§7. Gold production, 1800-1850. The legal ratio of 15 to 1 in the United States, at which by the law of 1792 both metals were to be freely coined at the mint, proved to be an undervaluation of gold. The market ratio of the two metals had been gradually changing before 1792, and continued to change, gold becoming more valuable in terms of silver. Gold largely left circulation, and by 1818 silver and bank-notes formed nearly the whole of the circulating medium. Then the production of gold began to increase absolutely and relatively somewhat more than that of silver, and when the market ratio had become about 15 1/2 to 1 in 1834, the legal ratio of the United States was changed to 16 to 1. This overvalued gold and brought a good deal of it back into circulation, gradually driving out most of the silver (the heavier coins disappearing first).

6 The amount of silver is here expressed at its coining value; this is not the commercial value, but rather the number of silver dollars 371.25 fine grains weight that could be made out of the silver produced. Silver and gold of equal coining value are, therefore, as to weight always in ratio of 16 to 1.

In the decade 1841-50 the average annual value of the gold production, for the first time since the early sixteenth century, exceeded that of silver. Then, from 1848 to 1850, came the great gold discoveries in California and in Australia. The value of gold produced in the world in 1851 was one and one half times that of silver, in 1852 three times, and in 1853 four times as great; and then slowly declined, but continued every year as late as 1870 to more than twice as great. Let us observe the effect on prices that was brought about by the discoveries of 1848-49.

§ 8. Gold production and price changes, 1850-1873. The unprecedented increase in gold production between 1849 and 1853, and the continuance of production in volume about fourfold as great as that of the decade 1840-49, caused the displacement of silver by gold in the United States and drove out a large proportion of the silver coins of smaller denominations. To make possible their retention the law of 1853 was passed, authorizing subsidiary coinage (on government account only) of lighter weight.7 Gold became then the one standard money actually in circulation in the United States, and the increased gold production was reflected at once in a rise of prices. This was the most revolutionary price change that had occurred since the sixteenth century. A period of prosperity in business culminated in the crisis of 1857, felt more or less in all the leading countries. This prosperity accelerated the effect of increasing quantities of the standard money. Credit was stimulated and the rate of circulation and the efficiency of money were increased. Prices rose to a temporary maximum in 1857, and then fell, as a great international financial crisis occurred.

7 See ch. 4, § 4.

Then the substitution of gold for silver in monetary uses made an additional market for gold, and at the same time the rapid growth of population, commerce, and industry in Europe and America began to take up ("absorb") the new supplies of gold. The price movements in the United States between 1860 and 1879 are passed over here, for the excessive issues of greenbacks drove gold out of circulation and made greenbacks the standard money (except in California and elsewhere on the Pacific Coast, where, by public opinion, gold was retained as the circulating medium). In the European countries prices in terms of gold, though fluctuating somewhat, kept at about the same level from 1860 to 1870. The years 1871 and 1872 were very prosperous and showed rapidly rising prices, which reached a maximum in 1873, when a financial panic occurred.

§ 9. The great fall of prices, 1873-1896. In the year, 1873, notable in monetary history, just as the gold production for the first time since 1851 had fallen below $100,000,000, several notable changes in monetary legislation were effected which made gold more important in the circulation of a number of countries. In 1873 Germany made gold the standard throughout the new German Empire (having prepared the way by legislation in 1871 which made gold a legal tender alongside of silver), and provided that silver was thenceforth to be used only in the subsidiary coinage. The same year Belgium, and the next year the other countries of the Latin Union (France, Switzerland, and Italy) took steps that resulted in demonetizing silver, that is, in limiting its coinage to governmental account, and in making gold their one standard money.

In the United States at that time, and until 1879, greenbacks were standard money, and neither gold nor silver was regularly in circulation (except in California). There was a long-continued discussion of a "return to specie payments," which meant the return to a metallic standard, and the redemption of greenbacks on demand. Meantime in 1873 a law was passed making the gold dollar "the unit of value" and dropping out the standard silver dollar from the list of coins authorized to be issued at the mint.8 From 1873 until 1879 prices (in greenbacks) were falling in this country very rapidly because the country, with the increase in population, wealth, and business, was "growing up to" its unchanging currency supply. For a like reason, at the same time gold prices throughout the world were falling. While this country was lowering its level of prices from an inflated paper money to a gold commodity basis, the gold basis itself was sinking to a lower level.9 Between 1864 and 1876 our own gold product had been nearly all exported; but, beginning in 1878 and continuing till 1888, the demand of our Treasury and banks for gold caused the retention of our own gold product in this country (nearly $400,000,000 worth, coining value, in the period of eleven years), and required an enormous net importation, amounting (in the same period) to $225,000,000 worth of gold. The combined effect of these causes is seen in the great fall of prices in all gold-standard countries in the period of 1873-1896.

The general price level fluctuated but on the whole tended downward between 1884 and 1893 (the year of panic), and reached a minimum in the year 1895 in Germany, 1896 in England, and 1897 in America. The resulting increase in the burden of outstanding debts was felt by all debtors, but particularly by great numbers of the agricultural classes both in Europe and in America. Their tribulations were aggravated by the fact that at that time (especially from about 1873 to 1896) the prices of their products were falling much more rapidly than were general prices, as a result of the very rapid extension of the agricultural land supply.10 There was complaint, agitation, and demand for relief on the part of many interests in France, Germany, England, and the United States. As a result, the money question became in this country a leading political issue and continued to be such between 1873 and 1900.

This change was what later was referred to in political discussions as "the crime of '73." The dollar referred to was the standard silver dollar; at the same time the coinage of a trade dollar was authorized (intended to be used only in foreign trade), which, after 1876, was not legal tender in the United States.

See ch. 4, § 4.