Honest Money Part II

By: Douglas V. Gnazzo | Wed, Aug 10, 2005
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This commentary was originally posted at www.financialsense.com on 20th October 2004.

Part II: Silver Standard with a Bimetallic Coinage System
The Standard and the Coinage System

As we have seen, the Constitution along with the Coinage Act of 1792, established by statutory decree that the dollar was the unit of account and also declared that a dollar or unit was "each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure silver, or four hundred and sixteen grains of standard silver".

According to statute, the United States was on the silver standard. However, as we have seen, Congress also decreed that gold coins were to be minted and circulated along side of silver coins, and fixed the statutory valuation of silver to gold at 15 to 1.

In other words, Congress had "fixed" the exchange rate between the two metals. Thus the United States was on a silver standard, but it was also on a bimetallic system of coinage, that included gold to be circulated at a "fixed" exchange rate to the silver standard.

Such a system can present problems, however, as the free market exchange rate between gold and silver can diverge from the statutory or legally fixed exchange rate - necessitating the adjustment of the other metals legal value up or down to conform to the statutory fixed rate of exchange.

In other words, Congress was trying to make two different types of metal coinage equal in purchasing power. This was not a good idea and would have been better left undone.

This also raises the very interesting question as to whether or not this "fixing" was an accidental mistake, by very learned men, well acquainted with this exact monetary issue, as the discussions of such are in the Congressional records.

Past historical monetary writings also address the issue in detail. Perhaps such was not a mistake, but was very much intended and planned, although unknown by most but a select few. We will trust the reader with making such determinations, as the following discussions occasion.

Legal Tender and Purchasing Power

Involved in the issue of "fixed" exchange, are the ideas of legal tender and the concept of purchasing power.

Legal tender has to do with distinguishing between the legal or juristic meaning of money, and the purely economic meaning and use of money. The term legal tender refers to the medium of payment that is designated as the legally accepted settlement of debts, especially debts due and owed to the government.

Money in the purely economic sense is commonly referred to as the medium of exchange or that which the common man uses to exchange one good for another to facilitate commerce and trade.

In a free market environment, whatever is determined to be the legal medium of payment (legal tender) must first naturally evolve as the accepted medium of exchange. Man by free choice determines what is to be money - the most commonly accepted or marketable medium of exchange.

A truly free society or government will only declare as legal tender, that media that society has already chosen as the accepted medium of exchange by its own free will.

As we have seen with the development of our Constitution and its monetary policy, the dollar was the unit or medium of exchange that was the most accepted then current medium - a specific weight and fineness of silver - the "silver dollar".

Any alteration in this Constitutional dollar, both as the medium of exchange and the medium of payment or legal tender - without a Constitutional amendment - would not be the workings of a free society or government, but one of forced obedience.

This also goes to the point that the legal intrinsic value of the dollar is the physical amount of silver or gold as measured against the "standard", which in the case of the U.S. dollar is a specific weight of silver.

However, the economic value or purchasing power of the medium of exchange is not "intrinsic", as it is not based on an objective determination or standard, but on the subjective valuations of the market participants. Some refer to this as the subjective theory of value or the theory of declining marginal utility.

It is exactly this difference - between the legal intrinsic value of money based on an objective standard or defined weight of metal - versus the subjective value of the medium of exchange that changes according to the supply and demand of the marketplace - that precludes any system of bimetallic coinage, that sets one metal as the standard, and then declares the other metal to be "exchangeable" for the standard metal at a "fixed" rate of exchange - to be inherently doomed to fighting free market forces and laws of supply and demand, continually requiring "regulatory" legislation and "adjustment". Such is not the workings, of a truly free market, but of a contrived or fixed market.

Although in the strict technical and statutory sense, the standard was silver and the system of coinage was bimetallic - in all practical applications or according to the prevailing "populist" views - the system was a duometallic system that reciprocally recognized and exchanged one metal for the other. As will be shown, however, the system fluctuated back and forth from one metal to the other, and with good cause - the purposefully contrived reasons of power and influence: all in the pursuit of profit and gain.

Gresham's Law

Establishing fixed exchange rates allows "Gresham's Law" to enter the picture, whereby an artificially overvalued money tends to drive an artificially undervalued money out of circulation.

Free markets and supply and demand being what they are, inevitably the market values one metal over the other. Eventually one metal is driven out by the other. This process is oft times referred to as "demonetization". But remember, bimetallism under a fixed standard is not necessarily a completely free system.

Starting slowly in the 1780's, the market value of silver slid downwards, steadily continuing down through the 1790's, up until about 1804-1805; mainly in response to the increased supply of silver from Mexico and the diminishing supplies of gold from Russia; while at the same time, its mint price remained the same, thereby causing silver to be overvalued in relation to gold.

Gold coins started to flow out of our country and ceased to circulate, while silver coin flowed in and was abundant. Gold coin was melted down and exported abroad. From 1800 to 1834 only silver coin circulated as the currency of choice. Gold had been driven out - but by what force? Might there be an unseen "guiding hand"?

First gold was driven out of circulation, and then over time silver became the lackey, until eventually both metals were driven into exile and buried beneath a mountain of worthless paper debt and hollow promises to pay: that is our now current system of paper fiat - a mere shade of its former self. But such events beg the question: a lackey of whom or by what power?

Congress would have been better off to have simply minted gold Eagles without fixing a dollar value on them, thereby allowing the free market forces of supply and demand to regulate their exchange rate value. This would help prevent the "authorized" control by other than free market principles or by "others".

Because of this flaw in a bimetallic system of coinage that has one metal as the standard and then fixes the exchange rate between the two metals, and the resulting "crying" up or down of the value of one metal in regards to the other - our monetary history was one where first one metal was dear and the other shunned, and vice versa, on several different occasions.

Conclusions So Far

It has been shown that the both the Constitution and the Original Coinage Act of 1792 established the monetary standard to be silver, in conjunction with a bimetallic system of silver and gold coinage.

Now that we have discovered just what the Constitution and the Original Coinage Act of 1792 established as our monetary standard and system - the standard being a defined weight of silver with a bimetallic coinage system of silver and gold coins - let's now look and see how the various and subsequent monetary acts brought forth, by the process of devolution, our present system of irredeemable paper fiat currency.


 

Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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