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Silver coin use fluctuated with the times

julian0729-1.jpgIn early 2008, the value of silver and gold climbed ever higher, setting records in the process. Silver was often at or above the current $18 per ounce mark while gold danced around the $1,000 mark. These recent fluctuations mask the fact that for decades the value of silver greatly influenced American coinage.

Although regular silver coinage began at the Philadelphia Mint in October 1794, this metal had long played a key role in the American marketplace.
As early as 1652 Massachusetts had produced silver coins from its mint in Boston but pressure from the British authorities in London in the early 1680s was to close down this important source for coinage.

After the demise of the Massachusetts mint, colonists had to make do with a variety of foreign coins, primarily small Spanish silver struck at Mexico City and elsewhere. Some gold was used by large merchants but the average person made do with Spanish silver, primarily the half-real, one-real and two-reales pieces.

In 1775 the Revolutionary War began with the skirmishes at Lexington and Concord and within a short time the newly formed Continental Congress had voted to issue paper currency to pay for the necessary troops and materiels. A note for $1, for example, was said to be worth a Spanish milled dollar (eight reales) but it was a rare citizen indeed in those days who got silver coins from the government in exchange for his paper money.

julian2.jpgIn real terms, of course, the Continental Congress was not all that naive since it had no real taxing authority and depended upon the states to provide funding. The rapid depreciation of the paper currency in effect proved a tax; by 1783 the Confederation currency was virtually worthless.

In the mid-1780s an attempt was made to establish a mint and coinage, but the government was so poverty stricken that it proved a futile gesture. The coinage plans, which used silver as their basis, had been carefully worked out by a Virginia congressman named Thomas Jefferson.

In 1787 leaders from all states met to prepare a federal style constitution. The idea was to create a strong central government in order that the economy, among other matters, would have a chance to prosper. Within a few months the 1787 Constitution had been adopted and the new government began operations in April 1789.

By early 1790 there was sufficient demand from the public for an American coinage that Congress asked Treasury Secretary Alexander Hamilton to submit a report on the subject; it was finished in January 1791. In March that body reacted by passing a formal resolution asking that President George Washington take the necessary steps to create a U.S. Mint and coinage based on the Hamilton report.

The President attempted to carry out the request of Congress but when this proved difficult under existing legislation, he pointedly remarked to the legislators that a comprehensive law was needed, not just good wishes. In late 1792 a Senate committee began writing the necessary draft bill for consideration.

julian3.jpgIn preparing their bill, the Senators paid very careful attention to the Hamilton report. The latter had recommended a bimetallic system with a fixed ratio between gold and silver coins. He reported that the current international ratio was roughly 15-to-1 (i.e., one ounce of gold was worth fifteen ounces of silver). Congress agreed and in April 1792 the basic Mint law was enacted.

Using the Spanish dollar as the basis, all other silver and gold denominations were created and given definitive weights. Silver was first struck in October 1794, followed by gold in July 1795. Until about 1799 the bimetallic system worked reasonably well, though gold coins never really went into the marketplace, their use being reserved for large transactions and foreign payments.

julian4.jpgCollectors today think of the early U.S. silver coins being in the marketplace, but this was not quite true. Most of the small silver change was actually Spanish. The two reales was equivalent to the U.S. quarter dollar. So many of them were in daily use that very few quarters were made in the early days.

If the widespread use of Spanish silver seems odd to modern eyes, it was also true that the large issues of American gold coins after about 1802 were heavily exported, especially to Europe. The 15-to-1 ratio had shifted on the international money markets to 15.5-to-1, which undervalued gold and created the exodus of such coins.

Beginning in 1803 the coinage of half dollars was stepped up at the Philadelphia Mint, but only part of this output was meant for the marketplace. Some of it was used in treaty payments on the frontier, but large quantities were also stored in bank vaults along the East Coast as backing for issues of paper currency. A growing number of half dollars did go into daily use, however, as the Spanish equivalent (four reales) was always in short supply.

At about the same time (1804) as the increased half dollar coinage, Mint Director Elias Boudinot stopped the coinage of silver dollars. Too many of them were being exported to China for luxury goods, never to return, a situation eerily similar to today and the large quantities of U.S. currency going to that country.

julian5.jpgFrom 1805 through 1807 there was an unexpectedly heavy coinage of quarter dollars. This was due to fewer of the Spanish two-reales coins being imported from the West Indies and Mexico; however, in 1807 the tide of incoming Spanish silver resumed and the 1807 Philadelphia coinage of quarter dollars remained on hand for several years.

