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Tuesday, July 13, 2010

Common Cause, Part XV: The United States Currency Union

As the world's most common reserve currency, the United States Dollar currently functions as a quasi-common currency of the world. Before World War I, the British pound held this place. Before the middle of the nineteenth century, the "Piece of Eight" had the number one spot. The "fall" of these currencies was not caused by the pressures of maintaining a world position, nor was the displacement of the Spanish dollar or the British sovereign the cause of their subsequent or simultaneous devaluation. Their respective declines were the result of factors intrinsic to attempting to misuse currencies as something other than a sound and stable medium of exchange and store of value.

These are attempts familiar to every collector of world coins. Any collector can chronicle the decline of a specific currency as the government responsible for maintaining and regulating its value misused its powers to meet short-term political goals. These factors are evident even in the numismatic history of the United States.

States' Rights

One of the most jealously protected rights of the United States under the Articles of Confederation was that of regulating and emitting coin and currency. This was a particular bone of contention during the early years of the United States as a result of the Continental Currency debacle. The states were, for good reason, reluctant to give up their right to regulate their domestic currency to a central government. Who, after all, knew what sort of irresponsible actions a central government might take?

Often grouped under the heading, "Colonial Coppers," state issues should appropriately be treated the same as, e.g., their German analog before Bismarck forced unification on his terms. That is, they are independent currencies by states joined in a very loose political union. As one authority put it,
It will be seen that the currency of the early colonies was by no means uniform, and each colony acted on its own in the use of whatever currency it could secure or manufacture. At times exchange tables were used, and a traveler from Massachusetts to Carolina found it necessary to exchange his money on arrival at destination, as a traveler does now with his American money when visiting foreign countries. The first guide book published in New York, in the late seventeenth century, contains an elaborate and interesting exchange table of money from the different colonies. These varying exchange values were true also of foreign money. Hence, a pound sterling was worth six Spanish dollars in New York and North Carolina, seven and one half in the middle colonies (except New York), and four and one quarter in South Carolina and Georgia. (Joseph Coffin, The Complete Book of Coin Collecting. New York: Coward, McCann & Geoghegan, Inc., 1979, 40-41.)
A number of "speculative issues, tokens, and patterns" were prepared beginning almost immediately after independence. The "Continental Dollar," believed to have been struck in Philadelphia, is dated 1776. Tokens called "Nova Constellatio Coppers" seem to have been a quasi-private venture by Gouverneur Morris, who was Assistant Financier of the Confederation. These appear to have been manufactured in Birmingham, UK, and were struck in fairly large quantities. Some unusual "Immune Columbia" coins exist that may have been manufactured in Birmingham and intended for New York, but nothing is known of their origin for certain. There are also some "Confederatio Coppers" from (maybe) the same factory and (possibly) intended as patterns for a national currency.

Official Issues

New Hampshire was first to consider coinage after independence, but little came of the project. Only a very rare "pattern" copper penny was produced, bearing a pine tree on one side and a harp on the other. New York, possibly the most commercially oriented of the former colonies, never minted any coins . . . officially. The Empire State relied on existing coinage and the product of private mints operating without official sanction. There is, of course, the famed 1787 "Brasher Doubloon," or $16.00 gold piece, made privately by a jeweler Ephraim Brasher — pronounced "BRAYzher," as the coin guides hasten to add. The "Nova Eborac" (slightly distorted Latin for "New York") coppers were manufactured by Thomas Machin in a factory near Newburgh, which also produced massive quantities of counterfeit British halfpence.

Only Massachusetts, Connecticut, New Jersey and Vermont issued coins on a regular basis. Most state currency was the detested paper. Massachusetts had both unofficial and authorized issues. All of the unofficial coppers are believed to be unique, while the authorized issues are — for state issues — reasonably priced and relatively easy to obtain.

Issues by the state of Connecticut may be the most common coins struck between the adoption of the Articles of Confederation and the ratification of the Constitution. Possibly to pass easier in circulation, there is a vague resemblance to the British regal halfpence — and, of course, to the ubiquitous counterfeits.

New Jersey — "Nova Caesarea" — issued coins in some quantity, making it easier for modern students and collectors to study an undeservedly obscure period in American financial history. These are nowhere near as plentiful as the issues of Connecticut, but they are still relatively easy to obtain. All have the same basic design, a horse's head over a plow on the obverse (the "front" of the coin), and a shield on the reverse.

