This commentary was originally posted at www.financialsense.com on 20th October 2004.
Part II: Silver Standard with a Bimetallic Coinage System
The Standard and the Coinage System
As we have seen, the Constitution along with the Coinage Act of 1792, established by statutory decree that the dollar was the unit of account and also declared that a dollar or unit was "each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure silver, or four hundred and sixteen grains of standard silver".
According to statute, the United States was on the silver standard. However, as we have seen, Congress also decreed that gold coins were to be minted and circulated along side of silver coins, and fixed the statutory valuation of silver to gold at 15 to 1.
In other words, Congress had "fixed" the exchange rate between the two metals. Thus the United States was on a silver standard, but it was also on a bimetallic system of coinage, that included gold to be circulated at a "fixed" exchange rate to the silver standard.
Such a system can present problems, however, as the free market exchange rate between gold and silver can diverge from the statutory or legally fixed exchange rate - necessitating the adjustment of the other metals legal value up or down to conform to the statutory fixed rate of exchange.
In other words, Congress was trying to make two different types of metal coinage equal in purchasing power. This was not a good idea and would have been better left undone.
This also raises the very interesting question as to whether or not this "fixing" was an accidental mistake, by very learned men, well acquainted with this exact monetary issue, as the discussions of such are in the Congressional records.
Past historical monetary writings also address the issue in detail. Perhaps such was not a mistake, but was very much intended and planned, although unknown by most but a select few. We will trust the reader with making such determinations, as the following discussions occasion.
Legal Tender and Purchasing Power
Involved in the issue of "fixed" exchange, are the ideas of legal tender and the concept of purchasing power.
Legal tender has to do with distinguishing between the legal or juristic meaning of money, and the purely economic meaning and use of money. The term legal tender refers to the medium of payment that is designated as the legally accepted settlement of debts, especially debts due and owed to the government.
Money in the purely economic sense is commonly referred to as the medium of exchange or that which the common man uses to exchange one good for another to facilitate commerce and trade.
In a free market environment, whatever is determined to be the legal medium of payment (legal tender) must first naturally evolve as the accepted medium of exchange. Man by free choice determines what is to be money - the most commonly accepted or marketable medium of exchange.
A truly free society or government will only declare as legal tender, that media that society has already chosen as the accepted medium of exchange by its own free will.
As we have seen with the development of our Constitution and its monetary policy, the dollar was the unit or medium of exchange that was the most accepted then current medium - a specific weight and fineness of silver - the "silver dollar".
Any alteration in this Constitutional dollar, both as the medium of exchange and the medium of payment or legal tender - without a Constitutional amendment - would not be the workings of a free society or government, but one of forced obedience.
This also goes to the point that the legal intrinsic value of the dollar is the physical amount of silver or gold as measured against the "standard", which in the case of the U.S. dollar is a specific weight of silver.
However, the economic value or purchasing power of the medium of exchange is not "intrinsic", as it is not based on an objective determination or standard, but on the subjective valuations of the market participants. Some refer to this as the subjective theory of value or the theory of declining marginal utility.
It is exactly this difference - between the legal intrinsic value of money based on an objective standard or defined weight of metal - versus the subjective value of the medium of exchange that changes according to the supply and demand of the marketplace - that precludes any system of bimetallic coinage, that sets one metal as the standard, and then declares the other metal to be "exchangeable" for the standard metal at a "fixed" rate of exchange - to be inherently doomed to fighting free market forces and laws of supply and demand, continually requiring "regulatory" legislation and "adjustment". Such is not the workings, of a truly free market, but of a contrived or fixed market.
Although in the strict technical and statutory sense, the standard was silver and the system of coinage was bimetallic - in all practical applications or according to the prevailing "populist" views - the system was a duometallic system that reciprocally recognized and exchanged one metal for the other. As will be shown, however, the system fluctuated back and forth from one metal to the other, and with good cause - the purposefully contrived reasons of power and influence: all in the pursuit of profit and gain.
Establishing fixed exchange rates allows "Gresham's Law" to enter the picture, whereby an artificially overvalued money tends to drive an artificially undervalued money out of circulation.
Free markets and supply and demand being what they are, inevitably the market values one metal over the other. Eventually one metal is driven out by the other. This process is oft times referred to as "demonetization". But remember, bimetallism under a fixed standard is not necessarily a completely free system.
Starting slowly in the 1780's, the market value of silver slid downwards, steadily continuing down through the 1790's, up until about 1804-1805; mainly in response to the increased supply of silver from Mexico and the diminishing supplies of gold from Russia; while at the same time, its mint price remained the same, thereby causing silver to be overvalued in relation to gold.
Gold coins started to flow out of our country and ceased to circulate, while silver coin flowed in and was abundant. Gold coin was melted down and exported abroad. From 1800 to 1834 only silver coin circulated as the currency of choice. Gold had been driven out - but by what force? Might there be an unseen "guiding hand"?
First gold was driven out of circulation, and then over time silver became the lackey, until eventually both metals were driven into exile and buried beneath a mountain of worthless paper debt and hollow promises to pay: that is our now current system of paper fiat - a mere shade of its former self. But such events beg the question: a lackey of whom or by what power?
Congress would have been better off to have simply minted gold Eagles without fixing a dollar value on them, thereby allowing the free market forces of supply and demand to regulate their exchange rate value. This would help prevent the "authorized" control by other than free market principles or by "others".
Because of this flaw in a bimetallic system of coinage that has one metal as the standard and then fixes the exchange rate between the two metals, and the resulting "crying" up or down of the value of one metal in regards to the other - our monetary history was one where first one metal was dear and the other shunned, and vice versa, on several different occasions.
Conclusions So Far
It has been shown that the both the Constitution and the Original Coinage Act of 1792 established the monetary standard to be silver, in conjunction with a bimetallic system of silver and gold coinage.
The definition of a "dollar" has been found to be a specific weight and fineness of silver; commonly referred to as the silver dollar: 371.25 grains of silver.
The silver dollar was the unit of money or account that the Constitution and the Original Coinage Act of 1792 established.
Silver was exchangeable with gold at the rate of 15 to 1.
Neither the Constitution nor the Original Coinage Act of 1792 mentioned or established a gold dollar.
A U.S. gold dollar did not exist at this time in history and did not appear until 1849.
The gold eagle coin was of the value of ten dollars - the dollar being defined as the standard weight of silver of 371.25 grains of silver.
Gold exchanged for a dollar at 24.75 grains of gold (10 x 371.25 divided by 15), however, there was not any actual gold dollar coin.
The Constitution established that the States could not accept anything but gold and silver coin as legal tender and that Congress had the authority to mint silver and gold coins, but not the authority to print or emit bills of credit or paper money.
Now that we have discovered just what the Constitution and the Original Coinage Act of 1792 established as our monetary standard and system - the standard being a defined weight of silver with a bimetallic coinage system of silver and gold coins - let's now look and see how the various and subsequent monetary acts brought forth, by the process of devolution, our present system of irredeemable paper fiat currency.