Precious Metals

A Brief History of Monetary Silver

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Silver has a similar history to gold of being money. Following the ending of barter, communities worldwide adopted durable metals – gold, silver or copper, depending on local availability — as the principal medium of exchange. And until the 1960s this heritage, with respect to copper and silver, was still reflected in the coinage used in most nations. The British currency is still known as sterling because since the reign of Henry II (1154–1189) money was silver coinage of sterling alloy, comprised of 92.5% silver, the balance being mainly copper.

Silver was the sole monetary standard, sometimes with gold on a bimetallic standard, for most regions from medieval times until the nineteenth century. Sir Isaac Newton reset the silver standard against gold in 1717, and it was because the British government overpriced gold and failed to adjust to the consequences of changing mine supplies, principally the subsequent expansion of gold supply from Brazil, that British commerce moved towards a gold standard during the eighteenth century.

We look in greater detail at these events later in this article.

As international trade developed, gold for trading nations assumed greater significance, leading eventually to the adoption of the British sovereign coin as the gold standard in the early nineteenth century.

In colonial America, silver was the principal circulating currency in common with that of Britain at the time, but following Newton’s introduction of a silver standard for the pricing of gold, similar practical relationships between the two metals existed for trade in nearly all Britain’s colonies; in America’s case at least until independence was formally gained by the Treaty of Paris in 1783.[i]

When Alexander Hamilton was Treasury Secretary, the US introduced a bimetallic standard with the first coinage act in 1792 when the dollar was fixed at 371.25 grains of pure silver, minted with alloy into coins of 416 grains. Gold coins were also authorised in denominations of $10 (eagles) and $2.50 (quarter eagles). The ratio of silver to gold was set at fifteen to one. All these coins were declared legal tender, along with some foreign coins, notably the Spanish milled silver dollar, which had 373 grains of pure silver making them a reasonable approximation for the US silver dollar.

However, not long after Hamilton’s coinage act was passed, the international market rate for the gold/silver ratio rose to 15.5:1, which led to gold being drained from domestic circulation, leaving silver as the common coinage. Effectively, the dollar was on a silver standard until 1834, when Congress approved a change in the ratio to 16:1 by reducing the gold in the eagle from 246.5 to 232 grains, or 258 grains at about nine-tenths fine. An additional adjustment to 232.2 grains was made in 1834. After a few years, gold coins then dominated in circulation over silver, the circulation of which declined as it became more valuable relative to gold. Gold discoveries in California and Australia then increased the quantity of gold mined relative to silver, making silver even more valuable relative to gold coinage thereby driving it almost totally out of circulation. This was remedied by an act of 1853 authorising subsidiary silver coins of less than $1 to be debased with less silver than called for by the official mint ratio and less than indicated by the world market price.

Under financial pressure from the civil war, in 1862 the government issued notes that were not convertible either on demand or at a specific future date. These greenbacks were legal tender for everything but customs duties, which still had to be paid in gold or silver. The government had abandoned the metallic standards. Greenbacks were issued in large quantities and the United States experienced a substantial inflation.

After the war was over Congress determined to return to the metallic standard at the same parity that existed before the war. It was accomplished by slowly removing greenbacks from circulation. The bimetallic standard, measuring the dollar primarily in silver, was finally replaced with a gold standard in 1879, reaffirmed in 1900 when silver was officially relegated to small denomination money.

In Europe, most countries on a silver standard moved to gold after the Franco-Prussian war (1870–1), when Germany imposed substantial reparations from France which were paid in gold, and Germany was then able to migrate from a silver to a gold standard. Other European nations followed suit.

More recently, silver circulated as money in Arab lands in the form of Maria Theresa dollars, which had circulated widely in the Middle East and East Africa from the mid-nineteenth century and were still being used in Muscat and Oman in the 1970s.

These are just some examples of silver’s use as money in the past. It lives on in base metal coins today, made to look like silver. Now imagine a world where fiat currencies are discredited: gold or gold substitutes will almost certainly return as the money for larger transactions, and silver will equally certainly return as money for everyday transactions. Bimetallism might not return as official policy due to the frequent adjustments required, but history has shown that a relatively stable market rate between gold and silver is likely to ensue, and silver more than gold will ensure widespread distribution of circulating metallic money.

Supply and demand factors

Analysts are currently grappling with the effects of the coronavirus on supply and demand in their forecasts for the rest of this year. Silver mines have been affected by changes in grades and production shutdowns. According to the Silver Institute, in 2019 less than 30% of mine supply was from mines classified as primarily silver, the rest coming from lead/zinc, copper, gold mines and “others” in that order of importance. Miners of lead/zinc, copper and others made up about 56% of global silver mine supply, so that a decline in global economic activity automatically leads to a decline in silver output from base metal miners.

At the same time, falling industrial demand for silver throws a greater emphasis on investment to sustain demand overall. Last year, non-investment demand was 806 million ounces, while investment was estimated at 186 million, a relationship which in a deep recession will require a significant increase in investment demand to absorb the combination of mine, scrap and available above-ground stocks. Identifiable above-ground stocks are estimated at 1,651 million, a multiple of 1.67 times 2019 demand, and 8.9 times 2019 investment demand.

For 2020 and beyond, I am very bearish for the global economy for reasons stated elsewhere. If I am right, current estimates for mine supply, of which over half is dependent on base metal mines, will prove optimistic. But silver demand for non-investment usage is likely to decline even more, in which case investment demand will probably need to at least double if silver prices are to rise in real terms.

An interesting point is found in the comparison with gold, where above-ground stocks are many multiples of mine and scrap supply. Stock-to-flow comparisons have been popularised recently by the cryptocurrency community as a measure of future monetary stability, compared with that of infinitely expandable fiat currencies. A high stock-to-flow signals a low rate of inflationary supply. Silver has a very low stock to flow ratio due to the low level of above-ground stocks. But it is a mistake is to rely on this measure of monetary stability for a metallic money when the lack of physical liquidity should be the main consideration.

At current prices, silver’s above-ground stock is worth only $31bn, compared with gold’s at over $10 trillion. With this relationship of 323 times of gold to silver’s above-ground stock values and an annual mine supply ratio of only 8 times as many silver ounces to that of gold, it appears that if gold returns to its traditional monetary role, silver will turn out to be substantially undervalued. “If” is a little word for a very big assumption; but given the unprecedented and coordinated acceleration of monetary expansion currently proposed, an ending of the current fiat currency regime and a return to gold and silver as monies is becoming increasingly likely.

The relationship with gold in the numbers above suggest that a bimetallic standard today on mine supply considerations alone would be at almost half Isaac Newton’s 1717 exchange rate. Obviously, the issue is not so simple and will be settled by markets. But looking at some other facts suggest the gold/silver relationship is due for a radical rethink. Table 1 below lists some of the relevant ones.

The clear outlier is the gold/silver ratio.

– Source, James Turk’s Goldmoney


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