Currency and Coinage
CURRENCY AND COINAGE
CURRENCY AND COINAGE. Until World War II, coinage was thought to have played a great role in U.S. economic history through its relations to money supply and monetary policy. Colonial coin shortages, the uncertain coinage policies of the early nineteenth century, and the bimetallist controversies of the late nineteenth century are standard features of older histories. Studies in the last half of the twentieth century, however, made it apparent that coinage has been a rather passive institution in American affairs. The denominations, metallic content, and volume of U.S. coins have done little either to retard or to advance U.S. economic development. Apart from occasional financial crises, the coinage system has generally accomplished well enough what has been demanded of it.
In the colonial period, it is true, the lack of an adequate volume of coins was certainly irritating. Unlike the Spaniards, the English denied their American colonies the right to possess local mints. Massachusetts coined "pine tree shillings" from 1652 to 1684, but no other colony managed to strike more than a small number of coins. Colonists in less-prosperous areas used wampum, tobacco, beaver skins, and other forms of commodity money. Elsewhere the lack of an adequate amount of English specie was compensated by French, Dutch, Portuguese, and above all Spanish coins, all of which were allowed legal-tender privileges by the English authorities. For large transactions the colonists could use bills of credit and other forms of paper currency. One could even say that the English monopoly of coinage in colonial America proved a blessing in disguise, since when independence was won, none of the states possessed a vested interest in a state minting operation.
The term "dollar" has European origins. It comes from the English corruption of the German word "thaler," the term for the widely circulated silver coin from the Joachimsthal silver-mining center, which was located in what is now the Czech Republic. The English and their colonists applied the term indiscriminately to thalers, to French silver "dollars" (écus), and to the Spanish "pieces (pesos) of eight," or eight reals. In keeping accounts, colonists and colonial governments reckoned usually in pounds, shillings, and pence; but the most common coins were probably the real (nominally a sixpence, but usually rated at seven or eight pence) and the eight-real piece, or "dollar." Because the sixpence and the real carried the slang name "bit," the two-real piece, or quarter of a dollar, was sometimes called "two bits."
The present U.S. coinage system was established, at least in outline, by the Coinage Act of 2 April 1792. By this act the dollar was fixed at about the same weight of silver as the Spanish peso. In true Enlightenment fashion, and perhaps also as a symbol of independence from the European system of pounds, shillings, and pence in England and livres, sous, and deniers in France (signified by the symbols £, s., and d.), the American statesmen Robert Morris, Thomas Jefferson, and Alexander Hamilton decided on a decimal system of relations among the coins—the world's first. For accounting purposes they divided the dollar into one hundred "cents" (a new term) and also into half-dollars; quarter-dollars; "dismes," or dimes (the term, like "cent," shows the French influence); and half-dismes. The actual coins were to be of silver, except for the copper cents and half-dismes. In addition, gold coins would serve as multiples of the dollar, as in "eagles," or ten-dollar pieces; half-eagles; and quarter-eagles. But the gold-silver ratio that was chosen, 1to 15, meant that a satisfactory bimetallic system was exceedingly difficult to maintain. At this rate, gold was heavily undervalued, and therefore it was either sent out of the country, hoarded, or consumed in industry. Not enough was brought to the new Philadelphia mint to satisfy the country's needs for large-denomination coins.
Silver available for coinage, too, was decidedly rare during the first half of the nineteenth century. The United States produced only a tiny trickle of precious metal; consequently, U.S. bullion supplies usually failed to meet transaction requirements. Hoping to encourage gold coinage, the government in 1834 changed the mint ratio to 1to 16; thus, it was silver's turn to be undervalued. However, while the shortage of specie undoubtedly worsened the Panic of 1837, on the whole, it seems to have been more an annoyance than a severe impediment to the conduct of business. Foreign silver continued to fill the gap for both large and small denominations. The bountiful note issues of state banks took up the currency slack.
It was not until 1850 that the government decided to make improvements to its small change. By this time, the outpouring of California gold was driving up the price of silver so rapidly that there was a severe decline in the already insufficient amount of silver coinage. With some misgivings, Congress in 1851 authorized the first bullion (mixed silver and copper) coin, a three-cent piece. The coin was an immediate success, and few seemed bothered by its "subsidiary" character—that is, by the fact that there was slightly less than three cents' worth of silver and copper in the coin. Encouraged by the public's obvious willingness to accept slightly "debased" coins, in 1853 Congress ruled that all the other silver coins (except the dollar) also be turned into subsidiary coins. Almost overnight, the U.S. need for foreign coins vanished as the new pieces poured out of the mint. Since foreign coins were no longer needed, keeping accounts in pounds, shillings, and pence finally ended. This reform also virtually wiped out a thriving business in counterfeiting the small change.
