So I'm teaching money and banking. I taught it last semester. I'm teaching it again.
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.
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.
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.
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.
Before I begin, I'll just tell you why I'm interested in monetary debasement.
I've known about this for quite some time. I read Murray Rothbard's great little book, What Has Government Done to Our Money?
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.
In the recent boom, commodities prices rose, including copper.
U.S. pennies that were made before 1983 are full copper.
They obtained a bullion premium, so they actually worked more than face value, so they started getting hoarded out of circulation and sold.
and Money is the most important of those.
You'd sell these pennies for one and a half, two times space value, right?
This is Gresham's Law in Action.
Now, I was actually engaged in this process.
I found it pretty fascinating.
I've always been a coin collector.
So I was a penny hoarder, and that brings up the questions, brings up all these issues
of monetary economics, Gresham's Law, debasement of the coinage.
The penny was debased down to zinc, so this bullion premium issue would go away.
It's not a legal debasement, because the penny was never a legal standard, but it's still
Essentially a debasement, lightening of the coin and changing of the metal of the coin.
So that got me really interested going through this process of monetary debasement.
First off, let's go to the roots of the US dollar.
The US dollar is based on the Spanish mill dollar, this is the most prevalent coin in
circulation in early America.
And this coin has a long track record, it started in the late 1400s in Spain and it
It was initially established at this weight here, around 420 grains, and it was really
never debased because the Spaniards found so much silver in the New World, they really
didn't see a need to debase this coin, ever.
In circulation in the U.S. until the 1850s, it became the Mexican silver dollar, of course,
after Mexican independence.
Of course, eventually, the Mexicans found it necessary to start debasing the coinage
around 1900.
This coin had a long track record, it was very reliable.
To show the prevalence of this coin, continental currency was denominated in Spanish mill
dollars.
Of course, it was never paid off in Spanish mill dollars, so that's another story.
The Spanish came up with this technology of milling the edge of the coin, making it perfectly
round and putting a little pattern in the edge to prevent its shaving of the coin.
This made it a highly reliable coin.
The previous coins were very apt to be shaved and they weren't very reliable at all.
Of course, we're all familiar with the monetary provisions of the Constitution.
Only Congress can coin money.
All the monetary powers are with Congress.
The states have none, which hopefully we're all familiar with this.
But there's one thing to note here.
There's no strict limitation on Congress's power to emit bills of credit.
This was actually debated during the Constitutional Convention and it was narrowly defeated to
We've got a little opening of the door for the national government to print money.
We get the dollar defined in 1792, it's basically just copied off the Spanish mill dollar.
The dollar, the unit, which Jefferson called it the unit, the United States is going to
be the Spanish mill dollar, 371 grains of fine silver, so that's the net silver content.
Hamilton says we've got to have bi-metalism so we can increase the money supply.
So at the prevailing market ratio, which is 15 to 1, that becomes the mint ratio.
So you divide 371 by 15, you get 24 grains of gold.
Here's the coins they produced initially.
An eagle, $10, $5, $2.50.
Later on we added a dollar, a $3, and a $20, these are United States-made produced coins.
The silver coin is a dollar and its division is down to five cents. It's all proportional, of course.
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.
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.
This kind of shows the progress of inflation. A half cent used to be a highly relevant coin.
It ceased to be minted in the 1850s.
Of course, we start off with private bank notes. The first bank of issue, Bank of North
America, and then the first and second banks of the United States. Then all kinds of state
chartered banks are issuing bank notes throughout this period. Now, these are just claims on
money, right? These are money substitutes. The one feature they all have in common is
is payable to bear on demand. That's a feature every single private listed banknote has.
Circulation is subject to trust, of course. You have to take the bank's word for it. So
the reputation is at play to establish circulation. And actual redemption of the notes, there
has to be some kind of redemption of the notes going on, otherwise they won't circulate.
We have the development of these banknote reporters that tell you how reliable they
I want to just comment here on the idea of fractional reserve banking vis-a-vis debasement.
