The History of Bimetallism in the United States

§ 1. From the end of 1886 to the middle of 1890 the country enjoyed a short respite from monetary disturbance. In spite of the legislative agitation in Congress for free coinage of silver, the gold reserves were large and easily recouped by the receipts from customs (see line B in
Chart XIX). During this period the Treasury received from 70 to 95 per cent of its customs duties in gold (see line A in
Chart XX). This favorable state of affairs, however, did not long continue. The well-devised plans of the silver agitators in Congress brought about additional legislation in favor of silver. They made alliances with other interests in Congress, and a so-called compromise took the form of the Act of July 14, 1890, which had momentous effects on the country.

Although the mechanical details of the Act of 1878 were changed in 1890, the new law, in fact, continued the policy of the old, but increased the amount of silver bought. It should be noticed, however, that the Act of 1890 did not repeal the Act of 1878; it only repealed that provision of it which required the monthly purchase and coinage into silver dollars of not less than $2,000,000 nor more than $4,000,000 worth of silver bullion. Instead of this provision, the Secretary was directed to purchase “silver bullion to the aggregate amount of 4,500,000 ounces” each month, and to pay for it with Treasury notes in denominations from one dollar to one thousand. This meant the purchase by the Treasury in the beginning of much more silver than under the Act of 1878. Instead of buying under the old act so many dollars’ worth of silver bullion (which produced a varying number of ounces, from changes either in the value of the dollar or the price of silver), the Secretary was required to buy a fixed number of ounces. Hence the total amount of Treasury notes paid out for this bullion would represent the total value of the silver at the time of its purchase. If the silver did not depreciate there would be behind each Treasury note an amount of silver equal to the face value of it in gold, but to the extent that the silver fell in price after it was purchased by the Treasury would there be a less than full value behind the notes. While the act of 1890 was in force there were bought 168,674,682.53 fine ounces of silver at an average cost of $0.9244 per ounce, or $155,931,002.25. That quantity of silver had lost value by 1896 ($0.65 per ounce) to the amount of about $46,000,000, and to that extent, or about 30 per cent, the notes have no value behind them.

A new kind of paper money was also introduced by the Act of 1890—the Treasury notes—which “shall be a legal tender in payment of all debts, public and private, except where otherwise expressly stipulated in the contract, and shall be receivable for customs, taxes, and all public dues,” and when held by any national banking association may be counted as a part of its lawful reserve. Inasmuch as parts of the Act of 1878 remain in force, the provisions governing the issue of silver certificates are still binding. Hence there are two kinds of paper money arising from the purchase of silver. The silver certificate (see Act of 1878) is not a legal tender for “all debts public and private,” while the Treasury note is, standing on a par with the greenbacks. But the Treasury note differs from the silver certificate in a more important respect. The silver certificates have not been formally redeemable in gold (see Chapter XV, § 6); but on demand of the holder of a Treasury note the Secretary must redeem it in gold or silver coin, at his discretion, which means in gold so long as the Treasury has any. There can be no more reason for the depreciation of Treasury notes (even though backed by only 70 per cent of silver bullion) than the depreciation of greenbacks. Instead of the quasi or indirect redemption of silver certificates, there is a direct redemption of Treasury notes.

In this connection, however, the Act of 1890 went further, and by its language evidently meant to convey the intention to include silver dollars and silver certificates in the general proviso concerning redemption (Section 2): “It being the established policies of the United States to maintain the two metals on a parity with each other upon the present legal ratio, or such ratio as may be provided by law.”
*72 Thereafter it became the legal duty of the Executive to prevent the silver currency—either silver dollars, silver certificates, or Treasury notes of 1890—from falling in value below its parity in gold.

§ 2. By reference to line A in Chart XIX it will be seen that, even with this creation of an enlarged silver currency, little difficulty was experienced in keeping it out of the Treasury. No such sums of silver were heaped up as in 1882-1888. Not only could there not be the same distrust of Treasury notes, redeemable in gold, as of silver certificates; but the expenditures of the Treasury were so nearly equal to its income at this time
*73 that its reserve funds were necessarily paid out. The absence of a surplus, however, did not prevent the silver current from returning upon the Treasury. So soon as conditions of depression arose, which made the currency redundant (such as the Baring crisis, late in 1890 and in 1891), the system of redemption previously described began to work; the banks strove to get rid of their silver; ceased to pay in gold to the Treasury (see Chart XX) for duties; and silver streamed into the Treasury. At a time when the country had a surplus it could invest this surplus in dead silver, and the operation would produce no public distress and cause no comment; but when the surplus dwindled, this process began to produce distress. Any large payments would have to be met in silver.
*74

The difference between the Treasury note and the silver certificate aided to keep the new issues in circulation. The banks could properly accept Treasury notes redeemable in gold in all payments to themselves, and they could be likewise received at the Clearing-House. Under these circumstances the banks would use the large denominations; hence, under the Act of 1890, it was possible to keep out a considerable quantity of the large Treasury notes, in addition to the smaller notes in general use for small and large change. It will be recalled that it had been impossible to keep large denominations of silver certificates out; and the gain under the Act of 1890 just described is clearly a result of the system of direct redemption.

