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College Professor needing Help Understanding the Problem with Bi-metalism

I am an American Goverment instructor, and want to expose students to the real American history, the problems with fiat currency, and central banking. I don't want to force my beliefs on my students, but the textbook is so biased in favor of the pro-central banking Hamiltonian vision that I feel compelled to share the other side.

Here is the problem. In my research, I have discovered that populists in the late 19th century felt oppressed by the de facto gold standard after the Coinage Act of 1873 left silver at a deflated price. I think Ron Paul opposes bi-metallism, correct? Why does he oppose it? The populists of the time seemed correct in their belief that the de facto gold standard was a friend to the wealthy but not the masses. Furthermore, the Coinage Act that ended bi-metallism in America was part of the reason for a major depression in 1873. Perhaps greater liquidity via bi-metallism would have been a safer way (as opposed to the issuing of Greenbacks for example) to prevent over-deflation in the economy at that time?

I see that Milton Friedman actually argued that bi-metallism had a been a good thing for the American economy, by promoting price stability. The irony is that the populist of his time, William Jennings Bryan was pro-bi-metallism while the populist of our time, Ron Paul, is for a strict gold standard. Anyone care to explain why the gold standard was better than bi-mettalism given the pain it caused so many of those outside of the elite?

How would a gold standard not cause the same pain if our movement was able to get it passed? It seems to me that bi-metallism is truer to the concept of competing currencies and that it is superior cause it does not favor the rich over the masses.

Please share your views and please offer references to help me understand this phenomenon better. In addition, if you have seen Bill Still's The Secret of Oz, please share your opinion. I find the pro-Silver interpretation of the Wizard of Oz fascinating as well, and think it could serve as a great way of explaining the downside of allowing banks to monopolize money. It is too bad that he focuses so much energy on advocating for fiat currency. Then again, maybe he has a point when he says it is not what backs money that is key, but rather who decides how much of it there will be.

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OP, ^^^^^^^^THIS is the

OP, ^^^^^^^^THIS is the answer you are looking for.

Thank you for asking, Professor!

When my son in law was taking his college level American History class, they actually had a section in the book about the Federal Reserve and fiat currency. The day they were to cover it in class, the professor was sick and when he got back he just skipped that assignment rather than make it up - it was "not important anyway."
I have always wondered if that was coincidence or an annual flu.
And remember, admitting to those students that you don't have all the answers is not a bad thing at all. It will likely inspire many of them to dig and dig, until they can come teach YOU what you could not find on your own. Always leave 'em wanting more...

Love or fear? Choose again with every breath.

I think it's been adequately

I think it's been adequately explained but if you have a legal tender law you want one standard, otherwise everyone has to engage in arbitrage all the time rather than proper price accounting. The rate of exchange between the two metals is fixed rather than market determined.

It helps to remember the purpose of money.

The purpose of money is to allow for cost accounting. Without money you can't easily tell if you made a profit from an activity. If you can't tell if you made a profit, you can't tell if you added to or subtracted from the wealth of society. If you made a profit then you added; what you offered was more valued to the recipient than what you received from them and vice versa.

Without money, ie barter, that exchange only tells you something about the two parties to the exchange. With money and prices, you know something about how the entire society around you values the subjects of the exchange.

Quick example, one innovation of the oil industry was gasoline. Originally kerosene was the primary product. When some refiners (was it Rockefeller?) learned to purify gasoline and create market demand for it they would bid up the price of crude, away from refiners that only sold kerosene. This benefited society, but the person selling the crude didn't need to know that. He just knew that refiner A offered more than refiner B.

In a monometallic standard all prices are relative to the base metal. The currency is the metric.

In a bimetallic standard you always have to know the price relative to both metals, or else risk making an inferior bargain. This interferes with knowing the real value of goods and services.

But with the advent of computers I think the best thing might be just not to have legal tender laws at all and let the market sort out what currency is optimal.

Let me offer the other side of this excellent argument

The gold / silver ratio historically has represented a rough approximation of how much was being mined. Market manipulation of the metals has left this valuation method in the dustbin of history, but if that ratio were restored the above argued problems of arbitrage are solved.
I heartily agree with the last line - competing currencies with no limitations. If I can get people to trade with me in beans and furs, why should I be stopped? If you want to trade in bitcoins and find amenable merchants, why should the government stand in your way? That is what "freedom to contract" is all about.

Love or fear? Choose again with every breath.

Well yes that was just

Well yes that was just theory. As a practical matter bimetallism is always better than fiat:) But the historical motive for pushing bimetallism has always been inflationary, and to introduce arbitrage options. But that form of inflation is self limiting. So 'free silver' type movements are not that destructive compared to what we have today.

