silver standard

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The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver standard was widespread until the nineteenth century, largely due to the prevalence of the Spanish pieces of eight that had played the role of an international trading currency for nearly four hundred years. In 1704, following Queen Anne's proclamation, the British West Indies became one of the first regions to adopt a gold standard in conjunction with the Spanish gold doubloon coin. Following the Napoleonic wars, the United Kingdom introduced the gold sovereign coin and formally adopted a gold standard in 1821. At the same time, revolutions in Latin America interrupted the supply of silver dollars (pieces of eight) that were being produced at the mints in Potosi, Mexico, and Lima. The British gold standard extended to some of the British colonies, notably the Australasian colonies and the Southern African colonies, but it did not extend to the North American colonies, to British India, or to South-East Asia. Canada adopted a gold standard in 1853 as did Newfoundland in 1865. In the early 1870's most of the developed nations changed over to the gold standard, and by the first decade of the twentieth century, only China and the British colony of Hong Kong remained on the silver standard. The silver standard finally came to an end when it was abandoned by China and Hong Kong in 1935.

The relative value of silver and gold

Since the time that silver was discovered by the Spanish in the new world in the sixteenth century, until the latter half of the nineteenth century, the value of gold in relation to silver, maintained a relatively stable ratio of 15½/1. The reason for the subsequent sharp decline in the relative value of silver to gold has been attributed to Germany's decision to cease minting the silver Thaler coins in 1871. On 23rd November 1871, following the defeat of France in the Franco-Prussian war, Bismarck exacted one thousand million dollars in gold indemnity, and then proceeded to move Germany towards a new gold standard which came about on 9th July 1873 with the introduction of the gold mark.^[1]

It has also however been suggested by Nevada Senator John Percival Jones in 1876 in a speech to the US Senate, that the downward pressure on the market value of silver began somewhat earlier with the formation of the Latin Monetary Union in 1866. Jones argues that the Latin Monetary Union involved a partial demonetization of silver. ^[2]

Silver made a partial come back in the first decade of the twentieth century, such that the silver dollar coins of the Straits Settlements and silver Peso coins of the Philippines had to be made smaller in size, and with a reduced silver content in order to prevent their silver value exceeding their recently established gold exchange value. An even larger rise in the price of silver after the first world war caused the Royal Mint in London to reduce the silver content of the sterling coinage. But silver never returned to the 15½/1 ratio of the first half of the nineteenth century, and the predominant long term trend was that silver continued to decline in value against gold. Nowadays the ratio in relation to the value of gold, although variable, is more of the order of 50/1.^[3]

Ancient Greece

The first metal used as a currency was silver more than 4,000 years ago, when silver ingots were used in trade. During the heyday of the Athenian empire, the city's silver tetradrachm was the first coin to achieve "international standard" status in Mediterranean trade.

China

China had long used silver as monetary units, along with the cast copper-alloy cash. The use of silver ingots can be traced back as far as the Han dynasty (206 BC-220 AD). But prior to Sung era (960-1280 AD), those silver ingots were used mainly for hoarding wealth. During Yuan dynasty, silver ignots were made into the shape like boat or Chinese shoe, and was called "yuan bao" (元寶) - literally "treasure of Yuan". This often became the shape of silver ingots in the following centuries. Paper money were issued as monetary standard at the beginning of Ming (1368-1644 AD) dynasty, but in 1436, the first year of Zhengtong Emperor, change was made and tax were officially required to be paid by silver. From late Ming to Ching dynasty (1644-1911 AD), the silver ingots were used enormously in foreign trade until the modern silver coin was established in 1889.

The silver standard in China was codified by the newly established republic in 1914, with one yuan being equal to 7 mace and 2 candereen 0.9 fine silver. However, the US silver purchase act of 1934 created an intolerable demand on China's silver coins, and so the silver standard was officially abandoned in 1935 in favor of the four Chinese national banks "legal note" issues. China, and the British Colony of Hong Kong which followed suit in this regard in September 1935, would be the last to abandon the silver standard.

