A HISTORY OF MONEY AND BANKING IN THE UNITED STATES: THE COLON | Kayleigh McEnany

A HISTORY OF MONEY AND BANKING IN THE UNITED STATES: THE COLONIAL ERA TO WORLD WAR II

#Book 1
#Part 1

As an outpost of Great Britain, colonial America of course
used British pounds, pence, and shillings as its money. Great Britain was officially on a silver standard, with the shilling defined as equal to 86 pure Troy grains of silver, and with silver as so-defined legal tender for all debts (that is, creditors were compelled to accept silver at that rate).

However, Britain also coined gold and maintained a bimetallic
standard by fixing the gold guinea, weighing 129.4 grains of
gold, as equal in value to a certain weight of silver. In that way,
gold became, in effect, legal tender as well. Unfortunately, by
establishing bimetallism, Britain became perpetually subject to
the evil known as Gresham’s Law, which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation. Hence, the popular catchphrase of Gresham’s Law: “Bad money drives out good.” But the important point to note is that the triumph of “bad” money is the result, not of perverse free-market competition, but of government using the compulsory legal tender power to privilege one money above another.

In seventeenth and eighteenth century Britain, the government maintained a mint ratio between gold and silver that consistently overvalued gold and undervalued silver in relation to world market prices, with the resultant disappearance and out-flow of full-bodied silver coins, and an influx of gold, and the maintenance in circulation of only eroded and “lightweight” silver coins. Attempts to rectify the fixed bimetallic ratios were always too little and too late.

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