Gold: A Glittering History
By: The U.S. government's rocky relationship with gold
Gold In America
The U.S. government's relationship with gold (and silver) has a long and difficult history.
The U.S. tried, in early years, to make both gold and silver coins legal tender. Like all the empires before it, the United States had a widely circulated gold coin: the Eagle, minted from 1795 to 1933. It was originally 91 percent pure gold and contained 0.516 ounces of gold.
Money was a problem in the early years of the U.S. After the Revolution, the U.S. didn't have enough of it. The country imported more than it exported and its hard currency was going overseas.
The solution? Paper money. During the Revolution, the Continental Congress printed money with nothing to back it, as did the individual states. It proved worthless. That painful experience caused the Founding Fathers to insert a clause in the Constitution stating that "No State shall..make any Thing but gold and silver Coin a Tender in Payment of Debts."
After the Revolution, private banks began issuing paper money backed by gold and redeemable for gold. Before the Civil War, these private bank notes were the most widely used money in America.
Problem was, the banks expanded the money supply too much. The value of the paper money far exceeded the value of the gold held in the vaults. If all the note holders showed up at once to redeem their paper for gold—which happened many times—the bank went under.
The solution, or course, was more discipline by banks—fewer bank notes—and, ultimately, a central bank with a monopoly on bank notes.
But all that was in the future. What was needed was more credit for a growing country, and that meant a need for more gold.
California Gold Rush
The year 1848, when the mother lode was discovered in California, changed everything. In 1853 over 100 tons of gold were shipped from California to the East Coast. The rush didn't last long, but it was enough to dramatically expand the gold supply and it finally gave the United States the coinage it needed to grow its economy and launch it as a global power.
But there's a problem with tying your economy so closely to gold: any lack of it causes big problems. Gold was typically transferred from California to the eastern United States via ship that went around South America. In 1857, the steamship Central America sank off the coast of South Carolina with 21 tons of gold on board.
The loss of that gold was a factor in what became known as the Panic of 1857. Many banks went under.
It got worse when the Civil War started. There was no central bank. Most money was still in the form of privately issued bank notes, supposedly backed by gold. The U.S. government, pressed for cash to pay for the Civil War, borrowed gold from the banks. This left the banks with a shortage of gold to back the notes. When they put a halt on the ability to redeem the notes for gold, many of the notes became worthless.
The Greenback and Fiat Money
But the government still needed more money. A New York Congressman named Elbridge Spaulding created the greenback, federal paper money that could not be redeemed for gold. It was issued by the Federal Government and declared to be Legal Tender, simply because the U.S. government said so. By the end of the war, the government had issued $400 million in greenbacks.
The U.S. resumed convertibility into gold after the Civil War, but the greenbacks still circulated. One greenback equaled one gold dollar, but the values changed—the price of gold changed, and the value of the greenback changed depending on the amount in circulation.
Despite problems created by tying a currency to gold, the U.S. and most of the world adopted the gold standard in the 19th century. Gold and silver coins circulated as money; paper money was backed by convertibility into gold. The U.S. went to a gold standard in 1873.
World War I changed everything
World War I changed everything. To finance the war, most of Europe went off the gold standard. They had to: They had spent their gold on the war, which they financed (now that they were off the gold standard) by printing money. When it was over many countries had a significant inflation problem, Germany the worst of all.