The Aporetic

The GOP has revived talk of a gold standard. The Wall Street Journal, which nodded approvingly when we went off the gold standard in 1972, now says “realization that America’s system of fiat money is part of its economic problem is moving from the fringes of political discussion to the center.”  There are so many reason why the gold standard is a bad idea, some of which I’ve covered before. But the GOP associates it with a return to tradition, something the history of American money doesn’t really bear out. The U.S. was on a gold standard for less than thirty years, all told, and the history of our money reflects not stability and tradition but innovation, compromise and experiment.

The colonial period was full of monetary experiments, most famously expressed in Ben Franklin’s argument for the virtue of paper money. Legal tender “continental dollars” financed the Revolutionary war. But the inflation they caused made elites uneasy.

In his 1792 address on the establishment of a mint, Alexander Hamilton redefined “the dollar” as either “31.25 grains of pure silver or 24.75 grains of pure gold.” When congress approved his plan, they put the US on a bimetallic standard.

Here we might consider what exactly it means to be on “the gold and silver standard.” Theoretically, it means that any paper note can be redeemed at any time for gold or silver, which the paper note merely symbolizes. The paper note is just easier to transport than the metal coins, more convenient: it simply says “there is an equal amount of gold sitting in somebody’s vault.” In fact, since the invention of “fractional reserve banking” in the 15th century there is always more paper money in circulation than there is metal in vaults. Banks create money in excess of deposits, hoping that the time never comes when all depositors show up and demand the gold or silver  at once. And they’ve been doing that for 500 years.

So not surprisingly, Americans before the Civil War rarely saw gold or silver. Instead, they used an astonishing and truly incredible variety of kinds of money. Individual banks could print their own money and did; by 1850 there were roughly 8000 different kinds of legitimate banknotes circulating. There were also money-printing institutions not formally charted as banks: insurance companies printed their own money; Joseph Smith started the “Kirtland anti-bank” to print paper money and finance the early Mormon church. Businesses ranging from railroads and steamship lines to construction companies to hairdressers, dancing masters, and saloon keepers could also print their own money. No one knows how much, because little of it was regulated.

Clockwise from top left: state banknote from Memphis, TN; paper note issued by the Delaware Bridge Company; five cent note issued by Ponder and Sons of Milton, DE; $2 bill issued by NY lumber company; fifty cent note issued in Rochester, NY; ten cent note issued by NYC tobacconist.

Many of the forms of paper in circulation were never imagined to be backed by gold. Gold and silver were scarce, and their scarcity made credit scarce. So Americans printed their own money, and persuaded other people to accept it.

Besides the tens of thousands of forms of paper money, there were also “hard times tokens,” given as change in shops, or in saloons. By one estimate more than fifty million pieces of token money circulated, at a time when the population of the US was about 35 million. Like the paper notes, they worked as money wherever people agreed to take them.

“Hard times tokens” issued by, from top left, a Bowery clock shop; a Bergen, NJ iron works; a Racine, Wisconsin clockmaker; and a 1837 political token of unknown issue

There was also massive counterfeiting–at times up to 40% of the money in circulation was estimated to be counterfeit–and good counterfeits were often preferred to legitimate notes from dubious  institutions.

When Americans confronted the limits a metallic standard imposed, they simply ignored them and invented their own money. This is surely not what the Wall Street Journal imagines by a return to “the gold standard.”

During the Civil War, both North and South abandoned a metallic standard  and printed legal tender paper money, again in large amounts. Paper money worked extremely well for the North, but was a disaster for the Confederacy. The North also passed a series of laws taxing state and local banknotes out of existence. By around 1865, the only paper money circulating was Federally printed “greenbacks,” officially known as “United States Notes.”

Following the war, one faction wanted to keep using the paper “greenbacks.” Another faction wanted to move to a pure gold standard. A third faction wanted to continue with gold and silver, as Hamilton had intended. The greenback faction lost, even though or perhaps because it formed its own third party, and even though it advocated pretty much the kind of money we use today.

In 1873, the US adopted the gold standard, sort of. The Coinage Act of 1873, later to be made famous as “the Crime of 73,” declared gold to be the sole basis of the currency, and officially eliminated silver. But it was almost immediately followed by the Bland-Allison Act of 1878, which required the government to buy two to four million dollars of silver each month, and coin it into money. Huh?

You’re right, it makes little sense. Adding to the confusion, the Bland-Allison Act was augmented by the Sherman Silver Purchase Act of 1890, which required the government to buy an additional 4.5 million in silver each month, and mint it into coins as well. Historians sometimes call this policy “limping bimetallism:” although we were supposedly on a gold standard, the government was required by law to buy up to 8.5 million in silver each month, and mint it into coins which then mostly sat in vaults.

In practice, you rarely saw these silver coins, or gold coins either. Most people did business with the above-mentioned “United States Notes,” backed by gold and silver, or else increasingly they paid by writing a check. And again, no bank in the US ever had enough gold or silver in its vaults to redeem all the paper money its depositors might bring, if they all came at the same time.

Silver forces went down to their final defeat in the election of 1896, in which McKinley, promoting the gold standard, thumped Bryan, bloviating for silver. In 1900, with the passage of the Gold Standard Act, the US officially went on a real, no kidding, this-time-we-mean-it gold standard–although from 1917 to 1919, the US suspended the international gold standard in response to WWI.

In 1934 Franklin Roosevelt took the US off the gold standard in domestic exchange. The Gold Reserve Act of 1934 made it illegal to hold “monetary gold,” and required all citizens to turn any such hoards in to the Treasury, in return for paper dollars. Shortly after, FDR authorized and publicized the creation of Fort Knox, to store the gold which no longer did what people imagined. The US remained on the gold standard in international exchange until 1971, when Richard Nixon ended that policy.

“There is no magic in gold” the Wall Street Journal declared at that time. It does not stop inflation, and governments can come and go from it as they please. Gold advocates “hark back to the days of World War I,” but “a nation’s money needs some flexibility to adjust to the economy’s legitimate needs.” [1. Wall Street Journal, September 1, 1971.]

Although the WSJ seems to have changed it’s mind, it’s reasonable to say there is no tradition of the gold standard in the US, at least not as people imagine it today. There was, at the nation’s founding and into the 1860s, a gold and silver standard which people widely ignored by simply printing their own money. There were greenbacks, and parties devoted to their continuance, from 1861 through 1873. There was a pseudo-gold standard from 1873 to 1900, in which we claimed to be on the gold standard but continued to treat gold and silver as the basis for paper money.

The “classic” gold standard, the gold standard most like that being imagined in the GOP platform, only existed between 1900 and 1934, with a timeout for WWI. We have been off the gold standard for much much longer than we were ever on it. It’s entirely plausible to see calls for a gold standard as a radical departure from American tradition. Not only is it a terrible idea: it’s unamerican.