From 1807 until after the War of 1812 ended in 1815, American silver coins used by the public consisted mostly of half dollars although some quarter dollars dated from 1805 through 1807 were seen on occasion. Dimes and half dimes were rarely encountered, especially after 1805 when half dimes ceased to be made.

The problem for American dimes and half dimes was that they did not fit into the Spanish system of coins. American coins have always been decimal but the Spanish silver was not and it was in widespread use, even on the frontier. Because of this, many items were priced at 6.25 cents (half real) or 12.5 cents (one real).

There are still echoes of the old Spanish system in our daily life. One of the old common high school athletic yells reads “Two bits, four bits, six bits, a dollar,” which means “Twenty-five cents, fifty cents, seventy-five cents, a dollar.” (Among the public in the 19th century, one silver real was often referred to as “one bit.”)

julian6.jpgIn the late 1820s the situation began to change for the better. It is not clear at present whether the supply of small Spanish (or Mexican after 1821) silver had begun to diminish or simply that Americans wished to use their own coins in daily commerce. But, whatever the reason, the Mint began to strike increased numbers of such coins and they did go into active use. The half dime was again struck beginning in 1829 and would not have been made if there had not been an increasing number of items priced at five cents.

By the early 1830s it had finally dawned on Congress that something had to be done about our monetary system. Well before 1834 American silver coinage was at last in full circulation but there was no gold of our stamp to be seen. Everyone now knew that the legal ratio of 1792 (15-to-1) was out of line with international reality. The increasingly large amounts of gold being mined in the southeastern United States played a major role in the congressional actions taken during this decade of change.

In June 1834 Congress at last took action by changing the ratio to 16.002-to-1. The weights of the gold coins were drastically reduced, resulting in heavy coinages which remained in the United States. Treasury officials, however, were concerned that too much gold was flowing into this country and that it might drive the silver out. This resulted in a January 1837 law which changed the ratio to 15.998-to-1.

julian7.jpgThe January 1837 law also took the opportunity, long overdue, of changing the fineness of the gold and silver coins to an even 900/1,000. (The silver, under the 1792 law, had been a clumsy .8924.) The weight of the silver dollar was reduced from 416 grains to 412.5 grains, though the amount of pure silver remained the same; smaller silver coins were in direct proportion to the dollar.

In late 1836 the Mint began, in a small way, to reintroduce the silver dollar to active circulation. Increased dollar coinage followed in 1840 but the pieces did not go into widespread use; rather, they took the place of half dollars as the choice for bank reserves. This in turn released many of the older half dollars to the marketplace.

Between 1837 and 1849 true bimetallism operated in the United States for the first and last time. There was a good supply of gold and silver bullion for coinage and the mints took advantage of this availability. Even the war with Mexico did not shake the strong currency system in effect for these years.

The Mexican War, however, had an unexpected result. The massive discoveries of gold in California beginning in 1848 meant that too much gold was being mined in terms of what the public required. This in turn created a demand for silver, especially in Europe, resulting in American silver coins being worth more than face value. Bullion dealers soon took advantage of this, resulting in the rapid disappearance of silver coins from the marketplace.

julian8.jpgIn 1851 Congress responded to the growing shortage of silver coins by creating a debased three-cent silver coin; struck in great quantities, the “trime” stayed in circulation because of its low intrinsic value. It was the first step in the abandonment of bimetallism, but this one coin could only solve a small part of the coin shortage.

In February 1853 Congress took the final step by lowering the weights of the minor silver coins by about six percent. The silver dollar was not touched, but it did not circulate anyway and very few were struck through 1858. The nation was effectively on the gold standard with minor silver a subsidiary coinage struck strictly on government account. Arrows were placed at the dates of silver coins in 1853 to denote the change in weight and status. In legal terms we now had a de jure bimetallic system but a de facto gold standard.

The 1853 law stipulated that minor silver coins (half dime through half dollar) could only be paid out by the mints for gold coin, thus regulating the amount reaching the marketplace. San Francisco and New Orleans Mint officials carefully adhered to the law but Mint Director James Ross Snowden at Philadelphia had other ideas.

Snowden thought that the Mint was too valuable an institution to waste and proceeded to pay out silver coin for silver bullion, which in effect repealed portions of the 1853 law and reintroduced a limited form of bimetallism. This illegal act resulted in mass coinages of silver, which increasingly irritated shopkeepers and bankers.

By 1858 there were so many complaints about this flood of coins that the Treasury finally ordered Snowden to obey the law; silver coinage quickly dropped to lower levels but the Civil War was just around the corner (1861) and this conflict would soon force further changes in the coinage system.

