Evolution from Gold to Fiat Money

I have been a coin collector all my life. In 1963, when I read in the Coin World newspaper that they were going to remove the silver from our coins, I asked my Dad to get as many Franklin half dollars for me as he could. He told me "No, that's silly. They'll never be worth anything." Of course, we all know that the 8 year old coin collector was proven right, and the 33 year old credit union member was not. I think this shows the value of specialists' information - regardless of the specialist's age.

Recently, I became curious about the numismatic value of my 2 dollar bills and silver certificates. Since I had never really been all that interested in paper money before, and felt ignorant, I went to the library and checked out the book "Paper Money of the United States" by Robert Friedberg. Some of the information in there is very enlightening, and I wanted to share it with all my freedom loving friends.

In general, coins (made of gold, silver, or copper) have an intrinsic value (this does not apply to US coins since 1963). When you accept such coins as money, you know what you are getting and have a solid grasp of the actual value of that money. This 'solidity' and 'known value' have never been attributes of paper money. The paper itself has virtually no value, and so the monetary worth must derive from something other than intrinsic value. Two factors give paper money value: 'security' and 'obligation'. Security refers to something of intrinsic value which is placed on deposit in exchange for the paper money. Obligation refers to a promise (generally printed directly on the paper money) which the bearer of the paper money may request be fulfilled. It is very interesting to observe the evolution of the security and obligations of the paper money of the United States of America.

In 1775, the Continental Congress authorized the issuance of currency to finance the Revolutionary War. The obligation printed on these notes read:

This bill entitles the BEARER to receive Three Spanish milled Dollars, or the Value thereof in Gold or Silver, according to a resolution of CONGRESS, passed at Philadelphia Februa- ry 17, 1776.

These notes depreciated to a point where it cost more to print than it would buy. Why? Because there was no security. The obligation turned out to be worthless without security to back it up. Also, the obligation itself is vague about who is obligated and how the note should be presented for redemption. It should be a source of neverending shame to any patriotic American that the US government has never seen fit to honor the obligations on these notes. Printing of Continental Currency ceased in 1779.

After the Revolutionary War ended, and a few years later the Articles of Confederation were deemed inadequate, the new country adopted a new Constitution. The Constitution forbids any state from making anything but gold or silver a legal tender. A mint was established in Philadelphia and in 1793 coins with true intrinsic value were produced. No paper money was produced. This situation lasted until 1861, when President Lincoln declared a national emergency upon the outbreak of the Civil War. Lincoln became what is known as a 'constitutional dictator' (for more information on this read "War and Emergency Powers" from the American Agriculture Movement) and suspended the Constitution. The Act of July 17, 1861 permitted the Treasury to print and circulate 60 million dollars in paper money. Soon the government suspended specie payment so that this new paper money could not be converted into coin. Specie payment resumed in 1879.

[Impatient readers may now skip ahead.] Here we list the various US paper monies, and the obligations printed on each.

1861, Demand Notes, apparently no security:

The United States promise to pay to the bearer __ Dollars on demand ... Payable by the Assistant Treasurer of the United States at (New York, Philadelphia, Boston, Cincinnati or St. Louis). Receivable in payment of all public dues.

1863-1866, Fractional Currency, not secured:

Exchangeable for United States Notes by any Assistant Treasurer or designated U.S. Depository in sums not less than five dollars. Receivable in payment of all dues to the U. States less than five Dollars.

1867-1876, Fractional Currency, not secured:

Exchangeable for United States Notes by the Assistant Treasurers and designated depositories of the U.S. in sums not less than three dollars. Receivable in payment of all dues to the United States less than five Dollars except customs.

1870-1875, National Gold Bank Notes, secured by gold coin and United States bonds:

This note is secured by bonds of the United States deposited with the U.S. Treasurer at Washington ... The (name of bank and city) will pay __ Dollars to bearer in gold coin on demand ... This note is receivable at par in all parts of the United States in payment of all taxes and excises and all other dues to the United States, except duties on imports, and also for all salaries and other debts and demands owing by the United States to individuals, corporations, and associations within the United States, except interest on public debt.

1865-1921, Gold Certificates, secured by gold:

This certifies that there have been deposited in the Treasury of the United States of America __ Dollars in gold coin repayable to the bearer on demand.

