• Military Menu                       

• Introduction
• Systems
• Facilities
• Agencies
• Industry
• Operations
• Countries
• Hot Documents
• News
• Reports
• Policy
• Budget
• Congress
• Links

• WMD
• Intelligence
• Homeland Security
• Space

Free Silver

As an outpost of Great Britain, colonial America used British pounds, pence, and shillings as its money. Great Britain was officially on a silver standard, with the shilling defined as equal to 86 pure Troy grains of silver, and with silver as so defined legal tender for all debts (i.e., creditors were compelled to accept silver at that rate).

However, Britain also coined gold and maintained a bimetallic standard by fixing the gold guinea, weighing 129.4 grains of gold, as equal in value to a certain weight of silver. In that way, gold became, in effect, legal tender as well.

Unfortunately, by establishing bimetallism, Britain became perpetually subject to the evils known as Gresham's Law, which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation.

Hence, the popular catchphrase of Gresham's Law: "Bad money drives out good." But the important point to note is that the triumph of "bad" money is the result, not of perverse free-market competition, but of government using the compulsory legal tender power to privilege one money above another.

In 17th-and 18th-century Britain, the government maintained a mint ratio between gold and silver that consistently overvalued gold and undervalued silver in relation to world market prices, with the resultant disappearance and outflow of full-bodied silver coins to China, and an influx of gold, and the maintenance in circulation of only eroded and "lightweight" silver coins.

Among the gold coins circulating in America were the French guinea, the Portuguese "joe," the Spanish doubloon, and Brazilian coins, while silver coins included French crowns and livres. By far the leading specie coin circulating in America was the Spanish silver dollar, defined as consisting of 387 grains of pure silver. The dollar was divided into "pieces of eight," or "bits," each consisting of one-eighth of a dollar. Foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857.

In the early 1850s, Gresham's Law finally caught up with the bimetallist idyll that the Jacksonians had forged in the 1830s, replacing the earlier de facto silver monometallism. The sudden discovery of extensive gold mines in California, Russia, and Australia greatly increased gold production, reaching a peak in the early 1850s. From the 1720s through the 1830s, annual world gold production averaged $12.8 million, never straying very far from that norm. Then, world gold production increased to an annual average of $38.2 million in the 1840s, and spurted upward to a peak of $155 million in 1853. World gold production then fell steadily from that peak to an annual average of $139.9 million in the 1850s and to $114.7 million from 1876-1890. It was not to surpass this peak until the 1890s.

The consequence of the burst in gold production was, of course, a fall in the price of gold relative to silver in the world market. The silver/ gold ratio declined from 15.97 in January 1849 to an average of 15.70 in 1850 to 15.46 in 1851 and to an average of 15.32:1 in the eight years from 1853 to 1860.

As a result, the market premium of American silver dollars over gold quickly rose above the one-percent margin, which was the estimated cost of shipping silver coin abroad. That premium, which had hovered around one percent since the mid-1830s, suddenly rose to 4.5 percent at the beginning of 1851, and after falling back to about 2 percent at the turn of 1852, bounced back up and remained at the 4-5 percent level.

The result was a rapid disappearance of silver from the country, the heaviest and therefore most undervalued coins vanishing first. Spanish-milled dollars, which contained 1 percent to 5 percent more silver than American dollars, commanded a premium of 7 percent and went first. Then went the full-weight American silver dollars and after that, American fractional silver coins.

It was clear that America was undergoing a severe small coin crisis. Gold coins were flowing into the country, but they were too valuable to be technically usable for small denomination coins. The Democratic Pierce administration saw with horror a flood of millions of dollars of unauthorized private small notes flood into circulation in early 1853 for the first time since the 1830s.

Under pressure of the crisis, Congress decided, in February 1853, to keep the de jure bimetallic standard but to adopt a de facto gold monometallic standard, with fractional silver coins circulating as a deliberately overvalued subsidiary coinage. By April, the new subsidiary quarter dollars proved to be popular and by early 1854 the problem of the shortage of small coins in America was over.

As soon as greenbacks depreciated to less than 97 cents in gold, fractional silver coins became undervalued and so were exported to be exchanged for gold. By July 1862, in consequence, no coin higher than the copper/nickel penny remained in circulation. Postage and fractional notes did not help matters, because their lowest denominations were 5 cents and 3 cents respectively. The penny shortage was finally alleviated when a debased and lighter weight penny was issued in the spring of 1864, consisting of bronze instead of nickel and copper.

The Democratic sweep in the congressional elections of 1874 forced the Republicans into a semblance of unity on monetary matters, and, in the lame-duck congressional session led by Sen. John Sherman, they came up with the Resumption Act of January 1875. Despite the fact that the Resumption Act ultimately resulted in specie resumption, it was not considered a hard-money victory by contemporaries.

Return to the gold standard in 1879 was almost blocked, in the last three years before resumption, by the emergence of a tremendous agitation, heavily in the West but also throughout the country, for the free coinage of silver. The United States mint ratios had been undervaluing silver since 1834, and in 1853 de facto gold monometallism was established because silver was so far undervalued as to drive fractional silver coins out of the country. Since 1853, the United States, while de jure on a bimetallic standard at 16:1, with the silver dollar still technically in circulation though nonexistent, was actually on a gold monometallic standard with lightweight subsidiary silver coins for fractional use.

In 1872, it became apparent to a few knowledgeable men at the U.S. Treasury that silver, which had held at about 15.5 to 1 since the early 1860s, was about to suffer a huge decline in value. The major reason was the realization that European nations were shifting from a silver to a gold standard, thereby decreasing their demand for silver. A subsidiary reason was the discovery of silver mines in Nevada and other states in the West.