As happens in all major wars and upheavals, the public soon hoards items of value, which in this case was the gold and silver coinage. By June 1862, except on the West Coast, gold and silver had vanished from the marketplace, to be replaced by a blizzard of paper money, some of it as low as three cents in value.

In 1865 and 1866, respectively, Congress effectively replaced the three-cent and five-cent silver coins with pieces made of copper-nickel. The decision was made permanent in 1873 when these two silver denominations were simply abolished.

In one of those quirks of history, at the same time that virtually no silver coins were circulating east of the Rockies, there was an increasing amount of silver being mined in the West. This had started in 1859 at the Comstock Lode, which resulted in heavy silver dollar coinage in 1859 and 1860; depositors still had the right, under the 1853 law, to bring in their silver bullion in exchange for this denomination. War quickly put an end to that trend, however.

The problem of heavy silver mining remained and by the late 1860s the value of an ounce of silver had begun to slip. The result, perhaps to be expected, was that East Coast bullion owners brought their silver to the Philadelphia Mint to be coined into dollars. This trend began during 1868 and accelerated over the next few years to the point that annual
mintages exceeded one million.

At the same time the nation faced the problem of having been on a paper money diet since 1862. In 1870 the Treasury finally decided that something had to be done and appointed John J. Knox to prepare a coinage bill to reflect current trends and the need to put gold and silver back into the marketplace.

The result of Knox’s work, and a thorough congressional discussion, was the Mint Act of February 1873. Not only were some unnecessary denominations abolished (two-cent, three-cent silver and half dime) but the silver dollar went as well. In place of the dollar, Congress created the Trade dollar, which was meant to serve as a vehicle to export our growing surplus of silver to the Orient, especially China.

One of the key elements of reform for the currency was the appointment of Henry R. Linderman as Mint director beginning in April 1873. At the secret orders of President Ulysses S. Grant, Linderman started putting silver coins into daily use throughout the East, a direct violation of federal law; this law had been passed to safeguard the paper currency but now stood in the way of reform.

The bold gamble by the President worked and silver entered the marketplace at an ever-increasing rate. In 1875 a red-faced Congress quietly repealed the legislation forbidding this practice.

In 1873, as in 1853, the government chose to mark a weight change on the silver coinage by placing arrows at the dates. It is doubtful, however, if the public paid much attention to this as they were happy just seeing silver in use again. Arrows in 1853 had marked the practical end of the partnership between silver and gold, while the arrows of 1873 marked the official end.

During the 1870s, due to the ever-declining value of silver, there was increasing agitation for resuming silver dollar coinage to reduce the surplus of silver from western mines. In early 1878 the “silverites” in Congress were at last successful and the Bland-Allison Act was passed.
Coinage of Morgan dollars began almost immediately and was carried on at a strong pace since the government was forced to buy a considerable amount of silver each month for coinage. (At the same time the coinage of Trade dollars was phased out.)

The new dollars did have unlimited legal tender but coinage was not free, being strictly on government account. Despite popular belief, this action did not alter the fact that we were completely on the gold standard.

The last sustained effort by the silver forces came in 1890 when Congress passed the Sherman Silver Purchase Act. In addition to an increase in silver purchases, Treasury Notes were now issued that could be redeemed in silver or gold. Many foreign banking houses got nervous at this development and began to redeem their holdings for gold. A financial collapse of the American government was narrowly averted when President Grover Cleveland forced a repeal through Congress in 1893, but silver dollars continued to be coined until 1904, when bullion on hand was exhausted.

The 1896 Presidential race between William Jennings Bryan and William McKinley ended in victory for the latter and the end of a dream for the silverites. Bryan, who knew next to nothing about monetary systems or market forces, made his famous “Cross of Gold” speech, in which he blamed gold for most of the evils in the world. He demanded the free coinage of silver at the old ratio of 16-to-1 at a time when the market ratio was 31-to-1.

In a strange afterthought, in 1900 Congress passed a curious resolution which proclaimed that we were now officially on the gold standard. The United States, however, had actually been on the gold standard since 1853.
From 1900 through the mid-1960s silver coinage was struck as needed. In the late 1950s, however, silver began to recover some of its past glory and the officially fixed price of 92.5 cents per ounce was under pressure. The Treasury asked Congress to remove silver from the coinage. This was done in 1964 although coins dated 1964 were coined well into 1965. For political reasons the half dollar was allowed to keep a 40 percent silver alloy but this was phased out in 1970, leaving the “sandwich” coins.

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