WEBVTT NOTE Endangered Specie: Monetary Debasement in the U.S. 1 00:00:00.000 --> 00:00:03.500 So I'm teaching money and banking. I taught it last semester. I'm teaching it again. 2 00:00:03.500 --> 00:00:08.500 I guess I was either so good at it or they had so many students who needed to take it that they asked me to do it. 3 00:00:08.500 --> 00:00:20.500 And the main question that came to mind is how do we get from our original monetary standard, which is a gold, silver standard, to our current standard, which is fiat money. 4 00:00:20.500 --> 00:00:28.000 We all know that this happened, but how exactly did it happen? And I never found a clear exposition of the story in one source. 5 00:00:28.000 --> 00:00:41.000 It's all scattered throughout all these different kinds of sources, so my goal here is just to tell this story in a very concise manner, in a very simple manner, in one simple source, hopefully create kind of a handy reference to tell this story. 6 00:00:41.000 --> 00:00:45.000 Before I begin, I'll just tell you why I'm interested in monetary debasement. 7 00:00:45.000 --> 00:00:51.000 I've known about this for quite some time. I read Murray Rothbard's great little book, What Has Government Done to Our Money? 8 00:00:51.000 --> 00:01:00.000 I've been aware of this for a long time, but what really got me interested in it was a year or two ago, I started hoarding pennies. 9 00:01:00.000 --> 00:01:05.000 In the recent boom, commodities prices rose, including copper. 10 00:01:05.000 --> 00:01:09.000 U.S. pennies that were made before 1983 are full copper. 11 00:01:09.000 --> 00:01:17.000 They obtained a bullion premium, so they actually worked more than face value, so they started getting hoarded out of circulation and sold. 12 00:01:17.000 --> 00:01:18.800 and Money is the most important of those. 13 00:01:18.800 --> 00:01:20.760 You'd sell these pennies for one and a half, two times space value, right? 14 00:01:20.760 --> 00:01:22.320 This is Gresham's Law in Action. 15 00:01:22.320 --> 00:01:25.240 Now, I was actually engaged in this process. 16 00:01:25.240 --> 00:01:26.240 I found it pretty fascinating. 17 00:01:26.240 --> 00:01:28.540 I've always been a coin collector. 18 00:01:28.540 --> 00:01:32.560 So I was a penny hoarder, and that brings up the questions, brings up all these issues 19 00:01:32.560 --> 00:01:36.780 of monetary economics, Gresham's Law, debasement of the coinage. 20 00:01:36.780 --> 00:01:42.140 The penny was debased down to zinc, so this bullion premium issue would go away. 21 00:01:42.140 --> 00:01:46.360 It's not a legal debasement, because the penny was never a legal standard, but it's still 22 00:01:46.360 --> 00:01:50.360 Essentially a debasement, lightening of the coin and changing of the metal of the coin. 23 00:01:50.360 --> 00:01:56.480 So that got me really interested going through this process of monetary debasement. 24 00:01:56.480 --> 00:01:59.800 First off, let's go to the roots of the US dollar. 25 00:01:59.800 --> 00:02:04.000 The US dollar is based on the Spanish mill dollar, this is the most prevalent coin in 26 00:02:04.000 --> 00:02:06.240 circulation in early America. 27 00:02:06.240 --> 00:02:13.200 And this coin has a long track record, it started in the late 1400s in Spain and it 28 00:02:13.200 --> 00:02:20.400 It was initially established at this weight here, around 420 grains, and it was really 29 00:02:20.400 --> 00:02:24.280 never debased because the Spaniards found so much silver in the New World, they really 30 00:02:24.280 --> 00:02:28.360 didn't see a need to debase this coin, ever. 31 00:02:28.360 --> 00:02:32.400 In circulation in the U.S. until the 1850s, it became the Mexican silver dollar, of course, 32 00:02:32.400 --> 00:02:33.400 after Mexican independence. 33 00:02:33.400 --> 00:02:37.060 Of course, eventually, the Mexicans found it necessary to start debasing the coinage 34 00:02:37.060 --> 00:02:38.060 around 1900. 