In 1844 Lysander Spooner, noted pamphleteer, asserted that the power of Congress "to coin money" did not override any natural right on the part of individuals to issue and use their own money. Said Spooner, "Provided individuals do not 'counterfeit' or 'imitate' 'the securities or current coin of the United States,' they have a perfect right, and Congress has no power to prohibit them, to weigh and assay pieces of gold and silver, mark upon them their weight and fineness, and sell them for whatever they will bring in competition with the coin of the United States" (The Unconstitutionality of the Laws of Congress Prohibiting Private Mails, 1844, p. 18). Article I, Section 8 of the Constitution provides that "The Congress shall have the power…To coin Money, regulate the value thereof, and of foreign Coin.…" Section X of the same Article provides that "No State shall…coin Money.…" Since Amendment X reserves to the states (except where an express prohibition exists) or to the people "the powers not delegated to the United States by the Constitution," it is clear that individuals are not enjoined from manufacturing their own coinage.
The numismatic history of the United States during the 19th century demonstrates that private coinage did in fact exist for a number of years in different locales. As early as 1840 the Director of the Mint, in his report to Congress, referred to one C. Bechtler who operated a private mint in Rutherfordton, North Carolina in competition with the U.S. mint at Charlotte. The Mint Director could take no legal action against Bechtler for he observed: "It seems strange that the privilege of coinage should be carefully confined by law to the General Government, while that of coining gold and silver, though withheld from the States, is freely permitted to individuals, with the single restriction that they must not imitate the coinage established by law" (E.H. Adams, Private Gold Coinage of California, 1849-1855, 1975, p. xi).
The tradition of private coinage which existed until at least the end of the 19th century has all but died out in the 20th. Yet the tradition itself is interesting, as it is unique in the history of our country. Private issues of gold coins and ingots were the dominant media of exchange in California until at least 1855. The almost complete absence of paper money, coupled with the traditional use of gold coin, led to rejection of the Federal greenbacks in that state during the Civil War. To relate the history of money in California and its significance for us today, in view of the recent legalization of gold ownership, are the objectives of this article.
The history of American California, encompassing as it does the development of an almost primitive society into a civilized state, is interesting in its own right. American settlement began in California as early as 1841, and by 1846 there was extreme agitation for making California an American territory. U.S. forces occupied California during the Mexican War, and in 1848 Mexico ceded all of its claims to California to the United States. Gold was discovered in January 1848 and the Gold Rush, as we know it, began in the fall of that year. Military government lasted until October 1849, at which time a state convention created a constitution and made a formal request for admission to the Union. Meanwhile government on all levels barely existed: there was no formal law, there were no jails, immigration to the gold fields progressed unimpeded, and the military strength of the Federal government was relatively weak. Finally, in September 1850, California was accepted as a state and the struggle began to establish formal government. Communication with the East was difficult until the telegraph reached the state in 1861, and transportation remained a problem even after direct rail connection was made with the East in 1869.
The requirements of the early mercantile community in California, especially of San Francisco businesses, led directly to many of the events in which we are interested. According to Federal law in effect in 1849, all custom duties due the United States were payable in lawful United States coin. Accordingly, every piece of coined money which existed in California was hoarded to pay import duties and the normal channels of trade suffered from a shortage of coined money. At first gold dust was used as a substitute for coined money, but the military governor discovered that the law regarding duties could only be satisfied by a tender of coins, whether gold or silver. Thus gold coins eventually came to command a premium over gold dust since they were desperately needed at the Custom House. Since the supply of coins was so limited, it was suggested by members of the mercantile community that private assayers issue gold pieces to fill the need. The first suggestion to this effect appeared in July 1848, and by early 1849 private issues were struck. The private issues enabled the miners to get more coined money for their gold dust and allowed a greater number of coins to circulate in general trade.
COMPETITION IN COINAGE
The first private gold coin was probably issued by the firm of Norris, Gregg, & Norris and was followed, during the summer of 1849, by strikes from the assay and gold brokerage business of Moffat & Co. At first gold dust was assayed and formed into rectangular ingots with the firm's name, the fineness (in carats) and the dollar value appearing on the bar. Shortly thereafter a $10 gold piece, struck as a circular coin, was issued by Moffat & Co. By the end of 1849, a virtual avalanche of private issues had found circulation in California, including minting work done by the Mormons in Salt Lake City, by J.S. Ormsby & Co., and the Miners' Bank.
