January 15, 2004

Federal Reserve Bank of Cleveland

The Trime by Michael F. Bryan

In 1851, under severe competitive In 1845, Congress cut postage rates by pressure, the U.S. postal service lowered more than half, to 5 cents for a one-page You might not have heard of the the postage on a one-page letter from letter delivered within 500 miles. But by trime, the tiny 3-cent silver coin 5 cents to 3 cents. The act changed the the late 1840s, private express compa- character of American money. nies were delivering mail between major minted in the United States from cities for 2 cents a letter, and the compe- 1851 to 1873, but it may have played This Commentary tells how a conflu- tition from the private carriers pressured a big role in shaping the kind of ence of two events, the expansion of government postage rates even lower. In money you carry around in your steam-powered transportation and the 1851, Congress reduced the postage rate wallet today. California gold rush, created a problem to 3 cents a letter. of “monetary indivisibility” for the U.S. post office, the solution to which was the The drop in postage to 3 cents created a coin in the same act. The coin, called the minting of a 3-cent silver coin, the trime. monetary problem. Gold coins were only trime, had a metallic value worth only 1/ Besides being the smallest of all U.S. produced in denominations of $1 and about 2 2 cents, but was legal tender for coins, the trime had another distinction: above because smaller denominations sums up to 30 cents, making it our first It was the first legal tender with a face would require coins so small that they money with a content in precious metal value greater than the market value of would be impractical in trade. Silver worth less than its legal value in trade the metal it was minted from. The trime coins, which were relatively awkward for (sometimes called a “subsidiary coin.”) was America’s first step toward separat- denominations of more than one dollar The trime was 20 percent smaller than ing its money from precious metals and because they would have been too heavy our modern dime, and only about one- the eventual creation of our “fiat” to be conveniently carried, were only third of its weight (figure 1). While the money—a money that is not backed by produced in denominations of $1, $0.50, British were on a gold standard and had or convertible into any commodity. That $0.25, $0.10, and $0.05. While copper been using subsidiary silver coins for is, a money with no intrinsic worth. cents and half cents were minted, the cir- small change for nearly 40 years, the culation of the coins was mostly limited trime was a decided break from the ■ Railroads, Postage Stamps, to the major eastern cities and, even there, American experience. and Indivisible Money they were unpopular with the public.2 Why did Congress choose to reduce the In the early to mid-nineteenth century, Because the nation had no widely circu- silver content of the 3-cent coin? The the U.S. postal service, the largest U.S. lating money in a denomination less than answer to this question begins on Janu- commercial enterprise of the era, had a 5 cents, many people would have been ary 24, 1848, when James Marshall, who virtual monopoly on mail delivery forced to buy the new 3-cent stamps in was building a saw mill for John Sutter between major cities, the large profits bundles of five or ten. from which it doled out in political on the American River near Sacramento, patronage.1 But the postal service’s The problem confronting the United California, found a few tiny gold stranglehold on mail delivery began to States with the drop in postage is nuggets. The discovery began the great- loosen with the great expansion of cheap referred to as “monetary indivisibility,” est migration of people in U.S. history, rail and steamship transportation. and it is a common shortcoming of mon- as a half-million people descended upon Between 1840 and 1850, track in opera- etary systems in which the value of the California. The gold rush was on. money is tied to a particular good (a tion more than doubled to 6,000 miles, ■ California Gold, Gresham’s and the cost of shipping by rail fell “commodity” money). The problem Law, and Indivisible Money nearly 40 percent. As travel became occurs when the smallest denomination Between 1849 and 1853, the amount of more routine, large volumes of mail of money is too large for people to trade gold coming out of California was stag- began being carried by ordinary travel- effectively. gering. People of all walks of life left ers and “express companies,” which their jobs and their families and headed to delivered pouches and boxes of mail To solve the monetary indivisibility cre- California in search of fortune. The between cities. The postal monopoly ated by the new 3-cent stamp, Congress expansion of gold in circulation was was crumbling. authorized the minting of a 3-cent silver ISSN 