Important Dates in the Monetary History of the US
Solari.com, by
David Liechty Monday, 20 July 2009, 12:04 pm
Part I: 1606 to 1776 – Colonial Era
Prior to the signing of the Declaration of
Independence, the American Colonies were subject to the rule of
English Common Law and pronouncements of the English Crown
and Parliament. Charters from the English Government delineated
legal powers granted to the colonies, and at least one,
Virginia’s Charter of 1606 , gave that colony the power to
coin its own money. Others, however, did not have this power,
and it was Massachusetts’ 1652 establishment of a
mint, for example, that led in part to revocation of its
Charter in 1684 and closure of the mint in 1688.
English Common Law at this time, and up until
1816, required English government coin to be of precious metal
(gold or silver) regulated, in terms of weight and fineness,
against a “sterling” standard.
Silver coin of a specific weight (one “pound”) and fineness
(92.5% silver) was set as the “sterling metal” against which all
other coin, foreign and domestic, was compared and valued.
Silver coin was kept at a constant value, while the issue of
gold coin fluctuated in denomination with changes in the
relative market value of gold. This bimetallic system was
followed in England from 1603 until 1816. In 1672, the English
government first issued copper farthings and half-pence, which
were treated differently under the common law.
This English Government-issued coin was only
one medium of exchange used in the colonies, however, and was
relatively scarce. The American colonists utilized a wide range
of foreign coin, as well, and given the amount of trade with
Spanish Colonies in the Americas, the Spanish milled dollar, or
“Piece of Eight” became ubiquitous throughout, with Virginia
establishing it as the standard of its colonial currency as
early as 1645.
The American colonists also utilized commodity
money-substitutes such as tobacco, wampum, corn, bullets, and
livestock, which often circulated within the colonies in the
form of warehouse receipts. “Book credit” was also common,
wherein merchants would extend credit to other merchants,
artisans, and farmers.
The various Colonial Governments also issued
paper currencies, termed “bills of credit.” In 1690,
Massachusetts issued £7,000 of “indented”
bills of credit , the first such issuance in the Colonies,
and said to be the origin of paper currency in the British
Empire. As these bills of credit devalued against the English
Pound, Massachusetts passed a law declaring them legal tender,
requiring that they “pass current … in all payments equivalent
to money.” Another first, the devaluating currency was foisted
upon the public. Bills of credit in the Colonies were not fiat
money, as they had substantive backing, issued usually in one of
two ways.
In the first, government land banks or loan
offices issued paper currency as loans secured by mortgages. In
the second, governments paid on-going government expenses with
bills of credit which they pledged to redeem using future tax
receipts. These bills of credit had arguably beneficial effects
on the Colonial economies, but devaluation against the English
Pound was a common element to all of them.
Between 1720 and 1774, for example,
devaluation of the Colonial currencies ranged from 12-13% in
New York and Virginia up to 1,340% in Rhode Island. The relative
rates of devaluation led to great friction between merchants in
various Colonies, most notably between Connecticut and Rhode
Island, as seen in some of the writings of
Roger Sherman.
In 1751 and 1764 the English Parliament passed
acts restricting the issuance of Colonial bills of credit, but
this legislation met with fierce resistance in the Colonies.
Bills of credit were seen by some parties to be essential to
their economic success, and the Colonies found ways around the
Parliamentary prohibitions, and continued to issue bills of
credit.
The 1764 legislation curtailing bills of
credit was seen by many, including Benjamin Franklin, to be a
major cause of the
American Revolution .
Part II: 1776 to 1787 – Independence and
Articles of Confederation
Upon signing of the Declaration of
Independence, with the removal of English governmental
authority, the independent states asserted plenary power to coin
money, issue paper currency, and declare issued paper currency
legal tender. The Continental Congress began developing a
national system of gold and silver coin based on the
Spanish milled dollar in 1776, but as early as 1775 it also
issued
Continental Currency and other bills of credit. These
“Continentals” were ostensibly redeemable in Spanish milled
dollars or their equivalent in silver or gold, and the Colonies
collectively pledged to redeem them.
The amount issued between 1775 and 1779,
approximately $241,500,000, dwarfed the colonial money supply
available, which totaled around $10,000,000 in early 1775. This
vast over-issuance when compared to potential future tax
receipts, hampered by the absence of a national taxing power in
the
Articles of Confederation (signed in 1777), and combined
with uncertainty over the eventual success of the colonies in
their war against England, led to pessimism and devaluation.
