Coinage act of 1873
One of the reasons I started this website is to learn and teach others about the history of money and what exactly is money on a fundamental level. We trade these little pieces of green paper back and forth constantly, but what exactly are they? I have found that there is a lot of nuances to this question, which is why there are multiple posts about the history of money. One piece of legislation that was never taught in school (at least one I have gone to) is the Coinage Act of 1873 (also known as the Mint Act of 1873). This act is very interesting because it became so notorious that it was later referred to as the “Crime of 1873”.
In the above cartoon, you can see “Sound Money Law of 1900”. This is referring to the Gold Standard Act of 1900 which officially placed the United States on the Gold Standard. As we will get into in the next paragraphs, the Coinage Act of 1873’s demonetization of silver was one of the original cracks in Silver’s sword (The sword of silver is broken in the cartoon).
History
The original definition of the US dollar given by the founding fathers was in grains of silver, and the value of gold was then 15 times that of silver. In order to maintain control of the money supply the government would change this gold to silver ratio. Without this, people would search for arbitrage plays on the metals themselves. This was how the dollar pretty much started. Now, there is a lot of history between here and the era right after the civil war when the Coinage Act of 1873 was signed by President Ulysses S. Grant, but there are entire books written about this and we will hit the highlights in later posts.
As you can imagine, right after the civil war, public confidence in the United States government was rather low. Due to this, people were hoarding gold and silver as typically happens in and after a crisis period. The hoarding of the metals caused their prices to increase, classic supply and demand, high demand because people wanted it to hoard, and low supply because no one wanted to sell theirs back into the market. This also caused little silver to be presented to the Mint (where the government makes the physical coins). At the time, John Jay Knox, the fourth comptroller of the currency, foresaw an increase in the production of silver due to silver-rich areas out west. This drastic increase in supply would induce a decrease in the price of silver, and if the increase was too large, it was argued that the bimetallism system the United States was using could be endangered.
After the passage of the bill, the silver price dropped just like Knox predicted, but when producers took their stock to the U. S. Mint, they could no longer have their metal stuck into bullion. Since the demonetization of silver part of the bill wasn’t a major discussion point, the public wasn’t too aware of it either. It is argued on whether or not this was done out of malice or just not really paying attention. The demonetization of silver was not discussed originally because senators were focused on the omission of the coinage charge that affected what miners and refiners would get for their metal. The coinage charge is the fee for the Mint’s services in converting the actual metal into money.
It is argued that taking away silver’s status of money was one of the leading causes of the series of financial panics that ensued after this act and also the reason the act itself was later deemed the “Crime of 1873”. If the act was a contributing fact to the financial panics, those were most likely just unintended consequences. This is supported by historian Allen Weinstein as he stated, “Silver’s demonetization, according to the traditional account, came as an unplanned if fortunate by-product of a complex and largely technical revision of the mint laws in the coinage act of 1873.”
What did the Crime of 1873 actually do?
Remember how the founding fathers defined the dollar in terms of grains of silver? The Coinage Act of 1873 redefined the dollar to be in terms of grains of gold. Essentially, silver was no longer considered money in the United States because it no longer had a tie to the dollar itself. This transferred the United States from a bimetallism system (gold and silver) over to the gold standard (only gold). The other way this act demonetized silver was silver was no longer considered legal tender for a debt above $5. This limit came from the Specie Payment Resumption act of 1875, but technically the greenbacks could still be redeemed for silver. Keep in mind that the reason this was such a big deal is because the holder of the silver bullion could no longer have their metal struck into legal tender dollar coins. This had the largest impact on people who had debts to pay and were not particularly wealthy: miners, farmers, etc.
Consequences of the Crime of 1873
After the bill was passed, the price of silver plummeted due to an oversupply. This caused the price of gold to increase dramatically relative to silver because people wanted to trade their silver for gold. Let’s take a second to walk through the supply and demand of the situation. There was an oversupply of silver, since silver was not abundant, it was less valuable, so people wanted to trade it for something more valuable (scarce), in this case gold. The demand for gold increased while the demand for silver decreased. So essentially, everyone who held silver wanted to get rid of it because it was losing value, well, due to the Coinage act of 1873, they could no longer take it to the Mint to be made into legal tender. Basically, the government had legislated the largest buyer of silver out of the market. This basically meant people just had to hold onto the silver until they could find another buyer that would use it for other reasons or try to get it to a foreign country somehow.
Since this act had such a significant negative effect on the general population, the government did a lot to try to soften the blow. The Bland-Allision act of 1878 was a way to appease the miners in the west as well as silver supporters. Basically, the government forced the Treasury to become a buyer of two to four million dollars in silver every month, of which they bought from silver miners. Also, twelve years later, congress passed the Sherman Silver Purchase act which required the government to buy an additional 4.5 million ounces of silver bullion monthly. For this one the government typically bought the silver with gold notes, slowly driving silver out of circulation.
Another major consequence of demonetizing silver is that it shrank the money supply drastically almost overnight. With fewer currency units, the prices of goods and services decreased drastically. This is great from the perspective of a consumer, but if you are holding any form of debt, that can be detrimental. This is the reason the Coinage Act of 1873 is believed to have been a contributing factor to the financial panics that happened during the next few decades of its passage.
This exposes a very important lesson that must be understood for any kind of debt. You need to understand what your debt is denominated in because if something happens to that currency, you could be in huge trouble. This is something that investors who invest in foreign countries are well acquainted with, especially if they make or take loans in different currencies. If the currency in which your loan is denominated in starts to increase in value (decrease in money supply as shown by this post) then your debt increases dramatically in terms of purchasing power because the nominal value of your loan is constant, but the value of each unit increases.
Conclusions
Not a lot of people remember that the United States was originally a bimetallism system with both gold and silver used as currency. Honestly, the last time I heard about this was in middle school, and even then, it was a passing remark in a history class. However, this whole fiasco with the Coinage act of 1873 shows us two major things: the economy and financial health of the country is heavily influenced by the type and amount of the money supply, and the government doesn’t always think of the possible unintended consequences of their actions. It can be argued that they never try to think about unintended consequences, but I don’t think I can write about that and minimize my bias at the same time, so maybe that will be a future post.
To your wealth and future,
James Forsythe
For more on precious metals and financial history
https://jamesdforsythe.com/category/finance/goldandsilver/
https://jamesdforsythe.com/category/finance/financial-history/
For a YouTube video of me going more in depth with my thoughts
Below is a pdf of the Coinage act of 1873 if you are interested
Some references that were helpful
https://www.usmint.gov/news/inside-the-mint/mint-history-crime-of-1873
https://www.encyclopedia.com/history/dictionaries-thesauruses-pictures-and-press-releases/crime-1873