1922-1928, Gold Certificates, secured by gold:

This certifies that there have been deposited in the Treasury of the United States of America __ Dollars in gold coin repayable to the bearer on demand. This certificate is a legal tender in the amount thereof in payment of all debts and dues public and private. Acts of March 14, 1900, as amended and December 24, 1919.

1929-1933, Gold Certificates, secured by gold coin:

This certifies that there have been deposited in the Treasury of the United States of America __ Dollars in gold coin payable to the bearer on demand ... This certificate is a legal tender in the amount thereof in payment of all debts and dues public and private.

1878-1885, Silver Certificates, secured by silver dollars:

This certifies that there have been deposited with the Treasurer of the U.S. at Washington, D.C. payable at his office to the bearer on demand __ silver Dollars ... This certificate is receivable for customs, taxes and all public dues and when so received may be reissued.

1886-1928, Silver Certificates, secured by silver dollars:

This certifies that there have been deposited in the Treasury of the United States __ silver Dollars payable to the bearer on demand ... This certificate is receivable for customs, taxes and all public dues and when so received may be reissued.

1929-1962, Silver Certificates, secured by silver coin:

This certifies that there is on deposit in the Treasury of the United States of America __ Dollars in silver payable to the bearer on demand ... This certificate is a legal tender for all debts public and private.

1890-1891, Coin Notes, secured by silver bullion:

The United States of America will pay to bearer __ Dollars in coin ... This note is a legal tender at its face value in payment of all debts public and private except when otherwise expressly stipulated in the contract.

1863-1907, 1916-1929, National Bank Notes, secured by US bonds:

This note is secured by bonds of the United States deposited with the U.S. Treasurer at Washington ... The (name of bank and location) will pay the bearer on demand __ Dollars ... This note is receivable at par in all parts of the United States, in payment of all taxes and excises and all other dues to the United States, except duties on imports, and also for all salaries and other debts and demands owing by the United States to individuals, corporations and associations within the United States, except interest on public debt.

1908-1915, National Bank Notes, secured by US bonds or "other" securities:

This note is secured by bonds of the United States or other securities deposited with the U.S. Treasurer at Washington ... The (name of bank and location) will pay the bearer on demand __ Dollars ... This note is receivable at par in all parts of the United States, in payment of all taxes and excises and all other dues to the United States, except duties on imports, and also for all salaries and other debts and demands owing by the United States to individuals, corporations and associations within the United States, except interest on public debt.

1929-1935, National Bank Notes, secured by US bonds:

National Currency secured by United States bonds deposited with the Treasurer of the United States of America ... The (name of bank and city) will pay to the bearer on demand __ Dollars ... Redeemable in lawful money of the United States at United States Treasury or at the bank of issue.

1915-1917, Federal Reserve Bank Notes, secured by US bonds:

Secured by United States bonds deposited with the Treasurer of the United States of America ... The Federal Reserve Bank of (location) will pay to the bearer on demand __ Dollars ... This note is receivable at par in all parts of the United States in payment of all taxes and excises and all other dues to the United States except duties on imports and also for all salaries and other debts and demands owing by the United States to individuals, corporations and associations within the United States except interest on public debt.

1918-1928 (?), Federal Reserve Bank Notes, secured by US bonds, certificates of indebtedness or gold notes:

Secured by United States bonds or United States Certificates of indebtedness or United States one year gold notes, deposited with the Treasurer of the United States of America ... The Federal Reserve Bank of (location) will pay to the bearer on demand __ Dollars ... This note is receivable at par in all parts of the United States in payment of all taxes and excises and all other dues to the United States except duties on imports and also for all salaries and other debts and demands owing by the United States to individuals, corporations and associations within the United States except interest on public debt.

1929-? (not current), Federal Reserve Bank Notes, secured by "other securities:

National Currency secured by United States bonds deposited with the Treasurer of the United States of America or by like deposit of other securities ... The (name of bank and city) will pay to the bearer on demand __ Dollars ... Redeemable in lawful money of the United States at United States Treasury or at the bank of issue.

1862, Legal Tender Notes, apparently no security:

The United States promise to pay to the bearer __ Dollars on demand ... Payable at the Treasury of the United States at New York. This note is a legal tender for all debts, public and private, except duties on imports and interest on the public debt, and is exchangeable for U.S. six per cent twenty year bonds, redeemable at the pleasure of the United States after five years.

late 1862-1868, Legal Tender Notes, apparently no security:

The United States promise to pay to the bearer __ Dollars on demand ... Payable at the Treasury of the United States at New York. This note is a legal tender for all debts, public and private, except duties on imports and interest on the public debt, and is receivable in payment of all loans made to the United States.