Large-scale counterfeiting of Continentals by the British
compounded this loss of confidence and correspondent value.
Whereas in 1777 most states acquiesced in
Congress’ request to declare Continentals legal tender at full
value, by 1780 none but Massachusetts would accept them for tax
payment even at Congress’ lowered fixed rate, then at 1/40th
par. Less than a year later Congress devalued the Continentals
even further to 1/75th of par value, but finally recommended
that they cease to “be current.” Throughout this period, the
states continued to issue their own bills of credit and to pass
laws declaring these bills legal tender.
Ratification of the Articles of Confederation
in 1781, giving Congress the power to regulate coin, both its
own and that minted by the states, and the power “to borrow
money, or emit bills on the credit of the united states” did
nothing to change the situation. The period between 1783 and
1787 was a time of economic chaos. As
The Federalist describes, communities developed “[a] rage
for paper money, for an abolition of debts, for an equal
division of property”, and for “other improper or wicked
project[s]”
The Federalist No. 10 and
here . States continued over-issuing bills of credit,
debtors parties gained power and made this depreciated currency
legal tender for all debts, and taxpayers’ revolts erupted,
including Shay’s Rebellion in 1786.
In 1785, Congress reviewed a plan proposing
the Spanish milled dollar as “the Money-Unit” of the United
States, and resolved that the “money unit … be one dollar” (29
Journals of the Continental Congress, 1774-1789 (Library of
Congress ed. 1904 et seq.) at
499-500 . A Congressional Board of Treasury statement in
1786 indicated that the “dollar” referred to by Congress in 1785
was “the common Dollars that are Current in the United States,”
“will contain three hundred and seventy five grains and sixty
four hundredths of a Grain of fine Silver,” and “will be worth
as much as the New Spanish Dollar,” with relative value between
gold and silver coin to be that which “Custom has established”
(30 id. at 162-163). By this, Congress reflected the English
Common Law system for a national money system as outlined by
Blackstone. Congress retained silver and gold as money,
established a specific weight of silver as the unit of value
against which the value of all other coinage would be regulated,
and recognized the propriety of permitting free trade in gold
and silver.
Part III: 1787 – The Constitution of the
United States
The
Constitutional Convention of 1787 was envisioned as a
necessary rectification of the failings of the Articles of
Confederation. Changes in the monetary powers granted to
Congress were no exception.
Article I , Section 8,
Clause 2 of the Constitution grants Congress the power “to
borrow Money on the credit of the United States,” which is a
significant change from the power granted under the Articles of
Confederation “to borrow money, or to emit bills on the credit
of the united states.”
Congress’ power under the Articles to emit
bills of credit was not carried over into the Constitution.
State governments were specifically barred from emitting bills
of credit, as well, under Article I, Section 10, Clause 1.
Similarly, “the sole and exclusive right and power” granted to
Congress by the Articles to “regulat[e] the alloy and value of
coin struck by their own authority, or by that of the respective
states” was also altered.
While Article I, Section 8, Clause 5 retained
Congress’ power “to coin Money, [and] regulate the value
thereof, and of foreign Coin,” Article I, Section 10, Clause 1
barred states from coining money. This clause gave a further
restriction on the states, understandable in light of the
economic chaos immediately preceding the Constitutional
Convention, that they not “make any Thing but gold and silver
Coin a Tender in Payment of Debts.”
Two provisions in the Constitution make
specific reference to “dollars.” Article I, Section 9, Clause 1
indicates the ceiling for a tax of “ten dollars” on the
importation of “persons,” and Amendment VII, specifies “twenty
dollars” as the required value in controversy at which jury
trial must be preserved.
No internal definition for the term “dollar”
is given in the Constitution itself, however Vieira has argued
persuasively that this term should be understood to be the
“dollar” adopted by Congress in 1785 and 1786 (Vieira, Pieces of
Eight: The Monetary Powers and Disabilities of the United States
Constitution (2002) 134-137
(see
here) . That it must be some constant unit of value is
evident given the heated debate in the Convention over the slave
issue.