0428-1276 spectacular. Over this four-year period, So in reducing the silver value of the A customer who offered a gold dollar 1/ the U.S. Mint coined four times more trime to approximately 2 2 cents, Con- in payment for a small article would gold than it had produced in total since its gress effectively eliminated any incen- receive in exchange perhaps ten or founding in 1792. But of course, with the tive for the public to export its silver. But fifteen 3-cent pieces and a half-dozen flood of gold came a decline in its value, in doing so, Congress also crossed into almost unrecognizable reals and and this drop in gold prices created some- rather uncharted and controversial mone- medios. A Philadelphia paper refers thing of a monetary crisis for the nation. tary ground by authorizing a legal tender derisively to shopkeepers scooping up At the time, the United States had a that had value based on their say-so and 3-cent pieces with a ladle to make bimetallic commodity money standard; a not on its metal content. change for a $5 bank-note.7 dollar was defined in terms of a specific Retailers were paying large premiums Even though its small size made it quantity of silver (371.25 grains) or gold on silver coins, and some, including the awkward to use in exchange, the trime (23.2 grains)—a fixed ratio of 16-to-1. post office, began to require exact enjoyed a rather wide circulation Because the value of gold was falling, the change transactions. Some merchants between 1851 and 1853; almost 25 mil- “dollar” cost of things was rising, what offered tokens exchangeable for goods lion of the coins were minted—more economists today might call “inflation.” and small private notes, mockingly than three times the number of all the called “shinplasters” by the public, and But there was another, even greater mon- other silver coins combined. Yet despite these were also flooding the market. On etary problem created by the gold rush. its relatively large production numbers, February 21, 1853, Congress settled on The falling market value of gold relative the trime was incapable of carrying the a solution to the coin shortage. They to silver meant, alternatively, that the coinage load that was being placed on it. decided to make all silver coins denomi- market value of silver was rising relative All silver coins were disappearing from nated in values less than a dollar sub- to gold. In other words, it would cost the circulation as the price of gold fell. In sidiary coins, just as they had with the mint more than 3 cents to purchase the 1850 and 1851, the United States trime. The silver content of all coins silver required to produce the trime at the exported $25 million more in silver than under a dollar was reduced 7 percent, fixed 16-to-1 ratio of silver to gold. it imported, an amount that exceeded the but they retained the same face values nation’s total silver coinage of the pre- and would be legal tender for amounts The market values of gold and silver ceding 20 years.5 The “bad” gold money up to 5 dollars. (Figure 2 shows the were often out of alignment with their was driving the “good” silver money value of the silver used in these coins official (or “face”) values, and when this from the economy, and monetary indi- relative to the prevailing gold-to-silver occurred, coins containing the more pre- visibility was getting worse. cious of the two metals would either price ratio.) trade at a premium (that is, trade above Monetary indivisibility is a consequence Those who favored keeping the dollar on their face value) or disappear from of the operation of Gresham’s Law that a bimetallic standard were at a loss on circulation altogether as a result of is not commonly appreciated.6 Since how to maintain the two metals and still hoarding or export.3 An “undervalued” gold coins were of relatively large deal with the coin shortage. Some in (good) money driven from circulation by denomination and silver coins were of Congress hoped to eventually provide for an “overvalued” (bad) money is called small denomination, the exit of silver two circulating metals by adjusting the Gresham’s Law. It was a major short- from circulation introduced a shortage of official gold-to-silver price ratio down- coming of America’s bimetallic mone- small change. Other than the trime and ward from 16-to-1 after the value of the tary system. the slighted cent, the smallest denomina- two metals resumed “a reasonable degree tion of U.S. money minted in any signifi- of stability.” Since the act left the silver In figure 2, I show the market value of cant amount in the first few years of the content in the silver dollar the same, gold relative to silver in the United 1850s was the $1 gold piece, roughly the many in Congress may have believed States between 1843 and 1863. I esti- equivalent to the average worker’s daily they were maintaining the bimetallic mate that the “export threshold” of wage. In today’s wages, that