Hong Kong then adpoted the gold exchange standard and the Hong Kong dollar took on the exact value of one shilling and three pence (1s 3d) sterling.

Persia

The dirham was a silver coin originally minted by the Persians. The Caliphates in the Islamic world adopted these coins, starting with Caliph Abd al-Malik (685–705). Silver remained the most common monetary metal used in ordinary transactions until the 20th century.

Bohemia

Beginning in 1515, silver coins were minted at the silver mines at Joachimsthal - Jáchymov (St. Joachim's Valley) in Bohemia, now part of the Czech Republic). Although formally called Guldengroschen, they became known as Joachimsthalers, then shortened to thaler.^[4] The coins were widely circulated, and became the model for silver thalers issued by other European countries. The word thaler became dollar in the English language.

Spain

Rich deposits of silver in the Spanish colonies of the New World allowed Spain to mint great quantities of silver coins. The Spanish dollar was a Spanish coin, the "real de a ocho" and later peso, worth eight reals (hence the nickname "pieces of eight"), which was widely circulated during the 18th century.

By the American Revolution in 1775, Spanish dollars backed paper money authorized by the individual colonies and the Continental Congress.^[5] In addition to the American dollar, the 8-real coin became the basis for the Chinese yuan.

India

The Indian rupee is derived from the Rūpaya, a silver coin introduced by Sher Shah Suri during his reign from 1540 to 1545. Since this is around about the same time that the Spanish discovered silver at the Cerro Rico in Potosi, the silver value of the rupee maintained a stable relationship with gold right up until the early 1870's. From 1871, the value of silver depreciated relative to gold, due to the drop in demand for silver in the mints of Europe and North America, as those countries changed over to the gold standard. This had severe consequences for the rupee and it resulted in the fall of the Rupee. Following the Fowler report, India adopted the gold exchange standard in the year 1898, fixing the value of the rupee at exactly one shilling and four pence (1s 4d) sterling.^[6]

Great Britain

Great Britain's early use of the silver standard is still reflected in the name of its currency, the pound sterling, which traces its origins to before the Middle Ages (see Anglo-Saxon pound), when King Offa of Mercia introduced the silver penny, which copied the denarius of Charlemagne's Frankish Empire.

The early silver pennies were struck from fine silver (as pure as was available). However, in 1158, King Henry II introduced Tealby penny. English currency was almost exclusively silver until 1344, when the gold noble was put into circulation. However, silver remained the legal basis for sterling until 1816.

In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds). However, this valuation overvalued gold relative to silver compared to other European countries. British merchants sent silver abroad in payments while exports were paid for with gold. As a consequence, silver flowed out of the country and gold flowed in, leading to a situation where Great Britain was effectively on a gold standard. In 1816, the gold standard was adopted officially, with the silver standard reduced to 66 shillings (66/-, 2.3 pounds), rendering silver coins a "token" issue (i.e., not containing their value in precious metal).

The economic power of Great Britain was such that its adoption of a gold standard put pressure on other countries to follow suit.

Germany

After its victory in the Franco-Prussian War (1870-71), Germany extracted a huge indemnity from France of £200,000,000 in gold, and used it to join Britain on a gold standard. Germany's abandonment of the silver standard put further pressure on other countries to move to the gold standard.

United States

The United States adopted a silver standard based on the "Spanish milled dollar" in 1785. This was codified in the 1792 Mint and Coinage Act, and by the Federal Government's use of the "Bank of the United States" to hold its reserves, as well as establishing a fixed ratio of gold to the US dollar. This was, in effect, a derivative silver standard, since the bank was not required to keep silver to back all of its currency. This began a long series of attempts for America to create a bimetallic standard for the US Dollar, which would continue until the 1920s. Gold and silver coins were legal tender, including the Spanish real. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins.

The US Treasury was put on a strict hard money standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1848, which legally separated the accounts of the Federal Government from the banking system. However the fixed rate of gold to silver overvalued silver in relation to the demand for gold to trade or borrow from England. Following Gresham's law, silver poured into the US, which traded with other silver nations, and gold moved out. In 1853 the US reduced the silver weight of coins, to keep them in circulation, and in 1857 removed legal tender status from foreign coinage.

