“Sir, we can’t coin that.”
The miner was confused. He had walked into the US Mint with sacks of silver a dozen times before and it had never been a problem.
“It’s good silver,” the miner replied politely. “You can weigh it yourself.”
The clerk offered a slight, somewhat confused smile. He appeared to be truly sympathetic.
“Sir, I don’t doubt that it’s good silver. But I’m not allowed to make it into dollars anymore. The law changed.”
The miner was shocked.
The sack of silver on the counter represented months of his labor. He had pulled the ore out of a Nevada mountain himself. Then he had it smelted down, and he made the long trip to the US Mint – just as he always had. And just as his father had done before him. It was a business as old as the country itself.
The miner couldn’t contain his frustration.
“Changed how!? Silver’s been money my whole life. We have made this transaction countless times.”
The clerk could only shrug and offer his sympathies. He explained that he didn’t entirely understand it either. Apparently Congress had passed a new law and the President had signed it, and it said that the silver dollar was no longer to be struck.
The clerk admitted that he didn’t know anything more than that. He was simply told that he could not accept silver bullion any longer.
“You can take it home,” the clerk offered timidly. “Or you can sell it as metal. But it doesn’t come out of here as money. Not anymore.”
The miner couldn’t do anything but shake his head. He grabbed his sack of silver and stomped out… never to return.
The miner’s name was lost to history. But his interaction, and scores of others, were recorded by the US Mint in those days.
He was one of thousands of men working the great silver lodes of the American West — the Comstock in Nevada most famous among them. The miners would risk it all to pull silver ore out of the mountains in the belief that what they mined would be converted into money.
And for the entire history of the republic up to that moment, it was. Silver was money. You could take your silver to the mint, hand it over, and walk out with silver dollars. That was the law. It had been the law since Alexander Hamilton wrote it into being in 1792.
But that had quietly changed.
On February 12, 1873, President Ulysses S. Grant signed a piece of legislation called the Coinage Act. It consisted of dozens of sections covering mint fees, coin designs, and administrative procedure. It was the kind of dry housekeeping bill that puts a legislature to sleep.
But buried inside the bill was a single, quiet provision that stopped the minting of the standard silver dollar. It was the most consequential change to American money since the country’s founding… and it passed through Congress with hardly a debate on that particular provision.
That’s why the miner was so surprised. Silver’s demonetization happened without warning.
The silver miner would not have understood, standing there at the window, that he was looking at the wreckage of something much larger than a coin. He would not have known that the law which turned him away was a symptom, and that the integrated economic vision that had helped build the country had already started to fracture.
To understand how a free man could be turned away from his country’s own mint, we have to go back farther in history – to a summer day in Springfield, Illinois, twenty-one years earlier.
Lincoln’s Solemn Vow
It was July 6, 1852 and Henry Clay had been dead eight days.
If we remember, Clay was the Kentucky statesman and orator who had spent his career advocating for a modern version of Alexander Hamilton’s American System. That system called for protective tariffs on imported manufactured goods, federal investment in domestic infrastructure, and a national bank to ensure that credit was primarily directed towards productive activity.
Hamilton hadn’t listed it as a key pillar because he thought it was intuitive, but the American System also presumed sound money. That is to say, money that could not be inflated at will.
With Clay’s death, the American System lost its biggest political advocate for that era. But one man swore that the system would not be lost to history.
In the Hall of Representatives at the Illinois statehouse — the same chamber where he had served as a young legislator — a 43-year-old country lawyer named Abraham Lincoln rose to give Clay’s eulogy.
The room was full of Whigs, which was the political party that Clay had built. They had gathered to mourn the man they called the Great Compromiser. But Lincoln had not come to talk about compromise. He had come to claim an inheritance.
Clay was the man who gave the American System its name. And he was the one who took the institutional foundation Hamilton laid, the theoretical framework Friedrich List developed, and the economic philosophy Henry Carey extended and forged them into a political program that he fought for across thirty years.
Clay championed the system for three decades and never got to fully execute it. He theorized it, named it, and fought for a modern version of the American System… and he died with much of it still unbuilt.
Lincoln would later call Clay “my beau ideal of a statesman, the man for whom I fought all my humble life.” And on that July day, Lincoln took up the cause and intensified his fight.
The American System’s 19th Century Builder
When we think of Abraham Lincoln today, we almost exclusively fixate on the War Between the States, which was inaccurately named the American Civil War. We also remember Lincoln’s Emancipation Proclamation. And with good reason. Those were major events in American history.
