America’s Trade Dollars
I wrote a bit about the politics of silver in Morgan Silver Dollars, and promised there to write a separate piece about America’s Trade Dollars. This is that story.
I have glossed over quite a few details and left out most of the politics to keep this story short and hopefully easier to follow. The references at the end will provide those details if you are interested.
If you are not a coin collector, you may never have seen or even heard of Trade Dollars. What is most interesting about them is that they were produced to be used in China, not in the United States. As usual, the story includes greed and politics.
Silver in China
To fully understand why America made Trade Dollars, we need to look at the history and politics of silver in China as well as in the United States. Of course, that Chinese history starts much earlier.
Chinese money began with shells and progressed to copper coins. Gold and silver ingots were used as money very early, but gold and silver were rare, so most transactions were bronze coins. Transferring large amounts of low value bronze coins was inconvenient; merchants started using promissory notes as early as 118 BC. Chinese rulers realized the value of notes, issued government notes, and sometimes banned trade in silver and gold.
Around 1350, the silver to gold ratio was 10 to 1, but inflation and scarcity raised that to 4 to 1 in 1365. Soon after, Ming dynasty rulers banned the use of silver as money, but merchants still preferred it. By 1425, silver once again was used openly, though still ingots. When coins did circulate, value was by weight and purity, not by stamped value.
The Spanish pillage of South America after 1492 opened up much of the world to trade, but China did not participate, and saw none of the silver coming from South American mines. In 1540, Japan found large deposits of silver. Japan was inconveniently at war with China, but Portuguese and Philippine traders sold Chinese silk and other goods for Japanese silver, which found its way back to China. After 1571, China traded food with Spain for South American silver.
I am running through this very quickly; there is much more history in all of this.
The Chinese were accustomed to silver being scarce, and because Chinese governments had sometimes banned the use of silver for trade, silver was highly desirable in China. It was so desirable that Europeans could buy silver in Spain and sell it in China for a 50 to 100 percent profit. Economists argue whether this was bad for China or helped make them part of world trade, but for our purposes here, we only need to understand that China valued silver highly.
Because Mexican mints were producing silver coins, these coins entered China. These were the famous “pieces of eight”, so called because they were worth 8 reales.
Probably sometime before 1700, Chinese merchants started marking silver coins as a guarantee of value. The marks were initially small, but in the 1830s and beyond, became larger. This may have been because counterfeit coins had arrived; a large chop would expose more base metal. The chops served as some guarantee that the coin was worth what it should be worth.
The United States wanted to sell its silver to China
In 1857, a large vein of silver was discovered in Nevada, possibly by two brothers named Grosh. They needed money to exploit the claim, but died before they could get to California to seek investors. They had left an illiterate man named Henry Comstock to guard their cabin. When Henry heard they had died, he claimed what turned out to be an enormous lode of silver. He sold his interest before the true worth was known and never succeeded as a prospector. Nevertheless, the mine took his name.
The Comstock Silver mine poured out silver in six great waves starting in 1859. More was found in 1873, and the total output until the mines ran out was over $21 million dollars worth of silver.
The large output of western mines pushed the price of silver down, but the United States Mint would still accept it for coining into silver dollars. The silver dollars could used to buy gold dollars, which could be melted and used to buy more cheap silver. In 1873, the United States demonetized silver dollars, putting the United States on the Gold Standard and effectively eliminating the ability to profit from trading silver for gold.
The production of silver dollars continued, but there was little use for them; most sat in vaults and did not circulate.
On the other hand, the United States did want to trade with China. Why didn’t they use silver dollars for that? One reason is that the Chinese preferred the Spanish Dollar coins. United States silver dollars were half a gram lighter than the Spanish coins.
Another reason was that Chinese merchants liked coin designs to stay constant. They preferred the unchanging Mexican version of the Spanish Dollar over coins minted in Spain or other countries where a change of rulers meant new designs. This was probably due to fear that an unfamiliar looking coin might be counterfeit. So, the best way the United States could trade with China was to buy Mexican Dollars. The Mexican government was well aware of all this, and charged an 8% tax for their coins.
In 1866, the Mexican Emperor Maximilian changed the dollar design to use his portrait, which made Chinese merchants unhappy. The time was ripe for North America to get its silver into China.
The Trade Dollar
Authorization for a silver dollar made its way through Congress and production began in 1873. The coin was 90% silver as all United States silver coins had been. The Mexican Dollar was 90.2%, but the Trade Dollar was 4 grams heavier, which made its silver content higher than the Spanish Dollar.
It is amusing that the coins showed their 420 grain weight, as most Chinese merchants would not have understood any of the writing.
The coin used a figure of Liberty rather than a ruler. That, plus the heavier weight, helped make the coin acceptable in China and Asia.
Initially, the Trade Dollar was legal tender in the United States for transactions up to $5.00. But western mines were still pushing out silver and driving the price downward, so the coins were demonetized in 1876.
In China, many were melted. This was because the older Mexican coins still circulated. Gresham’s law says bad money drives out good; in this case, the higher silver content of the trade dollars made them the “good” money.
This was actually predicted by the people who initially proposed the Trade Dollar: they assumed that few would make their way back to the United States for redemption. The law of 1873 eliminated redemption above five dollars, so that proposed benefit didn’t matter much, but it may have influenced passage just the same.
Beijing made the Trade Dollar official legal tender. Trade Dollars were accepted and preferred, but they were still chop marked.
The Chinese caught on that the coins not legal tender, and noted the falling value of silver in the rest of the world; they began to devalue trade dollars,. Trade dollar production for export stopped in 1885 as China began to refuse to accept them. In the United States, employees cheated employees because they could get Trade Dollars from the Mints at the bullion price of approximately 86 cents and pay workers as though they were worth a dollar. That was supposed to be illegal, as they were required to prove that the coins would be exported, but of course documents were forged.
The Trade Dollars could not be redeemed and were worth only about 86 cents in spite of their heavier weight and higher silver content. Merchants did not want them, but sometimes had no choice as that was all their customers had to offer. Of course the merchants and the cheated employees complained to Congress.
In 1887, the United States changed the law to allow redemption, but only if not mutilated. Eight million coins came from China, two million were sent back because of chop marks, which were considered mutilation, so the only six million were redeemed. Trade Dollars continued to circulate in China, but the United States no longer produced new quantities, except for a few years of proof coins sold to collectors.