Money Mischief_ Episodes in Monetary History - Milton Friedman [24]
Finally, we come to 1873. A movement was afoot to end the greenback episode and resume a specie standard. It was time for Congress to start tidying up the coinage legislation. The resulting Coinage Act of 1873 listed the coins to be minted. The list included gold coins and subsidiary silver coins, but it omitted the historical standard silver dollar of 371.25 troy grains of pure silver. Further tidying up occurred in 1874.* That was followed by the Resumption Act of 1875 and the successful resumption of a specie standard on the basis of gold on January 1, 1879.†
The events culminating in resumption in 1879 precisely parallel a corresponding sequence in Britain six decades earlier—a bimetallic standard before 1797, followed by the adoption of an inconvertible paper standard, the demonetization of silver in 1816, and resumption in 1821 on a gold basis (whereas, without the 1816 legislation, resumption would have been on silver).‡ The parallelism is not pure coincidence. The initial step, the ending of convertibility and the adoption of a paper standard, was a reaction in both countries to the financial pressures of war.* As in the United States, Britain's decision to return to a specie standard reflected the desire to have a sound money, which manifested itself in the outrage of the financial community, holders of government bonds, and some economists at the inflation produced by the departure from a specie standard—though the inflation was exceedingly modest by modern standards, at most about 5 percent to 10 percent a year. While Britain's choice of gold instead of silver was something of an accident, it was a major reason why the United States made the same choice roughly sixty years later.†
If resumption in the United States had occurred under the pre-Civil War coinage legislation, silver would have become the cheap metal whenever the gold-silver ratio rose appreciably above 16 to 1, as happened by 1875. Under those conditions, producers of silver would have found it advantageous to bring their silver to the mint rather than selling it on the market, and owners of gold coins would have found it advantageous to melt their coins down and sell the gold on the market rather than using the coins as money at their nominal face value.*
In practice, neither the conversion of specie into currency at the mint nor the melting down of gold or silver coins is costless. Commonly, a small seignorage charge is made to cover the expenses of the mint, and melting also involves some costs. In addition, interest is lost because of the delays involved in minting, and trading involves costs in selling gold or silver, and conversely. As a result, the tendency to regard the legal ratio as a precise number so that only one metal can circulate at a time is a fallacy. "Gold points" permit the exchange rates of two gold-standard currencies to fluctuate within a range without producing gold shipments; similarly, under a bimetallic standard "gold-silver price ratio points" permit the ratio to fluctuate within a range without producing either a premium on one metal or its complete replacement by the other.†
The omission of any mention of the standard silver dollar in the Coinage Act of 1873 ended the legal status of bimetallism in the United States. Had that fateful line not been omitted from the act, resumption in 1879 would almost surely have been on the basis of silver, not gold. That was "the crime of 1873" in the eyes of the proponents of silver.
The events raise two questions. The less important, but easier to answer, is: Was there a "crime," in any meaningful sense? The far more important, but also far harder to answer: What would have been the consequences of including the fateful line?
Was There a "Crime"?
In 1877, "an editorial in The Nation... read in part as follows: 'Mr. Ernest Seyd, a designing bullionist and secret agent of foreign bondholders, came to this country from London in 1873, and by corrupt bargains