The pro-slavery faction would not have
conceded to a tax on importation of slaves that could have been
manipulated in such a manner as to make importation practically
prohibitive. That the Spanish milled dollar, or its equivalent
value in weight and fineness, is the “dollar” intended by these
provisions is clear, also, given the universal presence of this
coin throughout the colonies, and both the Congressional
resolution immediately preceding the Convention and legislation
afterwards, in 1792.
Part IV: 1792 – Coinage Act of 1792
The
Coinage Act of 1792 (Act
of 2 April 1792, , ch. 16, 1 Stat. 246 , ) further codified
English Common Law principles regarding monetary policy as
described by Blackstone. In this Act, Congress established a
standard of value, a monetary “unit”, against which the value of
all other commodities, services, etc., in the market would be
compared. The “Unit” of value adopted, termed the “dollar” (§20,
1 Stat. at 250), was a coin “contain[ing] three hundred seventy
one … and four sixteenths [(371.25) grains] of pure … silver”,
and was set equal in value to “the Spanish milled dollar as
[then] current,” or in use, in the Colonies (§ 9, 1 Stat. at
248). Half- dollar, quarter-dollar, “dismes” (or “tenths”), and
“half-dismes” were also established, each containing a
proportionate amount of silver, and Congress also created copper
“cents” and “half- cents” (id).
Congress further established gold coins,
“Eagles” and “Half-Eagles”, which were to “be of the value of
ten [and five] dollars or units” respectively (id.). Statutorily
setting a silver to gold exchange rate of 15:1 (§11, 1 Stat. at
249), close to its historical average, Congress required gold
“Eagles” to contain the equivalent amount of gold, i.e., 247.5
grains, to make them equal in value to the silver contained in
ten “dollars or units,” i.e., 3,712.5 grains of silver. The
amount of gold required for Half-Eagles was also set in this way
(§9, 1 Stat. at 248). Gold coins were not termed “dollars,” but
were to “be of the value”, or equivalent to, a certain number of
“dollars or units” of money as established (id). Congress in
this way set silver coin of a specified weight and fineness as
the benchmark “unit” of value for the United States, following
the English
Common Law tradition. Gold, like any other commodity, was to be
valued in relation to this standard “unit”. Congress, empowered
by the Constitution to “regulate the Value” of its coinage
(Article 1, §8, cl. 5), set the rate of exchange between gold
and silver for these purposes, and created gold coins according
to this rate and the amount of silver in the benchmark “unit.”
Essentially, Congress put the United States monetary system onto
a
“silver standard .”
Coins “struck at, and issued from” the mint
established in this Act Congress made “lawful tender in all
payments whatsoever,” those of “full weight” according to their
statutory value and those “of less than full weight” at “values
proportional to their respective weights” (§16, 1 Stat. 250). In
this way, Congress reaffirmed the role of the statutory
“dollar,” the “full weight” of silver, as the nation’s standard
of value, the measurement against which all other commodities or
services, etc. would be compared and valued.
By the Act of 1792, Congress also provided for
free coinage, wherein private parties could bring gold or silver
bullion to the mint to be coined (§14, 1 Stat. at 249). For a
“one half per cent” fee, the individuals could receive
previously-minted coin immediately, or, for no fee, they would
receive “coins of the same species of bullion …, weight for
weight” when their bullion was actually coined (id). Those
government employees responsible for the coining process were
required to post “sureties” of $10,000 each (§5, 1 Stat. at
247), were given annual salaries of $1,500 (§6, 1 Stat. at 247),
could be fined $1,000 for giving “preference” in the coining
process (§15, 1 Stat. at 250), and were subject to capital
punishment if found debasing the coin (§19, 1 Stat. 250).
Part V: 1791-1857 – Fractional Reserve
Banking Backed by Coin
Gold and silver coin conforming to the Act of
1792 formed the basis of the US monetary system for over seventy
years. Certain foreign coin, including Spanish dollars, was also
allowed to circulate under the
Act of April 10, 1806 (ch. 22, 2 Stat. 374).
Fractional reserve banking based on reserves of this US and
foreign coin developed rapidly during this time.
The Federal government incorporated the first
Bank of the United States in 1791
(Act of 25 February 1791, 1 Stat. 191), and gave this
private bank, in which the US held 20% ownership, a monopoly
right to issue national bank notes up to $10 million over the
“monies” held in reserve. The Act made these notes quasi-legal
tender by accepting them as payment for any debt owed to the
United States government. The number of state-chartered private
banks increased rapidly, also, each issuing bank notes
redeemable in coin.