35 00:02:38.060 --> 00:02:43.160 This coin had a long track record, it was very reliable. 36 00:02:43.160 --> 00:02:51.000 To show the prevalence of this coin, continental currency was denominated in Spanish mill 37 00:02:51.000 --> 00:02:52.000 dollars. 38 00:02:52.000 --> 00:02:59.720 Of course, it was never paid off in Spanish mill dollars, so that's another story. 39 00:02:59.720 --> 00:03:04.080 The Spanish came up with this technology of milling the edge of the coin, making it perfectly 40 00:03:04.080 --> 00:03:08.880 round and putting a little pattern in the edge to prevent its shaving of the coin. 41 00:03:08.880 --> 00:03:10.520 This made it a highly reliable coin. 42 00:03:10.520 --> 00:03:16.920 The previous coins were very apt to be shaved and they weren't very reliable at all. 43 00:03:16.920 --> 00:03:21.840 Of course, we're all familiar with the monetary provisions of the Constitution. 44 00:03:21.840 --> 00:03:24.400 Only Congress can coin money. 45 00:03:24.400 --> 00:03:25.900 All the monetary powers are with Congress. 46 00:03:25.900 --> 00:03:30.880 The states have none, which hopefully we're all familiar with this. 47 00:03:30.880 --> 00:03:32.040 But there's one thing to note here. 48 00:03:32.040 --> 00:03:35.760 There's no strict limitation on Congress's power to emit bills of credit. 49 00:03:35.760 --> 00:03:40.400 This was actually debated during the Constitutional Convention and it was narrowly defeated to 50 00:03:40.400 --> 00:03:52.760 We've got a little opening of the door for the national government to print money. 51 00:03:52.760 --> 00:03:58.360 We get the dollar defined in 1792, it's basically just copied off the Spanish mill dollar. 52 00:03:58.360 --> 00:04:01.960 The dollar, the unit, which Jefferson called it the unit, the United States is going to 53 00:04:01.960 --> 00:04:09.520 be the Spanish mill dollar, 371 grains of fine silver, so that's the net silver content. 54 00:04:09.520 --> 00:04:13.640 Hamilton says we've got to have bi-metalism so we can increase the money supply. 55 00:04:13.640 --> 00:04:18.320 So at the prevailing market ratio, which is 15 to 1, that becomes the mint ratio. 56 00:04:18.320 --> 00:04:23.640 So you divide 371 by 15, you get 24 grains of gold. 57 00:04:23.640 --> 00:04:25.840 Here's the coins they produced initially. 58 00:04:25.840 --> 00:04:31.560 An eagle, $10, $5, $2.50. 59 00:04:31.560 --> 00:04:37.360 Later on we added a dollar, a $3, and a $20, these are United States-made produced coins. 60 00:04:37.360 --> 00:04:45.360 The silver coin is a dollar and its division is down to five cents. It's all proportional, of course. 61 00:04:45.360 --> 00:04:53.360 Then the copper, which is not a legal standard, but it's used for small change because it's hard to make a silver coin that's small enough to be useful. 62 00:04:53.360 --> 00:05:00.360 The copper cent used to be huge. It used to be about the size of a modern day half dollar, and then the half cent, of course. 63 00:05:00.360 --> 00:05:05.800 This kind of shows the progress of inflation. A half cent used to be a highly relevant coin. 64 00:05:05.800 --> 00:05:07.920 It ceased to be minted in the 1850s. 65 00:05:07.920 --> 00:05:14.120 Of course, we start off with private bank notes. The first bank of issue, Bank of North 66 00:05:14.120 --> 00:05:18.800 America, and then the first and second banks of the United States. Then all kinds of state 67 00:05:18.800 --> 00:05:25.800 chartered banks are issuing bank notes throughout this period. Now, these are just claims on 68 00:05:25.800 --> 00:05:28.520 money, right? These are money substitutes. The one feature they all have in common is 69 00:05:28.520 --> 00:05:34.520 is payable to bear on demand. That's a feature every single private listed banknote has. 70 00:05:34.520 --> 00:05:39.520 Circulation is subject to trust, of course. You have to take the bank's word for it. So 71 00:05:39.520 --> 00:05:45.320 the reputation is at play to establish circulation. And actual redemption of the notes, there 72 00:05:45.320 --> 00:05:51.080 has to be some kind of redemption of the notes going on, otherwise they won't circulate. 