounts came from Alabama and Tennessee.

The year 1832 is perhaps as good an indication as any for the Southern bullion reaching the Mint. The total deposits of gold for that year were $800,000 and the Southern share came to $680,000. The Mint had become, as noted earlier, little better than an assay factory coining gold for export to Europe, a fact well known to officials of the Mint and Treasury.

President Andrew Jackson, who assumed office in March 1829, was especially concerned about the state of the coinage in this country. He not only wanted gold and silver to circulate among the common people but wanted such coins to stay in this country and not be exported. At the same time Jackson also intently disliked bank notes of all kinds, even those of the Bank of the United States; the latter institution acted as a brake on the more poorly run private banks, thus keeping the economy on a more even keel than otherwise would have been the case.

There were a series of Congressional hearings and reports in the early 1830s, primarily at the instigation of the Jackson Administration. In June 1834 there was a breakthrough in Congress, with that body passing a reform of the mint laws as they applied to the gold coinage. Prior to that time the half eagle had weighed 135 grains (8.75 grams) but this was reduced to 129 grains (8.36 grams); the other gold coins were reduced in proportion…

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