In 1857, the final crisis of the free banking era of international finance began, as American banks suspended payment in silver, rippling through the very young international financial system of central banks. In 1861 the US government suspended payment in gold and silver, effectively ending the attempts to form a silver standard basis for the dollar. Through the 1860-1871 period, various attempts to resurrect bi-metallic standards were made, including one based on the gold and silver franc; however, with the rapid influx of silver from new deposits, the expectation of scarcity of silver ended.

The combination that produced economic stability was restriction of supply of new notes, a government monopoly on the issuance of notes directly and indirectly, a central bank, and a single unit of value. As notes devalued, or silver ceased to circulate as a store of value, or there was a depression, governments demanding specie as payment drained the circulating medium out of the economy. At the same time there was a dramatically expanded need for credit, and large banks were being chartered in various states, including those in Japan by 1872. The need for stability in monetary affairs would produce a rapid acceptance of the gold standard in the period that followed.

The Coinage Act of 1873, enacted by the United States Congress in 1873, embraced the gold standard and de-monetized silver. Western mining interests and others who wanted silver in circulation labeled this measure the "Crime of '73". For about five years, gold was the only metallic standard in the United States until passage of the Bland-Allison Act on February 28, 1878 requiring the US Treasury to purchase domestic silver bullion to be minted into legal tender coins co-existent with gold coins. Silver Certificate Series 1878 was issued to join the gold certificates already in circulation.

By acts of Congress in 1933, the domestic economy was taken off the gold standard, and the Treasury Department was reempowered to issue paper currency redeemable in silver dollars and bullion, thereby divorcing the domestic economy from bimetallism and leaving it on the silver standard, although international settlements were still in gold.^[7]

This meant that for every ounce of silver in the U.S. Treasury's vaults, the U.S. government (not the Federal Reserve) could continue to issue money against it. These silver certificates bore the name of the U. S. Treasury, not the Federal Reserve; they were shredded upon redemption since the redeemed silver was no longer in the Treasury. With the world market price of silver having been in excess of $1.29 per troy ounce since 1960, Congress repealed the legal foundation for Silver Certificates on June 4, 1963; but President John F. Kennedy responded with Executive Order 11110 that the Treasury should continue to "issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury". This Series 1958 introduced an additional $4.29 billion worth of United States Notes into circulation, consisting of $2.00 and $5.00 bills; and although they were never issued, $10.00 and $20.00 notes were in the process of being printed when Kennedy was murdered in 1963. It is said that Pres. Kennedy and his Treasury Sec., C. Douglas Dillon, a Republican, had reservations about the merits of the Federal Reserve System; and for certain reasons wanted Treasury's silver certificates to circulate in competition with the Federal Reserve notes which had already flooded the world in the Marshall Plan, in the Cold War, and in importation of foreign goods. But the Treasury was being emptied of silver rapidly; in March 1964 issuance of the Series 1958 Silver Certificate was stopped and redemption in silver dollars was suspended; 24 June 1968 was the last day for redemption in silver bullion.

Finally, on 15 August 1971, President Richard M. Nixon announced^[8] that the United States would no longer redeem currency for gold or any other precious metal, forming the final step in abandoning the gold and silver standards.

See also

Numismatics portal

References

1. ^ "Monetary Madhouse", Charles Savoie [1]
2. ^ "Resumption and the Double Standard" a speech to the US Senate by John Percival Jones [2]
3. ^ 'Austin' gold information network [3]
4. ^ Rhodes, Richard (1986). The making of the atomic bomb. New York: Simon and Schuster. p. 118. 
5. ^ Julian, R.W. (2007). All About the Dollar. Numismatist. pp. 41. 
6. ^ "India's Balance of Indebtedness 1898-1913" [4]
7. ^ A History of Money and Banking in the United States; Murray Rothbard. ISBN 0-945466-33-1. (2005)
8. ^ http://www.youtube.com/watch?v=iRzr1QU6K1o