American Silver in Canadian Circulation
Posted on 10/1/2005
Collectors of United States coinage who have gone beyond the most basic guide books in their reading may have encountered references to our nation's silver coins being exported during the 1860s. As economic conditions changed, many of these coins returned, leading to a greatly reduced production of fractional silver beginning in 1878. This episode is described in Don Taxay's landmark book, The U.S. Mint and Coinage, and it is explained a bit further in Neil Carothers' study of Fractional Money. For the even more adventurous reader, there are a number of non-numismatic books in the field of economics which flesh out the story a bit from the perspective of the banking community. None of these books, however, provide an explanation of what happened to these coins while they were away from home. This, in itself, is quite a story and is the focus of this month's column.
America's Civil War of 1861-65, however tragic it may have been on a human level, was also an economic crisis. The sudden expansion of government expenditures upset the balance of payments between America and its trading partners, and most of the purchases exceeding our domestic production were expected to be paid for in gold. The resulting shortage of gold left Americans to make do with newly-issued paper currency. With most of this paper not immediately redeemable in specie (hard money), its value as measured in terms of gold and silver fell rapidly. Banks suspended specie payments of first gold, at the end of 1861, and then silver in the late spring of 1862. Except in the western states and territories, where paper money was shunned and, in California, even illegal, silver coins were not seen again in circulation until the mid-1870s. Gold did not achieve value parity with federal paper money until the end of 1878.
The greater part of the silver coinage circulating at the onset of the Civil War in 1861 consisted of pieces coined under the Act of February 21, 1853. This law had reduced the weight of fractional silver coins, and many millions of these coins had been struck over the next eight years to replace the earlier issues. Now worth more as bullion than their equivalent face value in paper money, it was inevitable that this mass of silver had to move someplace where their intrinsic value was an asset. While fairly large numbers of American silver coins, particularly half dollars, found their way to Latin America during the 1860s, by far the greater number went north to Canada.
Canadian banks had been making purchases of newly coined American silver for decades, often buying these pieces directly from the U.S. Mint. This practice was slowed when Canada received its own silver coinage in 1858, but American silver remained a familiar sight. Now that the USA was short of gold, and silver enjoyed very limited domestic circulation, purchases made by American businesses from Canadian sources typically were paid for in these fractional silver coins. Though Canadian banks were likely to accept deposits of such coins only at a slight discount below face value, it was still profitable to import American silver into Canada. These coins may have been worth too much to circulate in the USA, with its inflated paper money, but the international price of silver was actually declining at the time, providing plenty of room to allow for any such discounts on deposits.
By the time the war ended in 1865, Canada had become inundated with American silver coins. Banks were increasingly intolerant of such deposits, with the discounts at which they would receive them ranging from four to seven per cent of face value. Invariably, the coins refused or heavily discounted by banks were purchased by brokers who accepted them at somewhat lesser discounts. These individuals and companies profited mightily by paying out the American coins to laborers and merchants at full face value, the recipients not having sufficient leverage to refuse them. The cycle thus repeated itself, with only the brokers being satisfied. What had been for many years a minor irritant tolerated for the sake of convenience, was now a major political and economic issue in Canada.
Early in 1870, Canada acted to end this situation once and for all. It was to be a two-pronged attack. First, an order was placed with the Royal Mint in London for one million dollars in Canadian silver coins to supplant the foreign pieces, the first such issue since 1858 (this order was later reduced to just $600,000). The next step was to establish a redemption program for USA silver coins. It was announced that until April 15, 1870 Canada would exchange up to three million dollars worth of American silver at the discount rate of 5% for the first million, 5-1/2% for the second million and 6% for the final million received. After that date, American silver coins would be exchanged only up to a legal limit of ten dollars per transaction and at a much greater discount of 20%. The coins were to be redeemed in Canadian bank notes and government fractional notes.
As it turned out, there were even more USA silver coins circulating in Canada than estimated. The three million dollar limit was achieved well before the deadline, yet there appeared to be little diminishment in the supply of American silver. The government thus extended a discount rate of 5-1/2% through the April 15 deadline, by which time more than five million dollars worth of silver coins had been removed from the market. This finally brought the problem under control. William Weir, the Government Agent for the Exportation of American Silver, reported that nearly all of this silver was comprised of United States quarter dollars and half dollars, just a half million dollars worth being represented by smaller denominations. It's not clear from the records how many of these coins returned to the USA, if any, but Canada shipped at least $1,500,000 worth to England for conversion into bullion.
David W. Lange's column USA Coin Album appears monthly in Numismatist, the official publication of the American Numismatic Association.
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