Tuesday, July 21, 2009

No Quarter Will Be Given You!




[Executive Summary: This is the fifth part of an irregular series of essays about the United States Dollar--what it really is, and what the boys in Washington are doing with it and will do with it.]

This coin, to the left of the '64 Washington, is called a "Seated Liberty Quarter". It was made (you can just barely see the date) in 1853. No mint mark is visible, so we know that it was made in Philadelphia. It is worn so flat that the design has almost disappeared; it is so thin that it has almost ceased to be a "quarter" in any meaningful sense.

It’s just a little disk about an inch across.

It is so terribly worn that it can barely be recognized for what it is and weighs only about a half of its issuance weight.

I bought it for fifty cents from a coin shop’s junk-silver bin.

And yet this little piece of metal carries within itself the history of money in the United States. You can’t see it on this coin because of wear, but next to the date are arrows, thus: <-1853->.

These little arrows are roadsigns on the history of American money past... and future.

* * * *

From prehistoric times the metal of choice in trade was silver. This might surprise you, as we are trained to think of 'gold' as 'money'. But: silver has certain qualities that has always made it a better choice than gold for day to day commerce. It’s pretty, compared to most metals, when polished in a way that most metals are not. When you drop a silver coin onto a hard surface, it "rings" in a way that mere iron or copper or tin do not (the latter go “clunk” rather than ‘‘ding”). The shine made it attractive; its relatively common nature made it available, if not too much so, and the ding made it useful as a medium of exchange because anybody could authenticate a properly made coin just by dropping it on a hard surface.

Oh, sure, gold has always been used in trade also: but in general only by nobility for major exchanges, by cities paying tribute or taxes, and by kings who needed to pay armies. Gold was useful for paying armies with as, being much rarer and more valuable, it was also easier to haul large fortunes in small wagons. (An army’s paymaster could carry a season’s wages for an army could be carried on one or two wagons instead of 20 or 40.) But silver is what most people used to buy, sell, borrow and trade with on a day to day basis––as there simply was not enough gold to go around.

This is a key point. In ancient days, from the invention of the coin in 600 BC, those cities (such as Sardis in modern Turkey, Athens in Greece, and New Carthage in Spain) that had access to good silver mines (not necessarily to gold!) eventually rocked, then ruled, their worlds.

Take Greece. Following the victory of the Greeks over Persia at Salame in 470 BC* (yes, I know the PC version is “BCE”–sue me), the discovery of a rich vein of silver in Attica allowed the Athenians to build a great fleet, and through the fleet, the Athenian empire–the instrumentality of the downfall of Athens after they tried to subjugate their Greek neighbors.

By the time of the Roman Empire, silver was the hand that rocked their economic cradle. The conquest of Carthage by Rome gained for Rome access to the silver mines of Spain. Sure, again, gold was used, particularly by the army and by the imperial center. But silver is how the locals bought and sold commercial goods. A commoner could go years without ever seeing a gold coin. But silver was silver; more common and more freely available. The coin of choice was a denarius, from the Latin word for “day”; a silver coin about the size of a dime and perhaps 2/3 its weight. The full silver denarius was a day’s wage for a laborer––a unit of value that held its place for hundreds, even thousands, of years.



Penny of "Ethelred the Unready" ("Ethelred the Ill-Advised"), ca AD 1009 (Source: Wikipedia)

At the time of Charlemagne, a denarius was defined as 1/240 of a pound of pure silver, or 1.86 grams; twelve of these coins (denarii) were equal to a "solidus", which was 1/20 of a pound, or 22.36 grams. This became the basis of European and British money for over a thousand years. In England, over the years, the words became corrupted, a "solidus" became known as a "shilling" and a "denarius" became a penny. (And a pound became a “quid,” as in “quid pro quo” - ‘this for that’.)

But here is the problem. By the time of Charlemagne, the great mines of Spain and Turkey and Greece had become played out. All the ore therein was gone. Much of the silver previously in circulation had evaporated through wear, hoarding and other loss. And without new coins, the great commerce of the Empire eventually died. Every deal became barter, except among the nobility. And that choked out economic development for hundreds of years.

(Now, this was not the sole cause of the decline of Rome–the great migrations and decline of the Roman military played a major part in this as well–but it played a major role.)

Money is the blood of the body politic: without money the economy cannot grow. As the supply of money remains the same size, or shrinks, so does the economy. The term of art for this period of history is "the Dark Ages," but frankly, the term should have been "the Broke Ages" for that was its real problem.

Notice again how thin that coin is? It gets that way from being handled. Every person who handles a coin in circulation takes a few silver atoms off of the surface through the friction of handling it. Eventually, the coin loses weight and is no longer worth what it is said to be worth. So every generation or so the kings would call in the silver and recoin them anew. This is not, however, something kings liked to do, since––due to wear––they would always wind up with fewer new coins coming out than they had old coins going in. They often needed to supplement the coinage with more silver from other sources.

