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 bimetallism foundered 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.
The 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-percent-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 read- just the specie coinage.
In particular, the Jacksonians were anxious to eliminate small-denomination bank notes
($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 bilked by inflated paper money.
For 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 one 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 percent.
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.
It was unfortunate that the Jacksonians did not appreciate silver (to 396 grains) instead
of debasing gold, for this set a 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 gold and expel silver and establish a monometallic gold standard by the back door.
Recent study has shown, however, that the Jacksonians only wanted to give gold inflow
a little push through a slight undervaluation and that they anticipated a full coin circulation
of both gold and silver.
In 1833, for example, the world market ratio was as high as 15.93-to-1.
Indeed, it turns out that for two decades the Jacksonians were right, and that the slight
1-percent 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 they were "shielded"
and kept circulating by the presence of new, heavy- weight Mexican silver dollars, which
were exported instead.
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.
The 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 American-minted coins.
Hence, the Jacksonians, in two separate measures, legalized the circulation of all foreign silver
and gold coins, and they flourished in circulation until the 1850s.
A third plank in the Jacksonian coinage platform 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
it set up branch mints to coin gold in North Carolina and Georgia,
and silver and gold at New Orleans.
Finally, on the federal level, the Jacksonians sought to levy a tax on small bank notes and
to prevent the federal government from keeping its deposits in state banks, issuing small
notes, or accepting small bank notes in taxes.
They were not successful, but the independent Treasury eliminated public deposit in state
banks and the Specie Circular, as we have seen, stopped the receipt of bank notes
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 idyll that
the Jacksonians had forged in the 1830s, replacing the earlier de facto silver monometallism.
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 the 1830s, annual world gold production averaged $12.8 million, never
straying very far from that norm.
Then, 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 15.70 in 1850
to 15.46 in 1851 and to an average of 15.32-to-1 in the eight years from 1853 to 1860.
As a result, the market premium of American silver dollars over gold quickly rose
above the 1-percent margin, which was the estimated cost of shipping silver coins abroad.
That premium, which had hovered around 1 percent since the mid-1830s, suddenly rose to 4.5
percent at the beginning of 1851, and after falling back to about 2 percent at the turn
of 1852, bounced back up and remained at the 4- to 5-percent level.
The result was a rapid disappearance of silver from the country, the heaviest and therefore
most undervalued coins vanishing first.
Spanish-milled dollars, which contained 1 percent to 5 percent more silver than American
dollars, commanded a premium of 7 percent and went first.
Then went the full-weight American silver dollars and after that, American fractional
silver coins, which were commanding a 4-percent premium by the fall of 1852.
The last coins left were the worn Spanish and Mexican fractions, which were depreciated
by 10 to 15 percent.
By the beginning of 1851, however, even these worn foreign silver fractions had gone to
a 1-percent 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
for the smaller and medium denominations.
Something had to be done quickly.
The ultimate breakdown of bimetallism had never been clearer.
If 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; or (b) gold monometallism 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 "parallel standards" or "free metallism,"
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
gold and silver coins circulated freely and at fluctuating market prices.
The 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 monometallic system, either de facto or de jure, with the other metal circulating
in the form of lightweight, and therefore overvalued, or "token" coinage.
Silver monometallism 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
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.
Under 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 percent.
With silver commanding about a 4-percent market premium over gold, this meant that fractional
silver was debased 3 percent 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.
In rejecting proposals either to go over completely to de jure gold monometallism 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 silver dollar, the "dollar of our fathers,"
demonstrates that an eventual return to de facto bimetallism was by no means being ruled out
albeit 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.
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