Coins That Go Clunk
Wednesday, May 7, 2014
The year 2014 is a little noticed 50th anniversary: the anniversary of the disappearance of U.S. silver coins from circulation in 1964. In that year, the American people decided that silver was probably going to be a better store of value than paper dollars, regardless of the pronouncements of the central bankers and politicians of the time. The people were right. At silver’s year-end 1960 price of 91 cents an ounce, the 0.77 ounces of silver in a silver dollar had been worth about 70 cents. But by late 1963, it was worth a dollar. Today, with silver at approximately $20 an ounce, the silver in a silver dollar is worth more than $15. (Silver has been as high as $49 an ounce.)
Up to the 1960s, American dimes and quarters (as well as half-dollars and silver dollars in those days) rang when you dropped them on a table. Now they go clunk. This change from coins made of silver, it might be said, is of little practical importance. Yet it symbolizes a profound shift in the behavior of the U.S. government with respect to money, a precursor to the immensely destructive Great Inflation of the 1970s.
Long before the 1960s, all the gold coins and bullion of American citizens had been confiscated by their government under its diktat of 1933. At the same time, the same government defaulted on the bonds it had promised to pay in gold. It took the extreme, indeed despotic, step of making any possession of gold coins or bullion by American citizens illegal and a punishable, criminal offense! It became harder for Americans to protect themselves against money printing. This law, which today is hard to believe was real, lasted four decades, until 1974.
For foreign governments, though not for ordinary people, in 1964 the U.S. government was still promising to redeem its printed dollars for gold on demand, as required by the Bretton Woods System. Bretton Woods had been approved by Congress in 1945, when it had seemed plausible that “the United States dollar and gold are synonymous.”1
Today, with silver at approximately $20 an ounce, the silver in a silver dollar is worth more than $15.
Two decades later, the U.S. government was highly incensed when France under Charles de Gaulle insisted the promise be kept and took a lot of the gold — an excellent financial decision, as it turned out. The government also “discouraged those countries that depended on the United States either for military protection or for economic aid…from cashing in dollars.”2 That might be seen as a fair trade. The U.S. government’s 1971 outright reneging on the Bretton Woods promise was still off in the future.
So, 50 years ago, the American populace, unlike the Bank of France, did not have gold, but they still had silver coins. Moreover, they still had dollar bills which were “Silver Certificates.” These dollar bills explicitly stated on their face: “This certifies that there has been deposited in the Treasury of The United States of America one silver dollar, payable to the bearer on demand,” or “This certifies that there is on deposit in the Treasury of the United States of America one dollar in silver, payable to the bearer on demand.” This was an unquestionably clear and definite commitment. These dollar bills were thus actually redeemable notes of the government, not fiat paper currency.
Acting on this promise of redemption in early 1964, as colorfully related in William F. Rickenbacker’s contemporary book, Wooden Nickels, “Crowds of people were laying siege to the Treasury Building in Washington, asking for silver dollars.”3
What happened next? On March 25, 1964, Secretary of the Treasury Douglas Dillon announced that Silver Certificates would no longer be redeemed for silver dollars — tough luck! (A few years later, in 1968, when redemption of Silver Certificates for silver had been permanently stopped, the New York Times wryly commented, “There is some consolation for persons still holding this currency — they are still worth face value.”4 So much for the certification about “payable to the bearer on demand.” By the time of the article, the silver in a silver dollar was worth about $1.50.)
The natural effect of the Treasury’s decision was to make people even more inclined to hold on to the silver coins they had or received in payment. On April 5, 1964, Chairman of the Federal Reserve Board William McChesney Martin observed, “There is a chronic, serious coin shortage in the country.”5
The Treasury then decided to get the banks to help talk the American populace out of their rational preference for silver over paper. Writes Rickenbacker:
The Treasury Department, "in cooperation with" local banks around the country, began to issue advertisements on radio and television, urging the general public to stop saving coins, to take their coins to their friendly local banks, and to turn them in and get good paper dollars for them, in order to help their government out…. Secretary Dillon … asked the American Bankers Association to help broadcast anti-piggy bank commercials on 600 television stations and 4,000 radio stations.6
Of course, all this “merely convinced people of the importance of holding their silver."
The disappearance from circulation of U.S. silver coins in 1964 was an instructive application of Gresham’s Law that “Bad money drives out good” — the “bad” or less valuable money in this case being paper dollars, and the “good,” more valuable money being the coins.
In October, 1964, Assistant Secretary of the Treasury Robert Wallace denied that the Treasury planned to eliminate or reduce the silver in American coins.
Of course, elimination and reduction of silver coinage happened soon afterwards. The Coinage Act of 1965 eliminated silver dimes and quarters, debased the half dollar from 90 percent to 40 percent silver, and ordered no minting of silver dollars for five years. Recommending it to the Congress, President Lyndon Johnson assured the public, “I want to make it absolutely clear that these changes in our coinage will have no effect on the purchasing power of our coins.”7
When signing the act in July 1965, the president said, “We are gathered here today for a very rare and historic occasion … the first fundamental change in our coinage [since] the act of 1792.” For the new coins, “The mint is geared to get into production quickly and do it on a massive scale.” And: “Some have asked whether our silver coins will disappear. The answer is very definitely — no.”8 A poor prediction.
Writing in 1966 to the contrary, Rickenbaker concluded his book with this thought: “For the first time since 1792, we are on a money backed by nothing better that the politician’s pledge. The stage is set for the final inflationary blow-off if that is what our money managers desire.”9 Knowing as we do now about the Great Inflation of the 1970s, that was an outstandingly good prediction.
Alex J. Pollock is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.
FURTHER READING: Pollock also writes "Goodbye, Gold Redemption of the Dollar," "We've Broken Bond Promises Before," and "The Federal Reserve's Second 100 Years." Steven Conovor contributes “Confusing Cause and Effect in the Fiscal Policy Debate.” Vincent R. Reinhart examines “Auditing the Fed.” John Steele Gordon speculates "Good as Gold?"
Image by Dianna Ingram / Bergman Group
1. Benn Steil, The Battle of Bretton Woods (2013), quoting Harry Dexter White, p. 258.
2. George Selgin, “The Rise and Fall of the Gold Standard in the United States” (June 20, 2013), p. 18.
3. William F. Rickenbacker, Wooden Nickels (1966), p. 84.
4. “An Interesting Year for Collectors,” New York Times (December 29, 1968).
5. Quoted in Rickenbacker, p. 86.
6. Rickenbacker, pp. 92-3.
7. Quoted in Rickenbacker, p. 123.
8. Lyndon B. Johnson, Remarks at the Signing of the Coinage Act (July 23, 1965).
9. Rickenbacker, pp. 156-7.