The first steps out of the Dark, then Middle, Ages were taken when two things occurred. First, alas, half the population up and died from The Black Plague. While a terrible event, however, it DID have the effect of making the survivors richer––there were now half as many people to own the same amount of stuff. The survivors, in essence, doubled their wealth overnight. Particularly of coin. Result: inflation, the first in recorded Western history, followed by the first labor strife in recorded annals. (Peasants discovered that they could get ten silver coins for a week’s work instead of five.... which made them very eager to NOT have to live on five.)

At about the same time, in a small town in what is now the Czech Republic, new and rich silver veins were discovered, the first in a thousand years. In a little place now called Jakimov (pron. "yackimof"), in the Valley of Saint Joachim, moneyers started making new coins, each worth about five shillings–much bigger than any previously made. These coins were very, very popular, and suddenly everyone started making them. They were called “Joachimthalers”, or "Thalers" for short.

(Note the name Jakimov. It’s in the “Sudentenland” territories. More on that below.)

Fast-forward to the early 1500s. America has just been discovered. Europe is in turmoil as the Reformation tears the Church in two. A Dutchman named Karl, or, in Spanish, Carlos, winds up, through strategic birth, a good marriage, blind luck, and heavily bribed elections, king of about a third of Europe and Emperor of the Holy Roman Empire. He owns Western Europe, but it’s mortgaged to the hilt. He is known to history as "Charles V", or "Carlos I of Spain and V of the Empire." We'll call him "Carlos V".

At about the same time, in Cuba, a lower-nobility-derived adventurer known to us as Hernando Cortez got a local Spanish girl, the sister of the governor, pregnant. This girl turned out to be a real harridan, and this Hernando Cortez character -- think of him as the Harcourt Fenton Mudd of his day -- decided to go adventuring just to get shut of her.

He convinced a hundred or so mercenaries to join him in a little trip from Cuba to Mexico, telling them that they’re just going exploring. And thereby hangs an incredible tale (one that I won’t repeat here).

Needless to say that when it is over, Cortez, whose harridan wife was still waiting for him in Cuba, was now called "La Conquistador" and he was sitting on a pile of gold and silver artwork the likes of which would make the eyes melt, as well as sleeping with his traitorous Aztec mistress.

It certainly made the art itself melt. The Aztecs––the (let's not forget, the not-very-nice, human-sacrificing barbarian) people Cortez had conquered––had used their culture’s inheritance of gold and silver, not for trade and coining, but for art. As he conquered the lands, Cortez melted this measureless craft and beauty into bricks, and put the bricks on ships. He then sent the ships to Emperor Carlos, and managed thereby to become his friend (as people who give fortunes to kings are wont to do).

Carlos turned out to be not too much of a friend, however; Emperor Carlos gave Cortez a fancy title and fired him as governor of Spanish Mexico. That’s okay, though–Cortez went on to live a long and pleasant life, a much more pleasant life, in particular, after his wife mysteriously committed “suicide”. (Like I said. Nice guy.)

Anyway, Carlos V then used this money to fight a series of nasty religious and political wars against both the Protestants (who have just appeared in history) as well as the Turks who are trying to invade the West. Results: The Aztec's gold and silver wound up saving the West from Turkish conquest, as well as holding the Protestant tide to a stalemate. In short, the “confiscated” Aztec gold and silver probably saved the Faith of Christ.

Go figure.

Shortly thereafter the Incas fell to Pizarro, who managed to defeat yet a second civilization with even fewer Spanish resources than it took to crush the Aztecs. And it was the Inca's gold and silver that really killed Spain.



A Spanish Milled Dollar from the reign of Philip V, 1739 (Source; Wikipedia)


At first it didn't look like poison; it seemed riches beyond belief. But when the Spanish gold and silver made it to Spain in quantity, something happened that had never happened in Europe before, save after the Black Death: that was, inflation. There simply was too much money in the economy for the resources available. Prices doubled and doubled again: nobody understood why.

Eventually the Spanish nobility totally threw away their wealth: all that was left was fancy palaces and literal "castles in Spain." The money melted into the general European economy and Spain became a poor country again.

(It should be noted that Spain *could* have become a permanent world power by investing its newfound riches in itself rather than in luxuries for its nobles. Problem is, almost all of Spain's brilliant financiers and money men who might have done so had been driven out, along with the rest of Spain's Jewish population, by Ferdinand and Isabella.) (Ooops.)