The general situation, however, as it affected the Treasury and our currency was far from favorable. The mere fact of a large increase in the silver purchases by the Act Of 1890 was alarming. How long could the United States go on with this great annual addition of perhaps $40,000,000 or more to its silver currency without producing redundancy and loss of confidence in the maintenance of gold payments? The general state of mind among the shrewdest business circles is quickly reflected in the payments to the Treasury (see Chart XX. No one can look at the clear and easy condition from 1886 to 1890, and then observe the tangled confusion, whose beginning is apparent in the very month in which the new act went into effect (August 14, 1890) without seeing that we had entered upon a new and difficult stage of our monetary history. The percentage of gold payments to the Treasury began to decline at once; and the result was immediately apparent in the gold reserve (see line B, Chart XIX). Moreover, the gold payments into the Treasury continued to fall, and, with two brief exceptions (one in the end of 1891 and another in the fall of 1893), reached an insignificant sum, and 1894 practically ceased altogether. That was an ominous fact. So long as the banks believed that gold would be forthcoming from the Treasury, they could pay out gold with the assurance that it would come around to them again; but their accumulations of gold, and evident caution in paying out gold, showed their genuine distrust as to the status of the Treasury. Legal-tender notes, Treasury notes, and silver certificates collected in the banks, and by them were sent back to the Treasury. In short, the Treasury was thus being cut off from its usual source of gold. If it did not come in for duties, it could not come from elsewhere.

Chart XX shows since 1890 a confusion of lines comparable only with that of 1884-1886; but the two periods were in several respects different. In 1884-1886 silver accumulated in the Treasury (see Chart XIX); since 1890 the accumulations of silver in the Treasury have not been large, yet the gold reserve has been steadily falling in a most alarming way; while no such extreme decline in gold payments to the Treasury marked the earlier as it has the later period. The fear of a breakdown in gold payments certainly did not arise in the later period from a heaping up of silver in the Treasury. We must look in another direction for the cause. It is undoubtedly to be found in the long-continued agitation for a change of standard (see Chapter XVII, § 1).

During 1891 temporary expedients were resorted to to replenish the gold reserve, but in the end these were ineffective, being slight barriers against a strong current of distrust. One expedient was the offer to receive gold on deposit in New York, and to transfer money in forms of silver certificates to remote parts of the country at a slight expense. In this way silver money was pushed out into the West and South, and gold was collected to some extent in the Treasury. But the effect was only temporary.

§ 3. In advocacy of the purchase of 4,500,000 ounces of silver by the Act of 1890, its supporters strongly urged that this would raise the price of silver to par ($1.29 per fine ounce) with gold. There is good reason to believe that some of those engaged in pushing the measure through Congress were acting with knowledge of the operations of the most gigantic combination to speculate in silver of which we have any record. The passage of the “Sherman Act” was probably part of the scheme. At any rate, immediately upon its passage a combination of owners of silver in New York, London, and on the Continent began a speculative attempt to raise the price of silver all over the world, and its operations extended even as far as India.
*75 This succeeded for a brief period, and August 19, 1890, silver reached $1.21 per ounce fine. Immense amounts of capital must have been required to carry this silver.
*76 But the Baring failure punctured the speculation, making it impossible to carry such large sums, and the price of silver came down with most astonishing rapidity. This was the period just before the greatest fall in the par value of silver ever known. (See
Chart XVII, Chapter XIV.) That is, the United States, wholly without regard to what was going on in the countries of Europe and Asia, rashly started on an additional purchase of silver. It was not statesmanship; there can hardly be any other explanation than that speculators had hoodwinked Congress and made it play a part in their game to raise the price of silver. In view of the situation in the rest of the world, there seems to be hardly any other conclusion. The outcome, moreover, did not meet expectations. Not only did the price of silver not go to par as a result of the Act of 1890, but never in the history of the precious metals has it fallen so low as in the years following 1890. Even during the continuance of the act, silver lead dropped from 17.26:1 (August, 1890) to 28.20:1 (July, 1893).

As the price of silver declined, the issues of Treasury notes diminished. Under the Act of 1878, with the quotation of silver at 67 cents per fine ounce, about $46,000,000 at the minimum would have been coined; while under the Act of 1890, at the same price, only about $36,000,000 of notes would have been issued. Under the Act of 1878 a larger number of ounces would have been bought by a given sum of gold, as silver fell in price; under the Act of 1890 a less total sum would be expended on the required number of ounces, as the price per ounce fell.