Yeah I don't see why my account can't hold palladium or oil futures or even securitized mortgages. When I initiate a transaction the 'bank' would convert a sufficient quantity to cover the transaction to at the spot price and perform the reverse for the recipient into whatever they had in their account, or were willing to accept. We would still probably think about 'dollars' or euros but we would exchange claims to real assets. Naturally the bad guys will hate this and do everything to prevent it.

If money is the root of all evil, we have today the ability to get rid of money completely.

As a practical matter I think there would be a market for stable asset baskets, ratios of certain items designed to be maintain an optimal stability. I have no doubt this would offer far more price stability than we have today.

And obviously the best thing would be we would no longer have fiat credit expansion, which would mean the working class would see ever increasing purchasing power, and restore the proper free market balance of power between labor and capital. This last effect really needs hammered on more.

Ron Paul is certainly not a

Ron Paul is certainly not a populist and not our generations William Jennings Bryan (who RP would have been against).

Here's William Graham Sumner on bimetalism (RP is way closer to Sumner than Bryan):

For a contemporary smackdown of "greenbackers" (who have made a resurgence with Ellen Brown, Bill Still and his Money Masters garbage, as well as a few others), none is better than Gary North:

One of the big problems at that time

Was regionalism. Gold producing states vs Silver producing states, versus states that were heavy importers/exporters of goods. Each had an agenda with regard to a fixed ratio of value for silver/gold.

At the time only gold coins were worth their intrinsic value in U.S. Currency. Other coins were not, usually worth less. Silver mining interests wanted the government to coin lots of silver, even with the deflated value, because it provided an infinite market for the booming mining operations - i.e liquidity, and increasing production would not flood the local market and bring down prices - since the price was fixed. (and transporting silver long distances to sell overseas was expensive)

In the east, importers liked having a coin that was worth more in foreign markets than in the US market. Labor was cheap, and for each dollar of good purchased, you could buy 1.25 worth of products from your suppliers. The same thing happens now with China's fixed currency.

Gresham's Law is the answer to your question

In bimetallism the government fixes the ratio between gold and silver. In other words, they fix their relative prices. The problem is that over time the market prices of gold and silver change, while the fix remains...well, fixed. For example, suppose they fix the G:S ratio at 1:20, one ounce gold to twenty ounces silver. Suppose one year later the market prices of gold and silver have changed such that the market ratio is 1:23. Now gold is officially undervalued: i.e. the government values one ounce gold at 20 ounces silver, while the market values one ounce gold at 23 ounces silver. Now suppose you owe $1 in taxes to the government. Suppose the dollar is defined as 1/10 ounce gold or (per the 1:20 fix) 2 ounces silver. Given a market ratio of 1:23 gold to silver, would you pay your taxes in gold or silver? Suppose you have 1/10 ounce gold. You could pay your tax with this and have nothing leftover or you could sell this on the market for 23 ounces of silver, pay the government 20 ounces, and have 3 ounces of silver leftover. Thus, since silver is official overvalued (gold officially undervalued) you would choose to pay your tax (or any other debts) in silver rather than gold. This is why bad money (overvalued money) drives good money (undervalued money) out of circulation; in this case, silver drives gold out of circulation.

This is an inherent problem if bimetallism. Over time, the fix will inevitably get out of step with market prices, and one or the other metal (whichever is undervalued) will start to disappear from circulation.

So why did so many people support bimetallism in the 19th century? Essentially, they wanted inflation. They wanted silver to be re-monetized at a higher fix: i.e. to increase its purchasing power. The interests behind this were, among others, the western silver mining communities, as well as debtors who always like inflation for obvious reasons. The same interests behind the push for bimetallism later supported fiat money inflation - the goal was inflation, bimetallism was just a means to that end.

I;m not specifically familiar with Milton Friedman's view of bimetallism, but he was a proponent of "price level stability." He thought price deflation was bad in itself, and that the government should promote a steady annual inflation to avoid it. this is, of course, nonsense. Anyway, I assume that;s why he would have supported bimetallism, because of its inflationary consequences.

By the way, the panic of 1873 was caused by the same thing that causes all panics: a preceding inflationary boom. You have to understand, even though there was a gold standard, there was substantial inflation at various times in the 19th century, thanks to the national banking system (quasi-central-banking) created during the civil war. Moreover, the panic was real, but the long depression which mainstream economic historians says followed is a myth. They assume a depression occurred because prices were falling. What they don;'t appreciate is that prices falling is the natural state of affairs in a growing economy where the money supply is more or less fixed. By all measures of industrial activity, the period following 1873 was enormously prosperous: huge increase in output, huge increases in real wages, etc.


