NOTE – Part 3 and Part 4 of this series are now available.
In the previous post, I offered a riddle – is there any part of the US monetary system that still uses gold and silver? The answer is yes.
Before we cover gold and silver, it is first important to realize that there are actually two separate authorities for printing money in the United States – the federal reserve and the United States Treasury. The federal reserve is in charge of creating “federal reserve notes”, which we normally refer to as “dollars”. This is what we normally carry in our wallets:
Notice on the top it says, “Federal Reserve Note”. This is because it comes from the Federal Reserve, and represents “1 dollar” of money, whatever that is. Just as a reminder, the federal reserve is not part of the government, although they are linked in several places. So, this comes from the federal reserve. As a side note, they are printed by the government, through the US Bureau of Engraving and Printing (BEP). However, the federal reserve is in charge of issuing them, and simply asks the BEP to print them when it needs them. I believe the federal reserve has to pay a small fee (a few cents) per bill for the printing charge. Nonetheless, the point is that the authority in charge of issuing these types of bills is the Federal Reserve, and not the US Treasury.
However, the US Treasury is responsible for issuing another type of money. Take a look at this quarter:
Do you see the words “federal reserve” anywhere on this coin? As a matter of fact, it doesn’t appear anywhere. That is because coins are issued, not by the Federal Reserve (which is a private bank), but rather by the US Treasury.
So, already you can see that there are some cracks in this scheme – namely, how are the values of the coins and the bills coordinated? The fact is, there is no coordination. Each has the value assigned to it simply because the government printed the value on it. In fact, one economist once suggested that the US government solve its debt problem by simply minting a coin that it declares is worth $1 trillion dollars.
Now, a problem arises if the declared value of the coin is less than its intrinsic worth. For instance, the metal in a nickel is currently worth 6 cents. So, if you were to take all of your change as nickels, then melt them down, and then sell the result, you would profit 20%. For this reason, the government forbids doing this, or even moving these coins offshore in large amounts.
Hopefully you are starting to see the picture – our money supply has a lot of different sources and intrinsic values. The only thing linking them together is the declaration of the US government.
So was it always like this? Nope, not at all. It used to be that the Federal Reserve and the treasury used the same money. It was standardized on silver. A “dollar” was not a bill, but an amount of silver, hence the term “silver dollar”. Modern Federal Reserve notes today just say “one dollar” or “five dollars” or whatever, but older Federal Reserve notes say, “will pay to the bearer upon demand five dollars”. Look at the bottom here:
In other words, the reason why these notes were the same value as silver dollars is because they were measured in terms of silver dollars. In other words, it wasn’t the government that provided the value for the currency, it was the intrinsic value of silver which did – even in the paper money. The treasury also issued similar bills, which were actually labelled as “Silver Certificates” instead of “Federal Reserve note”. The only difference between the two was who was responsible for giving you the silver.
So what did these silver dollars look like? Silver dollars have been produced several times in the US, with the most well-known being the Morgan silver dollar:
So, historically, a dollar has mean “an ounce of silver”. Since leaving the precious metals standard, however, the value of the dollar has become disconnected from the value of silver. How much does an ounce of silver cost today? Answer – between $20 and $30. That’s what has become of our paper money – it is now worth 1/20 of what it used to be worth.
So, as you can see, our money has many sources, and they aren’t all equally-valued. Wouldn’t it be nice if some part of the monetary system still originated with gold and silver? Well, as a matter of fact, it does. The US Treasury, in addition to minting coins made of various base metals like copper and nickel, also continue to mint coins made out of silver and gold! And, in fact, they have a dollar amount marked right on them! These are called “American Eagles”, usually “Eagles” for short. Here is a silver, 1-ounce Eagle coin:
What does that say on the back? It says “one dollar”! That’s right – the US Treasury actually mints silver coins denominated in dollars! Likewise for gold, the gold eagles have “50 dollars” printed on the one-ounce coins.
In other words, while most US dollars are not backed by gold and silver, there are a number of coins that the US Treasury mints and affixes a value to which are denominated in dollars. These coins are never in circulation, because their investment value far outweighs their purchasing power. If I used a silver eagle, I would have to pay $25 to get the eagle, but it would only buy me $1 worth of goods at the local market.
So, there is the answer to the riddle – silver and gold eagles are the part of the monetary system which is still based on precious metals. It is obvious when you think about it, but few people ever think about silver dollars as real money, but only as investments.
In the next part of the series, we will look to see if there is any way to make use of this fact to restore our country’s economy.