sum trans- standard for the dollar. But clearly, there silver was about 1 percent of the 16-to-1 lates to a little more than $100. Imagine were some, including House Ways and ratio, which covers the cost of culling, trying to buy things when the smallest 4 Means chairman C. L. Dunham, whose brokerage, and transportation. Below coin in your pocket is $100 and you have intent was to move the country away this level, the market value of silver is little prospect of receiving change in from bimetallism to a monometallic sufficiently more than its face value that return. The problem of monetary indivis- (gold) standard, similar to that used in it becomes profitable to export. ibility was no longer about mere postage Great Britain. stamps, it had become a pervasive prob- Almost coincident with the discovery lem in the retail marketplace. of gold in California, the value of gold We intend to do what the best writers on relative to silver fell below the export ■ The Subsidiary Coinage Act political economy have approved, what threshold, meaning that silver money of 1853 experience, where the experiment has was too valuable to circulate at its In 1851, retail trade heavily depended on been tried, has demonstrated to be the official 16-to-1 ratio with gold. Had the the trime and the cent, which despite its best, and what the Committee believe to government minted a 3-cent silver coin general disfavor in the public, began be necessary and proper, to make but with a silver content commensurate being minted in much larger quantities. one standard of currency and to make with the 16-to-1 ratio, these coins would The only other coins that circulated with all others subservient to it. We mean to likely have been exported or hoarded. 8 a face value under a dollar were “a mot- make gold the standard coin… Very few of them would have purchased ley collection of underweight coins,” Even those who voted in favor of the stamps at the post office. including “badly worn” Spanish “bits.” measure may not have fully appreciated FIGURE 1 THE 1851 TRIME the alchemists down to the present Today, the U.S. dollar, like the money time, none can compare with that of virtually every other nation, is on a solved by this modern Congress. They “fiat” standard, which means that it is alone have discovered that they can not backed by or convertible into any make money—that they can make commodity.10 Its value is determined $107 out of $100.9 only by a merchant’s willingness to In 1853, almost 62 million subsidiary accept it in trade. The record of these coins were minted, and before the year’s monies in being able to maintain their end, there were enough small coins in purchasing power has been mixed. circulation to satisfy the demands of Most nations experienced a turbulent commerce. The coins traded at their face period of recurring inflation in the values, and the monetary crisis was over. 1970s and 1980s as their central banks allowed the expansion of their monies ■ On the Road to Fiat to greatly exceed demand for them. Over time, the goal of the gold-standard Today, most nations are providing front advocates was realized. Less than a greater stability to the purchasing back decade after the creation of subsidiary power of their money. Some nations (actual size) coinage, the U.S. Civil War brought a have gone so far as to require their cen- shortage of all metals, including copper tral banks to achieve specific inflation and gold. Shinplasters again flooded targets, while others have joined mone- retail markets. The federal government tary unions, and some have even FIGURE 2 U.S. COIN SHORTAGE accepted postage stamps as money for adopted a more stable foreign money OF THE EARLY 1850s values up to $5 (1862), issued paper as their own (an arrangement called notes in fractional amounts (1863), and “dollarization.”) Ratio of gold price to silver price 16.5 suspended the convertibility of large- denomination notes for gold (1862). In 1977 and 1978, Congress made price After the Civil War, the Coinage Act of stability a long-run objective of the Legal tender exchange rate Federal Reserve, so even though the 16.0 1873 omitted the silver dollar from its list of coins, and when the convertibility of country no longer ties its money to a Export threshold large notes for metal was resumed in precious metal, the central bank is 15.5 1879, convertibility was in gold only. The expected to limit the expansion of our Market value of dollar was officially on a gold standard. money to match the trade needs of the gold relative to silver nation. In this way, the Federal Reserve 15.0 But the “absurdity” described by anchors a dollar’s value to its ability to Commodity value of Andrew Johnson, that the government purchase the broad array of goods and subsidiary silver coins could simply decree a value for its services consumed in the United States. relative to gold (1853) 14.5 money that was disconnected from its And