is excerpted from
History of Money and Banking in the United States (2002).
An MP3 audio file of this article, read by Matthew Mezinskis,
As an outpost
of Great Britain, colonial America of course used British pounds,
pence, and shillings as its money. Great Britain was officially
on a silver standard, with the shilling defined as equal to 86 pure
Troy grains of silver, and with silver as so-defined legal tender
for all debts (that is, creditors were compelled to accept silver
at that rate). However, Britain also coined gold and maintained
a bimetallic standard by fixing the gold guinea, weighing 129.4
grains of gold, as equal in value to a certain weight of silver.
In that way, gold became, in effect, legal tender as well. Unfortunately,
by establishing bimetallism, Britain became perpetually subject
to the evil known as Gresham’s
law, which states that when government compulsorily overvalues
one money and undervalues another, the undervalued money will leave
the country or disappear into hoards, while the overvalued money
will flood into circulation. Hence, the popular catchphrase of Gresham’s
Law: “Bad money drives out good.” But the important point to note
is that the triumph of “bad” money is the result, not of
perverse free-market competition, but of government using the compulsory
legal tender power to privilege one money above another.
In 17th- and
18th-century Britain, the government maintained a mint ratio between
gold and silver that consistently overvalued gold and undervalued
silver in relation to world market prices, with the resultant disappearance
and outflow of full-bodied silver coins, and an influx of gold,
and the maintenance in circulation of only eroded and “lightweight”
silver coins. Attempts to rectify the fixed bimetallic ratios were
always too little and too late.
In the sparsely
settled American colonies, money, as it always does, arose in the
market as a useful and scarce commodity and began to serve as a
general medium of exchange. Thus, beaver fur and wampum were used
as money in the north for exchanges with the Indians, and fish and
corn also served as money. Rice was used as money in South Carolina,
and the most widespread use of commodity money was tobacco, which
served as money in Virginia. The pound-of-tobacco was the currency
unit in Virginia, with warehouse receipts in tobacco circulating
as money backed 100 percent by the tobacco in the warehouse.
money continued to serve satisfactorily in rural areas, as the colonial
economy grew, Americans imported gold and silver coins to serve
as monetary media in urban centers and in foreign trade. English
coins were imported, but so too were gold and silver coins from
other European countries. Among the gold coins circulating in America
were the French guinea, the Portuguese “joe,” the Spanish doubloon,
and Brazilian coins, while silver coins included French crowns and
It is important
to realize that gold and silver are international commodities, and
that therefore, when not prohibited by government decree, foreign
coins are perfectly capable of serving as standard moneys. There
is no need to have a national government monopolize the coinage,
and indeed foreign gold and silver coins constituted much of the
coinage in the United States until Congress outlawed the use of
foreign coins in 1857. Thus, if a free market is allowed to prevail
in a country, foreign coins will circulate naturally. Silver and
gold coins will tend to be valued in proportion to their respective
weights, and the ratio between silver and gold will be set
by the market in accordance with their relative supply and demand.
and Dollar Manipulations
By far the
leading specie coin circulating in America was the Spanish silver
dollar, defined as consisting of 387 grains of pure silver. The
dollar was divided into “pieces of eight,” or “bits,” each consisting
of one-eighth of a dollar. Spanish dollars came into the North American
colonies through lucrative trade with the West Indies. The Spanish
silver dollar had been the world’s outstanding coin since the early
16th century, and was spread partially by dint of the vast silver
output of the Spanish colonies in Latin America. More important,
however, was that the Spanish dollar, from the 16th to the 19th
century, was relatively the most stable and least debased coin in
the Western world.
Since the Spanish
silver dollar consisted of 387 grains, and the English shilling
consisted of 86 grains of silver, this meant the natural, free-market
ratio between the two coins would be 4 shillings 6 pence per dollar.
both by contemporaries and by some later historians, arose about
an alleged “scarcity of money,” especially of specie, in the colonies,
allegedly justifying numerous colonial paper-money schemes to remedy
that “shortage.” In reality, there was no such shortage. It is true
that England, in a mercantilist attempt to hoard specie, kept minting
for its own prerogative and outlawed minting in the colonies; it
also prohibited the export of English coin to America. But this
did not keep specie from America, for, as we have seen, Americans
were able to import Spanish and other foreign coin, including English,
from other countries. Indeed, as we shall see, it was precisely
paper-money issues that led, by Gresham’s law, to outflows and disappearance
of specie from the colonies.
their own mercantilism, the colonial governments early tried to
hoard their own specie by debasing their shilling standards in terms
of Spanish dollars. Whereas their natural weights dictated a ratio
of 4 shillings 6 pence to the dollar, Massachusetts, in 1642, began
a general colonial process of competitive debasement of shillings.
Massachusetts arbitrarily decreed that the Spanish dollar be valued
at 5 shillings; the idea was to attract an inflow of Spanish silver
dollars into that colony, and to subsidize Massachusetts exports
by making their prices cheaper in terms of dollars. Soon, Connecticut
and other colonies followed suit, each persistently upping the ante
of debasement. The result was to increase the supply of nominal
units of account by debasing the shilling, inflating domestic prices
and thereby bringing the temporary export stimulus to a rapid end.
Finally, the English government brought a halt to this futile and
inflationary practice in 1707.
But the colonial
governments had already found another, and far more inflationary,
arrow for their bow: the invention of government-fiat paper money.
In the late 17th and early 18th centuries, the British maintained
fixed mint ratios of from 15.1-to-1 of silver grains in relation
to gold grains, to about 15.5-to-1. Yet the world market ratio of
weight, set by forces of supply and demand, was about 14.9-to-1.
Thus, silver was consistently undervalued and gold overvalued. In
the 18th century, the problem got even worse, for increasing gold
production in Brazil and declining silver production in Peru brought
the market ratio down to 14.1-to-1 while the mint ratios fixed by
the British government continued to be the same.
The name "dollar" came from "thaler," the name
given to the coin of similar weight, the "Joachimsthaler"
or "schlicken thaler," issued since the early 16th century
by the Count of Schlick in Joachimsthal in Bohemia. The Joachimsthalers
weighed 451 Troy grains of silver. So successful were these coins
that similar thalers were minted in Burgundy, Holland, and France;
most successful of these was the Maria Theresa thaler, which began
being minted in 1751 and formed a considerable portion of American
currency after that date. The Spanish "pieces of eight"
adopted the name "dollar" after 1690.
Since 20 shillings make £1, this meant that the natural ratio
between the two currencies was £l = $4.44.
N. Rothbard (1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and chief academic
officer of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report, and appointed Lew as his
literary executor. See