12. The Jacksonians and the Coinage Legislation of 1834

0:00The Jacksonians and the Coinage Legislation of 1834 We have seen that the Coinage Act of 1792 established a bimetallic system in which the dollar was defined as equaling both 371.25 grains of pure silver and 24.75 grains of pure gold, a fixed weight ratio of 15 grains of silver to 1 grain of gold. But bi-metalism founded on Gresham's Law. After 1805, the world market value of silver fell to approximately 15.75 to 1, so that the U.S. fixed mint ratio greatly undervalued gold and overvalued silver. As a result, gold flowed out of the country and silver flowed in, so that after 1810, only silver coin, largely overvalued Spanish American fractional silver coin, circulated within the United States.

0:52The rest of the currency was inflated bank paper in various stages of depreciation. The Jacksonians, as we have seen, were determined to eliminate inflationary paper money and substitute a hard money consisting of specie, or, at the most, of paper 100% backed by gold or silver. On the federal level, this meant abolishing the Bank of the United States and establishing the independent treasury. The rest of the fight would have to be conducted during the 1840s and later at the state level where the banks were chartered. But one thing the federal government could do was readjust the specie coinage. In particular, the Jacksonians were anxious to eliminate small denomination banknotes – $20 and under – and substitute gold and silver coins for them. They reasoned that the average American largely used these coins and they were the ones billed by inflationary paper money.

1:43For a standard to be really gold and silver, it was vital that gold or silver coins circulate and be used as a medium of exchange by the average American. To accomplish this goal, the Jacksonians set about to establish a comprehensive program. As a vital step, one of the Coinage Acts of 1834 readjusted the old mint ratio of 15 to 1 that had undervalued gold and driven it out of circulation. The Coinage Act devalued the definition of the gold dollar from the original 24.75 grains to 23.2 grains, a debasement of gold by 6.26%. The silver dollar was left at the old weight of 371.25 grains, so that the mint ratio between silver and gold was now fixed at a ratio of 16 to 1, replacing the old 15 to 1.

2:33It was unfortunate that the Jacksonians did not appreciate silver to 396 grains instead of debasing gold for this set of precedent for debasement that was to plague America in 1933 and after. The new ratio of 16 to 1, however, now undervalued silver and overvalued gold since the world market ratio had been approximately 15.79 to 1 in the years before 1834. Until recently, historians have assumed that the Jacksonians deliberately tried to bring In 1833, for example, the world market ratio was as high as 15.93 to 1.

3:27Indeed, it turns out that for two decades the Jacksonians were right and that the slight 1% premium of silver over gold was not enough to drive the former coins out of circulation. Both silver and gold were imported from then on, and silver and gold coins both circulated successfully side by side until the early 1850s. Lightweight Spanish fractional silver remained overvalued even at the mint ratio so it flourished in circulation, replacing depreciated small notes. Even American silver dollars were now retained in circulation since In order to stimulate the circulation of both gold and silver coins instead of paper notes, the Jacksonians also passed two companion coinage acts in 1834.

4:19The Jacksonians were not monetary nationalists, specie was specie, and they saw no reason that foreign gold or silver coins should not circulate with the same full privileges as A third plank in the Jacksonian coinage program was to establish branch U.S. mints so as to coin the gold found in newly discovered mines in Georgia and North Carolina. The Jackson administration finally succeeded in getting Congress to do so in 1835 when and its set up branch mints to coin gold in North Carolina and Georgia, and silver and gold at New Orleans.

5:05Finally, on the federal level, the Jacksonians sought to levy a tax on small banknotes and to prevent the federal government from keeping its deposits in state banks, issuing small notes or accepting small banknotes in taxes. They were not successful, but the independent treasury eliminated public deposit in state banks and the species circular, as we have seen, stopped the receipt of banknotes for Public Land Sales. From 1840 on, the hard money battle would be waged at the state level. In the early 1850s, Gresham's Law finally caught up with the bimetallist idol that the Jacksonians had forged in the 1830s, replacing the earlier de facto silver monomedalism. The sudden discovery of extensive gold mines in California, Russia and Australia greatly increased gold production, reaching a peak in the early 1850s. From the 1720s through Through the 1830s, annual world gold production averaged $12.8 million, never straying far from that norm.

