Money Mischief_ Episodes in Monetary History - Milton Friedman [22]
How did this apparently innocuous legislative measure evoke such strong and contrasting reactions from leading scholars, businessmen, and politicians over so long a period? How did it become a central issue in a presidential campaign conducted more than two decades after its passage? (Chapter 5 tells that story.) Was it a crime, in any sense of the term? What were its actual consequences? To answer these questions requires some background in monetary history and theory.
The Background
The U.S. Constitution gives Congress the power "to coin money, regulate the value thereof, and of foreign coin," and prohibits the states from making "anything but gold and silver coin a tender in payment of debts." In initially exercising this power, the Congress, following the recommendation of Alexander Hamilton, passed the Coinage Act of April 2, 1792. That act defined the basic monetary unit of the United States as the dollar and defined subsidiary coinage on a decimal basis—the cent, the "half-disme" (later the nickel), the "disme" (later the dime), the quarter, and so on. It further defined the dollar as equal to 371.25 grains of pure silver or 24.75 grains of pure gold, authorized the free coinage of both silver and gold at the specified ratio of 15 to 1, and specified the fraction of alloy to be combined with pure metal in striking the coins.*
I have italicized two terms that are critical to understanding "the crime of 1873." Free coinage is critical because it gave practical content to a specie standard by providing that the government mint would convert all specie that individuals chose to bring to the mint into legal-tender currency denominated in dollars (initially solely in the form of coins, later in paper certificates as well) at the stated metallic equivalent. Both is critical because it effectively established the United States on a bimetallic standard, that is, a monetary standard that authorized the free coinage, and hence the use as money, of either of two metals, silver or gold. These two provisions were equivalent to saying that the U.S. government would buy all silver and gold offered to it at prices of $1.2929 ... per troy ounce of pure silver and $19.3939 ... per troy ounce of fine gold—in other words, 15 times as much for an ounce of gold as for an ounce of silver, whence the ratio of 15 to 1.*
Although either silver or gold could legally be used as money, in practice only silver was so used until 1834. The reason was simple. There was and is a market for silver and gold outside the mint—for jewelry, industrial uses, coinage by other countries, and so on. In 1792 the ratio of the market price of gold to the market price of silver was almost exactly 15 to 1, the ratio Hamilton recommended. But shortly afterward the world price ratio went above 15 to 1 and stayed there (see Jastram 1981, [>]). As a result, anyone who had gold and wanted to convert it to money could do better by first exchanging the gold for silver at the market ratio and then taking the silver to the mint, rather than taking the gold directly to the mint.
To put it another way, look at the mint as if it were a two-way street at a 15 to 1 ratio. An obvious get-rich scheme would be to bring 15 ounces of silver to the mint, get 1 ounce of gold in return, sell the ounce of gold on the market, and with the proceeds buy more than 15 ounces of silver, pocket the profit, and keep going. Clearly, the mint would soon be overflowing with silver and out of gold. That is why the mint's