The coins with which the early Californians had to do business soon fell into disrepute, as it was discovered that their intrinsic value did not always match their stamped value. The Mormon coins, which only contained $17 worth of gold in a $20 piece, soon ceased to circulate, as did many of the other private coins. The holders of such pieces had to sell their coins at bullion value and pocket the loss. Moffat & Co., whose pieces were always worth at least 98 percent of their stamped value, continued to issue coins in 1850, at which time there also appeared new issues by Baldwin & Co., Dubosq & Co., and by Frederick Kohler, the newly appointed state assayer.
By April 1850 the coin situation had come to the attention of the state legislature and during the same month laws were passed which prohibited private mints. Simultaneously, to fill the demand for coined money, the California legislature created the State Assay Office, which was responsible for assaying gold dust, forming it into bars, and stamping its value and fineness thereon. The State Assay Office is unique because it was the only establishment of its kind ever operated in the United States under the authority of a state government, and because its issues were so closely allied to that of gold coinage it is questionable that it did not violate the constitutional clause against state coinage. The State Assay Office was soon superceded by the U.S. Assay Office, which was established by Federal statute on September 30, 1850. Moffat & Co. became the contractor for the U.S. Assay Office and began operations in this capacity in February 1851. A month later the state prohibition on private coinage was repealed, since well over a million dollars' worth of gold had been privately coined in the first quarter of 1851 alone, so great was the demand for bars and coin.
Although Moffat & Co. became associated with the U.S. government as its assay contractor, they always recognized the right of private persons or firms to issue their own gold coins. In responding to criticisms leveled directly at them during the passage of the state prohibition on private issues they stated: "We aver that we have violated no law of the United States in regard to coining (our own) money; that we have defrauded no man of one cent by issuing our coin; that we have in no instance refused or failed to redeem in current coin of the United States all such issues without detention or delay, and we hold ourselves ready now and at all times hereafter to do so.…We hold ourselves responsible for the accuracy of our stamp, whether it be upon bullion or in the forms of ingots or coin. If there be error the party aggrieved has his remedy at common law" (Adams, pp. xi-xii).
Moffat & Co. was apparently the most responsible of the private concerns minting money, for in April 1851, the businesses of San Francisco placed an embargo on all private gold coinage except issues by Moffat. The remainder of the private issues were soon sent to the U.S. Assay Office to be melted down or else were passed only for their bullion content in trade. Under the directive establishing the U.S. Assay Office, slugs of not less than $50 were to be issued. Such ingots were too large for normal trade and soon a demand grew for coins of smaller denominations. Moffat & Co., as contractor for the U.S. Assay Office, requested authority to issue such coins. Since this authority was not forthcoming, in the end Moffat & Co. bowed to the demands of the merchants and minted such coins under their own authority and mark.
The situation worsened in 1852, when the U.S. Customs House refused to accept the $50 ingots issued by the U.S. Assay Office. Although these slugs were issued under the direct authority of the Federal government, their fineness was only that of average California gold, perhaps 884/ to 887/1000 fine. A new federal law required that all custom duties be paid in gold coinage of the fineness of standard U.S. coins, which was 900/1000 fine. Therefore the Treasury Department instructed its agents not to accept the issues of its own Assay Office, until these issues met the required fineness. The Washington authorities did not seem to recognize the ridiculousness of their decision, which not only disparaged their own issues, but practically denied the merchants any circulating medium at all. Eventually the controversy was settled by having the Assay Office conform to the higher fineness.
The Federal mint, which had long been agitated for in California, went into partial operation in April 1854. Within a few years it satisfied all the demand for coins. Until it went into full-scale operation, however, the demand for circulating coins was met by the issues of such private concerns as Kellogg & Richter, Kellogg & Humbert, and Wass, Molitor & Co. At the end of 1855 it was estimated that there was still some five to eight million dollars' worth of private coin in circulation. In the summer of 1856 coin was needed in San Francisco for export purposes, and both the issues of the U.S. mint and private coins were used to meet this need. By October 1856 the Federal mint was apparently able to meet all demands for coins in domestic circulation and for export, so that private issues of gold coin quietly passed out of existence. There is no record of any further private minting in California after this time.
CALIFORNIA'S ANTI-PAPER TRADITION
Although paper money found circulation in the East, at no time before the Civil War did banknotes play a substantial part in the circulating media of California. Between the cessation of private issues and the outbreak of the Civil War, the Federal mint in San Francisco continued to satisfy all demands for coins. This tradition of handling gold and silver coinage in California was buttressed by the provision of the state constitution which expressly prohibited the creation of any (paper) credit instruments designed to circulate as money.
