Crime of '73

• The Bottom Line: The “Crime of '73” was not a crime, but a pivotal US monetary policy change that ended the use of silver as currency, which unexpectedly strengthened the dollar, punished debtors, and provides a timeless lesson for value investors on the massive, hidden risk of government policy.
• Key Takeaways:
• What it is: The Coinage Act of 1873 was a US law that officially put the nation on a de facto gold_standard by stopping the minting of silver dollars, effectively demonetizing silver.
• Why it matters: It triggered decades of deflation (falling prices), dramatically increasing the real burden of debt and showing how a shift in monetary “rules” can create huge winners and losers, impacting the intrinsic_value of all assets.
• How to use it: The lessons from 1873 force you to analyze a company's resilience to macroeconomic shifts, especially its debt load and pricing power in an inflationary or deflationary world.

Imagine you're playing a high-stakes game of Monopoly. For years, the rules have stated that you can pay the bank with either the classic colorful paper money or with special “silver” game pieces, with one silver piece always being worth $16 in paper money. Now, imagine the banker, in the middle of the game, suddenly announces, “We're no longer accepting the silver pieces.” The silver pieces you've been hoarding are now just shiny trinkets. The paper money you hold is suddenly the only game in town, making it much more powerful. If you owe the bank money, your debt just got a lot harder to pay back because you can no longer use your cheap, plentiful silver pieces. This is, in essence, what the “Crime of '73” was all about. For most of its early history, the United States operated on a system called bimetallism. This meant that both gold and silver were officially money. The U.S. Mint was legally obligated to coin all the gold and silver brought to it at a fixed weight ratio: 16 ounces of silver were equal in value to 1 ounce of gold. This is known as the 16:1 ratio. The problem is, the market price of silver and gold constantly changes based on global supply and demand. For years before 1873, silver was actually overvalued at the 16:1 government ratio (meaning you could get more gold for it on the open market). So, people naturally sold their silver abroad and used gold for transactions in the US. As a result, very few silver dollars were actually minted or used. In 1873, Congress passed a new Coinage Act to clean up the messy state of its currency laws. In this large and complex bill, they simply omitted the provision for minting the standard silver dollar. At the time, nobody really noticed or cared—it seemed like a minor housekeeping change since silver dollars weren't circulating anyway. But then, something dramatic happened. Huge new silver deposits were discovered in the American West (like the Comstock Lode in Nevada). Suddenly, the market was flooded with silver, and its price plummeted. According to the old 16:1 rule, that cheap silver should have been a fantastic deal to turn into money. Silver miners and indebted farmers, who would benefit from “cheaper” money (inflation) to pay off their debts, rushed to the Mint, only to be told the game had changed. The Mint was no longer buying. They were furious. They claimed a secret conspiracy of bankers and bondholders had deliberately demonetized silver to make their own gold-backed assets more valuable. They branded the Act the “Crime of '73,” a powerful and catchy slogan that ignited one of the most intense political battles of the late 19th century—the fight for “Free Silver.”

“The dollar is a unit of measurement. And if you change the unit of measurement, you are going to fool a lot of people.” - Warren Buffett ¹⁾

So, the “Crime of '73” wasn't a heist or a murder. It was a piece of legislation whose consequences were not fully understood at the time of its passing, but which fundamentally altered the American economic landscape by moving the country from a bimetallic standard to a firm gold_standard.

This dusty piece of 19th-century legislation might seem like ancient history, but for a value investor, it's a treasure trove of timeless wisdom. The “Crime of '73” is a perfect case study in how the “rules of the game”—monetary policy—can be a far greater risk than a single company's bad quarter or a competitor's new product. Here’s why the lessons are critical for your investment philosophy today:

• 1. The Ultimate Risk is a Changing Yardstick: Value investing is all about calculating the intrinsic_value of a business and buying it for less, creating a margin_of_safety. But all our calculations are denominated in a currency—dollars, euros, pounds. The “Crime of '73” demonstrates that the value of this yardstick itself can be changed by government decree. The subsequent deflation made each dollar more valuable, which was great for creditors but catastrophic for debtors. Today, the risk is often the opposite: inflation, where central banks debase the currency, making each dollar worth less. A value investor must always ask: “How will this business perform if the very money I use to measure it loses 10% of its value? Or gains 5%?” This is a fundamental, often overlooked, layer of currency_risk.
• 2. Debt Can Be a Ticking Time Bomb: The farmers who had mortgages in the 1870s and 1880s were financially ruined by the “Crime of '73.” Their crop prices fell (deflation), but their mortgage payments were fixed. Their debt, in real terms, became an unbearable burden. This is a stark reminder that a company's balance sheet is not just a collection of numbers; it's a measure of its resilience to macroeconomic shocks. A heavily indebted company might look fine in a stable or inflationary environment, but it can be wiped out by a period of deflation or a credit crunch. As a value investor, you must view debt with extreme skepticism, understanding that its true weight can change dramatically based on forces far outside the company's control.
• 3. Distinguishing Price from Value: The government's 16:1 ratio was an attempt to fix the price of silver relative to gold. But the market, driven by new discoveries, had a very different idea of its value. The government's price-fixing scheme inevitably broke, just as all such schemes do. This is a macroeconomic parallel to what happens in the stock market every day. Mr. Market quotes you a price for a stock, driven by fear, greed, and popular narratives. Your job, as an investor, is to ignore the noise and calculate the underlying value of the business. The “Crime of '73” is a powerful lesson that government-mandated prices and market-driven values can diverge, and that value will always win in the end.
• 4. Beware of Powerful Narratives: The “Free Silver” movement was fueled by a compelling, emotional, and ultimately misleading narrative of a “crime” and a “conspiracy.” This story united millions of people and became a dominant political force. Sound familiar? Think of the dot-com bubble's “new paradigm” narrative or the “housing never goes down” story of the mid-2000s. Investors who get swept up in these powerful narratives stop looking at the fundamentals. They buy the story, not the business. The “Crime of '73” reminds us to be deeply skeptical of popular narratives and to ground our decisions in cold, hard, rational analysis.