73 00:05:51.080 --> 00:05:53.960 We have the development of these banknote reporters that tell you how reliable they 74 00:05:53.960 --> 00:06:11.980 I want to just comment here on the idea of fractional reserve banking vis-a-vis debasement. 75 00:06:11.980 --> 00:06:15.640 Fractional reserve notice, of course, they're going to issue more notes than they have specie 76 00:06:15.640 --> 00:06:22.480 to pay out these notes, but I'm going to argue that this is not a debasement unless the following 77 00:06:22.480 --> 00:06:28.480 prevails. The banks are legally allowed to suspend their VC payments or there's some 78 00:06:28.480 --> 00:06:34.600 kind of legal tender status attached to the notes, to the law. But as long as the bank 79 00:06:34.600 --> 00:06:40.720 note issue is free and competitive, that is the banks are free to go bust if the notes 80 00:06:40.720 --> 00:06:45.120 are free to fall, the price of the notes is free to fall in the market, that doesn't constitute 81 00:06:45.120 --> 00:06:50.000 debasement. There's no change to the legal standard. That's just the private business 82 00:06:50.000 --> 00:06:55.760 Failing, failing to meet its obligations. Here are some examples of private bank notes. 83 00:06:55.760 --> 00:07:02.340 They all have this feature. Table, bearer on demand, bearer on demand, bearer on demand. 84 00:07:02.340 --> 00:07:07.400 They got pretty, the engraving got pretty sophisticated eventually to both show the 85 00:07:07.400 --> 00:07:15.600 quality and to counterfeit. Speaking of suspension of species payments, here's sort of a brief 86 00:07:15.600 --> 00:07:24.480 historical outline always associated with wars and then financial panics there are 87 00:07:24.480 --> 00:07:29.440 ten species suspensions that I've identified and the last three are final 88 00:07:29.440 --> 00:07:36.000 I'll get into more detail on those of course with a bi-metallic standard you're 89 00:07:36.000 --> 00:07:40.480 going to have changes in the market price ratio of gold to silver and that's 90 00:07:40.480 --> 00:07:43.200 going to drive one coin or the other out of circulation according to the 91 00:07:43.200 --> 00:07:49.280 Operation of Gresham's Law. The government is always late to catch up. The first adjustment 92 00:07:49.280 --> 00:07:57.320 happens in 1834 and some have identified it as the crime of 1834 because the weight of 93 00:07:57.320 --> 00:08:01.760 the gold dollar was reduced. So if you had a contract from before 1834 and you get paid 94 00:08:01.760 --> 00:08:09.400 off and post $1834, you're actually getting cheated a little. 6.3% debasement. 95 00:08:09.400 --> 00:08:15.600 One thing that I found interesting though is that the U.S. Mint always signaled its debasements. 96 00:08:15.600 --> 00:08:23.080 It would change the coin. Here's an 1834 quarter eagle. It's got E. Purvis Unum, 1835 quarter 97 00:08:23.080 --> 00:08:28.560 eagle. They take that off. So you can readily identify the content of the coin just by some 98 00:08:28.560 --> 00:08:34.280 kind of device that they change on it. And this is the famous 16 to 1 mint ratio it's 99 00:08:34.280 --> 00:08:42.400 in 1854. This is what the silverites want to reestablish later on. 100 00:08:42.400 --> 00:08:48.120 The next thing happens in 1853 with the gold rush. Now gold is replacing silver in circulation, 101 00:08:48.120 --> 00:08:52.880 although especially small change, silver coins are being hoarded out. The silver dollar has 102 00:08:52.880 --> 00:08:56.800 been irrelevant for a long time, it hasn't even been minted, but the small change silver 103 00:08:56.800 --> 00:09:02.840 starts to get hoarded out, so there's a small change crisis. It actually starts about 1850. 