The metallic coinage of the Californians had provided them with a remarkable prosperity and stable purchasing power. Therefore, when as a result of the Civil War the Federal government issued legal tender notes in 1862, Californians were faced with the prospect of handling paper money for the first time. Acceptance and use of these new "greenbacks" (which had no gold backing, only the general credit of the government behind them) became a subject of public debate in California. Objections to the new currency concerned its constitutionality and the likelihood of its depreciation in terms of purchasing power.
Creditors were particularly fearful that their interests would be hurt as it would be possible for debtors to repay their loans in depreciated currency. At first this is exactly what happened, as can be seen from the grievance of a Sacramento financier:
About four years ago (1859) I loaned $10,000 in gold coin of the United States to John Smith of Sacramento City, for which said Smith executed to me a note, in the usual form, bearing interest at the rate of one and one-half per cent per month. This note I placed in the hands of my bankers, D.O. Mills & Co., Sacramento, with instructions to receive and receipt for the interest as it accrued thereon, and also to collect the principal at maturity. In January last (1863), Mr. Smith called at the banking house…and tendered $10,000 in greenbacks in payment in full of the note executed to me, knowing that the said notes were not at that time worth more than 68¢ on the dollar.…(My bankers) refused to receive the tendered greenbacks without consultation with me, and, moreover denounced the conduct of Mr. Smith as unfair in the extreme, at the same time reminding him of the fact that he had received the whole amount in gold coin. After a conference more protracted than pleasant, Mr. Smith offered to pay $10,000 in greenbacks and $1,000 in gold coin, which proposition, rather than be a party to a tedious and expensive lawsuit, I assented to.…As it is, I am loser to the amount of $2,200, allowing 68¢ on the dollar for greenbacks; and at the rate they are now selling—and I still have them on hand—my loss is about $3,500 (B. Moses, The Quarterly Journal of Economics, Oct. 1892, p. 1).
However, there were those who favored introduction of the legal tender notes in California. Loyalty and patriotism to the Union were advanced as the chief reasons. Some thought that a refusal by the people of California to use the currency of the Federal government would be tantamount to secession. Others felt that the greenbacks would act as a stimulus to business, and hoped to profit from the speculation inherent in their use.
GREENBACKS IN SAN FRANCISCO
Since the Federal notes continued to lose purchasing power, the commercial elements in San Francisco realized that a definite stand had to be taken on the use and acceptance of the greenbacks in local transactions. Businesses that had contracts with the Federal government were hard hit by the inflation, as they had expected to receive gold coin for their work and instead were paid in paper of a lesser value. Federal employees also found themselves at a serious disadvantage in receiving their wages and salaries in depreciated money, while their expenses were counted in gold. In November 1862 the merchants of San Francisco attempted to counter the use of greenbacks by effecting an agreement among themselves "not to receive or pay out legal tender at any but market value, gold being adhered to as the standard. The plan was to have this agreement signed by all the leading firms of the city; then to have it signed also by all other firms, both those in the city, and those in the country who had dealings with the city. If any one refused to enter the association, or having agreed to pay for goods in gold, paid for them in greenbacks at par instead, then his name should be entered in a black book, and the firms all over the State should be notified so that in all his subsequent dealings he would be obliged to pay for his goods in gold at the time of purchase" (Moses, p. 9).
As early as July 1862 questions raised by the circulation of the greenbacks had received attention in the courts. A case was brought before the Supreme Court of California during this month which sought "To compel the defendant, as tax collector of the city and county of San Francisco, to accept from the relator $270.45 in United States notes, tendered in payment of State and county taxes assessed upon his property for the present year.…" The tax collector had refused to accept the tender of paper money, claiming that his duty was to accept only "legal coin of the United States, or foreign coin at the value fixed for such coin by the laws of the United States." The court judged in favor of the tax collector and thus prohibited the payment of taxes in greenbacks.
At the same time the State Treasurer pulled off an ingenious financial coup by taking advantage of depreciation of the paper currency. The plan was to collect the Federal direct tax in coin and pay it into the U.S. Treasury in legal tender notes, saving the difference for the state. This "earned" the state the sum of $24,620, but the action was almost universally condemned. The moral attitude of the San Franciscans on paying their debts in depreciated money is well illustrated by the fact that the interest on the City's municipal bonds was paid in gold at New York, rather than in legal tender notes. To pay in depreciated notes was considered beneath the dignity of the city and a real violation of the faith pledged with the holders of the bonds abroad.
