Monday, January 23, 2012

A Short History of the US Gold Standard from "Liberty", Nov. 1995 Book Review

From Here to Economy: A Shortcut to Economic Literacy (Dutton, 1995, 259 pp., $21.95), by Todd G. Buchholz.

Although I am not a professional economist, I am reasonably well read in the field. As I read this primer, I marveled at how concisely Buchholz explained complex economic concepts and economic history, and the liveliness of his prose. Further, he shows
considerable respect for Austrian economics - a respect not often in evidence among mainline economists or their popularizers - and an admiration for the Chicago School. Surely, I thought, this is a book of great merit, making matters economic understandable to those unwilling to devote the study to the field that I have. I was already planning to buy copies as gifts for the economically underendowed when Iencountered the following two paragraphs:
The U.S. moved to a de facto gold standard in the 1830s and adopted it formally in 1900. Tourists who visited Washington could walk up to the Treasury Department building on Fifteenth Street and swap their bills for gold. Every bill was inscribed with the following promise: The United States of America Will Pay to the Bearer on Demand One Dollar in Gold." (In the 1930s the U.S. dropped this pledge and replaced the inscription with a promise to Pay to the Bearer on Demand One Dollar in Lawful
Money." A puckish man from Cleveland who decided to test the government then mailed a ten-dollar bill to Washington asking to swap it for lawful money." The wits at the Treasury Department mailed him back two fives!)

As it happens, this passage discusses the one aspect of economic history where my knowledge is systematic and arguably expert. And I immediately recognized several errors:
(1) The United States more or less adopted the gold standard de facto in 1873 and de jure in 1900, more or less abandoned it in 1934, and completely abandoned it in 1971. Prior to 1873, the U.S. was on a bimetallic standard; that is, the U.S. dollar was defined as a fixed quantity of either gold or silver; in
effect, there were two dollars in circulation, one .7734 troy ounces of silver, the other .04837 troy ounces of gold. Needless to say, this bi-metallic standard was an utter failure, as in the marketplace the values of both gold and silver fluctuated. Prior to the Coinage Act of 1834, the laws of the United States decreed that one ounce of gold was worth 15 ounces of silver, the market ratio that prevailed (more or less) at the time of the creation of the U.S. monetary system in the 1790s. Unfortunately, by the early 1800s, this arbitrary valuation was out of whack with the prices of gold and silver in the market. It overvalued silver; that is to say, $100 in silver coin had less value as metal than did $100 in gold coin. At the time, Congress had no authority to repeal Gresham's Law, so the result was predictable: gold coins were driven from circulation. The Coinage Act of 1834 changed the gold-silver ratio to 16-to-l, which was by then, more or less, the market ratio. As before, this new ratio worked for a while, but soon the market ratio changed, this time in favor of gold. (That is to say, the ratio soon overvalued gold.) Silver coins were driven from circulation. Between 1849 and 1873, the coinage system was an utter mess, thanks to this problem and to the paper-money inflation of the Civil War years. In 1873, Congress repealed authorization for striking a silver dollar, in effect, reducing the status of silver coins from standard to subsidiary coinage and demonetizing silver. Finally, the U.S. was on a de facto gold standard.
(2) There was no government issued paper money at all until the Demand Notes of 1862 and the Legal
Tender Notes of 1863. These notes were not legally redeemable in gold or in silver and, in fact, were routinely refused by the federal government when tendered in payment of tariffs. Needless to
say, they never included any language guaranteeing that they could be redeemed upon demand in gold.
(3) Between 1862 and 1933, the U.S. government issued, at one time or another, thirteen different types of paper money: Demand Notes, Legal Tender Notes (also known as United States Notes), Compound Interest Treasury Notes, Interest Bearing Notes, Refunding Certificates, Silver Certificates, Treasury Notes (also known as Coin Notes), National Bank Notes, Federal Reserve Bank Notes, Federal
Reserve Notes, National Gold Bank Notes, Gold Certificates, and Fractional Currency. These pieces of paper money had a wide variety of redemption clauses, some of which were changed from time to time. The only ones the federal government promised to redeem in gold were Gold Certificates and Federal
Reserve Notes (Series 1928 only). None of these were issued in denominations of $1.00. The Treasury Notes (Series lS90 and 1891) promised redemption in "coin," which in fact meant the bearers choice
of gold or silver coin, but this is nowhere stated on the note. The National Gold Bank Notes (co-issued
by the federal government and certain federally-chartered National Gold Banks during the 1870s) promised redemption in gold, but by the National Gold Bank, not the federal government.

So I don't know how much I ought to recommend From Here to Economy. Its discussion of the one area where I might be considered an expert is fraught with errors. The frustrations of a book-reviewer!
-R.W. Bradford

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