The charter of the First Bank of the United
States lapsed in 1811 and was not renewed by Congress.
The Federal Government made numerous issues of
Treasury Notes during 1812-1816 to fund the
War of 1812 and accepted private bank notes as payment. This
encouraged vast over-issuance of private bank notes relative to
reserves on hand, leading many banks to over-extend themselves.
Rather than let these risk-taking banks collapse, state
governments often allowed them to suspend payment in coin,
transferring loss to those customers holding the notes.
In 1816, Congress incorporated the second
Bank of the United States
(Act of 10 April 1816, ch. 44, 3 Stat. 266), citing a need
for a reliable source of lending in emergencies. The US again
retained 20% ownership, gave the bank a monopoly right to issue
national bank notes, and made these notes quasi-legal tender by
accepting them as payment for any debt owed to the United States
government. The Bank was also required to pay $1.5 million as
consideration for the rights granted by the statue. As in the
first Bank of the US, stock could be purchased using a mix of
coin and debt instruments, but as a practical matter the ratio
of debt to coin used to purchase stock in this bank exceeded
that allowed by the statute.
The constitutionality of the second Bank of
the United States was challenged in two primary cases. In
McColloch v. Maryland (17 U.S. 4 Wheat. 316 (1819), the
Court held that creation of a national bank was ”necessary and
proper” (Article I, Section 8, clause 18) for Congress to effect
movement of and access to federal money throughout the nation.
In
Osborn v. Bank of the United States (22 U.S. 9 Wheat. 738
(1824), the court held that a private corporation, even one
owned in part by the Federal government, acts as a private
corporation, and can undertake activities considered necessary
to effect the purposes to which it was created, in this case
banking services and emission of notes and bills, regardless of
governmental ownership.
In 1832, four years prior to its lapse,
Congress voted to renew the second Bank’s charter, but the act
was vetoed by President Andrew Jackson. In 1836 the Treasury
Secretary moved Federal deposits into a network of state and
territorial banks meeting requirements set forward by Congress
(Act of 23 June 1836, ch. 115, 5 Stat. 52v) as to reserve
and redemption policies. In 1840, Congress began a system of
“sub-Treasuries” dispersed throughout the nation which would
hold Federal funds, thus dispensing with the use of private
banks
(Act of 4 July 1840, ch. 41, 5 Stat. 385).
The market value of silver dropped in relation
to gold during this time, and in the Coinage Act of 1834
(Act of 28 June 1834, ch. 95, 4 Stat. 699) Congress reduced
the amount of gold in the “eagle” to reflect this change,
setting an effective statutory exchange rate of silver to gold
at 16:1. Congress thus continued to recognize the standard
“unit” of value in the US as the silver “dollar” set forward in
the Coinage Act of 1792, modifying the amount of gold in the
coin “having the value of” ten dollars. In the Coinage Act of
1837
(Act of 18 January 1837, ch. 3, 5 Stat.136), Congress
altered the amount of alloy in gold and silver coins to be
minted to 1/10 by weight, and expressly recognized all
previously minted coin as continuing to be legal tender.
Privately issued bank notes continued to be
the main media of exchange circulating in the US at this time,
and some states took full or part ownership in these private
banks. The constitutionality of these banks and the notes issued
thereby challenged in
Briscoe v. Bank of Kentucky (36 U.S. 11 Pet. 257 (1837),
Woodruff v. Trapnall (51 U.S.10 How. 190 (1850) , and
Darrington v. Bank of Alabama (54 U.S. 13 How. 12 (1851).
The Supreme Court, however, held that these banks were private
corporations, regardless of the extent of government ownership,
and therefore the issued notes were not “bills of credit” under
Article I, Section 10, Clause 1. These state-owned banks
followed their counterparts’ pattern in over-issuing bank notes
and suspending payment, often with direct legislative
intervention to facilitate suspension where it had been
specifically forbidden in legislation creating the banks.
In the
Coinage Act of 1849 (Act of 3 March 1849, ch. 109, 9 Stat.
397) Congress introduced “gold dollars … of the value of one
dollar, or unit”, thus applying the term “dollar” to a gold coin
directly for the first time, though continuing to reflect the
silver dollar as the fundamental unit of value (§1, 9 Stat.
