by Lawrence H. White (George Mason University)
This blog post is based on a forthcoming article in The Economic History Review, and is available on Early View until the 30th June at this link : https://onlinelibrary.wiley.com/doi/10.1111/ehr.13086
Alongside the lighthouse, famously scrutinized by Ronald Coase, the precious metallic mint has also played the role of what Coase called, ‘an example of something which has to be provided by government rather than by private enterprise’. Prominent economists who have characterized the mint this way include Carl Menger, William Stanley Jevons, Henry Sidgwick, and, more recently, Charles Goodhart.
Their leading argument: Asymmetric information about coin quality makes it privately profitable to issue substandard coins, causing market failure. Sidgwick and Jevons argued in a purely theoretical fashion, without discussing any evidence on the historical performance of private mints. Conversely, Herbert Spencer defended competitive private enterprise in coinage, but he too argued his case deductively without reference to actual mints.
Neglected evidence for testing the competing hypotheses can be found in the United States’ economic history. There were three distinct regional gold rushes with private mints: the southern Appalachians, 1830-51, California between 1849-54, and Colorado during 1860-62.
A visitor to the Bechtler mint in North Carolina in 1827 described how ‘country people’ brought in ‘rough gold’ that the mintmaster weighed and recorded in his book, while ‘to others he delivered the coin he had struck’, net of fees, from the gold that they had previously brought. The mint’s operations were like ‘those at a country grist mill, where the miller deducts the toll for the grist he has manufactured’. A mint’s revenue likewise consisted of fees deducted from the metal it ‘fluxed’ (cleaned), assayed to determine fineness, and stamped into coins. The Bechtler mint charged 2.5 percent for assaying and coining. Thus, a miner who brought sufficient gold dust to make $102.50 would receive $100 in new coins.
A private gold mint accordingly did not need to produce substandard coins to make a profit. Deliberately issuing substandard coins would earn a greater profit per coin, as theoretical sceptics noted, but only until the ruse was discovered. Evidence from contemporary newspapers and numismatic historians indicates that while fraud and incompetence by some private mints was initially a problem, the publication of independent assay results in local newspapers meant honesty eventually dominated as a profit-maximization strategy.
Templeton Reid of Georgia opened the first private gold mint in the United States. Reid over-estimated the purity of his gold, produced coins soon found to contain too little gold, and shut down within three months. The Bechtler mint, by contrast, gained a reputation for competence and honesty that kept it in business for twenty years, between 1831 and 1851. It produced more than $3 million in gold coins, in denominations of $1, $2.5, and $5; these coins were also marked also with weight in grains and fineness in carats, until the local mines began to play out (Figure 1).
In California, private mints produced an estimated $36 million of gold coins between 1849 and 1854. Four of the six prominent private mints established in 1849 produced substandard coins. Once newspapers reported assay results, merchants refused or heavily discounted the underweight coins, forcing their holders to have them melted and recoined elsewhere. Bad mints did not survive into 1850, unlike the two good mints (Moffat & Co., which likely outproduced all the others combined, and the Oregon Exchange Company). Of the five major private mints established in 1850, and later, only one (Baldwin & Co.) produced underweight coins and quickly exited. The other four were competent and honest, and three of them minted large quantities — Dubosq & Co., Wass, Molitor, & Co., and Kellogg & Co.
In Colorado, Clark, Gruber & Co., minted about $3 million of coins dated 1860 and 1861. Their coins were quite popular because they were known to contain a quantity of gold slightly above the US Mint’s standard (Figure 2).
Apparently innocent of American experience, Sidgwick predicted chronic market failure from private coinage in his Principles of Political Economy, 1883: ‘It is in the interest of the community that coins should be as far as possible hard to imitate, hard to tamper with, and qualified to resist wear and tear; but the person who procured the coin from the manufacturer—who would want, of course, to pass the money, and not to keep it—would be prompted by no motive of self-interest to aim at securing excellence in these points.’ Other economists have predicted trouble from the temptation to profit by fraudulent debasement. But in the American experience these problems were transitory rather than chronic: the miners who procured coins wanted to pass them on without difficulty — they had a self-interest to procure coins known to be excellent. The interest of the community in high-quality, full-weight coins, was thus brought to bear on private mints. Private mints that did not ensure the quality of their coins did not stay in business.
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