"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

^this. Greenbackers,


Greenbackers, bimetallists, Bryan et al have a fundamentally mistaken view of money as some mystical force in soceity and that "too little money" can somehow cause economic problems.

Creating titles to wealth does not create wealth.


It meant that the government forced silver and gold to be the basis for the currency and to be exchanged at a fixed rate?

Obviously, then, when one of the metals loses value it can simply be exchanged for the one that hasn't lost value, at the fixed rate...If the two metals' actual market value isn't unchanging, if, say, silver value drops internationally, someone can convert their silver to gold at the fixed rate, creating a gold shortage because gold is, in real world terms, being "purchased" extremely cheaply.

The rule, "Price fixing leads to shortages," sums this up.

When you fix the price of something too low, it is chronically underproduced and overconsumed, and there can never be enough.... When you fix the price too high, it is underconsumed, and, very soon thereafter, underproduced, since market demand *seems* to have dropped off.

So bi-metalism has nothing to do with the proposed gold standard, I'd say. The gold standard is an alternative to fiat currency. It just proposes that the currency be a representation of ONE commodity, but doesn't try to dictate how that commodity is priced in the market. The currency isn't a separate commodity exchanged with gold at any fixed rate, it's just a check for X amount of gold. If gold value drops off to nothing, same would happen to the currency.....Gold is, under this scheme, the actual currency.

With b-metalism, the price of gold and silver are FIXED, by government, in relation to each other, so as soon as there's an imbalance in their market value, one will be used to buy out the other at the fixed price, and you get shortages.

Essentially correct save that gold was NOT the basis for the

currency, but was more aptly, an additional coinage authorized by Congress.

We were on a silver standard with the Coinage Act of 1792. It defined gold coins in terms of silver value, not each independently. (which might have worked better) The value of gold was not regarded save for its relation to silver, and thus the "dollar." (which was and is - silver. It is not abstract.)

price fixing

Bi-matalism is price fixing. The purpose of a market is to determine price. Ron Paul advocates allowing the market choose the medium of exchange freely, while also pointing out that the US constitution requires gold or silver to be used as money. It isn't accurate to say he is for the gold standard.

Ok, but he does critique

Ok, but he does critique bi-metallism in his book, The Case for Gold. So please tell me more. Are you saying he does not favor gold backed currency?

Paul outlines a few systems

There's pure fiat currency, which is a cabal of guys who get to arbitrarily buy anything they deem an asset, even if the asset is known to be otherwise illiquid. The funds to buy with are created out of thin air, by a ledger entry. Under this system government spending is unlimited. In the United States at this time, a huge chunk of the spending is funding the use of military force in numerous places.

Paul seems to be right to mistrust pure fiat currency. It has created a debt that will never be paid back, or will have to be paid at some terrible cost, not necessarily in money, but in some other unfavorable consequence that is yet to be suffered.

Then there's the gold standard as defined in the constitution. Dr. Paul prefers this version of the gold standard over pure fiat currency. This option is specified clearly in the constitution: No State shall [...] emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. Paul believes this system is preferable to pure fiat currency because the government has to directly tax the people, which the people resist. The government cannot run large deficits very long. There is less militarism, less intrusion into the market economy compared to fiat currency regimes. Paul believes that in general the constitution is good advise that is wise to follow.

The critique you point out is that fixing the price between gold and silver is bad policy.

Then there's the Brenton Woods system, which ended in 1971, causing him to begin his long journey to eventually influencing this very conversation we are having.

He actually favors the Brenton Woods system over the fiat currency system, but still has his critiques of it. After all, this is the system gave the Fed the global reserve currency status, which is what enabled the USD to become a pure fiat currency in the first place.

He believes that a system permitting each individual to decide what to use to settle transactions results in better prosperity.

His beliefs come directly from the Austrian school, and a number of others such as Peter Schiff, Tom Woods, Gary North, and Lew Rockwell express in different ways.

Part 2 - the solution

Read my comment below first: http://www.dailypaul.com/270735#comment-2912932

Repeal legal tender laws.

If possible, repeal Congress' power to coin money, or at least, don't make it exclusive. Extend that power to the States and the People as well.

Bar the issuance of "notes of indebtedness" or "bills of credit" by Congress and the States. (no paper currency based on debt)

Then, Congress and the States can get the ball rolling with early coinage, and private interests will most likely get up to speed and take over, of fill the gaps.