104 00:09:02.840 --> 00:09:07.120 People are paying off in pennies. People are carrying sacks and sacks of pennies around. 105 00:09:07.120 --> 00:09:13.320 It's quite a problem. So the Congress debases silver now to make up for this. And actually, 106 00:09:13.320 --> 00:09:17.400 not just to match the market ratio, but to go a little under to make the coins basically 107 00:09:17.400 --> 00:09:26.400 a fiat coin. It's overvalued by 3% to try to guarantee that these coins will still circulate. 108 00:09:26.400 --> 00:09:30.320 Yeah, this is not because of the Gresham's Law problem. But once again, they tell us 109 00:09:30.320 --> 00:09:37.320 So that's what they're doing. There's 1853. 1853 were the errors of the day and they could be raised on the back. 110 00:09:37.320 --> 00:09:42.320 So they're letting us know that they're changing the weight of the coin. 111 00:09:42.320 --> 00:09:48.320 What was the new ratio? 112 00:09:48.320 --> 00:09:56.320 I can tell you off the top of my head. Silver was debased by 7%. 113 00:09:56.320 --> 00:10:02.320 Well, that's the market ratio, so it's going to be close to that. 114 00:10:02.320 --> 00:10:11.240 Private coinage was issued on the U.S. standard throughout the, well from 1830 until the 1860s. 115 00:10:11.240 --> 00:10:13.520 Several different states where there were gold discoveries. 116 00:10:13.520 --> 00:10:17.520 I wanted to just point out a few features here though. 117 00:10:17.520 --> 00:10:23.200 These coins were, this was a competitive coin issue and the quality varied. 118 00:10:23.200 --> 00:10:30.120 The Beckler coins from the Carolinas displayed the weight and the finance, a very reliable 119 00:10:30.120 --> 00:10:31.120 coin. 120 00:10:31.120 --> 00:10:37.080 The assays proved that these coins turned out to be pretty solid, pretty reliable. 121 00:10:37.080 --> 00:10:43.360 The U.S. Mint was always very good about its quality, but not its quantity, so private 122 00:10:43.360 --> 00:10:46.520 individuals had to step in and fill the need. 123 00:10:46.520 --> 00:10:49.680 California Gold, there's lots of different companies, there's 15 different companies 124 00:10:49.680 --> 00:10:50.680 in California. 125 00:10:50.680 --> 00:10:55.180 You'll notice this coin here, which is a double-legal, looks just like the U.S. government issue. 126 00:10:55.180 --> 00:11:01.180 The differences are, instead of Liberty on the headband, we've got the name of the private company. 127 00:11:01.180 --> 00:11:04.180 So very good substitutes and competition. 128 00:11:04.180 --> 00:11:06.180 We've got a variation in quality. 129 00:11:06.180 --> 00:11:11.180 The Mormon coins are the worst, but people are going to know that. 130 00:11:11.180 --> 00:11:15.180 They're going to be assayed, and people are going to trade those coins at a discount. 131 00:11:15.180 --> 00:11:18.180 We have Colorado Gold, Oregon Gold, all these different companies. 132 00:11:18.180 --> 00:11:32.020 We'll see that they have to be modeled after private bank notes, payable to bear but not 133 00:11:32.020 --> 00:11:33.020 on demand. 134 00:11:33.020 --> 00:11:39.540 This is a course of legal tender law, a course of circulation, massive inflation, $450 million 135 00:11:39.540 --> 00:11:40.540 worth authorized. 136 00:11:40.540 --> 00:11:45.540 That's on top of initial money supply, $745 million. 137 00:11:45.540 --> 00:11:46.540 We finally get redemption. 138 00:11:46.540 --> 00:11:58.540 Let me just point out the legal tender claim. This notice of legal tender for all debts public and private, we're familiar with that, except duties on imports and interest on public debt, and this was a single payment of all loans to the United States. 139 00:11:58.540 --> 00:12:13.540 The government paid interest on the debt in specie, I think this was to encourage people to continue buying U.S. bonds, but we start now with a legal tender claim, and it's a pretty extensive legal tender claim. 