Working rapidly, these Treasury men, along with Sen. Sherman, slipped through Congress in February 1873 a seemingly innocuous bill which in effect discontinued the minting of any further silver dollars. This was followed by an act of June 1874, which completed the demonetization of silver by ending the legal tender quality of all silver dollars above the sum of $5.

The timing was perfect, since it was in 1874 that the market value of silver fell to greater than 16:1 to gold for the first time. From then on, the market price of silver fell steadily, declining to nearly 18:1 in 1876, over 18:1 in 1879, and reaching the phenomenal level of 32:1 in 1894. In short, after 1874 silver was no longer undervalued but overvalued, and increasingly so, in terms of gold, at 16:1.

The first silver agitation of the late 1870s began as an urban movement, furthermore, not an agrarian crusade. Its original strongholds were the large towns and cities of the Midwest and middle Atlantic states, not the country's farming communities. The first batch of bimetallist leaders were a loosely knit collection of hard money newspaper editors, businessmen, academic reformers, bankers, and commercial groups. With the passage of the Silver Purchase Act of 1878, silver agitation died out in America, to spring out again in the 1890s.

The fateful decade of the 1890s saw the return of the agitation for free silver, which had lain dormant for a decade. The Republican Party intensified its longtime flirtation with inflation, by passing the Sherman Silver Purchase Act of 1890, which roughly doubled the Treasury purchase requirement of silver.

People in the newer western parts of the country saw themselves as starved of access to credit and viewed higher interest rates in their areas as reflecting the scarcity of funds. Regional interest rate differentials persisted until around the time of the Great War and helped shape the attitudes of Americans living in western areas toward the nation's financial system.

These regional differences gave rise to a major political movement in the latter part of the 19th century, as western farm borrowers increasingly demanded a reform of the U.S. monetary system. Their chief complaints included the high interest rates they faced as well as the burdens placed on them by deflation that increased the real value of their debts. Indeed, the economy experienced 1 to 2 percent deflation annually in the years leading up to the 1890s.

Before the war of the rebellion agriculture was under many disadvantages in the western states and territories. Grain, after the payment of transportation to a market, seldom paid any great profit, and the use of corn for fuel was quite common. During the war the government became a heavy customer of easy access, the mortgages on farms, originally due in gold, were paid in paper at from 50 to 60 per cent, discount, and in 1865 agriculture was at its flood tide of prosperity. All was commonly attributed, however, to the inflation of the currency by the introduction of "greenbacks," and since 1865 there has been a constant disposition among many men of all parties in the agricultural states to recur to the inflation of the currency as a remedy for evils of all sorts, for the loss of the government as a customer, for loss upon crops, or for general financial distress.

Another influence, closely kindred to the foregoing, was the feeling of many farmers that the bankers, particularly in the eastern states, whom they suppose to hold most of the bonds of the United States, made a hard bargain with the government in the time of its greatest need, and have been trying to make their bargain harder ever since; that, having paid for their bonds in greenbacks worth from 38 to 75 cents on the dollar, they would have been well paid in greenbacks at or near par; that they had influenced congress to give them, in the act of March 18, 1869, more than their due by making all bonds payable "in coin," even when the face of the bond did not specify the medium of payment, and that, when silver began to decrease in value as compared with gold, they had again influenced congress in 1873 to demonetize silver and thus make their bonds payable in gold alone.

The American wheat grower sold a bushel of wheat for an ounce of silver, which, formerly worth $1.20 in gold, was worth in 1896 only 65 cents. The result was that the American wheat grower received in gold half of what he received in 1873. And so it was with cotton and other farm products. The value of exportable products with which Americans paid their debts had constantly declined, in gold the balance of trade was unfavorable, and it must be paid in gold.

Farmers refused to admit it, but the primary cause of their problem was overproduction caused by increases in acreage of farm land and increased yields per acre due to improved farming methods generated by newly created agricultural colleges. Thus, farmers produced more than consumer demand, and prices fell to a point that farmers barely made a profit. Farmers, however, came to believe that their chief problem was not the market dynamics of supply and demand but that they sold goods in a free market and purchased goods in a protected and monopolistic market. They primarily zeroed in on two villains – banks and railroads. In their view banks charged outrageous interest rates, and monopolistic railroads not only charged outrageous rates but their rates were unfair and arbitrary in that the railroads charged farmers higher rates than they charged fellow industrialists.

The country's currency was linked to gold, and deflation reflected the growing scarcity of gold relative to the amount of economic activity. Uneasiness about the shift from gold to silver and the continuing free-silver agitation caused foreigners to lose further confidence in the U.S. gold standard, and to cause a drop in gapital imports and severe gold outflows from the country. This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.

A shock went through the financial community, in the U.S. and abroad, when the United States Senate passed a free-silver coinage bill in July 1892; the fact that the bill went no further was not enough to restore confidence in the gold standard.

By the end of 1893, the panic was over as foreign confidence rose with the Cleveland administration's successful repeal of the Sherman Silver Purchase Act in November 1895. Further silver agitation of 1895 endangered the Treasury's gold reserve, but heroic acts of the Treasury, including buying gold from a syndicate of bankers headed by J.P.Morgan and August Belmont, restored confidence in the continuance of the gold standard.

The "free silver" movement grew in response to these economic forces. Its most famous advocate, William Jennings Bryan, the Democratic presidential nominee in 1896, sought an increase in the money supply - by the coining of silver in addition to gold - as a solution to reversing this deflation. The rise of Bryanism resulted from price contraction of the last three decades of the 19th century.

The victory of the free-silver Bryanite forces at the 1896 Democratic convention caused further problems for gold, but the victory of the pro-gold Republicans put an end to the problem of domestic and foreign confidence in the gold standard.