Specie Payments, Suspension and Resumption of

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SPECIE PAYMENTS, SUSPENSION AND RESUMPTION OF

SPECIE PAYMENTS, SUSPENSION AND RESUMPTION OF. Under a system of specie payments, it is required by law or custom that fiduciary money, usually in the form of bank notes or government paper money issues, be redeemed at par and upon request of the issuing bank or the Treasury in metallic coin. The founding fathers remembered with distaste the paper-money inflation of the Revolution and the excesses of some of the states during the Confederation. The decision for a specie standard of value was therefore implicit in the constitutional grant of power to Congress "to coin Money" and "regulate the Value there of," and that the states refrain from emitting bills of credit or making anything but gold or silver a legal tender.

The maintenance of specie payments in the United States was difficult from the outset. In 1792, Congress adopted a bimetallic standard of value under which the dollar was defined in terms of both silver and gold. By adopting the then prevailing market ratio of 15 to 1 as the mint ratio, Alexander Hamilton hoped to keep both metals in monetary circulation. Unfortunately, soon after coinage began, the international market price of silver began to fall and gold was hoarded or exported to Europe. It even proved difficult to keep the newly coined silver dollars in circulation because they were accepted at a higher value in the Spanish possessions. In 1834, an attempt was made to bring gold back into monetary circulation by reducing the gold content of the dollar from 24.7 to 23.2 grains while maintaining the silver dollar at 371.25 grains. This meant a new mint ratio of silver to gold of 16 to 1. This ratio undervalued silver, since the international market ratio of the time was about 15.75 to 1. Consequently, silver tended to disappear from circulation while an increasing number of gold coins were minted. Essentially, after 1834 and until 1934, the gold coin reigned as the dominant standard of value in the United States.

America's usually unfavorable balance of trade made it difficult to maintain specie payments during the nineteenth century. In addition, wars and economic crises accelerated the exportation of specie in payment for goods. Also, until 1864, when the National Banking System was established, it was difficult to control the paper bank-note issues of the state-chartered banks. Encouraged by a Supreme Court decision exempting them from the constitutional prohibition against the state issue of bills of credit, the state-chartered banks proceeded to issue bank notes far in excess of their ability to maintain specie payments. In wartime, moreover, the federal government met its needs for revenue through the issue of irredeemable paper money.

In 18141815, in response to the unregulated credit expansion of the banks and wartime issue of Treasury notes, most of the banks and branches of the U.S. Treasury suspended specie payments altogether. Coin payments were resumed in February 1817. Soon, another great credit expansion fostered by the policies of the second Bank of the United States culminated in the panic of 1819, and a severe depression during which most banks in the South and West refused to pay specie.

The years 18301837 saw solid economic development as well as feverish speculation in land. This eventually led to the panic of 1837 and a nationwide suspension of specie payments. Factors involved in the suspension included a doubling of bank circulation between 1830 and 1837; Andrew Jackson's Specie Circular of 11 July 1836, which halted the land boom; and the distribution of a government surplus, which removed much hard money from the less-developed regions of the country. More importantly, large exports of specie followed the cessation of European investment. Partial resumption was achieved prematurely in 1838. After a premature resumption in 1838, continuing outflows of metallic coin brought another suspension in 1839. Specie payments did not resume until 1842.

The cycle repeated itself in the 1850s. Heavy domestic and foreign investment fueled the rapid expansion of railroads and industry. State bank-note issues increased, and speculation was prevalent. In 1857, capital imports from Europe slackened and the flow of California gold decreased. Money became tight. On 24 August, the failure of the Ohio Life Insurance and Trust Company precipitated a panic in New York City that spread to the rest of the country. Specie payments were suspended. They were resumed six months later.

The most serious deviation from the specie standard occurred in the years 18621879. As the Union's military situation deteriorated, precious metals seemed the only secure medium of value. The hoarding and exportation of specie forced the banks and the government to suspend gold payments on 30 December 1861. Also contributing to the crisis was the failure of the Secretary of the Treasury, Salmon P. Chase, to recommend drastic increases in taxes and his use of demand Treasury notes, a form of paper money.

In February 1862, the government began issuing U.S. notes, better known as "greenbacks." These notes were legal tender, and, by 1865, had been issued to the amount of $431 million. While the greenbacks caused no interruption in specie payments, the failure of Secretary of the Treasury Hugh McCulloch's contraction program after the Civil War made resumption very difficult. Powerful economic groupsnamely, creditorsopposed the green-back because of its inflationary effect. The obvious solution would have been a devaluation of the gold content of the dollar. Instead, Congress opted to let the country's economy grow up to the currency supply. On 14 January 1875, Congress passed the Resumption Act, which provided for coin payments to be resumed on 1 January 1879.

