Contrary to popular misconception Congress did not create a "gold dollar" until fifty-seven years after the Coinage Act of 1792 It didn't do that until The Coinage Act of 1849. In fact it reaffirmed that "the money of account of the United States shall be expressed in dollars or units" and again defined those units as coins containing 371.25 grains of pure silver. What Congress did do was authorize the minting of a gold coin and arbitrarily fix the value of the gold in that coin at fifteen times the value of the dollar. And it also stated that all silver and gold coins produced in the federal mint were to be legal tender in accordance with their value, based on weight and purity, relative to the standard of the silver dollar.
Oh yes, another thing. It set the death penalty for anyone who debases the nation's coinage; a law which, if enforced today, would wipe out the House of Representatives, the Senate, the managerial level of the Treasury Department, and the Presidency as well.
Perhaps the most important provision of this Act, however, was the establishment of what is called free coinage. Under free coinage, any citizen may take raw silver or gold to the mint and, for a nominal fee, have it converted into coins for personal use. The government merely performs a technical function of creating the coin and stamping it with its insignia to certify the correct weight and purity. The state's role in this is exactly the same as inspecting the scales in a grocery store or the meter on a gasoline pump. It is merely fulfilling the Constitutional requirement to set standards and verify the accuracy of weights and measures.
Free coinage was to become an important part of the American success story, and it lasted until the Gold Reserve Act of 1934 which, not only terminated it, but even made it illegal for citizens to possess gold. We shall take a closer look at that dismal period in a later section but, for now, it is important to recall the greatness of our monetary system as it once was. Elgin Groseclose explains
The principle of free coinage has proved its practical worth as a deterrent to debasement and depreciation. Where coinage is on private account there is no profit to the state in tampering with the standard, and there is no opportunity for such practice by the individual. The circulation of coins of similar appearance and denomination but of uncertain standard, the arbitrary and unpredictable modifications in the standard by autocratic government, the temptations to profit which were constantly dangled before despotic rulers-these were evils which had perplexed and harassed society and hindered the natural growth of economy since the days when coined money first appeared. By a stroke they were swept away. At the same time, the institution of free coinage, by giving stability and character to one of the chief instruments of organized economy, made possible a more vigorous and healthy commercial life and gave prestige and increased substance to the government adopting it.
SOUND MONEY AND ECONOMIC PROSPERITY
This was, indeed, an auspicious beginning for the new nation, and the result was immediately observable in an upsurge in prosperity. The December 16, 1789 edition of the Pennsylvania Gazette declared: "Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. But that was just the beginning. Historian Douglass North says that "the years 1793-1808, were years of unparalleled prosperity. Louis Hacker describes the period as one "of unexampled business expansion, one of the greatest, in fact, the United States has had.... The exports of the country mounted from $19 millions in 1791 to $93 millions in 1801.'4 Furthermore, the federal deficit, which amounted to twenty-eight per cent of expenditures in 1792, dropped to twenty-one per cent in 1795. By 1802, the deficit had disappeared altogether and had been replaced by a surplus that was almost as large as the government's total spending.
George Washington watched this economic miracle with great satisfaction and, in correspondence to his friend, LaFayette, the
- Groseclose, Money and Man, p. 167.
- Quoted by Saussy, p. 36.
- Douglass C. North, The Economic Growth of the United States (New York: W.W. Norton, 1966), p. 53.
- Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39.
French statesman and former General in the Continental Army, Washington commented: "Our country, my dear sir,... is fast progressing in its political importance and social happiness." In a letter to Catherine Macaulay Graham, he said: "The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." And in a letter to the American poet and diplomat, David Humphreys, Washington exclaimed: "Our public credit stands on that high ground which three years ago it would have been considered as a species ofmadness to have foretold.
On the specific subject of paper money without backing by gold or silver, Washington wrote:
We may one day become a great commercial and flourishing nation. But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.2
This, then, was the monetary blueprint laid down by the men who drafted our Constitution. In retrospect, about the only flaw one can find was the attempt to set a fixed ratio between the value of gold and silver. Rather than placing a dollar value on a gold coin, the mint should have imprinted the gold value in terms of weight and fineness. The free market then would have assigned it an exchange value in terms of goods and services, and that automatically would have determined its correct monetary value as a ratio to the silver dollars which were bidding for the purchase of the same items. It was inevitable, therefore, that soon after the "ten-dollar" Eagle was created, the value of gold over silver began to climb higher than the prescribed ratio of fifteen-to-one, and the Eagles ceased to circulate. In later years, with the discovery of the great gold fields in California and Australia, the process reversed itself, and silver dollars disappeared from commerce. But, even though this bimetallism led to a discrepancy between the actual conversion ratio and that which the government had prescribed, nevertheless, it took place in the open market and no one was greatly injured by the inconvenience. Throughout it all, there was just one standard:
- These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6.
- Written in 1789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, Missouri: Monetary Realist Society, 1982), p. 5.
the defined silver content of a dollar. Furthermore, both the silver and gold coins were of intrinsic value and totally honest in their measure. No nation could do more for the prosperity of its citizens than that.
The Constitution prohibits both the states and the federal government from issuing fiat money. This was the deliberate intent of the Founding Fathers who had bitter experience with fiat money before and especially during the Revolutionary War. In response to the need to have a precisely defined national monetary unit, Congress adopted the Spanish dollar then currently in use and defined the content of that dollar to be 371.25 grains of pure silver. With the establishment of a federal mint, American silver dollars were issued in accordance with that standard, and gold Eagles also were produced which were then equal in value to ten silver dollars. Most importantly, free coinage was established wherein Americans were able to convert their raw silver and gold into national coins officially certified by the government as to their intrinsic value. The product of these measures was a period of sound money and great economic prosperity, a period that would come to an end only when the next generation of Americans forgot to read their history and returned to the use of paper money and "bills of credit."
The monetary plan laid down by the Founding Fathers was the product of collective genius. Nowhere in history can one find so many men in one legislative body who understood the fraud inherent in fiat money and the hidden-taxation nature of inflation. There was never such an assembly of scholars and statesmen determined to set a safe course for the nation of their own creation. Literally, they handed us a treasure map. All we had to do was follow it to economic security and national prosperity. But, as we shall see in the following sections, that map was discarded when the lessons of history died out with those who had lived it.
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