397). The actual market exchange rate between silver and gold at
this time was such that silver coin became scarce, and in the
Coinage Act of 1853 (Act of 21 February 1853, ch. 79, 10
Stat. 160) Congress reduced the amount of silver in coins of
half-dollar and lower denominations to 93.1% of their previous
weight, but restricted their legal tender status to debts “not
exceeding five dollars” (§2, 10 Stat. 160). In the
Coinage Act of 1857 (Act of 21 February 1857, ch.56, 11
Stat. 163), Congress repealed all acts “authorizing the currency
of foreign gold or silver coins,” thus eliminating the Spanish
milled dollar from circulation for the first time, and limiting
circulating coin in the US to that minted under the acts of 1792
and 1837 (§3, 11 Stat. at 163).
Part VI: 1861-1862 – Greenbacks and the
Rise of National Paper Money
In 1861, as the
Civil War began, gold and silver coin remained the only
national currency, while private-issued fractional-reserve bank
notes, redeemable in coin, remained the major medium of
exchange. Coin did circulate, however, due at least in part to
Congressional acts requiring the United States government to
transact in coin (see
Veazie Bank v. Fenno (75 U.S. (8 Wall.) 533, 536 (1869)).
Congress initially borrowed money to fund the
war by authorizing sale of $10 million in Treasury notes
fundamentally similar to earlier-issued notes, which were
interest-bearing and redeemable at a definite point in the
future (Act of 2 March 1861 (ch.
68, 12 Stat. 178). This initial sale was insufficient,
however, and in July of 1861, Congress authorized issue of $250
million in “Demand
Notes”, Treasury notes “not bearing interest, but payable on
demand”, which could be “issued in exchange for coin” or used
directly to “pay salaries or other dues from the United States”,
which forwent the need to actually “borrow money” to place them
into circulation (Act
of 17 July 1861 (ch. 5, §1 12 Stat. 259)).
In December of 1861 the state banks again
suspended payment on their issued notes (see Veazie Bank, 75
U.S. at 537), causing further difficulty for Congress to raise
funds. In February and March of 1862, after heated debate,
Congress passed the Legal-Tender Acts, authorizing issue of $150
million in “United
States notes, not bearing interest, payable to bearer” which
were “lawful money and a legal tender in payment of all debts,
public and private, within the United States, except” duties on
imports and interest on bonds, which had to be paid in coin (Act
of 25 February 1862 (ch. 33, 12 Stat. 345)).
Rather than being redeemable in coin, these
“Greenbacks” could only be exchanged for interest-bearing United
States bonds (§1 12 Stat. 345). As gold and silver coin minted
under the Coinage Acts of 1792 and 1837 remained the standard
“unit” of value, these bonds were ultimately redeemable in coin,
however, and this coin remained the fundamental monetary unit on
which the national monetary system was built. Congress
eventually authorized $850 million in Greenbacks, using them
directly to pay government expenses, and over the next two years
their value dropped from par to a low in July 1864 of $285 in
Greenbacks to $100 coin.
The Legal-Tender Acts were declared
unconstitutionally invalid in a majority decision delivered by
Chief Justice Salmon Chase, the former Treasury Secretary who
had lobbied for the Greenbacks and whom President Lincoln
appointed specifically to uphold the Acts (Hepburn
v. Griswold, 75 U.S. (8 Wall.) 603 (1870)). This was a
highly politicized issue, however, and a year later the Supreme
Court bent to outside pressure, revisited the issue, and
reversed itself in a five-four decision (Knox v. Lee (The
Legal-Tender Cases), 79 U.S. (12 Wall.)
457 (1871)).
The majority opinion found expansive
“auxiliary” powers associated with the Constitution’s “express
[grant of] power” to Congress, including “a general power over
the currency” emanating from the power “to coin money and
regulate the value thereof” (id. at 542). This general power
over the currency included not only the non-expressly-forbidden
power to emit bills of credit, but the power to declare “the
government’s promises to pay money … equivalent” to the
statutory “unit” of value (id. at 546, 553). Chief Justice Chase
delivered a dissenting opinion in which he reaffirmed his
earlier finding that the acts were unconstitutionally invalid.
*************
David Liechty is an attorney who is
currently studying for a PhD in Constitution Studies. He is
interning with Solari this summer.
|