140 00:12:13.540 --> 00:12:19.340 The national banking system that's established during the Civil War gives us national bank 141 00:12:19.340 --> 00:12:20.340 notes. 142 00:12:20.340 --> 00:12:28.740 They tax the state bank notes out of existence, national bank notes, secured by U.S. bonds. 143 00:12:28.740 --> 00:12:32.620 They've got a kind of illegal tender status, the receivable in government taxes, not all 144 00:12:32.620 --> 00:12:37.980 of that's public and private yet, and they are redeemable, but there's a catch to the 145 00:12:37.980 --> 00:12:38.980 redemption here. 146 00:12:38.980 --> 00:12:46.460 to go to the home office of the bank, but the currency is uniform, so all national currency 147 00:12:46.460 --> 00:12:47.460 looks the same. 148 00:12:47.460 --> 00:12:50.900 So if you can get your national bank not circulated on the other side of the country, chances 149 00:12:50.900 --> 00:12:54.540 are you're never going to get redeemed, besides the government guarantees redemption anyway 150 00:12:54.540 --> 00:12:57.380 so you can still fail and the government's going to take care of the note. 151 00:12:57.380 --> 00:13:02.620 So redemption basically grinds to a halt during the national bank note era, but the legal 152 00:13:02.620 --> 00:13:07.300 tender claim and then the counterfeit claim is so extensive on these, if you fold it in 153 00:13:07.300 --> 00:13:15.300 And then half would basically be a book. That's the process here of developing the legal tender money. 154 00:13:15.300 --> 00:13:22.300 And then here's the next phase here. They all look the same, only the name of the bank issue changes. 155 00:13:22.300 --> 00:13:31.300 Eventually it starts to look like modern currency. And here's the obligation. It's pretty similar to United States notes. 156 00:13:31.300 --> 00:13:39.300 We also have gold certificates, because gold is still being used. These are basically strictly to economize on gold coin circulation. 157 00:13:39.300 --> 00:13:44.300 We come to the crime of 1873, which we talked about, but it's really not a debasement. 158 00:13:44.300 --> 00:13:51.300 This is just, we're going to stop minting the silver dollar because the market ratio has changed so much. 159 00:13:51.300 --> 00:13:54.300 So it's not a debasement. 160 00:13:54.300 --> 00:14:10.300 Although the silver rights want silver dollars to still be minted, to inflate the currency and to keep the interest of the silver miners going, so they eventually get some silver minted and the silver that does get minted gets turned into silver certificates. 161 00:14:10.300 --> 00:14:19.300 But the main thing I want to point out here is these silver certificates are now a fiat money. The metal value of the coin is far below the face value. 162 00:14:19.300 --> 00:14:23.460 So we get a little bit of fiat money inflation starting off with silver certificates in the 163 00:14:23.460 --> 00:14:24.460 1970s. 164 00:14:24.460 --> 00:14:26.980 So there's a step in the movement towards fiat money. 165 00:14:26.980 --> 00:14:34.420 These last until actually 1968, not all that long ago. 166 00:14:34.420 --> 00:14:38.140 And the obligation there has been deposited one silver dollar. 167 00:14:38.140 --> 00:14:40.060 It's actually a good claim. 168 00:14:40.060 --> 00:14:41.060 It's true. 169 00:14:41.060 --> 00:14:44.060 This is what the modern ones look like. 170 00:14:44.060 --> 00:14:47.660 Treasury notes are basically the same thing as silver certificates, although it says in 171 00:14:47.660 --> 00:14:52.860 and Coin, so the government can choose gold or silver, depending on how the market ratio 172 00:14:52.860 --> 00:14:53.860 works out. 173 00:14:53.860 --> 00:14:57.220 The gold standard act is not to be based on either, it just says the government is going 174 00:14:57.220 --> 00:15:01.140 to redeem treasury notes in gold, basically. 175 00:15:01.140 --> 00:15:05.060 Now if they would come to Federal Reserve notes, finally. 