Coinage Act of 1873
The Coinage Act of 1873, also known as the Fourth Coinage Act, the Mint Actor the “Crime of ‘73”, was signed into law on 12 February 1873 by the then U.S. President, Ulysses S. Grant. This enraged the supporters of bimetallism or a monetary standard consisting of both gold and silver, since the Coinage Act of 1873 “embraced the gold standard and demonetized silver” (Wikipedia).
The Coinage Act of 1873 placed the United States on a de facto gold standard. This was seen as a crime by Western mining interests and other parties, who rightly referred to it as the “Crime of ‘73” at a later stage. However, the “…U.S. did not actually adopt the gold standard de jure until 1900, following a lengthy period of debate that was made famous by William Jennings Bryan’s cross of gold speech at the 1896 Democratic convention. By this time, most major nations had moved to a gold standard. The only major nation that continued on the silver standard into the twentieth century was China. China and Hong Kong abandoned the silver standard in 1935” (Wikipedia). In addition to demonetizing silver and instating a de facto gold standard, the Coinage Act of 1873 resulted in the U.S. Mint’s placement within the jurisdiction of the U.S. Department of the Treasury. It also led to the end of the Two-cent piece, the Three-cent piece and the half dime, all minor coins that were minted before the enactment of the act. Silver also fell relative to gold in price. In fact, the gold/silver ratio increased from 1:15 to 1:40 by 1908 as a direct result of the Coinage Act of 1873, which placed 1 ounce of gold on an equal basis with 40 ounces of silver. The discovery of more silver at the time also helped to depress the silver price. Needless to say, Founding Father, economist, soldier, political philosopher and constitutional lawyer, Alexander Hamilton, must have over turned in his grave when the Coinage Act of 1873 came to light, because he was the guy who introduced a successful bimetallic standard in the U.S. in 1792. Under the system driven by Hamilton’s bimetallic standard, “…the legal price of gold in terms of silver, that is, how many pounds of silver you get for one pound of gold, which was set by the Coinage Act at 15 for 1, was greater than the market price, then nobody would bring gold to the mint and the country would be on a de facto monometallic silver standard” (The Crime of 1873, www.micheloud.com). The U.S. monetary system was almost solely driven by Hamilton’s bimetallic standard from 1792 to before the enactment of the Coinage Act of 1873, with a notable exception of the Greenback period during the American Civil War (1861–1865). The Greenback period refers to the period during the American Civil War in which the United States issued paper currency in order to make ends meet.
The dire consequences of the decision to switch to a de facto gold standard through the enactment of the Coinage Act of 1873 were not immediately seen, since “…silver was undervalued at the legal ratio and nobody used it anyway. But as one country after the other switched to the Gold Standard at the end of the century, the demand for gold rose tremendously and a flow of silver was freed from monetary purposes in France, England, Germany and most other big countries. The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly” (The Crime of 1873, www.micheloud.com). This and more ultimately “…led to a depression so great that you would have to wait for 1932 to see the same again. Unemployment peaked at 18 % in 1894. But some people suffered more than others” (The Crime of 1873, www.micheloud.com). This was only in terms of the macroeconomic consequences.
Bimetallism, a monetary standard where a fixed rate of exchange is set between gold and silver, didn’t work, because they fixed the prices of both gold and silver, separately and in relation to each other. This caused distortions in the market, because the one pushed the other out of the market, creating unnatural and unhealthy shortages. This is not to say that gold and silver are not money or cannot be used as money successfully within the same monetary system, it is to say that the free market should set gold and silver prices (not even to mention other prices!). Yes, natural shortages can develop when honest money such as gold and/or silver is used, but it gives the incentive to mine more gold and/or silver, to expand the money supply in a more healthy and gradual way. What is after all healthy and gradual about monetary expansion when an estimated 9+ tons of ink is used daily just to print fiat dollar notes alone, not even to mention the fiat dollars they create electronically with a few strokes on a keyboard?