July 23 marks the 50th anniversary of the Coinage Act of 1965, which stripped U.S. coins of silver and made legal tender out of base metal slugs. It’s an anniversary that comes at an apt time, as Congress considers monetary reform.
This discussion has been quietly taking place in recent months, in the Senate Banking and House Financial Services committees. Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, recently reintroduced a proposal for a Centennial Monetary Commission as the Federal Reserve starts its second century.
The anniversary of the 1965 Coinage Act is a reminder of why reform is needed. Speaking from the White House Rose Garden, President Lyndon B. Johnson called the law he signed a “very rare and historic occasion.” It certainly was; it superseded the coinage act drafted by Alexander Hamilton and passed by Congress in 1792.
The original coinage act established the United States Mint and declared the dollar as the “money of account” for the new republic. It defined the dollar as 3711/4 grains of silver or the equivalent in gold; the penalty for debasing coins struck under the law was death.
When LBJ signed the 1965 act, the value of a dollar was almost exactly the same as it had been in 1792—0.77 ounces of silver. Despite some downs and ups, on average it had been remarkably steady for the long span.
That was because since Hamilton’s day, as the president noted, “our coinage of dimes, and quarters, and half dollars, and dollars have contained 90% silver.” Not any more: The new dimes and quarters would “contain no silver.” Instead they would be “composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper.” The new half dollar would have 80% silver on the outside and 19% silver inside.
In the face of a “worldwide shortage of silver,” LBJ said, “the only really prudent course was to reduce our dependence upon silver for making our coins.” Then the president made claims that look, in light of history, laughable.
“Some have asked whether our silver coins will disappear.” He denied it; silver coins would “very definitely” not disappear or “even become rarities.”
The president estimated that the more than 12 billion silver dimes and quarters and half dollars in circulation would “be used side-by-side with our new coins.” He also warned against hoarding silver: “Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin.”
This was a vain boast. The value of the dollar started sinking after the 1965 coinage act, and by 1980 the dollar—so long valued at 0.77 ounces of silver—plunged to 0.02 ounces of silver. Today it is valued at 0.06 ounces of silver.
The pre-1965 silver coins have mostly disappeared from circulation. Misers who try to spend silver or gold coins they have hoarded are subject to a capital-gains tax. Monetary purists, incidentally, prefer to speak of “spending” gold and silver, rather than “selling” it, because gold and silver are the true constitutional money.
The U.S. Constitution prohibits states from coining money themselves or making anything but gold or silver coins legal tender. But taxing the value silver and gold coins retain has prompted several states to look at exempting gold and silver coins minted by the federal government from state capital-gains taxes. Utah passed such a law in 2012, removing its capital-gains taxes from federal coins of gold and silver. Yet even if such laws catch on, they would be more protest than an answer to the default on LBJ’s promises of 1965.
A more radical approach would be the Free Competition in Currency Act, originally the brainchild of Ron Paul, the former Texas congressman, and offered again in the last Congress by Rep. Paul Broun (R., Ga.). It adopts the idea of the late Nobel laureate Friedrich Hayek. This measure would end the legal tender laws, halt capital-gains taxation on gold and silver, and permit private coinage.
The bill never got out of committee, but Hamilton would have understood its importance. He created the first U.S. central bank and would have welcomed a centennial review of the Federal Reserve—and a review of the folly LBJ signed 50 years ago.