176 00:15:05.060 --> 00:15:11.940 Initially it says 40% gold backing, redeemable in gold, right, they've got to be, because 177 00:15:11.940 --> 00:15:16.380 it's got to be copied off the previous issue. 178 00:15:16.380 --> 00:15:23.980 This gets changed only gradually, I want to point out. First, we've got the 1933 gold 179 00:15:23.980 --> 00:15:29.420 confiscation. It's reduced to lawful money. Then, after 1963, it's just legal tender. 180 00:15:29.420 --> 00:15:33.340 So this is kind of a long requirement. We've got lots of different currencies circulating. 181 00:15:33.340 --> 00:15:35.900 Federal Reserve notes, of course, are eventually going to take over. They're going to kick 182 00:15:35.900 --> 00:15:40.580 out gold certificates, national currency, greenbacks, United States notes, and then 183 00:15:40.580 --> 00:15:45.260 and Solar Certificates, and now it's just Federal Reserve. 184 00:15:45.260 --> 00:15:50.220 We have the suspension of species payments from FDR in 1933, confiscation of the citizen's 185 00:15:50.220 --> 00:15:55.620 gold in 1933, and then the authorization of the president to actually reduce the gold 186 00:15:55.620 --> 00:16:04.020 to devalue the dollar in 1934. So we go from 24.75 grains to 15 grains, in other words, 187 00:16:04.020 --> 00:16:09.020 $35 an ounce. But it doesn't really matter anymore because there's no redemption of the 188 00:16:09.020 --> 00:16:16.740 notes for U.S. citizens. This only matters now for foreign central banks. 189 00:16:16.740 --> 00:16:24.020 I want to point out one thing I find interesting. The notes look the same since the late 1920s, 190 00:16:24.020 --> 00:16:29.340 but the obligation suddenly changes. This is a Federal Reserve note, redeemable in gold 191 00:16:29.340 --> 00:16:33.860 coin. This is a Federal Reserve note, it looks almost exactly the same, redeemable in lawful 192 00:16:33.860 --> 00:16:38.940 money, which is now just greenbacks, or silver, which is fiat money. This looks almost exactly 193 00:17:08.940 --> 00:17:22.460 Devaluation. American citizens can still trade in their dollars for silver until 1968 because 194 00:17:22.460 --> 00:17:25.500 the price of silver actually rises to where it's no longer fiat money so they get rid 195 00:17:25.500 --> 00:17:33.540 of the redemption of silver certificates. Now we're fully fiat currency since 1971. 196 00:17:33.540 --> 00:17:38.220 So the main point I want to make is that this is a long, drawn-out process. It's not a sudden 197 00:17:38.220 --> 00:17:44.740 event, it's not a policy. There's five major steps in the debasement that I've identified. 198 00:17:44.740 --> 00:17:47.940 Then there's the steps towards the debasement, then there's steps back from the debasement. 199 00:17:47.940 --> 00:17:51.500 We've got the greenbacks, but those actually get redeemed. That's a good step backwards. 200 00:17:51.500 --> 00:17:55.380 Then there's lots of different minor steps. The adjustments to the mint ratio, debasement 201 00:17:55.380 --> 00:18:03.500 and the small coinage, suspension of the VC, legal tender laws and all this. 202 00:18:03.500 --> 00:18:05.820 It's a long drawn out process. 203 00:18:05.820 --> 00:18:09.780 There's lots of different embodiments of US currency and the step-by-step process each 204 00:18:09.780 --> 00:18:17.620 currency has to kind of model its ancestor with slight changes and it brings, the question 205 00:18:17.620 --> 00:18:22.980 it brings forth is when we're asking why does it happen, well we've got to look at the politics 206 00:18:22.980 --> 00:18:27.820 of Inflation. What's the demand for the change in these notes? It's not just the government 207 00:18:27.820 --> 00:18:31.580 trying to rip us off by changing the currency, it's lots of different interest groups wanting 208 00:18:31.580 --> 00:18:36.580 to change the currency for their own benefit. That's the main point I'm trying to make.