American coinage, much like its paper banknotes, have changed little in decades, at least in regard to their design. This continuity, surely along with the US dollar’s role as a reserve currency, have made American money recognizable to many around the world for generations, especially those engaged in trade or finance. There was however, an American coin minted in the 19th century that lasted only a few years in production. More intriguingly, it wasn’t even intended to be used for domestic business but was meant for use in international trade. It was one of the last of a centuries’ long series of ‘trade coins’ minted by various nations with foreign trade in mind.
Bullion in Trade
The traffic of precious metals was always an important facilitator of world trade, at least up until the 20th century. However, not all gold and silver bullion were created equal; certain coins were more trusted and widely accepted than others. Consider that from the 16th through to the 19th centuries, pesos from Spain and Mexico would have been accepted by merchants around the world. Indeed, both the US dollar and Chinese yuan have their origins in Spanish and Mexican coinage. There was also the Maria Theresa thaler, first minted in Austria during the reign of Empress Maria Theresa but copied elsewhere. The thaler was widely used in trade in Asia and Africa and was so well known that it was even legal tender in some African countries until the middle of the last century. Indeed, even the modern currency of Ethiopia has its origins in this Austrian coin.
In some cases, coins were used in trade that were not even legal tender in the country in which they were struck. These coins were called ‘trade coins’ and were meant for export only. In addition to 18th century Austria, trade coins were minted in Mexico and Britain. In the 1870s, the United States issued its own trade coins, called the ‘trade dollar’, intended to placate its domestic silver industry and facilitate greater trade abroad, especially in Asia.
Coinage Act of 1873
When the American trade dollar was introduced, the United States had a wild west monetary system, with no central bank and a currency linked to both gold and silver, a so-called ‘bimetallist’ standard. During the mid-1800s, anyone could send gold or silver bullion to a mint to have struck into dollars on demand, an arrangement known as free coinage. This was also a system being tested by the changing economics of precious metals. When several countries established bimetallist monetary standards in the mid-19th century, it was fresh off of gold finds in America and Australia that depressed the price of gold relative to silver. However, after a few decades, it was silver that was cheapening.
The mines of the American west in the late-19th century saw booming silver production. New discoveries in places like Nevada caused US silver mine output to double in the 1870s, reducing the price of silver. This cheapening saw a surge in silver being struck into coins as the ‘melt value’ of the metal fell below the face value of the currency it could be exchanged for. Of course, this meant a steady increase in the amount of currency in circulation and threatened to make the bimetallist system a de-facto silver standard. Some feared this to be a harbinger of inflation. That said, many continued to support bimetallism because of, and not despite, inflation. They believed steadily increasing prices to be healthy for the economy and their own economic interests.
Regardless, much of the country’s elite saw a silver standard as a threat, believing that inflation would steadily reduce the real value of their wealth. To wean the country off this course of direction, the American Congress passed the Coinage Act of 1873, which in effect ended free coinage of silver in the US and put an end to the bimetallist monetary standard. However, in a compromise with the silver industry, the trade dollar was introduced for trade with Asia and would carry specifications similar to the silver dollars of the past. Initially, the trade dollar was made legal tender domestically as well, but only for transactions under $5.
Despite the fact it was given a limited status of legal tender at home, the trade dollar was intended to be exported overseas, to be used by merchants in foreign trade. Nonetheless, the US had already been a large net exporter of precious metals in the 19th century. This outflow in bullion helped finance large trade deficits in manufactured goods. Consider that in 1873, the year the trade dollar was first minted, the American merchandise trade deficit was $120 million, partially financed by $36 million in net exports of gold and $27 million in silver. Though the government tended to run budget surpluses in times of peace, these were generally smaller than the trade deficits, resulting in a net outflow of the precious metals.
Trade Dollars
It was under this unfavorable balance of trade that the new dollar was introduced in 1873. Part of the motivation for creating an American trade coin was to lower the transaction costs of American merchants abroad who often had to exchange their dollars into foreign coins that were more broadly accepted. The trade dollar was minted with this objective in mind, designed to be comparable to the Mexican peso already widely used in Eastern trade. To this end, the coin was made slightly larger than domestic US silver dollars at 27.3 grams as compared to the domestic coins’ 26.7 grams. However, the American trade dollar was 90% silver as compared to 90.3% for the peso and Chinese merchants continued to prefer Mexican pesos over US dollars.
This was not the only factor limiting the success of the trade dollar in its aim of easing foreign exchange. As the 1870s wore on, there was also a diminished need for net exports of precious metals as the merchandize trade deficits of early-to-mid-19th century America turned into growing trade surpluses. Notably, each of the ten years preceding the introduction of the trade dollar saw American trade deficits in merchandise. By contrast, all but one of the ten following years saw trade surpluses. Thus, in the years following the Coinage Act, net exports of silver shrank by two-thirds, and the US even became a net importer of gold, a rather unthinkable prospect a few years earlier.
Despite these barriers to the widespread circulation of trade dollars abroad, the quick end for the new coin came for different reasons. During the later half of the 19th century, the price of silver continued to slide to new record lows. Of course, because the trade dollar was meant for foreign trade and its status as legal tender limited, its face value was essentially irrelevant. A merchant in China did not care much that the coin was denominated in dollars but rather valued it according to the value of its metal. Falling silver prices caused the melt value of the coin, and thus its purchasing power abroad, to fall accordingly.
Just prior to the introduction of the trade dollar, silver had traded at around $1.29 an ounce (31 grams). This meant the 27-gram coin which was 90% silver by composition had a metal value of just over $1. However, as the price of silver fell to around $1 an ounce in the following years, the value of the trade dollar had it been melted would be a mere 80 cents. Because the value of the coin in foreign trade fell below its face value, the trade dollars in Asia were reimported into the US. The abrupt and large repatriation of the coins caused the government to revoke their status as legal tender in 1876. They continued to be minted in large quantities for two more years, but buyers had to prove that they would indeed be exported abroad. After 1878, production would cease altogether besides a small output intended for collectors. The end had come for one of America’s shortest-lived series of coins.
Lesson
The trade dollar may have been short-lived but it is an informative artifact of the American economy in the second half of the 19th century. Its introduction and abandonment reflect changes underway in the American economy at the time with respect to trade and the monetary standard. The trade dollar marks one of the last trade coins, currency minted with an explicit intention to be used solely in international trade. Indeed, the logic behind trade coins, that certain monies are more trusted for trade than others, still lives on. Today, the US dollar still functions as this trade currency, used as the currency of choice for denominating invoices, even for purchases and sales that do not involve American firms. That said, no special coin is needed for this purpose nowadays, though critics of the current world monetary order may, with merit, think otherwise.
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Further Reading
1. “Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970.” Sept. 1975. Series U.
2. Blanchard and Company. “A Brief History of the U.S. Trade Dollar.” CoinWeek, 14 Apr. 2019.
3. Duncan, Kathleen. “The History of the Trade Dollar.” CoinWeek, 31 May 2012.
4. Lipsey, Robert E. “U.S. Foreign Trade and the Balance of Payments, 1800–1913.” The Cambridge Economic History of the United States, pp. 685–732.
5. Section 4.2. Handbook of World Exchange Rates, 1590-1914, by Markus A. Denzel, Routledge, 2017.