Although Californians could continue to own gold the very existence of the legal tender law created a general feeling of insecurity. The merchants of San Francisco were determined to remain on the gold standard and they were encouraged by the decision of the court in favor of the tax collector. In order to keep the business of the state on a gold basis, however, it became clear to the merchants that legislation must be had to enable the parties to a contract to enforce the collection of the kind of money which had been specified in the contract. They had at first attempted to agitate for exemption of California from the Federal legal tender law, but their resolution to this effect in the state legislature was postponed indefinitely. Later, resolutions were introduced in the legislature to obtain relief for those working for the Federal government by having them paid in gold coin. Nothing was gained by the discussion of these resolutions except to arouse the ire of advocates of the greenbacks.
GOLD VS. PAPER: CONTRACTS
These legislative maneuvers, even if they had been successful, would not have accomplished what was needed to keep the state on a specie basis. Slowly people realized that, where there were two different types of money in circulation, legislation was needed to make it possible to enforce contracts in either paper currency or metallic coinage, as provided for in the contract. Advocates of such legislation held that "contracts fairly made in view of all the circumstances ought to be enforced. If, then, contracts are made specifically to be performed by the payment of gold, it seems to us to be a duty on the part of the legislature to provide the remedy for their enforcement. Common honesty cannot refuse this."
The legislation which accomplished this objective was approved on April 27, 1863. By amending the procedures in civil cases, writs of execution or judgment on a contract or obligation for the direct payment of money in a specified kind of money or currency had to be fulfilled by the same kind of money or currency that was specified in the original contract or obligation. This came to be known as the Specific Performance Act or Specific Contract Law, since it voided the requirement of the Federal legal tender act and substituted the provisions of each contract for purposes of determining what kind of money was to satisfy a debt. In the discussion that led to the passage of this bill in the state legislature it was pointed out that there was no mention of gold or silver in the law itself. The law simply let freely contracting parties choose the means of payment between themselves. Formerly there had been no legal means to enforce payment of gold coin on a contract or debt, even though it had been specified as the means of payment. A man owing $100 in gold could pay it with $100 of legal tender notes, even if $100 in notes would only buy $50 in gold coin. Now a creditor could seek justice. Supporters of this legislation were not entirely antagonistic to the use of legal tender notes, but they saw no reason to compel acceptance of paper money at an artifically enforced value. The law did not discriminate between the two types of money, but it enabled the parties to make contracts understandingly and upon equal terms, regardless of whether they chose gold or paper as the means of payment.
Any opposition to the Specific Contract Law which may have existed was disarmed by a State Court decision of July 1864, which upheld the act as constitutional. It was ruled that the specific contract to pay in gold was more than a contract merely for the payment of money, but went to the extent of defining by what specific act the contract should be performed. The court noted that,
A contract payable in money generally is, undoubtedly, payable in any kind of money made by law legal tender, at the option of the debtor at time of payment. He contracts simply to pay so much money, and creates a debt pure and simple; and by paying what the law says is money his contract is performed. But, if he agrees to pay in gold coin, it is not an agreement to pay money simply, but to pay or deliver a specific kind of money, and nothing else; and the payment in any other is not a fulfillment of the contract according to its terms or the intentions of the parties (25 Cal. 564).
The Specific Performance Act was also held to apply to contracts made before its passage. In an action brought before the court to enforce gold payment of a note which had been executed before the passage of this legislation, it was held that "where laws confessedly retrospective have been declared void, it has been upon the ground that such laws were in conflict with some vested right, secured either by some constitutional guarantee or protected by the principles of universal justice." But this act "takes a contract as it finds it, and simply enforces a performance of it according to its terms," and is not changing the relations of the parties to the contract. The Specific Contract Law was also used to enforce payment under agreements "to pay a specific sum in gold coin or upon failure thereof, to pay such further sum as might be equal to the difference in value between gold coin and legal tender notes." As the San Francisco Chamber of Commerce noted in 1864, the Specific Contract Act "simply enforces the faithful performance of contracts. It enjoins good faith, a principle which lies at the very foundation of public prosperity, and without which there can be no mutual confidence, no progress, no credit and no trade…" (Moses, p. 24).