Here's what they should mint:

Silver, Gold, Copper, and perhaps Nickel, Palladium, and Platinum

1 gram
2 grams
5 grams
10 grams
20 grams

Silver, Gold, Copper, and perhaps Nickel, Palladium, and Platinum

50 grams
100 grams
200 grams
500 grams

Silver, Gold, Copper, and perhaps Nickel, Palladium, and Platinum

1000 grams (1 kilo)
2000 grams (2 kilos)
5000 grams (5 kilos)
10000 grams (10 kilos)

Various shapes for the coins can be used:


As well, reeded edges can be used on PM's and smooth edges on base metals if the same shape is used, or regardless to preclude "clipping and shaving."

Now, I don't mean to say this system needs to be dictated, but that it would be the most optimal and the one the market will likely settle on all by itself. But we can certainly give it a boost initially.

Alternatively, we could settle on this system:


1/20 ounce
1/10 ounce
1/5 ounce
1/2 ounce
1 ounce


2 ounces
5 ounces
10 ounces
20 ounces
50 ounces


100 ounces
200 ounces
500 ounces
1000 ounces

All in the same metals. Note, these are Troy Ounces which we used today for coinage.

NONE of these items should be stamped with ANY monetary unit. NONE.

They should be stamped and designed so as to be easily distinguishable by quick sight or feel as to their metal content and purity.

Thus a 1/10 ounce silver coin should not have "ONE DIME" stamped on it, but simply 1/10 or "ONE TENTH" oz. .999 silver. (Ag and similar symbols can be used for space considerations)

This will break us of the problem of abstracting monetary units and instead focus pricing in terms of what it always really has been - the relative value to another quantity of some commodity.

Prices will be in terms of grams or ozt. of silver, gold etc.

Merchants will have conversion charts or software to easily handle payment in multiple forms.

The ratio of 1:2:5 are used instead of 10:4:2:1 because 1:2:5 is the optimal ratio for making change or making up any amount using the least number of coins. This is an important consideration when using a coinage system since people will not want piles of nearly useless coins weighing down their pockets. (their higher value will help with that as well of course) This ratio will cause all coins to be used in the same proportion relative to one another and no single denomination or size should find itself collecting for lack of need or use.

Again, this system doesn't have to be dictated, but if it is minted and circulated, it will spread like wildfire.

Also, using grams is more convenient for international trade and will likely place America back at the forefront of world monetary leader for real, rather than at the point of a nuke.

And we already use grams and have been for over 100 years to define our coinage. We haven't used the Troy system except as a throwback for many many moons.

The reason for including Nickel and Copper is the same as the Framers included Copper - you need subsidiary coinage for change and most purchases. Since some sizes overlap in value, you may or may not see them circulate together, but they will all circulate somewhere. Also, since Nickel and Copper trade places in relative value, you may see one or the other circulate at different times.

Adding Palladium and Platinum are for the same reasons on the mid and upper scale - flexibility of the monetary system to respond to shocks in relative value. By having a system with six possible metals, two each in three tiers of relative value, then you set yourself up for not having any major inflations of deflations which can shock the economy and cause disruptions.

The Framers didn't see a need to include Copper in their Article 1 § 10 limitation on State legal tender laws. But perhaps we can specifically include the other metals if we desire.

Agree but never underestimate

I agree with you and think that would be a great plan to implement.

My only comment is that we should never underestimate the state's ability to not let semantics get in the way of inflating a currency. This is just a comment on labeling each coin as the weight it is. I agree with this but I just want to point out that the UK uses the "pound sterling" as the name of it's fiat currency because it was once worth a pound of silver. Similarly the Dollar was reference to a standard weight of silver (German taler) known at the time. But this didn't stop either of them from transitioning away from the standard weight and measure they originated as.

So not trying to rag on your idea, just wanted to point out that even if are able to implement your plan we label them as their weight, don't be surprised to find yourself rolling in your grave as your great-great-grandchildren use fiat paper called United States Ounces as a reserve currency.

HAHA! Yeah, I've contemplated that one myself.

Which is why I think it is okay for Government to offer the service of setting a standard (under Article 1 § 8 they have the power to set weights and measures) and to possibly mint some early examples under this standard, but I want to see the power to coin money extended to the States and to the People especially.

Maybe simply repealing the coining power and leaving and then exercising the standards power is enough. Likely so.

If I had the means, I'd start minting this stuff now and circulate it as bullion, then press some Congressmen and Senators to "make it so."