1869-1900, Legal Tender Notes, apparently no security:

The United States will pay to bearer __ dollars ... This note is a legal tender at its face value for all debts public and private, except duties on imports and interest on the public debt.

1901-1928, Legal Tender Notes, apparently no security:

The United States of America will pay to the bearer __ dollars ... This note is a Legal Tender for __ dollars subject to the provisions of Section 3588 R.S. ... This note is a Legal Tender at its face value for all debts public and private except duties on imports and interest on the public debt.

1929-1962, Legal Tender Notes, apparently no security:

The United States of America will pay to the bearer on demand __ dollars ... This note is a legal tender at its face value for all debts public and private.

1963-present, Legal Tender Notes, apparently no security:

This note is legal tender for all debts, public and private.

1914-1928, Federal Reserve Notes, no security:

The United States of America will pay to the bearer on demand __ Dollars ... This note is receivable by all national and member banks and Federal Reserve Banks and for all taxes, customs and other public dues. It is redeemable in gold on demand at the Treasury Department of the United States in the city of Washington, District of Columbia or in gold or lawful money at any Federal Reserve Bank.

1929-1933, Federal Reserve Notes, no security:

The United States of America will pay to the bearer on demand __ Dollars ... Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank.

1934-1962, Federal Reserve Notes, no security:

This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank.

1963-present, Federal Reserve Notes, no security:

This note is legal tender for all debts, public and private.

The Definition of 'Dollar'

Once upon a time there was a German silver coin named a Joachimsthaler. English speakers corrupted this to 'thaler', and early American settlers called the Spanish milled coin (of similar size to the thaler, and also silver) a 'dollar'. The 'pieces of eight' were in common circulation in the American colonies. Thus, the word 'dollar' has always meant a coin, specifically a large silver coin. This summary of the evolution of the definition of 'dollar' was extracted from "What Are We Using for Money" by Bakewell and "A History of United States Coinage" by Schwarz. In all cases, 'coin' is assumed. An Eagle was to have the value of ten dollars.

Date	Dollar (grains silver)	Eagle (grains gold)
April 2, 1792 (the first Coinage Act)	371.25	247.5
June, 1834	-	232
January 18, 1837	206.25	258
February 12, 1873	378	-

This is all the coinage acts say about the definition of a dollar. However, this is only because the Mint has ceased producing dollars. The U.S. government has continued to redefine 'dollar' in legislation.

The 1834 act also states "...the said gold coins shall be receivable in all payments, when of full weight, according to their respective values; and when of less than full weight, at less values, proportioned to their respective actual weights". The 1873 act includes "...that any owner of silver bullion may deposit the same at any mint, to be formed into bars, or into dollars...". This last is significant, because it implies that the government considered a 'dollar' to be a coin containing a certain quantity of silver. In 1868 the Supreme Court ruled that nothing other than coined money had been recognized by legislation of the national government as lawful money.

Conclusion

First, security evolved from gold to gold/silver to gold/silver/bonds to "other security" to "no security required". Then the Federal Reserve was created and the obligation evolved from "redeemable for gold" to "redeemable for silver" to "legal tender". Meanwhile, the meaning of the word 'dollar' suffered substantial redefinition, from '1/20th ounce of gold' to 'this piece of paper, take it or leave it'. Historically, here's the picture:

Before Lincoln - no paper money

1861-1879 - paper money not redeemable

1880-1933 - gold certificates honored

1880-1962 - silver certificates honored

1863-1907, 1916-1917 - bank notes secured by bonds exclusively

1908-1915, 1918-1928 - bank notes secured by bonds or 'other' security

1880-1928 - legal tender notes redeemable, NOT good for import duties or interest on public debt

1914-1928 - federal reserve notes redeemable

1929-1962 - legal tender and federal reserve notes redeemable in silver only

1963-present - fiat money

The federal government hopes the public never becomes aware of the true meaning of the current obligation. "Legal tender" means that the only value paper money has to the bearer is that the government may force someone else to accept it. And, although the Treasury still carries it on its books, one has to wonder what happened to all the gold that the Treasury accepted "on deposit" from 1861 to 1933.