Evan after this, however, the American silver and gold resources were not completely played out. Mines in Peru, particularly at the mountain fastness at Potosi, still pulled new silver out of the ground, enough to provide the monetary needs for the entire Western Hemisphere. They started putting out "Spanish Milled Dollars," Carlos V's answer to the above-mentioned "Thalers."

And it was these coins that (as I have mentioned in earlier articles in this series) that became the model for the United States dollar.

Now, back to our coin--what is it about this quarter that makes it so special?

To answer that, we need to discuss "bimetallism," which ranks up there with "colonoscopy", "hypotenuse," "depreciation" and "Canadian" in terms of being among the least interesting words in the English language. Nevertheless, it's an important concept that an intelligent citizen needs to understand. And it turns out that it is also fairly easy to explain.

Starting in the 1790s, Alexander Hamilton, a first class brain, a top financier, and the only whole-souled aristocrat-monarchist found among the Founding Fathers, came to the conclusion that the United States of America should issue coins of all types: gold, silver and copper. The latter were to be used for small change and could be safely ignored. Gold and silver, however, had (according to every economic model that was understood at the time) to be issued in a fixed ratio, estimated at 15:1. That is, for every ounce of gold released in coin form, fifteen ounces of silver could also be released. This "bimetallic standard" was America's nominal way of doing business for its first 100 years.

There was a problem, though. While the ratio of 15:1 was actually an inspired guess, it was imperfect, and the price of gold and the price of silver fluctuated constantly based on a world market that was poorly understood. It all boiled down to how much metal was available for coining, and in how large a population it was intended to circulate. This varied from year to year, based on the playing out of old gold and silver mines and the discovery of new ones.

When a major new source of silver increased the silver supply, or a gold mine would play out, decreasing the gold supply, gold would be driven out of circulation as gold coins would be worth more than their face value in terms of silver. (Gresham’s law: “Bad” money drives out the “good.”) As new gold mines would appear and/or old sources of silver were depleted and ceased to increase the silver supply, silver would become relatively more scarce; silver would disappear instead. It was a constant see-saw; the United States, in its early years, was plagued by disappearing coins: now silver would disappear, now gold. No matter how many the U.S. Mint created, the coins (this year gold, next year silver) would just disappear, being sold overseas and/or melted. This because of "bimetallism."

By the decade before the Civil War, there was approximately one American coin in circulation per living American: an absurd situation.

Which brings us back to our quarter and the < -1853- > date.


An Uncirculated 1853 Quarter. (Source: Wikipedia)

About this time, silver was suddenly scarcer than before; our silver coins were worth more than their face value, hence they were being melted. So the Mint started making a new kind of coin. Starting that year, the size of the quarter was slightly reduced by weight. Not much–only a few grains–but still, light enough to make it not worth while to melt the coin. In other words, there were only about 22c worth of silver in a 25c piece. (They did this also on the dime and fifty cent piece.)

That made the 1853 coins not worth melting, and in other words, not worth what they said they were worth.

It was our first step away from bimetallism, and ultimately toward modern money. Because this was when we first started to grasp the idea that you could issue money that said it was worth something that it wasn’t, and people would still use it.

The quarters were accepted–and spent–just as easily as before, even though the new ones claimed to be worth three cents more than they actually were. And, since they were overvalued in terms of their content, they didn’t disappear from circulation, either.

And someone in the Government discovered–hey! The yokels are going along with the gag!

That got the money boys thinkin’. Is it possible to have money that just says it’s money–without actually being worth what it was claimed?

This seemed a prescription to prove that Federal paper money could safely be tried.

If so, this had all the makings of the Rumpelstiltskin fable, or that of Faust: the making of gold out of straw.

How America made gold out of straw, however, will have to await.... our next episode.

This was followed, in less than ten years, by America’s first large scale experiment in paper money since the Revolution. But not the last.

By 1873, after America had a tumult of currencies--private bank notes, Federal "greenbacks," gold coins and silver coins--the decision was made to abandon silver altogether as a money standard. Hereafter, gold, alone, would define the Dollar; and silver would be issued very strictly at a 16:1 ratio. The money supply would hereafter grow only as the gold supply grew.

This led to many difficulties, as the population and the economy both outgrew the gold supply of the time, leading to many strange new consequences: the Free Silver movement, the "Cross of Gold" speech, and The Wizard of Oz, inter alia. (Of which more presently).

So this badly worn quarter is actually an important bit of history: it was the beginning of the abandonment of the ancient ways of money making and the first step into the modern world. Its little arrows pointed the way--to today.

*By the way, Joachimthal, which is Jachymov, was also the source of a black, heavy ore that couldn’t be refined in the middle ages. They called it pitchblende, i.e., “black-heavy-waste-ore”. Pitchblende didn’t contain silver: it contained uranium. Which might explain the Nazi’s interest in the Sudeten territories in 1938.

NEXT: In-Continental Currency.

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