This is also another argument in favor of the gram system. Congress would have a hard time pulling that one out of hat once the entire world is using gram based coinage with no monetary unit. If you have private mints in the mix, more than likely, government can give up the money power entirely. (the safest bet really)

Excellent point though. In fact, I think it seals the deal in my mind about the efficacy of granting Congress the money power at all. I wouldn't. You just can't trust the bastards.

RP: No money monopoly

I believe that Ron Paul advocates "competitive currencies," and perhaps a part of that is restraining what the offical Mint can print as money to being only what the constitution says: Gold and Silver. But then in conjunction with that, or perhaps as a forerunner to that, repeal the legal tender laws which would allow individuals to choose which currency (FRNs, gold or silver...others?) they use for transactions and to pay their taxes. And no longer taxing "investment gains" from holding gold of silver and watching the dollar devalue against it and call that profit which has to be taxed. Because you're not allowed to pay your taxes in gold/silver and you are supposed to pay taxes on "profits" from holding them it makes it a non-competitive currency establishes a de facto monopoly of money with the Federal Reserve notes.

I believe that Rothbard pointed out (probably others too) that given the option to choose between competing currencies on a level playing field, the market will gravitate to the more sound and stable of the choices over time. I.e why gold/silver became money over the course of history, especially in the areas of the world with the most economic progress.

You ARE allowed to pay ANY debt in gold or silver, including


But no one in their right mind would do so at the moment, because either the tax amount is inflated, or the value stamped on the coins is too low. (a little of both, more so on the inflated tax amount)

ALL silver and gold coins EVER minted by the Congress are PRESENTLY "legal tender" for their face value. (that is, those issued for circulation. There are exceptions for those not released like the 1933 double eagles)

Good point

I guess I wasn't even thinking about someone paying a $100 tax with 100 silver eagles marked as $1 when the have a market value of $30+ although it is legal. Good point.

I guess that is just another way that the government is anti-competitive against the metals it mints to ensure the monopoly of their paper.

There's a hidden gem there though that as far as I know, no one

is exploiting properly.

Namely, since both are legal tender for face value (FRNs and American Eagles, as well as all older coins) then the reverse is possible.

One can deal entirely in silver and gold, keeping their books accordingly, and then pay taxes (if any because of the likely unmet thresholds) in FRNs which are severely devalued.

Some people have tried something similar but they made the mistake of using two sets of books. NEVER do this. Use only one - the silver/gold set. That way, you can't be accused of fraud. You are using a single standard at all times. Not one when it makes your assets look larger and another when it short changes the government by making your assets look smaller.

And the beauty of it, the IRS can't do anything about it. It is perfectly legal.

You can set up a business to sell goods or services, charging a certain price face value if paid in silver or gold coin, keep your books accordingly, and then if you incur any tax liability, pay that debt in devalued FRNs. They have to accept them. AND as long as your prices are set, they have to allow you to accept silver and gold at face value and book it accordingly. They can't make you take the coins for more than face value or book them at a higher value. They are only legal tender for face. It would be illegal to do otherwise.

The only stickler MIGHT be if you also accept FRNs. You may or may not be able to institute a surcharge, or accept them at a discount. You might have to take them at face as well, or perhaps you might be able to refuse to accept them entirely. Remember, legal tender hinges on the word "tender" which means to proffer as payment. It means it is legal for someone to try to pay you in those means, but there is no requirement that you accept it. You can demand payment in some other form if you wish.

He does not favor gold backed currency, though you

might find him saying that from time to time if it is the "only" alternative to non-backed currency. Given the false dichotomy of having to use currency, backed or unbacked, he'll take backed any day. He also has vacillated somewhat on where exactly his feet might be planted on this issue.

Presently, this is not his premier solution. He thinks we should simply remove the legal tender laws and allow the market to determine what is best to use. He wrote "The Case For Gold" quite some time ago. he's come to realize now that a gold only system is not wise, and certainly, backing paper with it will only turn back the clock 100 years. It won't solve anything. We'll just repeat the same mistakes.

He knows that the market will at least for his lifetime and his great grandkid's lifetime, settle on gold and silver coin. Mind you, not currency backed with anything, but actually circulating coin.

Bi-metallism certainly is preferable to a gold only system. It fails when you try to use it to back currency. Just like a gold only system fails when you try to use it to back currency. What fails isn't the backing, it's the currency. That's the mistake. Remember, the original Federal Reserve Notes were demand notes where you could be paid gold or silver coin if you turned in the notes. After massive inflation - that is massive printing of notes, that finally became untenable and Roosevelt ordered the practice ended.