Vermont coppers fall into two general categories: those that look vaguely like imitation British halfpence, and those that are clearly new types. The new types have a skyline of hills and a sunrise over a plow, and an "all-seeing eye" with rays and stars on the reverse.

The first official coins issued by the central government under the Articles of Confederation were the "Fugio Cents," so-called from the motto — suggested by Dr. Benjamin Franklin — "Fugio, Mind Your Business," i.e., "I (Time) Fly, (Therefore) Mind Your Business." As described in the enabling legislation of July 6, 1787,
Resolved, that the board of treasury direct the contractor for the copper coinage to stamp on one side of each piece the following device, viz: thirteen circles linked together, a small circle in the middle, with the words "United States around it; and in the centre, the words "We are one"; on the other side of the same piece the following device, viz: a dial with hours expressed on the face of it, a meridian sun above on one side of which is the word "Fugio" and on the other the year in figures "1787", below the dial, the words "Mind Your Business." (R. S. Yeoman, A Guidebook of United States Coins, 41st Edition, 1988. Racine, Wisconsin: Western Publishing Company, 1987, 56.)
Private Tokens and Unofficial Issues

Just as in England, there were a tremendous number of private tokens manufactured in various places and put into service. As in many periods of history, a dearth of official coinage forced private merchants and individuals to try and fill the need. The token issues of Ireland, Scotland and England are often a more fruitful area of study than official issues if we're trying to understand what was really going on at the time, especially economically.

Similarly, during the 1830s in the United States, as well as the Civil War and the Great Depression a great number of private issues were emitted to try and meet the need for circulating media when the government failed to supply sufficient coinage. While this is a fascinating area of study, it is peripheral to the concept of a common currency, which is our primary concern. Suffice it to say that some of the most interesting post-colonial coinages fall into the category of privately issued coins or "tokens." This is an area often overlooked, falling into the cracks between the colonial period and the ratification of the Constitution.

Nevertheless, the variety of issues offers endless opportunities, although we will not get into it in this series of postings. Many of these were manufactured in England or Ireland. A quick survey reveals the "North American Token," the "Bar 'Copper'," the "Auctoris Plebis Token," the "Mott Token," the "Standish Barry Threepence," the "Albany Church Token," the "Kentucky Token," the "Franklin Press," the "Talbot, Allum & Lee Cents," the "Myddelton Token," the "Copper Company of Upper Canada," the "Castorland Medal," the "New York Theatre Token," the "New Spain" token (struck for Texas, at the time under Spain), the "North West Company Token," and an incredible number of tokens celebrating George Washington.

The difficulty and confusion caused by having thirteen different currencies greatly inhibited economic development in the new country. Clearly something had to be done. When the new Constitution of 1789 was drafted, therefore, the central government was delegated the power of setting standards and regulating the value of a common currency. Individual states were deprived of the mint right. Whether or not private coinage was legal under the Constitution was a point continuously debated until local coin and currency were made explicitly illegal under the National Bank Act of 1863 and subsequent coinage act of 1864.

While the new Federal government took control over the coinage, paper money was another matter. Because of the Continental Currency disaster, the central government avoided paper money altogether. A number of states, however, made a few cautionary issues. Alabama, Florida (as a territory), Minnesota, Missouri and North Carolina issued paper notes to the Federal standard prior to the American Civil War. Texas also issued dollar-denominated paper currency until the 1840s, but as an independent republic. State chartered banks of issue, many of them financially shaky, issued large quantities of notes. These were frequently referred to as "shinplasters," indicating their presumed worthlessness, a characteristic by that time considered endemic to all paper money. Combined with a strong suspicion of central authority and concentrated power of any kind, the lack of sound paper money and credit prevented an adequate and properly regulated US currency.

A National Bank

As early as 1779 Alexander Hamilton had begun pushing for the establishment of a national bank on the model of the Bank of England — at least as the Bank of England operated prior to the suspension of convertibility in 1797 and Sir Robert Peel's Bank Charter Act of 1844. A national bank was necessary to ensure that all paper currency passed at par, regardless who issued it, and to have a lender of last resort for the private sector when ordinary commercial banks ran short of reserves and needed to rediscount their loans. Hamilton wrote to Robert Morris and proposed the formation of such an institution. (Edward S. Kaplan, The Bank of the United States and the American Economy. Westport, Connecticut: Greenwood Press, 1999, 7.) Hamilton never intended that any national bank should in any way finance government borrowing. He had observed first hand the problems associated with financing the Revolution with debt, and wanted none of it.

