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With the creation of a national monetary system in 1792, pursuant to its constitutional power “To
coin Money,” [and] “regulate the Value thereof” expressed in Article
I, § 8, cl. 5, it would seem that Congress had laid the subject to rest for all time. Not likely!
Two problems would arise to plague the system. Both should have been predicted.
One problem was the fifteen-to-one market exchange-ratio between silver and gold. Soon after passage
of the 1792 Coinage Act, gold rose in value relative to silver. An eagle, denominated as ten dollars in
value through the “regulat[ion]” of Congress, was worth more melted and sold in the market as
bullion than as a ten-dollar medium of exchange coin in domestic trade. In May of 1832 the Director of
the Mint wrote Congress that “[g]old at present constitutes no part of our currency.”[3]
Congress addressed this imbalance in the Coinage Act of 1834, by reducing the gold content of the
eagle to a new weight of 232 grains.[4]
Because the dollar remained unchanged at 371.25 grains of pure silver, the effective exchange-ratio
between gold and silver shifted to approximately sixteen to one. (Dividing 3,712.5 grains by 16 equals
232.03 grains.) The discovery of huge gold deposits in both Australia and California soon worked to undo
their efforts. Silver began to rise in value relative to gold. When the market exchange-ratio reached
about 15.7 to 1, silver dollars ceased to circulate[5]
As gold continued its slide, money-brokers found profit in the export of silver half-dollars, quarters
and dimes. Silver coin lost its currency, meaning that it ceased general circulation.
The other problem was “banks” or issues of paper currency. The word “bank” before the
Revolutionary War “meant only a batch of paper money, issued either by the government or a
corporation.”[6]
Paper money found favor with many because it was said to promote internal trade in the absence of
silver coin. Not that there was ever a complete absence of coin in the colonies, but it was hoarded or
went out as fast as it came in to purchase foreign capital goods, goods desperately needed but not
manufactured locally. For the most part early internal trade relied on direct barter. Many commodities,
including livestock, wampumpeag and corn, enjoyed legal tender status under this barter system.
Several things simultaneously used as money may lead to awkward circumstances. “If a large number
of commodities are made legal tender, the poorest quality of the commodity, which may be the cheapest at
the time of payment, will be given. Credit operations are therefore almost impossible.”[7]
In truth, even if only one commodity were legal tender, debtors always paid with their poorest stock.
“Prices rose to fit the worst form of payment which the seller might expect.”[8]
One of the earliest colonial experiences with paper money occurred in Massachusetts in 1690 when “an
expedition was fitted out against Canada, the payment for which was to come from the booty. It came back
not only without booty, but in great misery.”[9]
Bills of credit were then issued in denominations from 5s to 5£ to pay the soldiers who first disposed
of it at a one-third discount.[10]
The notes were “receivable for taxes, and for goods paid into the treasury for taxes.” “In 1692 it
was ordered that the bills be received at 5 per cent advance over coin at the colonial treasury, and the
Court promised to redeem them in money within twelve months. This kept the paper at par for twenty
years.”[11]
“The taste for paper money once acquired, the colonists were not disposed to go back to the rude
currencies of wampum and bullets, corn and cattle, or even the scanty circulation of accidental dollars
from the West Indies.”[12]
A wide variety of issues followed based on “the three usual forms of paper: that issued on landed
security; that based on taxes; and that representing the pure credit or authority of the government.”[13]
Benjamin Franklin, at the age of twenty-three in 1729, supported a paper money loan system for
Pennsylvania, writing that “For as bills issued upon money security are money, so bills issued upon
land are in effect coined land.”[14]
In 1874 Professor Sumner wrote: “The great philosopher was not unbiased in his judgment. He printed
the bills, having written a pamphlet in favor of them, and he says, ‘It was a very profitable job and
a great help to me.’ Looking back upon it later, he [Franklin] argues that it was a good thing, ‘though
I now think there are limits beyond which the quantity may be hurtful.’—Works, II.254”[15]
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