Bi-metallism as instituted by the Framers wasn't so bad. Certainly, it was preferable to a gold only coinage system. As well, technically, we were on a silver standard back then for they adopted a monetary system defined by silver, with gold being described in its relation to silver.

In 1873, that reversed, and instead, the dollar was defined by gold and the silver left to languish without re-adjustment. Also, Congress flubbed the issue by minting dollars for use in international trade that had a different silver content than domestic dollars. Then they lowered the silver content of the fractional coinage so that ten dimes, four quarters, or two halves didn't quite equal a whole dollar coin's worth of silver. This drove those whole dollars out of circulation per Gresham's Law. There precipitated a monetary deflation of sorts, leaving most money in the hands of the wealthy in the form of gold and very little circulating in the form of silver for everyone else. Combine this with a real estate speculation bubble and well, you have a recipe for disaster. That we only came out of that period with an income tax, an elected Senate and a Federal Reserve is nothing short of astonishing.

Remember, a dollar is not an abstract unit of account. It is a specific weight and measure of a particular substance, and that substance is NOT gold. It is silver. The "dollar" has ALWAYS been silver. It was created in response to gold only systems of the time (over 500 years ago) which worked well for the elite, but kept the working class in poverty. Silver is more convenient for every day cash purchases and can be made into convenient sizes for such transactions. Gold on the other hand has to be minute in size for such use and is therefore impractical for it. Silver is the currency of the working class.

The problem the Framers created was that they locked gold to a certain ratio of silver. Now mind you, they didn't do this willy nilly. They set it at the long accepted ratio that the two are found in the Earth. This average ratio held fairly steady for several hundred years. There was no thought to the fact that it would ever swing wildly out of whack. To be sure, they knew there would be SOME fluctuation, so they gave Congress the power to not only set standards of weights and measures (which was initially used to define the monetary unit as 371.25 grains .999 pure silver) but to regulate the value of the coinage. This allowed Congress to mint various sized coins as may be needed from time to time or seem more convenient, as well as adjust the relative size and thus value of gold coins as the ratio might fluctuate.

Note, the intention was NEVER for Congress to mint say a one ounce silver coin and stamp it with $5 or $10. But to change the amount of silver in the coin and THEREFORE change the value of it. The idea that the "dollar" was not tied to a specific amount of silver was to them not even contemplated because it was so self evident that a dollar WAS a specific amount of silver. It would be like someone telling us today that from henceforth we shall call all grass, trees and trees, grass. An absurdity to be sure, as it abstracts what in fact trees and grass really are to the point of silliness. When doing this to a monetary unit, the consequences are disastrous and without end, as we have experienced. Another analogy would be to say redefine a cup or a gallon to be some different quantity. It would appear to us to be entirely absurd. The Framers would have thought the same about the notion of the "dollar" being abstract.

The dollar, within a small range, was to always be 371.25 grains of .999 pure silver. If Congress wished to change the monetary unit, to say an ounce of silver, then they would have to give it a new name entirely. This is in fact what nations had been doing the world over with their gold coinage.

Likewise, the intention was never for Congress to mint a one ounce gold coin and stamp it with $50 UNLESS the ratio of silver to gold coming from the Earth, and more importantly existing above ground, was such that this was the new relative value of an ounce of gold. But the dollar - composed of silver, was the standard or yardstick by which gold would be measured.

This had an interesting effect. It removed the monetary system from the control of the elite bankers. It placed it in the hands of the law. And more importantly, it placed it in the hands of every day working consumers. THEIR daily interactions would therefore determine its purchasing power, and therefore the relative value of gold.

For the first time in history, the market would decide how much money was worth, and more importantly, would effectively value how much the elite's gold was worth, instead of the other way around. And it was done not with meddlesome central planning dictates, but by enshrining an already existing de facto standard into a framework of law. Recall, the Framers did not invent the dollar. It was already in use in the colonies. It was 300 years older than them. They merely adopted it.

Now, back to bi-metallism.

The problem was that the Framers stamped dollar amounts on the gold coins. They called them a different unit, but never stamped those units on them.

You see, Congress initially adopted the dollar as the unit of account. It then set the standard of weight and measure of that unit at 371.25 grains .999 pure silver. It then authorized the minting of coins in that unit (similar to the Spanish Milled dollar in circulation at the time) and subsidiary coinage.