But what gets lost is that Lincoln was an unwavering proponent of Hamilton’s American System. He took Clay’s updated blueprint and, in the space of a single presidential term, built out the system in ways that made perfect sense to its advocates at the time.
We don’t need to go very deep on them, but here’s a list of Lincoln’s moves:
- The Morrill Tariff of 1861 raised protective duties to levels Clay had only dreamed of.
- The Pacific Railway Acts of 1862 and 1864 launched the transcontinental railroad — the single largest infrastructure project in American history.
- The Homestead Act of 1862 opened the West to productive settlement.
- The Morrill Land-Grant Act of 1862 created the agricultural and mechanical colleges, which proponents saw as an investment in the productive capacity of the American workforce.
- And the National Banking Acts of 1863 and 1864 created, for the first time since Andrew Jackson killed the Second Bank of the United States, a unified national currency and a coherent national banking system.
Regardless of what we may think of these things today, Lincoln saw this as the American System being built in real-time. Tariffs, domestic infrastructure, national banking, productive credit — Clay’s three pillars and Hamilton’s monetary foundation, finally standing together in a single working structure for the 19th century.
Then, on the evening of April 14, 1865, days after the war ended, Lincoln was assassinated in a theater. The American System lost its champion just as it was being installed for the modern era.
That is the hinge on which this entire story turns.
As we have noted, the American System insisted that credit be issued for productive purposes, as opposed to speculative or extractive ends. Advocates saw the national banking system as the vehicle for ensuring that credit could reasonably be directed towards productive activity.
The American System also presumed sound money. Hamilton knew well that you could not maintain a system of productive credit if you had money that could be created from thin air.
With Lincoln’s death, his supporters split into two distinct camps – splitting the American System vision with them.
The System’s Great Divide
As we noted in the second installment of this series, Alexander Hamilton did not see himself as building out economic theory when he was laying out the foundations for what would become the American System.
Instead, he was trying to institute an integrated vision that would displace British influence over the young republic and help the United States to become economically independent.
Hamilton saw that as the key to remaining politically independent. He believed that American sovereignty required economic strength. Both Henry Clay and Abraham Lincoln carried that idea forward.
However, Lincoln’s death left a major vacuum. The historical record clearly shows that there were still vocal advocates for certain aspects of the American System after Lincoln. But nobody was championing the integrated system anymore.
Thus, the American System split into two general camps. On one side stood the Greenbackers.
During the Civil War, Lincoln had issued paper money, called greenbacks, in an attempt to keep the country running and the factories humming despite the wartime costs. Proponents were adamant that the greenbacks would be used to fuel productive activity and provide cheap credit to build farms, railroads, and other enterprises.
Lincoln had issued greenbacks largely out of what he considered to be necessity during the war. But a movement grew up around them, giving rise to the Greenbackers. They held firm to the original idea of productive credit, but they also championed Henry Carey’s idea that a currency should be backed by the productive output of the nation rather than gold. They were opposed to gold-backed currency.
Now, the greenback was not sound money. It was unbacked paper, and that unbacked paper did what unbacked paper always does — it inflated. The historical record shows that the greenbacks lost a significant portion of their value relative to gold after the war.
So the Greenbackers championed the idea of productive credit, but they pursued it by abandoning sound money — the very thing Hamilton had refused to give up.
On the other side of the split were the gold men. They wanted to retire the wartime paper money and put the country back on a currency backed by hard specie (precious metals). They wanted to restore sound money to America.
However, the gold men had no interest in the Hamiltonian concept of productive credit. They were not concerned with the idea that the financial system should attempt to direct credit towards productive activity. So they held firm to the principle of sound money, but they did not think it important to evaluate credit based on the nature of the activity it financed.
That was how the American System fractured after Lincoln’s death. And that brings us back to the demonetization of silver…
The Crime of ‘73
We opened today with the Coinage Act of 1873 – and the quiet little provision that stopped the minting of silver dollars. At the time, almost no one noticed… except for the silver miners.
And that’s because the nation’s political attention turned to the greenback debate. Those who were paying attention to national politics were arguing about paper money versus gold, and the silver question seemed like a technicality.
Silver had actually been worth slightly more as pure metal than as coinage in the years just before the debate, so little silver was being brought to the US Mint anyway. That’s why the silver demonetization provision passed in near silence.
