History of Money in the United States [HOMIUS] - 1.4

The Bank of North America. The United States: Bimetallic Coinage

Photograph of the Bank of North America by Helen C. Perkins

This is the fourth installment of the book club discussion of Rothbard's Money and Banking in the United States.

Book club: History of Money and Banking in the US

So far we have covered the book through Revolutionary War Finance section in Part 1.

The previous installment can be found here:

History of Money in the United States [HOMIUS] - 1.3

As usual, will quote directly the passages I found especially interesting, including my takes here and there. The emphasis is always mine, unless stated otherwise.

THE BANK OF NORTH AMERICA

in the spring of 1781, Morris introduced a bill to create the first commercial bank, as well as the first central bank, in the history of the new Republic.

Those were not two separate banks, but rather the same privately owned bank called the Bank of North America. It was headed by Robert Morris himself. The bank was modeled after the Bank of England.

The money system was to be grounded upon specie, but with a controlled monetary inflation pyramiding an expansion of money and credit upon a reserve of specie¹

It promptly received a federal charter and started operations in the beginning of 1782. Its notes were to be accepted in payment of all duties and taxes to all governments, at par with specie. No other banks were to be allowed to operate in the country.

In return for its monopoly license to issue paper money, the bank would graciously lend most of its newly created money to the federal government to purchase public debt and be reimbursed by the hapless taxpayer. The Bank of North America was made the depository for all congressional funds. The first central bank in America rapidly loaned $1.2 million to the Congress, headed also by Robert Morris.

Despite the nominal redeemability of the Bank of North America’s notes in specie, the market’s lack of confidence in the inflated notes led to their depreciation outside its home base in Philadelphia

Operating the central bank required a lot of power and pull. However, Morris's political power severely diminished after the war. In fact, his career ended in debtor's prison, after which he never recovered financially and spent the rest of his life broke. So after operating the bank for a year Morris converted it to a private commercial bank chartered by the state of Pennsylvania.

The rest of the chapter deals with the several states' attempts to re-inflate the prices that were falling due to the end of the war and reintroduction of imports from Britain. Several times in HOMIUS Rothbard mentions government attempts to inflate prices. The fundamental reason is always the same: wealth redistribution (legalized theft?). The particulars may vary: the main victim might be the local population, or inflation can be exported to foreign countries, the beneficiaries might be private debtors whose debt burden is lowered in real terms, or the government that benefits via Cantillon effect. Without looking at the sources I am not sure what the main reasons for those states wanting to inflate prices were, but I suspect that it was to increase tax receipts to pay for the Revolutionary War debts.

Rothbard illustrates the deleterious consequences of those attempts with the following quote:

In 1787–1788 the specie value of the paper had shrunk by more than fifty percent. Coin vanished, and since the paper had practically no value outside the state, merchants could not use it to pay debts they owed abroad; hence they suffered severe losses when they had to accept it at inflated values in the settlement of local debts. North Carolina’s performance warned merchants anew of the menace of depreciating paper money which they were forced to receive at par from their debtors but which they could not pass on to their creditors.²

THE UNITED STATES: BIMETALLIC COINAGE

We already saw how the Spanish silver dollar had become the most widely accepted currency in the Colonies. It continued in that role through the Confederation period as well.m Thus it was only natural that it would become the basic currency of the newly minted United States.

The new US Constitution gave Congress the exclusive power to "to coin money, regulate the value thereof, and of foreign coin". The states were prohibited not only from issuing paper money or coining money, but even from making anything other than gold or silver coin (e.g. other commodities) as legal tender in payment of debts:

Article I, Section 10
Clause 1 Proscribed Powers

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Using that power Congress passed the Coinage Act of 1792, which was recommended by Hamilton.

The Coinage Act established a bimetallic dollar standard for the United States. The dollar was defined as both a weight of 371.25 grains of pure silver and/or a weight of 24.75 grains of pure gold - a fixed ratio of 15 grains of silver to 1 grain of gold.26 Anyone could bring gold and silver bullion to the mint to be coined, and silver and gold coins were both to be legal tender at this fixed ratio of 15-to-1. The basic silver coin was to be the silver dollar, and the basic gold coin the $10 eagle, contain- ing 247.5 grains of pure gold.27

The 15-to-1 fixed bimetallic ratio almost precisely corresponded to the market gold/silver ratio of the early 1790s,28 but of course the tragedy of any bimetallic standard is that the fixed mint ratio must always come a cropper against inevitably changing market ratios, and that Gresham’s Law will then come inexorably into effect. Thus, Hamilton’s express desire to keep both metals in circulation in order to increase the supply of money was doomed to failure.

Increased silver production in Mexico raised the market rate of silver to gold to 15.5-to-1 by the 1790s, and after 1805 to approximately 15.75-to-1 after 1805. That's a drop to approximately 95% of the official exchange rate, which is historically enough to set Gresham's Law in motion³. Gold disappeared (in this particular case by importing silver, exchanging it for gold coins, then smelting and exporting the gold) and from 1810 until 1834 only silver coin (both domestic and foreign) circulated in the country,

Then things got more complicated. Congress provided that any foreign coins could be used as legal tender. By 1827 that legal tender privilege was cancelled for most coins. But the Spanish dollar - both full and fractional coins - remained as such. Long story short, very ironically by workings of Gresham's law after 1820 only fractional Spanish silver coins remained in the circulation in the US. All gold, all domestic coin, and full Spanish dollars disappeared.

1. For the discussion of pyramiding see the introductory post in this series

2. Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (New York: Holt, Rinehart, and Winston, 1962), p. 82

3. Gresham's Law: see the introductory post in this series