But they also minted gold coins. They called these "Eagles" instead of dollars. An Eagle was defined as 247.5 grains .999 pure gold. (slightly over 1/2 ounce) They also authorized Half Eagles and Quarter Eagles respectively. The problem is that instead of stamping the coins with "Eagle" "Half Eagle" and "Quarter Eagle" they stamped them with $10, $5, and $2.50 respectively. (Later Congress would mint the Double Eagle and stamp it with $20. It had slightly more than 1 ounce of gold in it) This was based on the ratio they set in law of silver to gold at 15:1. (meaning it would take 15 ounces of silver to equal 1 ounce of gold in purchasing power, or relative value)

Certainly, I guess, they didn't think this was a problem because they thought Congress would just adjust the gold coinage if need be when the ratios changed in nature, which they likely didn't really expect to happen. I don't think they ever expected or contemplated that Congress would not remember or realize that the dollar was a standard of weight and measure and thus shouldn't be altered very much, less abstracted entirely.

The problem with this practice arose when one after the other silver and gold mines were found throughout the nation as we moved west. The result was that for a time, there was a glut of one or the other metal. Certainly, the finding of the loads meant increased economic activity, and a need for more coinage in general, but this also had the short term effect of driving up demand on limited goods and services and thus rising prices. (this is how inflation - an increase in the money supply has the EFFECT of higher prices)

For those who get the money first, this is a benefit and no problem. But for those who get the new money last, it really sucks big time. (as we know well now with FRNs)

Congress tried to address this issue by instead of creating new denominations, or adjusting the overall ratios, they simply abandoned silver, but didn't stop minting it, and changed us to a gold standard monetary unit. Then it all went to pot and you've read that already.

My answer or solution to this problem is in part 2 above.

Thanks a lot for all the time

Thanks a lot for all the time you spent trying to help me. I haven't had time to fully digest what you wrote, but for now, let me ask this: Was the Coinage Act of 1873 an unfair manipulation of the market? That seems to be what you suggest above. So the problem is that the masses were hurt by the preferencing of gold right? And Ron Paul would say that the government should not have preferenced gold over silver, right? Please forgive my ignorance here. I am far fromm stupid, but for some reason, much of what you guys who follow the metals market flies over my head.

No need to apologize for learning, and hey, I'm not expert.

This is just how I read it.

On to your questions...

Was the Coinage Act of 1873 an unfair manipulation of the market?

I'm not sure what you mean by 'unfair' but was it a manipulation that should not have happened? Most definitely.

Now, that doesn't mean some change in the coinage didn't need to happen. It likely did. But even before that would be attempted, I would say Congress should have abolished the National Bank system, revoked the status of any and all 'greenbacks' in circulation, and tried to allow an adjustment period.

Then they should have looked at relative abundance of each metal and considered if it was an appropriate time to adjust the pegging of gold to the dollar or not. (that is, not to define a dollar in terms of gold, but where to move the 15:1 peg of the silver:gold ratio)

Really, this would have been the opportune time to realize the mistake of the Framers in pegging one metal to another, remove the dollar denominations from the gold coins, replace them with Eagle denominations, and allow them to float freely against each other.

This would have been the least disruptive change, yet still solve the problem.

What they instead decided to do was define the dollar in gold instead of silver. (which makes no sense at all. That's like defining a lollipop in terms of lead content rather than it's sugar content)

Then they compounded the problem with altering the silver currency as well, this time, changing the amount of silver in a dime, quarter and half-dollar. This creates a problem with coins already in circulation that contain more silver. By changing the amount of silver in the coin and keeping the denomination the same, Gresham's Law forced out the old coinage from circulation because it now had "more" silver than its face value. (not really, it was the new coins that had less silver in them, but since they carried the same face value, effectively, these became the new 'standard' of what constituted a 'dollar' of silver.)

They made this even worse in two ways.

#1 - they began minting new whole dollars with even MORE silver in them 420 grains instead of 371.25 to be precise. This was to be used ONLY in the orient in trade with China. (yes, China was causing us currency problems back then)

#2 - they made these new "Trade Dollars" legal tender up to FIVE dollars. Note, they didn't have five times the amount of silver in them as regular domestic dollars. They were only marginally larger. Eventually, these trade dollars made their way back to America and what a mess we had then!

So the problem is that the masses were hurt by the preferencing of gold right?


It wasn't the only thing causing a problem in this arena at the time, but it did hurt the average working Joe, immensely. Remember, we are still an Agrarian society at that point. Manufacturing and mass production haven't happened yet. Large scale monetary changes, especially ones that disrupt every day coinage can be disastrous. This is also a time, and this next bit is not reported much and somewhat controversial, when socialism began to take root in America. This is when the ideas of government backstopping crop losses began to take hold. This is when farmers stopped saving seed so much and started taking out loans to buy seed each year. This placed farmers in a very dangerous position. One that would come to haunt and decimate them when the dust bowl hit decades later. Much of the "free silver" movement came from the policies of this time, and the practices of this time, that were beginning to entrench themselves. (there is some research, though not verified that I am aware, that the financial backers of Marx and Engels et al, were the major players behind the GOP for Lincoln's run in 1960. Looking at his policies, there is little doubt that such influence was likely there.)

