The disappearance of coin as the result of the circulation of depreciated notes is another form in which the truth of Gresham's Law has been frequently clemontrated. During the war between our northern and southern States, both the Federal and the Confederate governments paid a portion of their bills in their own notes payable to •bearer, made legal tender and issued in denominations suitable for circulation as money. They very soon depreciated and be came a secondary standard of value, and coin of all kinds disappeared from circulation. since on the bullion market they could be sold for these notes at a good premium, and a five-dol lar note would pay as many debts or buy as many things as five silver dollars or a five dollar gold piece.
The terms in which Sir Thomas Gresham stated his law may be objectionable because the phrases had money and good money are not accurate descriptions of the forces which crowd some of the elements of the medium of exchange out of circulation and hold others in, but the law itself is as certain in its opera tion as those of the Medes and Persians. It is really only one form of the expression of a law of much broader application, namely. that all men are prone to make the most of their possessions.
The device of making some coins subsidiary to others which are called standard and of making the paper elements of the currency redeemable in coin prevents the operation of Gresham's law and has, therefore, been incorpo rated into the practice of all commercial na tions. (See article CURRENCY). This practice renders it desirable that standard coins should constitute an element of the medium of ex change, since the stamps on the other coins and the paper elements of the medium refer to definite amounts of the standard of value; and their exchange on the markets, rapidly and conveniently at all times and places for precisely these amounts requires that this com modity should be put up in convenient sized and conveniently labeled packages and be widely spread throughout the commercial world. These ends can only be attained when the standard of value is put up in the'form of coins and used as a medium of exchange.
The money of a country, which consists of its standard of value and of those elements of its medium of exchange which pass freely from hand to hand by mere act of transfer and without endorsement and which are ac= opted without question by everybody, is an historical product, and can, therefore, be ex plained only by reference to its history.
The Monetary System of the United The foundation of the monetary sys tem of the United States was laid in 1792 in which year Congress passed our first coinage act. That act provided for the manufacture of gold coins of the denomination 10, 5 and 2% dollars, to contain respectively 247%, 123X and 61h grains of pure gold; of silver coins of the denominations dollar, half-dollar, quarter dollar, dime and half-dime, to contain, the dol lars, 371% grains of metal, and the other proportionate amounts; and of copper coins of the denominations one cent and one-half cent. It further provided that the gold and silver coins authorized should be manufactured with out charge by the United States mint for any persons who would supply gold and silver bul lion of the requisite degree of fineness and that all such coins should a lawful tender in all payments whatsoever.lo
While the mint ratio of 15. to 1 between gold and silver coins established by this act closely corresponded to the bullion ratio between the two metals in 1792, it no longer did so in 1754 when the mint at Philadelphia was ready to begin operations. At that time the bullion ratio was about 15.37 to 1, and it never again fell to so low a point as 15 to 1. Gresham's law, therefore, operated almost from the begin ning and the gold coin disappeared from cir culation. Unfortunately the new silver coins did not circulate freely. Pending the construc tion of a mint and the manufacture of a suffi cient quantity of new coin to supply the needs of the country, Congress had authorized the use of several kinds of foreign coins, including the Spanish milled dollars. Since these latter contained more silver than the new American dollars and since both the Spanish and the American dollars were accepted at their face value in both the United States and the Spanish West Indies, with which we were at the time carrying on an active trade, the merchants of Boston, New York. Philadelphia and Baltimore engaged in this trade discovered a source of Profit in shipping American dollars to the West Indies and in bringing West Indian dollars home and transforming them into American dollars at the mint. rL • A remedy for this' condition was not success fully applied until 1834, and in the meantime the currency of the country consisted chiefly of notes issued by the banks of which there were two varieties — state institutions and the United States banks-- the first one operating in the period 1791-1811 and the second in the period 1816-36. The notes of many state banks were issued in small as well as large denominations, thus in part supplying the need for small change which the scarcity of coin frequently rendered urgent. In the interval be tween the first and the second United States banks, 1811-16, cur second war with England was fought, and the conditions thus created; aggravated by the liquidation of the first United States Bank forced the state banks into a state of suspended specie payments. Their notes depreciated in consequence and coin of all kinds, foreign as well as domestic, disappeared from circulation. The•remedy applied was the authorization of the second United States Bank which was' charged with the task of securing a i.resumption of specie payments. President Jackson's war against this bank started during his first administration had reached a stage by 1834, which foreshadowed the certain end of that institution so soon as its charter should expire in 1836 and that fact, together with the discovery of gold in North Carolina and a recollection of the currency difficulties which succeeded the liquidation of the first United States Bank accounts for the passage in 1834 of another important coinage act.