Fractional reserve notice, of course, they're going to issue more notes than they have specie
to pay out these notes, but I'm going to argue that this is not a debasement unless the following
prevails. The banks are legally allowed to suspend their VC payments or there's some
kind of legal tender status attached to the notes, to the law. But as long as the bank
note issue is free and competitive, that is the banks are free to go bust if the notes
are free to fall, the price of the notes is free to fall in the market, that doesn't constitute
debasement. There's no change to the legal standard. That's just the private business
Failing, failing to meet its obligations. Here are some examples of private bank notes.
They all have this feature. Table, bearer on demand, bearer on demand, bearer on demand.
They got pretty, the engraving got pretty sophisticated eventually to both show the
quality and to counterfeit. Speaking of suspension of species payments, here's sort of a brief
historical outline always associated with wars and then financial panics there are
ten species suspensions that I've identified and the last three are final
I'll get into more detail on those of course with a bi-metallic standard you're
going to have changes in the market price ratio of gold to silver and that's
going to drive one coin or the other out of circulation according to the
Operation of Gresham's Law. The government is always late to catch up. The first adjustment
happens in 1834 and some have identified it as the crime of 1834 because the weight of
the gold dollar was reduced. So if you had a contract from before 1834 and you get paid
off and post $1834, you're actually getting cheated a little. 6.3% debasement.
One thing that I found interesting though is that the U.S. Mint always signaled its debasements.
It would change the coin. Here's an 1834 quarter eagle. It's got E. Purvis Unum, 1835 quarter
eagle. They take that off. So you can readily identify the content of the coin just by some
kind of device that they change on it. And this is the famous 16 to 1 mint ratio it's
in 1854. This is what the silverites want to reestablish later on.
The next thing happens in 1853 with the gold rush. Now gold is replacing silver in circulation,
although especially small change, silver coins are being hoarded out. The silver dollar has
been irrelevant for a long time, it hasn't even been minted, but the small change silver
starts to get hoarded out, so there's a small change crisis. It actually starts about 1850.
People are paying off in pennies. People are carrying sacks and sacks of pennies around.
It's quite a problem. So the Congress debases silver now to make up for this. And actually,
not just to match the market ratio, but to go a little under to make the coins basically
a fiat coin. It's overvalued by 3% to try to guarantee that these coins will still circulate.
Yeah, this is not because of the Gresham's Law problem. But once again, they tell us
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.
So they're letting us know that they're changing the weight of the coin.
What was the new ratio?
I can tell you off the top of my head. Silver was debased by 7%.
Well, that's the market ratio, so it's going to be close to that.
Private coinage was issued on the U.S. standard throughout the, well from 1830 until the 1860s.
Several different states where there were gold discoveries.
I wanted to just point out a few features here though.
These coins were, this was a competitive coin issue and the quality varied.
The Beckler coins from the Carolinas displayed the weight and the finance, a very reliable
coin.
The assays proved that these coins turned out to be pretty solid, pretty reliable.
The U.S. Mint was always very good about its quality, but not its quantity, so private
individuals had to step in and fill the need.
California Gold, there's lots of different companies, there's 15 different companies
in California.
You'll notice this coin here, which is a double-legal, looks just like the U.S. government issue.
The differences are, instead of Liberty on the headband, we've got the name of the private company.
So very good substitutes and competition.
We've got a variation in quality.
The Mormon coins are the worst, but people are going to know that.
They're going to be assayed, and people are going to trade those coins at a discount.
We have Colorado Gold, Oregon Gold, all these different companies.
We'll see that they have to be modeled after private bank notes, payable to bear but not
on demand.
This is a course of legal tender law, a course of circulation, massive inflation, $450 million
worth authorized.
That's on top of initial money supply, $745 million.
We finally get redemption.
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.
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.
The national banking system that's established during the Civil War gives us national bank
notes.
They tax the state bank notes out of existence, national bank notes, secured by U.S. bonds.