Despite the Free Silver agitation of the late nineteenth century, the United States adhered to the gold standard. Conservative, hard money presidents rebuffed attempts by western and southern agrarians to restore silver to its ancient monetary function. Such measures as the Bland-Allison Act of 1878 and the Sherman Silver Purchase Act of 1890 simply provided a subsidy to the silver mine owners of the West. The defeat of William Jennings Bryan in 1896 effectively squelched the silver movement, and the Gold Standard Act of 1900 legally placed the nation's money on the monometallic basis, de facto since 1879.

Domestic hoarding and exportation continued to wreak havoc on specie policies through the turn of the century. The Treasury encountered difficulties in maintaining gold payments in 1893 and 1907. Unsound bank investments also contributed to the panic of 1907. The government deviated from the gold standard shortly after the United States entered World War I. Large gold exports seemed to threaten the base of the monetary and credit structure. On 7 September and 12 October 1917, President Woodrow Wilson placed an embargo on exports of coin and bullion. These restrictions were removed in June 1919.

The economic cataclysm of the 1930s marked the end of a legitimately defined specie standard of value in the United States. The 1929 stock market crash precipitated more than 5,000 bank failures in three years. When England abandoned the gold standard in September 1931, pressure to follow suit mounted in the United States. In the two weeks preceding the inauguration of President Franklin D. Roosevelt on 4 March 1933, the Federal Reserve banks lost more than $400 million in gold, bringing the reserve down to almost the legal minimum. Several states had already declared banking "holidays" when Roosevelt, on 6 March, issued an executive order closing all banks for four days and prohibiting them from exporting, paying out, or allowing the withdrawal of specie. By the end of March, most banks had been allowed to reopen, but specie payments were not resumed. By further executive orders issued in April 1933, the break with the gold standard was made more complete. No person or institution was permitted to hold gold or gold certificates. Roosevelt also placed an embargo on all international transactions in gold, except under license issued by the secretary of the Treasury. By a joint resolution on 5 June, Congress declared void the "gold clause" in government bonds and private obligations. For the first time, the United States had deliberately abandoned the gold standard de jure.

After fluctuating in value in international money markets for nearly two years, the value of the dollar was finally stabilized by the Gold Reserve Act and another presidential order in January 1934. The new dollar was defined as 13.71 grains of fine gold, a devaluation to 59.06 percent of its former value. On this basis, Secretary Henry Morgenthau announced the Treasury's willingness to buy and

sell gold at the new rate of $35 per ounce. It now became possible to obtain gold bullion for making international payments, but domestically the country continued on an irredeemable paper standard, which made gold holdings by citizens illegal.

This partial (some called it "bastardized") gold standard endured for thirty-seven years. Operating under a favorable balance of payments, the United States amassed a gold reserve amounting to more than $24 billion in 1949. After that time, deficits in the international balance reduced the gold stock until it amounted to only about $10 billion by 1971. The continuing deterioration of the balance of payments and the threat to the gold stock impelled President Richard Nixon, on 15 August 1971, to order that the Treasury cease all purchases and sales of gold. As of the year 2000, the dollar was not maintained either at home or abroad at any fixed value in terms of gold; it is uncertain whether gold will regain a place in the monetary system of the nation.

BIBLIOGRAPHY

Friedman, Milton, and Anna Jacobson Schwartz. The Great Contraction, 19291933. Princeton, N.J.: Princeton University Press, 1965.

Glasner, David, ed. Business Cycles and Depressions: An Encyclopedia. New York: Garland, 1997.

Huston, James L. The Panic of 1857 and the Coming of the Civil War. Baton Rouge: Louisiana State University Press, 1987.

Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1978, 1989; Wiley, 1996, 2000.

McSeveney, Samuel T. The Politics of Depression: Political Behavior in the Northeast, 18931896. New York: Oxford University Press, 1972.

Schweikart, Larry. Banking in the American South from the Age of Jackson to Reconstruction. Baton Rouge: Louisiana State University Press, 1987.

Unger, Irwin. The Greenback Era: A Social and Political History of American Finance, 18651879. Princeton, N.J.: Princeton University Press, 1964.

Wicker, Elmus. The Banking Panics of the Great Depression. Cambridge, U.K.; New York: Cambridge University Press, 1996.

Robert P. Sharkey / a. r.

See also Bimetallism ; Currency and Coinage ; Federal Reserve System ; Financial Panics ; Greenbacks ; Money ; Specie Circular .