In 1856 the United States made its first experiment with coinage made from nickel: the "flying eagle" one-cent piece. It was called a nickel until a five-cent piece of the same metal appeared ten years later, when the term was transferred to the coin of larger denomination. Meanwhile, the gold production of California and Australia made it easier to supply the country with coins of large denomination, including "double eagles" ($20). And the mints, with improved, more powerful machinery, were able to meet higher demands. By the beginning of the Civil War, therefore, the technical problems—if not the political and economic problems—of providing an expanding nation with a satisfactory coinage system had been solved. The government had gone a long way toward its goal of making as many transactions as possible based on specie or specie-backed paper currency. The war brought severe coinage shortages, gaps that had to be filled by "shinplasters" (fractional paper notes), but these substitutes were gradually driven out of circulation during the 1870s.
Coinage after the Civil War has little proper history of its own. As the use of notes increased, the volume of coinage, as a fraction of total paper and metal currency, shrank from about 50 percent in 1860 to about 15 percent in 1960. The many coinage "reforms" of the era reflected mainly the changing political fortunes of competing gold, silver, nickel, and copper interests or the support given to Populist leaders, who believed that "free coinage" of silver would greatly augment the total money supply and would therefore hold up general prices and wages during severe depressions. The Bland-Allison Act of 1878, the Sherman Act of 1890, and the Silver Purchase Act of 1934 all attempted to force more silver into circulation by requiring the government to buy set amounts of silver each year and to strike at least some silver dollars from this bullion. Silver dollars had not been struck at all between 1806 and 1836 and only in small amounts until the 1870s. But they came to be struck again and in enormous volumes: $22.5 million in 1878 and $38 million in 1890.
Apart from some regions in the West, however, silver dollars never became popular and were regarded mainly as objects of only numismatic interest. Besides, in spite of being called standard money in law, silver dollars were just as much "token" or "fiduciary" coins as their fractions. In 1939, for example, the bullion value of a silver dollar was only thirty cents. A large fraction was not even circulated; it remained in bags in vaults and thus benefited no one but the silver-mine operators.
The lack of American concern over the silver content of coins was highlighted when, in 1964 and 1965, part-silver half-dollars, quarters, and dimes were withdrawn and replaced by nickel-clad copper coins. The Bank Holding Company Act Amendments of 1970 brought about the withdrawal of silver from the dollar and its replacement with copper and nickel alloy. This closing episode in the centuries-old drama of government-fiat coins versus "sound money" caused hardly a ripple.
The only coinage issue to spark extensive debate after 1970 was the introduction of a one-dollar coin. Because coins have a longer life span than paper currency, they require less-frequent replacement. Congress introduced one-dollar coins in 1979 with the Susan B. Anthony dollar and again in 2000, when the Sacagawea dollar entered circulation. Most Americans avoided Susan B. Anthony coins, however, finding them too similar in shape and appearance to quarters and preferring the ease of using paper dollars. Some experts feared the new Sacagawea dollar would suffer the same fate as the Susan B. Anthony dollar. By the end of 2001, however, the U.S. Mint reported that the Sacagawea dollar had gained popular support among Americans and that some 700 million of the coins were minted in its first year of circulation, seven times as many as initially projected.
Carothers Neil. Fractional Money: A History of the Small Coins and Fractional Paper Currency of the United States. New York: Wiley, 1930.
Hepburn, A. Barton. History of Coinage and Currency in the United States and the Perennial Contest for Sound Money. New York: Macmillan, 1903.
Schwartz, Anna Jacobson. Money in Historical Perspective. Chicago: University of Chicago Press, 1987.
Schwarz, Ted. A History of United States Coinage. San Diego, Calif.: A. S. Barnes; London: Tantivy Press, 1980.
Wilson, Thomas F. The Power "To Coin" Money: The Exercise of Monetary Powers by the Congress. Armonk, N.Y.: M. E. Sharpe, 1992.
See alsoBimetallism ; Cotton Money ; Financial Panics ; Free Silver ; Gold Standard ; Hard Money ; Legal Tender ; Mint, Federal ; Mints, Private ; Money ; Pieces of Eight ; Pine Tree Shilling ; Specie Payments, Suspension and Resumption of ; Tobacco as Money .