Then the nation’s attention shifted.
On September 18, 1873, the prominent Philadelphia-based investment banking firm Jay Cooke & Company declared bankruptcy. Cooke had heavily financed railroad construction, especially the Northern Pacific Railway.
Cooke’s bankruptcy was the canary in the coal mine. It signaled to the market that many of the seemingly booming railroad projects were actually unprofitable. Then 89 of the first 364 railroads went bankrupt, dragging associated businesses down with them.
The failure sparked widespread panic and bank runs as depositors rushed to withdraw funds, stock prices plummeted, and the New York Stock Exchange closed for 10 days.
This caused dozens of banks and brokerages to fail alongside the railroads, erasing countless jobs in the process. At the peak of the crisis, unemployment rose to 14% across the country.
Suddenly, a faction within American politics coalesced behind the idea that the Coinage Act of 1873 caused the money supply to contract, and they associated that with grinding down farmers and working people who were struggling mightily to stay afloat financially.
Instead of the Coinage Act, they called it the “Crime of ’73”.
The outrage was real, and some of it was probably justified. The rules of the monetary game had been changed by legislative sleight of hand, quietly, after Americans had already signed their contracts and taken on their debts under the old rules.
The congressman who introduced the bill into the House would later admit, “I was ignorant of the fact it would demonetize the silver dollar.” Another called it “stealthily passed, without reconsideration and without debate.”
Whatever we may think of the monetary issue, the attention directed towards the “Crime of ‘73” fractured the American System even further. Specifically, it served to hijack the Greenbacker movement and replace it with something even more hollow.
Remember, the Greenbackers kept Hamilton and Carey’s idea of productive credit alive. But they made the mistake of abandoning sound money in the process.
The new populist movement rallying around the Crime of ’73 fixated on the remonetization and free coinage of silver… but they didn’t approach it from the sound money perspective. Quite the opposite.
They viewed deflation (the contraction of the money supply) as the enemy, and they viewed silver as the key to igniting inflation and expanding the money supply.
Thus, the Silverites were fiercely opposed to the gold standard. And that’s how it came to siphon off material support from the Greenbacker movement. They had a common enemy.
But the new populist movement focused solely on the money supply and nothing more. Coin more silver… put more dollars in circulation… inflate your way out of the squeeze. That was their vision in a nutshell.
So the silver movement did not argue for directing credit toward productive enterprise, as the Greenbackers had. It was simply a demand for more money — the same instinct that had inflated the greenback, now attached to a metal.
Thus, the integrated American System fractured even further. After 1873 — and especially after silver became the rallying cry — there was no longer anyone in the debate making Hamilton’s actual argument.
So by the end of the 1870s, the American System tradition had no advocate. And the country’s focus shifted entirely.
The Silverites framed the next two decades as the “Long Depression”, and they pointed out that deflation and contracting credit hurt farmers and working people. They suggested that the gold standard was a direct attack on the working class.
However, defenders of the gold standard suggested that what they were describing wasn’t a depression at all. To the contrary, real wages rose, American production increased, and consumer prices actually decreased. Things got cheaper and easier to buy over time, not more expensive.
As Austrian economist Murray Rothbard noted in A History of Money and Banking in the United States, there was a certain irony there. The gold standard enabled real wages to rise and consumer prices to fall, thus making life easier for regular people. Yet, the silver populists decried the system as elitist.
Out of the silver movement would rise a young man from Nebraska with a voice like a trumpet and a single, searing vision of a cross of gold that brought the political fight to a boiling point… but further detracted from the American System’s integrated vision.
Meanwhile, across the Atlantic, the British system that Alexander Hamilton and Thomas Jefferson both feared had successfully subsumed much of Europe into its fold. Now the forces behind that system had their eyes on America – which appeared ripe for the taking.
More to come…
-Joe Withrow
P.S. Episode 9 of the Phoenician League podcast dropped this morning. In it, we explore the current state of Bitcoin, and I walk through my personal history with it… it’s been quite the journey.
You can find the podcast at: https://phoenicianleague.com/podcast-episode-9-an-end-run-around-the-fed-bitcoin-as-money-the-21-million-hard-cap-and-the-coming-institutional-wave/
And if you would like to tune in via other means, the podcast is available on all the major platforms. This includes Apple Podcasts, Spotify, and all the others. The video version is available on our YouTube channel as well.
Alternatively, you can catch every episode after it has published at: https://phoenicianleague.com/podcast