There is also the huge problem that the greenbacks caused. They weren't backed by ANYTHING really. They were just notes issued as fractions of government war bonds. This was real fiat 'money.'

Had Lincoln not brokered that deal for the bonds and to circulate the notes he likely would have had to capitulate and let the Confederacy to itself. He didn't have the funds to pay the Army to continue fighting the war, and the soldiers were starting to grow restless about it, extremely so.

On top of this, Congress had already been mucking around with coin content (not values) and this had already caused some coins to drop from circulation. By the time the 1873 law passed, people were mostly using reduced copper cents (less than half their original size and content) and paper bank notes and greenbacks. Essentially, when Congress switched us over to a "gold dollar" there was effectively no "silver dollar" in circulation any more.

Now the working man was left with devalued copper and paper, which was issued by the robber barons who held most of the gold, who now had their fortunes tied to the new definition of the dollar, which their buddies in government made possible by the 1873 law.

It's no wonder there was outcry on the issue. It's a miracle, though maybe not a fortuitous one for posterity, that we didn't have another revolution on the spot. Perhaps the recent experience of the war was too much to even contemplate such a move any time soon.

And Ron Paul would say that the government should not have preferenced gold over silver, right?

You'll have to ask him.

Send him an email or letter.

You never know. You might get a personal reply.

Certainly, if you posed the question to the Mises institute, they should get back to you on the topic, especially you being a professor and all.

But I would think that's exactly what he would advise. Don't preference anything. Just repeal legal tender laws (which are a nasty form of 'preference') and let consumers decide what to tender, and merchants decide what to accept.

Certainly, as I mentioned in my "solution" there is room for governments to get the ball rolling so to speak, but the market should be free to find its own way without interference.

He does favor gold backed

He does favor gold backed currency.

I think the only problem with bi-metallism is locking the price of the two metals relative to one another. I admit though, I havent read the Case for Gold yet.

He no longer holds this view. He now prefers

"competing currencies."

Ok, but he would still want

Ok, but he would still want any paper money represented by one commodity then? Silver, gold, whatever, just something of traditional value, correct? And that would not preference one metal over the other as long as people could use whatever currency they wished to use?

So were the holders of silver back then not able to use their silver in transactions? Or was the problem that the silver had become so devalued after gold became the de facto standard? I guess that is what concerns me. I wouldn't want a return to those days, where the silver holding masses had an even greater comparative disadvantage to the wealthy.

minting coins

I think the difficulty comes in when the value of a dollar is defined as an amount of gold. BUT the coins are minted using a specific amount of silver. As though the amount of silver in a dollar coin will somehow remain fixed relative to gold.

It sounds like the actual value "assigned" to sliver back in those days was slightly off, favoring the rich. If it had been assigned a different value (favoring those who had the silver), I'm sure it wouldn't have bothered the masses. (that is 100% speculation on my part)

The comment below addresses the issue of Dr. Paul's position the


As to the situation in the late 1800s, silver was still legal tender. It wasn't that you couldn't use it, it is that you wouldn't get real value for it. The same situation exists now.

You wouldn't use a 1921 silver dollar to buy anything if you can only use it for face value. It really has that face value, the problem is that the goods you are buying have an inflated price. They technically say "dollars" but what they really are priced in is FRNs. So if you tried to use a silver dollar, you wouldn't get full value for it. There'd be no point to the transaction. This is what the common man faced in the 1870s.

All they had to use that was near current pricing values was copper coins and paper bank notes. (like we have now - copper and nickel coins, and paper bank notes)

I don't think you get it.

Dr. Paul doesn't want anything in particular. He wants the market to decide what is money. If people want to accept paper money, then those who do can. If a person wants metal coin in exchange, then he or she should be allowed to negotiate the transaction using metal coin. If the person wants a digital Bitcoin deposit in trade for a good or service, then that person should be allowed to do that.
The point is Dr. Paul doesn't get to dictate how people transact business and neither does the government. It isn't about what he wants. It is what you want. What you want is freedom. The market decides; Transactions are voluntary and accomplished without the state dictating the medium of exchange.
Read Rothbard's History of Money and Banking in the U.S.

[F]orce can only settle questions of power, not of right. - Clyde N. Wilson