Brief History of the Gold Standard in the United States I

Brief History of the Gold Standard in the

United States 

Introduction

The U.S. monetary system is based on paper money backed by the full faith and credit of the federal government. The currency is neither valued in, backed by, nor officially convertible into gold or silver. Through much of its history, however, the United States was on a metallic standard

of one sort of another. On occasion, there are calls for Congress to return to such a system. Such calls are usually accompanied by claims that gold or silver backing has provided considerable economic benefits in the past.This report briefly reviews the history of the gold standard in the United States. It is intended toclarify the dates during which the standard was used, the type of gold standard in operation at the

various times, and the statutory changes used to alter the standard and eventually end it. It is not a discussion of the merits of such a system. Gold Standards Money exists to facilitate exchange, functioning as a “medium” or middle part of a transaction. In a modern economy, every time someone purchases something, that person engages in half of an

exchange: one thing of inherent value has changed hands, with the buyer getting what he or she wants, but the seller still looking to get something of value in return. Money is a token given the

seller signifying that he or she is still owed something of value.

What Is a Gold Standard?

A gold standard uses gold—directly or indirectly—as money. In a pure gold standard, gold itself is used in transactions, with all prices in essence expressed in terms of the amount of gold needed

for purchase. Because gold may be alloyed with baser metals,1 and its weight impossible to ascertain without proper scales, it became common to mint it into coins so that its purity and weight were certified by an authority (usually the government).Such coins typically also become

a unit of account, so that instead of being specified in the number of grains of gold of a certainpurity, prices are expressed in terms of dollars, guineas, doubloons, drachma,etc.

A monetary system can also be regarded as a gold standard if representations of gold are used in exchange. For example, paper notes can be part of a gold standard if they represent a claim to gold. However, “claim” can be ambiguous. Typically, people think of paper currency as part of a gold standard if the notes are “backed” by gold, that is, if there is for every note outstanding acertain quantity of gold stored as “cover.”

Backing, however, may be largely irrelevant. For paper to represent gold, it must be regarded as equivalent to a given quantity and purity of gold. In general, this equivalence is achieved by“convertibility,” the commitment to exchange the notes for gold on demand. For the purposes of this report, a paper money system in which notes are convertible on demand by the issuer into gold of a given weight and purity is regarded as a gold standard.

 Mixing base metals with gold produces an alloy that is harder, and therefore better holds the shape into which it is stamped. Brief History of the Gold Standard in the United States Congressional Research Service 2

Legal Tender Legal tender is something that by law must be accepted in satisfaction of obligations denominated

in currency. Should a suit arise over a commercial or public transaction, the law holds that a

monetary obligation is satisfied if these notes have been “tendered” in the correct amount.2

Under such a law, it is still possible to make a contract in something other than the legally designated currency. A vendor, for example, may specify that the payment needed to induce provision of a service will not be accepted in legal tender. But if payment for an obligation not

otherwise specified is tendered in the legally designated medium, it must be accepted at face value. If some medium is made legal tender, payment of that medium for a debt cannot be refused on the grounds that the designated currency is not money. Issuing money is something else. It is possible to issue currency without making it legal tender.

The government can—and has—paid out various forms of notes that have circulated as currency, but have not been declared legal tender. Full-bodied gold or silver coins may be issued without

making them legal tender. At the same time, tender status can be conferred on the coins or notes of another country. Consequently, the monetary standard and legal tender can be different things.Basically Silver: 1792-1834Officially, the United States began not with a gold standard, but with a bimetallic standard in

which both gold and silver were used to define the monetary unit. The first coinage act,3 based on the recommendations of Treasury Secretary Alexander Hamilton, defined the dollar as 371.25

grains4 of pure silver minted with alloy into a coin of 416 grains.5 Gold coins were also authorized in denominations of $10 (“eagle”) and $2.50 (“quarter-eagle”).6 The ratio of silver to gold in a

given denomination was 15 to 1.7These coins were declared legal tender. But in addition, a number of foreign gold coins were also declared legal tender.8 Most significantly at the time, the Spanish milled dollar of silver was designated as legal tender and set equal to the U.S. dollar.9 Under the U.S. Code (31 USC 5103), U.S. coins and currency (including Federal Reserve notes and circulating notes

of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.  An act establishing a mint, and regulating the Coins of the United States, 1 Stat. 246, April 1792.  There are 7000 grains to a pound and 437.4 grains to an ounce. However, these are avoirdupois weights. When the weights of these metals are expressed in terms of ounces and pounds, apothecary weights are used. There are 480 grains to a troy ounce and 12 troy ounces to a troy pound (5760 grains). Silver half dollars, quarter dollars, dimes, and half-dimes were also authorized in the same alloy with proportionateamounts of silver.

 The “eagle” or $10 piece had 247.5 grains of pure gold to make a 270 grain coin (i.e., eleven-twelfths fine). With an eagle equal to 247.5 grains of pure gold, 24.75 grains of pure constitutes a dollar. The ratio of 371.25 to 24.75 is 15 to 1.

 By an act of February 1793 (Act to Regulate Foreign Coins, 1 Stat. 300) certain coins of Britain, Portugal, France,

Spain, and Spanish colonies were designated legal tender at prescribed rates until 1797. By a series of acts over the next

half-century, legal tender status on foreign coins was extended to meet the currency needs of the growing U.S.

economy. Brief History of the Gold Standard in the United States

Congressional Research
 Service 3
A country’s monetary system operates in the context of a world market for metals. And the world market price ratio of silver to gold fluctuates. Not long after the first coinage act was passed, the

market price ratio of silver to gold moved to around 15½ to 1. As a result, silver being the cheaper metal, gold was used for purchases abroad, and the coins used for domestic purposes became primarily silver. Effectively, the United States found itself on a silver standard for the first 40 years of its existence.