6:05Then world gold production increased to an annual average of $38.2 million in the 1840s and spurted upward to a peak of $155 million in 1853. World gold production then fell steadily from that peak to an annual average of $139.9 million in the 1850s and to $114.7 million from 1876 to 1890. It was not to surpass this peak until the 1890s. The consequence of the burst in gold production was, of course, a fall in the price of gold relative to silver in the world market. The silver-gold ratio declined from 15.97 in January 1849 to an average of 15.7 in 1850 to 15.46 in 1851 and to an average of 15.32 to 1 in the 8 years from 1853 to 1860.

7:01As a result, the market premium of American silver dollars over gold quickly rose above the 1% margin, which was the estimated cost of shipping silver coins abroad. That premium, which had hovered around 1% since the mid-1830s, suddenly rose to 4.5% at the beginning of 1851, and after falling back to about 2% at the turn of 1852, bounced back up and remained at the 4-5% level. The result was a rapid disappearance of silver from the country, the heaviest and therefore most undervalued coins vanishing first. Spanish mill dollars, which contained 1% to 5% more silver than American dollars, commanded a premium of 7% and went first. The last coins left were the worn Spanish and Mexican fractions, which were depreciated by 10-15%.

8:02By the beginning of 1851, however, even these worn foreign silver coins had gone to a 1% premium and were beginning to go. It was clear that America was undergoing a severe small coin crisis. Gold coins were flowing into the country, but they were too valuable to be technically usable for small denomination coins. The Democratic Pierce administration saw with horror millions of dollars of unauthorized private small notes flood into circulation in early 1853, for the first time since the 1830s. The Jacksonians were in grave danger of losing the fight for hard money coinage, at least The ultimate breakdown of bimetallism had never been clearer.

8:47If bimetallism is not in the long run viable, this leaves two free-market, hard-money alternatives. A. Silver monometallism with the dollar defined as a weight of silver only and gold circulating freely by weight at freely fluctuating market rates. Number B, gold monomedalism with the dollar defined only as a weight of gold, with silver circulating by weight. Each of these is an example of what has been called, quote, parallel standards or, quote, free-medalism, in which two or more metal coins are allowed to fluctuate freely within the same area and exchange at free market prices. As we have seen, colonial America was an example of such parallel standards, since foreign Modern gold and silver coins circulated freely and at fluctuated market prices.

9:33The United States could have taken this opportunity of monetary crisis to go on either version of a parallel standard. Apparently, however, few thought of doing so. Another viable though inferior solution to the problem of bimetallism was to establish a mono-metallic system, either de facto or du jour, with the other metal circulating in the form of lightweight and therefore overvalued or token coinage. Silver monomedalism was immediately unfeasible since it was rapidly flowing out of the country and because gold, being far more valuable than silver, could not technically function easily as a lightweight subsidiary coin. The only feasible solution then, within a monometallic framework, was to make gold the basic standard and let highly overvalued, essentially token, silver coins function as The Subsidiary Small Coinage Certainly, if a parallel standard was not to be adopted, the latter solution would be far better than allowing depreciated paper notes to function as small currency.

10:32Under pressure of the crisis, Congress decided, in February 1853, to keep the de jure bimetallic standard, but to adopt a de facto gold monometallic standard, with fractional silver coins circulating as a deliberately overvalued subsidiary coinage, legal tender up to a maximum of only $5. The fractional silver coins were debased by 6.91%. With silver commanding about 4% market premium over gold, this meant that fractional silver was debased 3% below gold. At that depreciated rate, fractional silver was not overvalued in relation to gold and remained in circulation. By April, the new subsidiary quarter dollars proved to be popular and By early 1854, the problem of the shortage of small coins in America was over.

11:20In rejecting proposals either to go over completely to du jour gold monomedalism or to keep the existing bimetallic system, Congress was choosing a gold standard temporarily, but keeping its options open. The fact that it continued the old full-bodied solar dollar, the quote, dollar of our fathers, demonstrates that an eventual return to de facto bimetalism was by no means being ruled out. Fiat Gresham's law could not then maintain the American silver dollar in circulation. In 1857, an important part of the Jacksonian coinage program was repealed as Congress, in an exercise of monetary nationalism, eliminated all legal tender power of foreign coins.