Morris organized the Bank of North America in 1781, and received the approval of Congress to serve as a national bank. Until 1784 the bank served to help stabilize the finances of the United States — but unfortunately this was largely by extending credit to the new government. Morris ensured that this was never to excess, but it established a precedent that subsequent generations would take for granted. Congress did not renew the charter as a national bank, but the Commonwealth of Pennsylvania issued the institution a charter as a state bank, and the bank continues to this day, having merged with the East Pennsylvania Banking and Trust Company in 1929. (Kaplan, op. cit., 13.)

The First Bank of the United States, organized by Alexander Hamilton in 1791, a year before the inauguration of the Federal mint in Philadelphia, was doomed from the start. Intended primarily as a depository for Federal funds and a means of facilitating public transactions by discounting and rediscounting bills of exchange, as well as to organize the financial system of the United States (of which the establishment of the mint in 1792 was a first step), the bank met only with distrust and suspicion. It was, after all, a national bank, and that meant national (federal) control and centralized power. The charter was not renewed when it came up in 1811.

The Bank of the United States represented centralized power over a particularly sensitive area. Control over money and credit could, and often does, determine who becomes prosperous, and who stays poor. Any central bank is instituted to give control over money and credit to someone. The only question, depending on how the institution is structured, is to whom that power is given.

Andrew Jackson's War on the Bank

The Second Bank of the United States, established in 1816, fared no better. There was a desperate need for a central bank or similar institution, if only to regularize government transactions and the payment system, to say nothing of providing adequate commercial credit and serving as a lender of last resort for the development of the new western territories. Still, suspicion of centralized financial power again brought down the bank. Almost the only popular thing Andrew Jackson accomplished as president was to shut down the Bank when the charter came up for renewal in 1836. This was, of course, after removing Federal funds and re-depositing them in other institutions run by his friends and supporters.

A nation-wide depression brought about by inadequate circulating media and the constriction of trade, "Hard Times," resulted from Jackson's emasculation and subsequent shut down of the bank. His subsequent issuance of the notorious "Specie Circular" that prohibited the federal government from accepting payment of taxes, duties, and land sales in any form other than gold or silver coin provided the trigger.

This resulted in the famous "Hard Times Tokens." These were privately issued copper cents and half cents (or reasonable facsimiles thereof) pressed into service to supply the demand for small change. Since the 1830s were possibly one of the most politically active eras in the history of the United States, most tokens carry a political theme, usually anti-Jackson. A representative sampling is available to any collector, and a United States coin collection is not considered complete unless it contains at least a few examples.

While Old Hickory might have thought he was solving the problem of the national bank by abolishing it, the battle continued to rage. Economists, financiers and statesmen knew that something was wrong, but an acceptable solution seemed out of reach. Dozens, if not hundreds, of books and pamphlets, to say nothing of uncounted journal and newspaper articles, poured from the presses from the 1830s through the 1850s. Henry C. Carey, the first American economist to command an international reputation, caused a great deal of consternation and acrimonious debate with the publication of his 1838 book, The Credit System in France, Great Britain and the United States, in which he advocated a laissez faire "free banking" system on the Scottish model, but with no national or central bank, and complete freedom from government regulation — conveniently forgetting that some government regulation is necessary if only to set common standards.

The public, meanwhile, limped along with inadequate Federal coinage, paper currency from state-chartered banks of issue, and foreign coins. The output of the mint during the 1830s was so small that some authorities estimate that there was less than one United States coin of any denomination in circulation per capita. Industrial and infrastructural development in the United States was financed by private bank credit, backed by foreign investment, mostly from Great Britain, instead of by a domestic central bank. In essence, the United States was using the private investors of Great Britain as a central bank.

Because the few sound banks largely controlled credit, the industrial and infrastructural wealth of western development was concentrated in very few hands. Only Abraham Lincoln's 1862 Homestead Act addressed the problem of concentrated ownership, and then only in agriculture. Since the Homestead Act was based on existing assets, it did not require a central bank to provide a uniform and sound credit currency.

