Coinage Act of 1965–90% Silver’s Legacy; Gresham’s Law
Prior to the Coinage Act of 1965 there had been several iterations of Coinage Acts since 1792 altering the amount of precious metals in U.S. coin currency, their fixed value, and what the U.S. Treasury would purchase or sell among other things. Leading up to the Coinage Act of 1965, silver demand had skyrocketed due primarily to industrial demand as new uses for silver in manufacturing were either discovered or expanded in their volume of production due to increasing demand. The silver price rise became so pronounced that the U.S. Treasury was exchanging silver at a fixed rate of Silver Certificates or Federal Reserve Notes at values that were less than the going market rate, draining the Treasury of its silver stock and effectively costing it money and enabling an arbitrage opportunity for speculators.
“Hoarding” of silver content coins had begun, primarily due to the silver price’s nominal legal tender value being lower than the market value, but the problem was blamed on a series of events including mismanagement of the demand differences across different regions by the U.S. Mint of the volume of coins needed to enable commerce. After an “extensive study by the Treasury”, where the decision had already been made and the study was done to justify it not truly study it, Lyndon B. Johnson asked Congress to eliminate the silver content from the dime and quarter going forward and to reduce the half-dollar silver content of 40% compared to the prior 90%. The silver dollar’s content would stay the same but they had no intentions of minting any given the current silver situation.
The opposition to the Act was primarily from western silver mining interests, who attempted to include provisions to ban the hoarding of silver coins or opposed the bill outright. The payoff to the mining industry to pass the bill was a guarantee from the Treasury to purchase any silver when presented to it by a mining company at a fixed $1.25 for five years. The final bill included a provision to allocate $30-$45 million dollars to expand existing mint facilities — it’s easier and cheaper to create currency when it’s not backed by anything of true value and they were about to finally free themselves of this hard money constraint.
Interestingly, the mint continued to strike 1964 silver quarters until 1966 when the then Secretary Fowler announced that the coin shortage was over. Silver held by the Treasury continued to fall as they attempted to maintain the fixed price with their solution being a two-tiered system for silver that refused sales deemed as speculative and focused on sales to U.S. industries and it evoked a right it gained under the Coinage Act to prohibit the melting or exporting of U.S. coins. While the silver price eventually subsided, the value of the 90% silver coins now not being produced continued to be “hoarded” (retained by folks smart enough to know it made sense to keep them instead of spend them as they are worth more) until they were effectively removed almost completely from circulation.
Analysis: To this day one may still find 90% silver in circulation but it has become increasingly rarer over the years as enough people are aware of the true silver value of these coins. Gresham’s law is summarized as “bad money drives out good” which is essentially saying that good money such as gold or silver end up being retained by people for its intrinsic current and future value while bad money such as fiat currency coins with next to worthless metal content is transacted in (spent for goods and services). People give up the less valuable and keep the truly valuable store of wealth. The effects of the Coinage Act of 1965 are one of the classic real-life manifestations of this theory today and demonstrate clearly what the public, when given a CHOICE, truly values and does not.
While this was not the final act in the Federal Reserve’s desire to not be tied to any type of hard money in their monetary policy and actions, it was one more step in the direction of fiat money dominance and reckless abandonment of responsible monetary policy by the Federal Reserve.