You can't trade stocks in 1874, but you can use the hard-won lessons from that era to build a more resilient portfolio today. Applying the wisdom of the “Crime of '73” is less about a formula and more about a mindset—a checklist to run through when you analyze any potential investment.

Here are four steps to incorporate these lessons into your investment process:

• Step 1: Analyze the “Rules of the Game.”
  • Before you even look at a company's income statement, take a moment to understand the current monetary environment. Are central banks printing money (quantitative easing, leading to potential inflation) or are they tightening credit and raising interest rates (potentially leading to disinflation or deflation)? Don't try to predict their next move. Instead, simply understand the current landscape and consider the range of possibilities. This is the economic “weather” in which all your companies must operate.
• Step 2: Stress-Test the Balance Sheet for Monetary Shocks.
  • Look at a company's debt, not as a static number, but as a dynamic risk. Ask yourself:
    • In a deflationary world (like the late 1800s): Could this company still service its debt if its prices and revenues fell by 10%? Companies with high fixed costs and large debts are extremely fragile in a deflationary environment.
    • In an inflationary world (like the 1970s or 2020s): Does this company have long-term, fixed-rate debt? This can be a huge advantage, as the company gets to pay back its loans with “cheaper,” less valuable dollars in the future. Conversely, a company heavily reliant on short-term financing will face soaring interest costs.
• Step 3: Identify Businesses with Pricing Power.
  • The ultimate defense against a changing monetary yardstick is pricing power—the ability of a business to raise its prices without losing customers. This is a core component of a durable competitive_moat. A company that sells a unique, essential product (like a critical software or a beloved consumer brand) can pass on rising costs during inflation. A company selling a commodity product with lots of competition will get its margins crushed. The farmers of the 1880s had zero pricing power; they had to take whatever the market would give them for their wheat and corn. Don't invest in the modern equivalent.
• Step 4: Distinguish Between Tangible and Financial Assets.
  • The “Crime of '73” was a battle between two forms of money—a tangible asset (gold) and a demonetized one (silver). It highlights that during periods of monetary turmoil, the value of real, productive assets becomes paramount. When analyzing a company, favor businesses with valuable tangible and intangible assets: factories, real estate, infrastructure, well-established brands, and patents. These are harder to replicate and tend to hold their value better than complex financial instruments when the monetary system itself is under stress.

Let's travel back to 1880, seven years after the “Crime,” and analyze two businesses through a value investor's lens.

This simple example shows that the best business isn't the one that looks good in a spreadsheet snapshot, but the one structured to withstand the inevitable storms of macroeconomics_for_investors.

Applying a 150-year-old event to modern markets requires a nuanced perspective. It's a powerful analogy, not a perfect blueprint.

• Monetary Policy is Never Neutral: It is one of the most powerful forces an investor will ever face. It systematically creates winners and losers, and you must understand how your portfolio is positioned.
• Debt is a Magnifier of Risk: The “Crime of '73” was a lesson in how deflation magnifies the real burden of debt. Inflation does the opposite, but either change can be fatal for an improperly structured company.
• Fundamentals Are the Ultimate Anchor: In times of chaos—whether driven by monetary policy, war, or a pandemic—the only thing you can rely on is the underlying earning power and resilience of the businesses you own.

• The Fiat Standard: Today, we live in a world of fiat_currency, where money is not backed by a physical commodity like gold or silver. Central banks can create it at will. This means the primary long-term risk has shifted from deflation (as seen after 1873) to inflation. The principle remains the same, but the direction of the threat has flipped.
• Globalization and Speed: In the 19th century, these economic shifts played out over decades. Today, capital flows and information move instantly. A central bank policy announcement in Washington D.C. can change asset prices in Tokyo within seconds. The feedback loops are much faster, making resilience even more critical.
• Complexity of the Financial System: The financial world of the 1870s was a simple place compared to today's landscape of derivatives, complex credit instruments, and algorithmic trading. This complexity can hide risks and create new vulnerabilities that were unimaginable in the Gilded Age.

• gold_standard
• fiat_currency
• inflation
• deflation
• currency_risk
• macroeconomics_for_investors
• competitive_moat