[Ed. See PDF for graphs.]
Dr. Weber earned his Ph.D. from the University of Cincinnati in 1954. He has taught in universities in Ohio. Missouri. Louisiana and Oklahoma. Presently 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.
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 I, 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 (21/2 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 4121/2 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 4,500,000,000 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.
Inset: During and after the Revolutionary War great quantities of paper money were issued not only by the United States, but also by individual states. This particular issue totaled 100,000 pounds in notes of twelve different denominations. These notes were numbered and signed by hand. The wording on the note, "This bill is equal to sixty shillings in Lawful Silver Money, and shall be received in all Payments within this State….," is especially significant because this legal tender provision was to be enforced by courts without jury trial. This provision, in turn, resulted in the famous decision in the case of Trevett vs. Weeden, which established the right of a United States citizen to trial by jury.
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:
MONEY IN CIRCULATION OUTSIDE TREASURY
AND FEDERAL RESERVE BANKS as of
JUNE 30, 1940-1974
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.