the first step toward the fiat stan- Shortage of silver metallic worth, would also eventually dard on which our money now rests coins (1850–1853) come true. In 1933, during the financial may have begun 153 years ago, when 14.0 crisis brought about by the national the federal government was forced to 18431845 1847 1849 1851 1853 1855 1857 1859 1861 1863 depression, and faced with huge foreign reduce the price of a postage stamp to SOURCE: Carothers (1930) and author’s calculations. outflows of gold, President Roosevelt 3 cents. nationalized the monetary gold owned ■ by U.S. citizens and abrogated contracts Recommended Reading that specified payment in gold. Only Neil Carothers, 1930, Fractional the significance of creating subsidiary foreign central banks could convert dol- Money, London: John Wiley and Sons. coinage. Some, including Andrew John- lars into gold. son, wondered scornfully how the gov- A. Barton Hepburn, 1924, A History of ernment, by a simple decree, could Between 1946 and 1971, much of the Currency in the United States, New cause the value of small coins to be world operated under the so-called Bret- York: Macmillan. 7 percent more than their value in silver. ton Woods system, which pegged for- David A. Martin, 1973, “1853: The End eign currencies to the dollar, while the of Bimetallism in the United States,” I look upon this bill as the merest United States promised to redeem cen- Journal of Economic History 33. quackery—the veriest charlatanism— tral banks’ holdings of dollars for gold so far as the currency of the country is at a fixed price of $35 per ounce. But Kelly B. Olds, 2002, “The Challenge to concerned. The idea of Congress fix- persistent balance-of-payments deficits the U.S. Postal Monopoly, 1839–1851,” ing the value of the currency is an during the 1960s once again drained Cato Journal 15. absurdity, notwithstanding the lan- U.S. gold reserves and on August 15, guage of the Constitution—not the 1971, President Nixon announced that Arthur J. Rolnick and Warren E. Weber, meaning of it… If we can, by law, the United States would no longer 1986, “Gresham’s Law or Gresham’s make $107 out of $100, we can, by the redeem dollars held by foreign central Fallacy?” Journal of Political Economy same process, make it worth $150. banks for gold. This act severed the last 94. Why, Sir, of all the problems that have thread connecting the value of the dollar come up for solution, from the time of to a precious metal. Thomas J. Sargent and François R. 6. The problem of bimetallic coinage is Velde, 2002, The Big Problem of Small described in great detail by Sargent and Michael F. Bryan is a vice president and Change, Princeton, N.J.: Princeton Velde (2002). University Press. economist at the Federal Reserve Bank of 7. Carothers (1930, pp. 110–11). Cleveland. The author would like to thank ■ Footnotes Spanish reals (silver dollars), also known Linsey Molloy for research assistance, and 1. See Olds (2002). as “pieces of eight” were commonly David Bowers, Steve Cecchetti, François divided into eight pie-shaped “bits,” each Velde, and Warren Weber for their com- 1 2. Why these copper pieces were so with a value of 12 /2 cents. A small Span- ments on an earlier draft. disliked is unclear, but the coins had ish coin called the “medio,” valued at 1 many perceived shortcomings. Cents 6 /4 cents, was also in wide circulation in The views expressed here are those of the and half-cents had an uncertain legal- the United States in the mid-nineteenth author and not necessarily those of the Federal tender status, they were very heavy for century. Reserve Bank of Cleveland, the Board of their value, and they were prone to dis- Governors of the Federal Reserve System, or coloration. The cent was formally made 8. Hepburn (1924, p. 64). its staff. legal tender (for sums up to 10 cents) in 1864. 9. Hepburn (1924, p. 65). Economic Commentary is published by the Research Department of the Federal Reserve 3. Rolnick and Weber (1986) describe 10. There is some disagreement among Bank of Cleveland. To receive copies or to be the conditions when an “undervalued” economists over the precise meaning of placed on the mailing list, e-mail your request commodity money will circulate at a fiat money, and a comparison of two to [email protected] or fax it to premium, and when it will disappear textbooks on money and banking is 216-579-3050. Economic Commentary is also from circulation. unlikely to yield the same definition. available at the Cleveland Fed’s site on the Alternative definitions include a money World Wide Web: www.clevelandfed.org/ 4. See Martin (1973, p. 830). that is produced and circulates at no cost, research. while another popular description is that 5. See Carothers (1930, p. 108). it is a money created by order of the We invite comments, questions, and sugges- government. tions. E-mail us at [email protected].

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