What money circulated during the Gold Rush?

The old term for paper money “banknotes” tells the origin of paper money: it was an IOU from a bank that had received cash on deposit. Banknotes in the early 19th century always traded at discount and often became worthless when the issuing bank went out of business. The California Constitution of 1850 specifically forbids the issuing banknotes; Haywood’s 1853 Gazetteer of the United States notes “the circulation of paper as money is prohibited.”

At the time of the Gold Rush the US was only beginning to recover from a 30 year coin shortage, caused by changes in the value of gold vs silver and the fluctuations in the metal markets in Europe.

“At the turn of the 19th century, the upheaval of the "Reign of Terror" and Napoleonic Wars resulted in a worldwide rise in gold prices. With the U.S. Mint statutorily bound to the weight specifications and 15 to 1 silver/gold ratio defined by the Act of 1792, the fluctuating market price of precious metals wreaked havoc with U.S. coinage, particularly the largest gold coin, the flagship $10 Capped Bust "Eagle." By 1795, an ounce of goldworth 15 ounces of silver in the United States-was worth 15.5 ounces of silver in Paris. That was enough motivation for bullion brokers to buy United States gold coins, mostly with Latin American silver coins, and ship them to Paris to be sold. By 1813 the ratio would reach 16.25:1, and before long, 98% of all U.S. gold coinage would be destroyed. At the end of 1804, President Thomas Jefferson ordered eagle production stopped. It would be thirty-four years before production resumed.”

“By the early 1830s, with Latin-American revolutionary chaos subsiding, Mexican silver exports jumped. This fact, combined with Congress' new 16-to-1 silver/gold ratio, U.S. coinage flourished. Mintages ballooned dramatically, and the introduction of steam powered coining presses in 1836 only enhanced the Mint's production capacity. While the ratio change-which favored silver-should have driven those coins from circulation, what actually occurred was an increase in the number of silver coins struck, particularly the smaller issues. Apparently Mexican mine owners found it profitable enough to sell their ore to the convenient and silver-hungry American market, despite the lower price. The U.S. was only too happy to turn their bullion into coins.”

http://www.coinresource.com

Most American silver was melted and sent to Europe at advantageous rates; this left little cash circulating. No silver dollars had even been produced between 1804 and 1840.

Outside of the cities, cash was seldom used. Most payment was done by barter. Until the Civil War, the most common coins in circulation, both on the West Coast and in the States were the Mexican silver coins, denominated in Reales. A Real was slightly smaller than a 17th century British Shilling, which was made of 12 pence each. The rate of 9 pence per Real reflects Colonial exchange rates of 3 Shillings to 4 reales. This makes the 8 Reales pieces trade even with one double Florin, or 28 Reales to a Guinea during Colonial times. The 8 Reales coin had the same size and composition as the American Dollar and traded at parity with it. Thus, the 1 Real coin (12 ½ cents), known as a schilling in New England, a ninepence2 in Maine, and as a Bit in the South traded at two for a quarter dollar. The half-Real (6 ¼ cents) was also known as a Medio or as a Picayune. French francs were also popular and traded at a premium in gold rush California.

“Coin was very scarce, what there was being nearly all absorbed by the gamblers, who required it for convenience in carrying on their business. Ordinary payments were made in gold dust, every store being provided with a pair of gold scales, in which the miner weighed out sufficient dust from his buckskin purse to pay for his purchases.

In general trading, gold dust was taken at sixteen dollars the ounce; but in the towns and villages, at the agencies of the various San Francisco bankers and express companies, it was bought at higher price, according to the quality of the dust, and as it was more or less in demand for remittance to New York.

…On the discovery of gold in California, the express houses of New Fork immediately established agencies in San Francisco, and at once became largely engaged in transmitting gold dust to the mint in Philadelphia…They had agencies also in every little town in the mines..receiveng deposits form miners and others, and selling drafts on the Atlantic States….

The want of coin was equally felt in San Francisco, and coins of all countries were taken into circulation to make up the deficiency. As yet a mint had not been granted to California, but there was a Government Asay Office, which issued a large octagonal gold piece of the value of fifty dollars—a roughly executed coin, about twice the bulk of a crown-piece; while the greater part of the five, ten, and twenty dollar pieces were not from the United States Mint, but were coined and issued by private firms in San Francisco.

Silver was still more scarce, and many pieces were consequently current at much more than their value. A quarter of a dollar was the lowest appreciable sum represented by coin, and any piece approaching it in size was equally current at the same rate. A franc passed for a quarter of a dollar while a five-franc piece only passed for a dollar, which is about its actual worth. As a natural consequence of francs being thus taken at 25 per cent. More than their real value, large quantities of them were imported and put into circulation. In 1854, however, the bankers refused to receive them, and they gradually disappeared.

J. D. Borthwick, The Gold Hunters, 1857, p 247-248

American coinage, as invented by Alexander Hamilton was a mixed decimal/fractional system denominated in Eagles, Dollars, Dimes, and Cents with fractions of half and quarter eagles, half and quarter dollars, half dimes, and half cents. The Spanish division into eighths did not fit well with a decimal system but survives in our stock market’s pricing system. In 1849 the availability of gold from California made the production of gold coins practical. Congress authorized issue of the Eagle series with a gold dollar and the Double Eagle being added.

“The first California gold to reach the Philadelphia Mint was dispatched by the territory's Governor, Col. R.B. Mason to Secretary of War William L. Marcy. Most of this shipment of just over 230 ounces was coined into Quarter Eagles, $2.50 pieces given an incuse stamp CAL over the eagle. This coinage was small, but it soon became obvious that the sheer mass of gold reaching the mints was going to require a much larger denomination than the quarter eagle, half eagle and eagle then authorized. North Carolina Congressman James Iver McKay, a powerful member of the House Ways and Means Committee, had already prepared legislation authorizing the smallest U.S. gold coin, the gold dollar. Acceding to the pressing need to mint gold into larger coin form, McKay was quickly persuaded to amend his bill to include another new gold coin at the opposite end of the spectrum, the Double Eagle or $20 piece. The authorizing statute was passed by Congress on March 3, 1849.”

http://www.coinresource.com

The supplies of gold from California depressed that gold’s value in relation to silver, leading to widespread hoarding and melting of silver coins, since they were worth more as metal than as money. Silver coins nearly disappeared from US circulation by 1851, when $100 of silver coins contained $106.60 worth of silver. In 1853 the amount of silver in US coins was reduced to match the new value.

Novel coins were also introduced before and during the Civil War. In 1857 the small cent was introduced to replace the unpopular large cent. The Bronze 2 cent was coined from 1864 to1873 . The “trime” 3 cent silver was introduced in 1851 along with a $3 gold to coincide with the issue of the 3 cent postage stamp. Trimes were used in great quantity but became unpopular because they were so easy to lose and because their alloy tarnished quickly. Nickel was introduced for the 3 cent and 5 cent pieces in 1865, allowing a more convenient size and a more durable coin. A double dime was tried from 1875 to 1878, after our period of interest. During the entire two decades between 1840 and 1859, the amount of US coin nearly tripled. Even so, there were only an average of 6 pennies per person minted. In those 20 years, even with the gold from California, there was only $20 in cash for each person in the country. Of that money $17 was gold rush gold coin -- $12 in double eagles.

During the Civil War the first US government banknotes were printed, including fractional denominations and postage stamp notes.

To all this complexity we can add the fact that about half of the Gold Rush population were not native-born Americans. Money from their native lands along with money obtained enroute, was also traded.