Financial History 143 Fall 2022 - Page 31

the 1790s , silver mining production in the United States was virtually nonexistent . Therefore , Congress ’ decision to allow foreign coins to continue circulating unabated severely hampered the Mint ’ s ability to produce a large quantity of American coinage for everyday commerce .
The Proper Alloy in US Silver Dollars
Hamilton determined the fineness of the silver dollar to be 371.25 grains of silver with a gross weight of 416 grains . The alloy was to be 44.75 grains of copper . The Coinage Act of 1792 concurred with Hamilton ’ s proposal regarding the composition of the silver dollar .
However , Mint assayer Albion Cox found the statuary fineness of . 89243 complicated and difficult to attain . Cox proposed maintaining the 371.25 grains of silver , but lowering the copper content to 41 grains , thus resulting in a 412.25 grain silver dollar of . 900456 fine silver . In response to Cox ’ s suggestion , Mint Director David Rittenhouse proposed that they increase the silver content to 374.75 , which would result in a total coin weight of 416 grains at . 90084 silver fineness . Even though this plan was not authorized by Congress — and in fact was hidden from Congress and the President — the Mint coined silver at this unlawful ratio for over a year .
This new standard was used to strike all 1,758 of the 1794 Flowing Hair silver dollars and all 203,033 of the 1795 ( both Flowing Hair type and Draped Bust type ) silver dollars . In The U . S . Mint and Coinage , Don Taxay writes , “ The most immediate effect of this practice was that depositors of silver had to pay an additional 21/2 grains bullion ( about 1 % extra ) for every dollar they received .” John Vaughn was a friend of President George Washington and a large bullion depositor at the Mint . Due to that unorthodox and unlawful practice , he lost $ 2,260 and petitioned Congress for its reimbursement . It took from 1795 until February 1800 for Congress to finally pay Vaughan for his losses .
The US Silver Dollar as a Circulating Medium
The Flowing Hair dollar of 1794 was the first silver dollar the US Mint produced . Its mintage of 1,758 was indeed small , followed by 160,295 pieces struck in 1795 . That same
An 1804 four reales ( top ) and a 1799 two reales ( bottom ) from Spanish America . Hamilton wanted such coins withdrawn from circulation within three years and used as bullion for the new American coin issues . But Congress did not include this important suggestion in the Coinage Act of 1792 , and they remained legal tender until 1857 .
year saw 42,738 of the new Draped Bust dollars minted in Philadelphia . One would imagine that these new American dollars — Hamilton ’ s national unit of account prescribed as such in the Coinage Act — would be popular and become an instrument of commerce in daily business transactions . Unfortunately , that did not happen .
The new US silver dollars had less silver than the omnipresent Spanish-American eight reales . The standard US silver dollar had 371.25 grains of silver , while fullbodied Spanish dollars had around 377.25 grains . Regardless of this difference , the US dollar and the Spanish dollar traded at par in the West Indies . Therefore , it was advantageous for merchants to partake in a continuous cycle of exchange arbitrage ; they would ship American silver dollars to the West Indies and trade them for Spanish dollars . In this manner , the US silver dollars virtually disappeared from circulation . The vast majority were shipped off as part of the China trade , where they were
discounted and melted into Chinese bullion , called sycee .
This mass exodus of US silver dollars caused the Mint to end their production after 1803 ; President Thomas Jefferson formally suspended their production in 1806 . The next time a silver dollar was struck for general circulation was in 1840 .
The Correct Silver to Gold Ratio
The correct ratio between silver and gold was important , for as Sylla and Cowen write , “ Hamilton realized that if one of the precious metals was overvalued at a future US Mint vis-à-vis the other , it would dominate the actual circulating money supply because people rationally would import the overvalued metal and export the undervalued one …” Therefore , it was of great importance to properly set the relative value of the two metals . If the bimetallic standard was correct , then the potential existed to increase the overall
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