Money Mischief_ Episodes in Monetary History - Milton Friedman [23]
In 1834 new coinage legislation was introduced, in recognition of the changed gold-silver price ratio, which by then was about 15.625 to 1 on the world market. This ratio was repeatedly recommended by the Select Committee on Coins of the House of Representatives from 1832 to 1834, supposedly in the desire to "do something for gold," which had recently been discovered in Virginia, North Carolina, South Carolina," and Georgia and "had become of genuine importance to the four southern states" (O'Leary 1937, p. 83). However, the Select Committee rather suddenly changed its recommendation to a ratio of 16 to 1, not to do something for gold—though it certainly did that—but to do something against Nicholas Biddle's Bank of the United States.† This was at the height of the famous "bank war" between President Andrew Jackson and Nicholas Biddle, which finally resulted in the failure of Biddle's bank to obtain a new charter when its original federal charter expired in 1836. As Paul M. O'Leary (1937, p. 84) put it, the ratio of 16 to 1 was "a golden club ... used by Jackson and his supporters to belabor their hated enemy, The Bank." The unsatisfactory state of the currency—it was a mixture of U.S. and foreign silver coins, plus paper money issued by state banks, some of doubtful quality—had made the notes issued by Biddle's bank a favored medium of exchange. The act of 1834 was expected to weaken the bank by making gold coins an effective substitute for its notes.
Two points about this episode deserve special mention. First, in 1834, 16 to 1 was a golden club; in the 1890s, 16 to 1 was a silver club. Second, in both cases the club was wielded by much the same political constituency against much the same political constituency—the largely rural, small-business, lower-class southern and western supporters of Andrew Jackson in 1834 and of William Jennings Bryan in 1896, against the bankers, financiers, big-business interests, and urban upper classes of the east and northeast.
In any event, the adoption of the 16 to 1 ratio—making the official price $20.671835... (= 480/23.22) per fine ounce of gold—spelled the end of the reign of silver. From then to the Civil War, silver coinage was limited almost entirely to subsidiary coins. They too were overvalued at the new legal ratio until 1853, when Congress voted to reduce their silver content. The difference was so small, however, and so many were underweight, that it was not worthwhile to melt them down (at least until the Civil War greenback inflation) (Carothers 1930, [>]). From 1834 on, gold coins circulated, and gold was the effective standard. Despite the increased demand for gold for monetary use, the gold-silver market price ratio fell after the California and Australian gold discoveries of the 1840s and 1850s. Gold's status as cheap money seemed secure.
The Civil War temporarily ended the reign of gold. The exigencies of financing the war led to the introduction of paper money—greenbacks—issued without gold or silver backing and without any promise of redemption in either metal.* Paper, as it were, became the cheap money. Gold continued to circulate, however, particularly on the west coast, but of course not on a one-to-one ratio with greenbacks. A free market arose in which the "greenback price of gold" rose above the official legal price—indeed, at the extreme, to more than double the official price. The government required customs duties and certain other obligations to be paid in gold; banks provided separate gold and greenback deposits for their clients. In short, gold and greenbacks circulated side by side at a floating exchange rate