Law of Currency

The case Hepburn v. Griswold, 75 U.S. 603 (1870) was the first of several legal tender cases decided by the Supreme Court.  In this case Chief Justice Chase while speaking for the majority of the Court in striking down the legal tender laws as being unconstitutional said:

There is a well-known law of currency, that notes or promises to pay, unless made conveniently and promptly convertible into coin at the will of the holder, can never, except under unusual and abnormal conditions, be at par in circulation with coin.  It is an equally well-known law, that depreciation of notes must increase with the increase of the quantity put in circulation and the diminution of confidence in the ability or disposition to redeem. Their appreciation follows the reversal of these conditions. No act making them a legal tender can change materially the operation of these laws.

The Chief Justice’s quotation explains that promises to pay (promissory notes) in gold or silver coin will never trade at the same price to physical gold and silver unless one can immediately convert the promises into coin.  He also explains that the more notes representing promises to pay that are in circulation, the lower the value of the notes will be, and that the reverse is also true.  He’s explicit in noting, that no act of Congress can change these natural laws.

The evidence demonstrates that Chief Justice Salmon P. Chase was correct.  In 1862 in order to fund the civil war Congress issued $150,000,000 of U.S. notes to be used in circulation for the general population.  Congress also established legal tender laws making these notes legally payable for all debts public and private.  Despite these laws, the notes depreciated in value hitting a low of $2.85 for $1.00 of coin in July of 1864.

In 1913, the year the Federal Reserve Act was passed; one troy ounce of gold was worth $18.92.  See nma.org. At the time of writing this blog, one troy ounce of gold is worth $1,417.30.  This is over a 98% devaluation in the value of dollars relative to gold in 98 years.  No matter what your definition of inflation, whether it is an increase in the money supply, or increase in prices, we have experienced massive amounts of inflation since the creation of the Federal Reserve (America’s Central Bank).

If we continue to depreciate the currency at the previous rate, in 30 more years one ounce of gold will be worth over $5,300.  I posit that so long as we continue to have central banking, inflation is going to increase at an ever increasing rate, far out pacing our experience of the past 98 years and sending gold far in excess of $5,300 by 2040.