The National Bank Act of 1864

The American Civil War amply demonstrated the inadequacy of the financial system, both North and South. There was a complete breakdown of the currency in the South, even before the outcome of the struggle became obvious. The North suffered heavy inflation, shortages, and the disappearance of coinage in compliance with Gresham's Law, the economic principle that "bad money drives out good." Both sides financed the war with issues of paper backed only by government debt, with the dearth of small change being made up by private token issues, postage stamps, and fractional currency.

Disaster was only averted in the North because its industrial base and foreign trade were largely untouched. Confederate and state currency in the South was worthless before the end of the war. There was no industrial base to back up the flood of issues. In addition, the North shipped large quantities of counterfeits into the Confederacy to break its back economically as well as militarily. A source of particular outrage in the South was the fact that, late in the war, Northern counterfeits were accepted when authentic Confederate currency was refused. The counterfeits were better executed and printed on higher quality paper than the South had at its disposal.

Treasury Secretary Salmon P. Chase pushed through a National Bank Act in 1863, modeled on Sir Robert Peel's Bank Charter Act of 1844. This turned out to be badly flawed, and a new act was passed in 1864. The real problem, however, was not addressed. Paper currency was mandated as backed by government debt, not the present value of existing inventories or of industrial, commercial, or agricultural assets.

"The Crime of '73"

The monetary reform of 1873, while attempting to satisfy all concerns and put national finances on a sound basis, pleased no one. Twenty years after its passage, during the Great Depression that followed the Panic of 1893, populist legend grew up that the "Crime of '73" was the result of payoffs from "International Bankers" in London. For their part, financial interests in the East were certain that Congress had surrendered to Populist concerns. They accused the politicians of selling out the credit of the United States to satisfy the demands of agrarian levelers and anarchists.

One good result of the reform of 1873 was that the United States had an adequate supply of sound circulating media for the first time in its history. To prevent the practice of "Wildcat Banking," all banks of issue had, since 1864, been required to meet stringent reserve requirements, and all had to be properly chartered by the federal government. True, the reserves had to be in the form of federal securities — debt — but as long as the American economy remained sound, there couldn't be too many problems . . . could there? In any event, the mints finally managed to meet the demand for coin, and sufficient credit was available domestically to finance internal development.

The weights of American subsidiary silver were changed to conform to the metric standards that had been effective in France before the Latin Monetary Union of 1865. The arrows that had been placed at the date on the Seated Liberty coins in 1854 to indicate a reduced weight, now reappeared in 1873 and 1874 to indicate increased weight. The Dime, for example, was now 2-1/2 grams of .900 fine silver. This was the same as the pre-1865 French Demi (Half) Franc.

The 20 Cent piece, introduced in 1875, matched the specifications of the pre-1865 Franc. Only the Dollar, the official legal tender coin, retained its original weight under the coinage act of April 2, 1792. This was 412-1/2 grains of silver (.7736 of a Troy ounce), although the original fineness had been increased from .8924 to .900. The US. Dollar was thus heavier than the Latin standard of .7324 ounces for the primary legal tender coin of the Union, although presumably equal in value.

Conforming U.S. coinage to metric weights was the first move in an abortive attempt to conform the United States to an international standard. Eventually the weight of the Dollar would have been reduced to match the standard legal tender coin of the Latin Monetary Union. The fineness of the subsidiary coinage (Dime through Half Dollar; the coinage act of 1873 abolished the silver Trime — three cent piece — and Half Dime) would have been reduced to .835 in order to reduce 20¢ US to the 19.3¢ of the Franc, Lira, Peseta, and so on.

A few years later, in 1879, patterns were developed for an international-standard 4 Dollar gold piece, the Stella. This coin would have fit into the bimetallic standard of the Latin Union. In 1873, however, the Latin Monetary Union effectively abandoned the bimetallic standard. This was a result of the French reparations due to Prussia and the increasing flood of silver on world markets.

Complications arising from having a domestic arrangement of an effective gold standard within an official bimetallic standard while attempting to reconcile the system with an international currency changing from a bimetallic standard to the gold standard proved too much to handle. When combined with a policy of avoiding foreign entanglements — and what could be more entangling than an international currency union — any effective attempt to have the United States meet international currency standards had to be abandoned. The domestic currency, however, was finally put on a sound basis.