They've got a kind of illegal tender status, the receivable in government taxes, not all
of that's public and private yet, and they are redeemable, but there's a catch to the
redemption here.
to go to the home office of the bank, but the currency is uniform, so all national currency
looks the same.
So if you can get your national bank not circulated on the other side of the country, chances
are you're never going to get redeemed, besides the government guarantees redemption anyway
so you can still fail and the government's going to take care of the note.
So redemption basically grinds to a halt during the national bank note era, but the legal
tender claim and then the counterfeit claim is so extensive on these, if you fold it in
And then half would basically be a book. That's the process here of developing the legal tender money.
And then here's the next phase here. They all look the same, only the name of the bank issue changes.
Eventually it starts to look like modern currency. And here's the obligation. It's pretty similar to United States notes.
We also have gold certificates, because gold is still being used. These are basically strictly to economize on gold coin circulation.
We come to the crime of 1873, which we talked about, but it's really not a debasement.
This is just, we're going to stop minting the silver dollar because the market ratio has changed so much.
So it's not a debasement.
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.
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.
So we get a little bit of fiat money inflation starting off with silver certificates in the
1970s.
So there's a step in the movement towards fiat money.
These last until actually 1968, not all that long ago.
And the obligation there has been deposited one silver dollar.
It's actually a good claim.
It's true.
This is what the modern ones look like.
Treasury notes are basically the same thing as silver certificates, although it says in
and Coin, so the government can choose gold or silver, depending on how the market ratio
works out.
The gold standard act is not to be based on either, it just says the government is going
to redeem treasury notes in gold, basically.
Now if they would come to Federal Reserve notes, finally.
Initially it says 40% gold backing, redeemable in gold, right, they've got to be, because
it's got to be copied off the previous issue.
This gets changed only gradually, I want to point out. First, we've got the 1933 gold
confiscation. It's reduced to lawful money. Then, after 1963, it's just legal tender.
So this is kind of a long requirement. We've got lots of different currencies circulating.
Federal Reserve notes, of course, are eventually going to take over. They're going to kick
out gold certificates, national currency, greenbacks, United States notes, and then
and Solar Certificates, and now it's just Federal Reserve.
We have the suspension of species payments from FDR in 1933, confiscation of the citizen's
gold in 1933, and then the authorization of the president to actually reduce the gold
to devalue the dollar in 1934. So we go from 24.75 grains to 15 grains, in other words,
$35 an ounce. But it doesn't really matter anymore because there's no redemption of the
notes for U.S. citizens. This only matters now for foreign central banks.
I want to point out one thing I find interesting. The notes look the same since the late 1920s,
but the obligation suddenly changes. This is a Federal Reserve note, redeemable in gold
coin. This is a Federal Reserve note, it looks almost exactly the same, redeemable in lawful
money, which is now just greenbacks, or silver, which is fiat money. This looks almost exactly
Devaluation. American citizens can still trade in their dollars for silver until 1968 because
the price of silver actually rises to where it's no longer fiat money so they get rid
of the redemption of silver certificates. Now we're fully fiat currency since 1971.
So the main point I want to make is that this is a long, drawn-out process. It's not a sudden
event, it's not a policy. There's five major steps in the debasement that I've identified.
Then there's the steps towards the debasement, then there's steps back from the debasement.
We've got the greenbacks, but those actually get redeemed. That's a good step backwards.
Then there's lots of different minor steps. The adjustments to the mint ratio, debasement
and the small coinage, suspension of the VC, legal tender laws and all this.
It's a long drawn out process.
There's lots of different embodiments of US currency and the step-by-step process each
currency has to kind of model its ancestor with slight changes and it brings, the question
it brings forth is when we're asking why does it happen, well we've got to look at the politics
of Inflation. What's the demand for the change in these notes? It's not just the government
trying to rip us off by changing the currency, it's lots of different interest groups wanting
to change the currency for their own benefit. That's the main point I'm trying to make.