Why did Congress limit the amount for which coins were legal tender?

IGWT

As just one example, the Act to authorize the Coinage of Five-cent Pieces, May 16, 1866, provides: "That said coin shall be a legal tender in any payment to the amount of one dollar." Similar limitations were imposed on coins of other denominations as well. Why?

mozeppa

probably to keep people from paying their taxes in pennies.......... as a form of protest.

DaveG

Pretty much what mozeppa said.

The main uses for legal tender (and the main sources of government revenue) in the first half of the 19th century was to pay import duties and to buy land from the Federal government. (You could barter, or give an IOU, for pretty much everything else.)

The government wouldn't have had the gold to pay interest on government bonds or to pay the salaries of government employees unless they received it in payment of duties and for land. They might have been able to pay their employees in truck-loads of cents, but foreign creditors certainly wouldn't have accepted them in payment on the government bonds they owned.

IGWT

That doesn't make a lot of sense to me. Why would the US impose limitations on itself for the benefit of foreign creditors? Edited to add: Are you saying that the limitation on legal tender did not apply to transactions between private parties or between the gov't and a private party?

DaveG

When the foreign merchant or banker has something you want and/or need, you'll do what you have to do to make them happy.

edited to add: Yes, the main applicabilty of "legal tender" is in what the payer of a payment is forced to pay in or what a receiver of a payment is forced to accept.

Example: you go into a store today and they have a sign: "No bills larger than $20 accepted." The store can do that, legally. However, if all you have is a $50 and the clerk won't accept it and calls the cops on you for "stealing", the cop will probably say "take the $50 - it's legal tender."

Another example: you're a farmer in Indiana in 1850 - you go into town to the general store and buy supplies. How do you pay? Well, it's up to you and the store owner: credit, barter for labor, barter for goods (bushels of corn, etc.).

Another example: you're an importer in 1850 and you owe the government import duty for a ship-load of French champagne. The government will only accept gold. You offer bushels of corn. The customs officer doesn't release your champagne. You go to court. The judge says: "The law says that the government will only accept legal tender for your duty of $200. The law also says that only gold is legal tender for that amount. Pay gold or no champagne."

IGWT

Yes, the main applicabilty of "legal tender" is in what the payer of a payment is forced to pay in or what a receiver of a payment is forced to accept.

That's my understanding as well. So, a creditor would be obligated to accept up to but not more than $1.00 in five-cent pieces as payment by his debtor (or course the creditor could accept more than $1.00 in five-cent pieces if he wanted). I'm still unclear why the gov't adopted a policy to limit the amount that a private creditor was obligated to accept as legal tender in payment of a debt.

DaveG

Again, it's basically what mozeppa said, except take out "taxes" and replace it with "bills."

If you were selling someone a horse or a wagon or any other reasonably expensive item, in which form would you rather receive payment? A few ounces of gold or a few hundred pounds of copper?

If you were a successful merchant or banker and the law said you were obliged to accept the few hundred pounds of copper, wouldn't you get together with your friends and lobby your elected representatives to change the law? If you were a congressman, wouldn't you listen to the leading businessmen and bankers?

edited to add: Also, if you were a congressman and you didn't act to change the law, would you want to receive all the government's revenue in cents? How would you store it? In addition, if all the government had to pay salaries (including to members of congress) and expenses with was tons and tons of cents, wouldn't the government employees be unhappy about receiving their pay in cents?

Writersblock

When the US started the mint the common belief was that in order to have value a coin had to contain its full face value in metal. This would have made the copper coins to cumbersome so their weight was reduced some. (Because of the rising value of copper this soon corrected itself and even with a further reduction in weight in December of 1795, the copper coins soon contained close to their full face value in metal as well.) Add to this the belief that gold and silver were the only true money and the result was that the gold and silver coinage were given unlimited legal tender status while the copper coins were not legal tender at all.

Jump to 1851 and the introduction of the three cent silver. This was the first case of a silver coin that was lower fineness and which went against the standard belief that a silver coin should contain its full face value in metal. You don't want to take legal tender status away from a silver coin, but they didn't want to grant full legal tender to a coin that didn't contain its full value either. So they gave it a legal tender status limited to 30 cents.

Now jump forward to 1857 and the redemption of the large cents and foreign silver with FE cents. The copper coins were now being minted at a loss. The new copper nickel FE cent once again allowed the mint to make a profit coining the cent. It's metal content was still a significant percentage of its face but not full value and it was not granted legal tender status either. But the mint produced them in immense quantities and they were used to replace not only the cents and half cents, but also a great deal of the silver coinage used in daily commerce. (Up to this point the mint still had been unable to produce enough coinage to actually supply commerce and the total coinage since 1793 amounted to just a few coins per citizen.) This meant a huge glut of cents in circulation and you began to run into the problems mentioned by DaveC. Merchants were receiving large quantities of cents that they didn't want to fool with, but neither did the bankers so they refused them thus leaving the merchants stuck haveing to deal with the problem themselves. So they began refusing them as well. It took awhile before this straightened itself out.

Now jump to 1864. With the hoarding of first gold then silver and then finally even the coppernickel cents the mint had to find smeway to create coins that would circulate. They noticed that the bronze CWT's were staying in circulation even though they contained only a small fraction of their face value in metal, or possibly because of it. So the govenment adopted the same weight and composition. But this went against the belief that the coins should have full value so they were on the one hand worried that people just might not accept them. The solution to that was to give them legal tender status. But remembering the headaches of 1857 and not wanting bankers and merchants to be forced to accept huge numbers and weights of these coins they decided to limit the legal tender status to a small amount. That would allow the coins to circulate for small sums and keep circulating, but it would keep people from having to accept large amounts of coins. This worked well and was continued when the thee cent nickel was introduced in 1865 and the shield nickel in 1866.

ricko

Very educational thread.. thanks for explaining this and the history lesson. Cheers, RickO