PRIVATE COINAGE OUTLAWED
Apparently the Federal government took little or no notice of the actions of the Californians during the Civil War. In fact the Specific Contract Law remains on the California statute books (as Section 667 of the Calif. Code of Civil Procedures) and has never been changed by California legislation. And it was not until 1933 that the federal government took any action to abrogate this state legislation (by outlawing gold clause contracts). However, as early as 1861 the Secretary of the Treasury realized that private coinage was a danger to the government's own prerogatives. Between 1860 and 1862 the firm of Clark, Gruber & Co. was engaged in the manufacture of their own coins from their mint in the city of Denver. Here again, the demand for a circulating medium was satisfied by private means before the government was able to act. The Clark, Gruber coins were of high quality and always either met or exceeded the gold bullion value of similar United States coins. In a period of less than two years this firm minted approximately three million dollars' worth of coin. Their mint promised to outdo the government's own production, and to get rid of them, the government bought them out in 1863 for $25,000.
Such private competition with the Federal mints led to an amendment of the coinage laws of the United States which prohibited private coinage. By an Act of Congress, on June 8, 1864, it was ruled:
That if any person or persons, except now authorized by law, shall hereafter make, or cause to be made, or shall utter or pass, or attempt to utter or pass, any coins of gold or silver, or other metals or alloys of metals, intended for the use and purpose of current money, whether in the resemblance of the coin of the United States or foreign countries, or of original design, every person so offending shall, on conviction thereof, be punished by fine not exceeding three thousand dollars, or by imprisonment for a term not exceeding five years, or both, at the discretion of the court, according to the aggravation of the offence.
It was not until after 1870, when Federal bank charters were granted to banks in California, that banknote circulation gained any real foothold in California. The entire history of California money up until that time supports the observation that "the more efficient money will drive from circulation the less efficient if the individuals who handle money are left free to act in their own interest." Thus in the early period the Moffat coinage, because it was consistently of higher quality, won out in the struggle among private issues. Since there was no legal tender law compelling people to use the coins of a particular company or mint, that money which best satisfied the people was most often used. Issues of questionable fineness were either rejected, or valued at bullion value and returned to the melting pot. Wherever the government failed to provide sufficient coined money private firms and private individuals soon filled the void, so long as they were not prevented from doing so by law.
The latter period under discussion, dated from the beginning of the Civil War, more closely resembles our own monetary situation today. The period was one of government inflation, caused generally by the budgetary strains of war. Issues of legal tender notes caused prices to rise, and between 1860 and 1864 prices doubled in the northern states. The rate of interest was appreciably affected in California due to the uncertainty of having debts paid off in greenbacks. Nevertheless, Californians avoided much of the government inflation by adhering to the gold standard and enacting the Specific Performance Act. Their main objection to the legal tender notes was to using them at an artificial value enforced by law. This realization defeated the purpose of the Federal government (or debtors who chose to cancel their debts with such notes) since their object was to obtain goods and services on a compulsory basis at an undervalued price. Since the power of the Federal government did not reach as strongly into California as into the North, people there were able to avoid the compulsory aspects of the tender law and value the government notes as they saw fit. (It is interesting to note that in San Francisco both paper and gold continued in use until 1914. With the outbreak of World War I the Federal Reserve Bank was desperate to put a stop to the handling of gold. By allowing the banks to pay only in $20 gold pieces when payment was demanded in gold, $5 and $10 pieces were gradually removed from circulation, and thus the effective base of gold handling was undercut.)
As Davis Keeler has pointed out in these pages ("Gold Clauses," REASON, Dec. 1974), the recent legalization of gold ownership cannot be the full solution to our monetary problems. Although Californians never lost the right to own or trade in gold, the Federal government had a stranglehold over the gold standard by creating the legal tender law. Business in California was stymied until the Specific Contract Law circumvented the legal tender law. Similarly, so long as the legal tender laws remain on the government's statute books today, all debts (regardless of the provision of the individual contract) must be satisfied by a tender of government paper. Even if contracts should be written which specify payment in gold coin, or gold bullion, or which are indexed according to a gold clause, our government still reserves the right to abrogate such contracts as being contrary to public policy. As this historical survey has made abundantly clear, what is required is not only the right to own gold or any other monetary metal, but also repeal of the legal tender laws and their replacement by the enforcement of all monetary obligations in terms of the specific performance doctrine.
Carl Watner is an independent libertarian scholar residing in Baltimore, Maryland. He has authored several articles, including "Lysander Spooner: Libertarian Pioneer," in REASON (March 1973).