In 1792, Congress passed the U.S. Coinage Act, which defined a dollar as a coin containing 371.25 grains of silver and 44.75 grains of alloy. Congress did not say a U.S. paper dollar was worth that amount of metal; it was that amount of metal. A dollar, then, was a unit of weight, like a gram, ounce or pound. Since the alloy portion of the coin was nearly worthless, a dollar was essentially defined as 371.25 grains — equal to 24.057 grams, or 0.7734 Troy oz. — of pure silver. (15.43 grains = 1 gram, and 480 grains = 1 Troy ounce.)
In a nutshell, a dollar was equal to a bit more than 3/4 of an ounce of silver; or, in reverse, an ounce of silver was equal to $1.293.
The same act declared that a new coin, called an Eagle, would consist of 247.5 grains of gold and 22.5 grains of alloy. It valued this coin by law at ten dollars, meaning 3712.5 grains of silver.
In other words, Congress, rather than allowing gold and silver to trade freely against each other, equated the value of a certain amount of gold to the value of a certain amount of silver. Briefly, it established an “official” value for gold so that 247.5 grains of gold = 3712.5 grains of silver. This is an exchange ratio of 15:1. A dollar was 0.7734 ounces of silver, and Congress was declaring that a dollar would buy 0.0515625 ounces of gold, so gold was valued at $19.39/oz.
This stupid attempt at creating an artificial parity drove gold coins out of circulation, because the market had determined that an ounce of gold was in fact worth more than 15 ounces of silver.
Still trying to establish a workable parity, Congress in 1834 passed another coinage act, changing the value of a ten-dollar gold piece from 247.5 to 232 grains of gold (plus 26 grains of alloy), thereby tweaking the gold/silver ratio closer to 16:1. Now gold was pegged at 23.2 grains per dollar, which is equal to 0.04833 ounces, so gold was now valued at $20.69 per ounce.
This was no fix, because after gold was discovered in California the market quickly valued silver higher than gold, thus driving silver out of circulation. Neither Congress nor, as we will soon see, the Fed, can repeal the laws of economics and succeed at forcing a particular value on anything.
The coinage act of 1837 tweaked the purity ratio of gold and silver U.S. coins, making it 90%. This change edged the gold content of an Eagle to 232.2 grains, meaning that one U.S. paper dollar would buy 23.22 grains of gold, so gold was now valued at $20.67per ounce. A dollar, however, was still 0.7734 oz. of pure silver.
The silver standard ended in 1873, when a new Coinage Act scrapped the definition of a dollar as a certain weight of silver and adopted a new standard based on the weight of gold, maintaining the formula of $1 = 1/20.67 ounce of gold. The Gold Standard Act of 1900 declared that gold would remain the only standard for valuing a dollar and confirmed that a dollar was 1/20.67 ounces of gold.
In 1913, Congress passed the Federal Reserve Act. This act gave a new banking corporation the monopoly power to issue dollar-denominated banknotes backed by bonds issued by the Treasury. In other words, it gave the Fed the power, in a roundabout way, to use government debt as backing to counterfeit dollars to benefit the government.
It was counterfeiting because the Fed issued its notes on dollars (gold) it never had, and it would never find itself obligated to liquidate its store of Treasury bonds.
The Fed’s counterfeiting diluted the supply of dollar-denominated debt, which naturally led to gold’s being worth more per dollar than the notes.
In January 1934, Congress passed the Gold Reserve Act, under which the government seized Americans’ gold, canceled all business contracts in gold, outlawed citizens’ possession of gold and reduced the amount of gold that would define a dollar.
President Roosevelt personally dreamed up a new value for the dollar, which he pronounced to be 1/35 of an ounce of gold, thus making the “price” of gold $35 per ounce. In one stroke, then, he stole 41% of the value of everyone’s dollars in a single moment, to the benefit of the government.
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