The Coinage Act of 1792 (P.L. 2–16, 1 Stat. 246) was Congress's first use of its constitutional power regarding coinage and money. Congress faced four major problems. First, there was no common system of monetary accounting in the new nation. Each state, as a colony, had created its own unit of account, based on the British system of pounds, shillings, and pence, that it continued to use—doubly unacceptable to the newly constituted nation.
Second, the medium of exchange (money used in transactions) was the Spanish dollar, a silver coin. The difference between the unit of account and medium of exchange was tremendously inconvenient. Third, a variety of other coins—both gold and silver—circulated. So the monetary relationship of gold to silver needed to be established. Fourth, these coins were all foreign: A domestically-produced coinage would be a hallmark of independence.
The provisions of the Coinage Act were based on a report prepared by Alexander Hamilton, secretary of the treasury. Hamilton suggested coinage that implicitly adopted a decimal system of account: the dollar, "tenth part" of the dollar, and "hundredth part" of the dollar. The Coinage Act provided that "the money of account of the United States shall be expressed in dollars or units, dismes or tenths, cents or hundredths, and milles or thousandths." Concretely, "all accounts in the public offices and all proceedings in the courts of the United States shall be kept and had in conformity to this regulation." Thus a decimal monetary system was created—the first in history for any country! The private sector followed the official shift to a decimal system of accounting within a decade.
Hamilton advocated a bimetallic standard, using both gold and silver coins. He observed that merchants valued the Spanish dollar at 24.75 grains of pure gold (a grain is 1/437.5th of the customary ounce), and he measured the average amount of silver in the Spanish dollar as approximately 371.25 grains. Following common practice in other countries, he suggested fineness of 11/12th for the coins, meaning alloy of 1/12th. The gross weight of the gold dollar would be 27 grains, and the silver dollar 405 grains. Hamilton recommended minting a $10 gold piece, called the "eagle" in the Coinage Act. The act also authorized coinage of half-eagles and quartereagles, as well as silver half-dollars and quarter-dollars. Hamilton's plan involved coinage of a gold dollar—wisely rejected by Congress, as this coin would have been very small.
The most ill-advised deviation of Congress from Hamilton's report was to legislate a gross weight of 416 grains for the silver dollar, implying a fineness of 1485/1664th (slightly less than 11/12th). The cumbersome fineness arose because the amount of pure silver in the Spanish dollar had been reduced below its legal standard of 11/12th, but the U.S. dollar was to be based on that coin. Hamilton's solution was a smaller coin; Congress opted for a lower fineness. The clumsy fineness led to technical problems at the mint and required correction in subsequent legislation.
The ratio of pure silver to pure gold (by weight) in the dollar was 15 to 1, recommended by Hamilton because this legal gold/silver price ratio was consistent with the relative market valuation of the two metals at the time.
Although the bimetallic standard worked initially, it lost effectiveness when the market ratio differed from the legal ratio. Later legislation addressed this problem.
Consistent with bimetallism, Congress authorized "free coinage" of both gold and silver, meaning that anyone could bring either gold or silver bullion to the mint to be coined.
Much later, free coinage of silver became a troublesome political issue. Also, all gold and silver coins were made full legal tender, meaning they had to be accepted in payment of a monetary obligation in any amount. The problem with this provision was that fractional coins (below a dollar) could all be lost should bimetallism be thwarted by a changed market ratio. Further Congressional action was needed to remedy this problem.
Finally, while the Coinage Act of 1792 established a U.S. mint, only foreign coins were circulating in the country. Hamilton recommended that foreign coins be permitted to circulate for just a three-year period. However, a number of subsequent Congressional acts continued the legal-tender status of foreign coins long beyond Hamilton's suggested period. Only with the Act of 1857 was the legal tender of foreign coins finally terminated.
Bibliography
Carothers, Neil. Fractional Money. New York: John Wiley, 1930.
Nussbaum, Arthur. Money in the Law: National and International. Brooklyn, NY: Foundation Press, 1950.
Nussbaum, Arthur. A History of the Dollar. New York: Columbia University Press, 1957.
Officer, Lawrence H. Between the Dollar-Sterling Gold Points. Cambridge, MA: Cambridge University Press, 1996.
