Silver standard

The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century. Following the discovery in the 16th century of large deposits of silver at the Cerro Rico in Potosí, Bolivia, an international silver standard came into existence in conjunction with the Spanish pieces of eight. These silver dollar coins 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. In 1717, the master of the Royal Mint, Sir Isaac Newton, introduced a new mint ratio as between silver and gold, and this had the effect of putting Britain onto a de facto gold standard. 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, Peru. The British gold standard initially extended to some of the British colonies, including the Australasian and Southern African colonies, but not to its North American colonies, British India, or to Southeast Asia. The Province of Canada adopted a gold standard in 1853, as did Newfoundland in 1865. In 1873, Imperial Germany changed over to the gold standard in conjunction with the new gold mark coin. The United States changed over to gold de facto in the same year, and over the next 35 years, all other nations changed to gold, leaving only China and the British colonies of Hong Kong and Weihaiwei on the silver standard. The silver standard finally came to an end when it was abandoned by China and Hong Kong in 1935.

Relative value of silver and gold

Since the time that silver was discovered by the Spanish in the New World in the 16th, until the latter half of the 19th 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 23 November 1871, following the defeat of France in the Franco-Prussian War, Bismarck exacted one billion dollars in gold indemnity, and then proceeded to move Germany towards a new gold standard which came about on 9 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.

Silver made a partial comeback in the first decade of the 20th 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 19th 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 70/1.^[2]

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.^[3] 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.

China

China had long used silver ingots as a medium of exchange, 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 the Song Dynasty (960-1279), those silver ingots were used mainly for hoarding wealth. During the Song dynasty, for the first time in history the government became the sole issuer of paper currency after 1024, but cast coins and silver ingots were still used as a medium of exchange. In the Shanyuan Treaty, signed with the state of Liao in 1004, Song China agreed to pay an annual indemnity or tribute of 100,000 tael of silver and 200,000 bolts of silk. This was the first time bulk silver in tael (Chinese: 銀兩) was used as indemnity in a treaty with a foreign power. Silver ingots had a shape similar to a boat or a Chinese shoe during the Yuan dynasty (1279–1368). This became an ordinary shape for silver ingots during the following centuries.

The use of silver as money was very established at the time of the Ming dynasty (1368–1644). Paper money was first issued in 1375 by the founder Hongwu Emperor amid the ban of silver as medium of exchange. But due to the increasing depreciation, the paper money became basically worthless and the ban on silver usage was finally lifted in 1436 (1st year of the Zhengtong Emperor). Meanwhile, silver was made much available through foreign trade with the Portuguese and the Spanish, beginning in the 16th century. The great tax reform by the statesman Zhang Juzheng in 1581 (9th year of the Wanli Emperor) simplified the taxation and required all the tax and corvee to be paid in silver. This can be seen as an indication of the firm position of silver in the monetary system of the Ming. However the reform would not have been a success or even feasible if the enormous amounts of silver had not been available through trade and imports from the Americas, mainly through the Spanish.

During the Qing dynasty (1644–1911), silver ingots were still used, but various foreign silver dollars had become popular in the Southern coastal region through foreign trade since the mid-Qing era. It was apparent that the silver ingots became awkward and more complicated to use vis à vis the foreign silver dollars, which could be counted easily, given their fixed specification and fineness of silver. However, the Qing dynasty very much resisted the idea of minting a silver coin of their own. It was not until late Qing, in 1890, that the first circulating silver coin was introduced by Guangdong province. The coin was at par with the Mexican peso, and soon this issue was emulated by other provinces. For these silver coins, the tael was still seen as the proper monetary unit, as the denomination of the coins were given as 0.72 tael (specifically: 7 mace and 2 candareens). Note for the treaties signed between the Qing dynasty and the foreign powers the indemnities were all in tael of silver, except for the Treaty of Nanking, where the silver dollar was indicated. (See the Treaties of Tianjin, Convention of Peking, Treaty of Shimonoseki and Boxer Protocol). It was not until 1910 that the "yuan" (Chinese: 圓, literally "roundness"), was officially announced as the standard monetary unit. The yuan was subdivided into 10 jiao or 100 fen, and specified as 0.72 tael of 900 fineness silver. The next year, 1911, the so-called "Great Qing Silver Coin" one yuan (dollar) was issued, but soon after the dynasty was replaced by the Republic.

The silver standard was again adopted and codified in 1914 by the newly established republic, with one yuan still being equal to 0.72 tael of 900 fineness silver. After the Chinese Nationalist Party (Kuomintang) unified the country in 1928, the yuan was again announced as the standard unit in 1933, but this time the relationship of the yuan to the tael was abolished, as one yuan was now equal to 26.6971 grams of 880 fineness silver. In the same year, 1933, while most of the Western countries (especially Britain and USA) had left the gold standard because of the Great Depression, it was said that China almost avoided the depression entirely, mainly due to having stuck to the silver standard. However, the US silver purchase act of 1934 created an intolerable demand on China's silver coins, and so in the end the silver standard was officially abandoned in September 1935 in favor of the four Chinese national banks' "legal note" issues. China would be the last to abandon the silver standard, along with the British crown colony of Hong Kong.

China's use of silver as a medium of exchange is reflected in the name for bank "銀行" (literally "silver house" or "silver office") and for the precious metal and jewel dealer "銀樓" (literally "silver building" or "silver shop").

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.

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.

Hong Kong

The British colony of Hong Kong would be the last, along with China, to abandon the silver standard in September 1935. Hong Kong then adopted the gold exchange standard and the Hong Kong dollar took on the exact value of one shilling and three pence ("1s 3d") sterling.

India

The Indian rupee is derived from the Rūpaya, (silver is called rūpa in Sanskrit) in 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 Potosí, the silver value of the rupee maintained a stable relationship with gold right up until the early 1870s. 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.^[4]

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.

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.

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/-, 3.3 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.

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, including the Gold Reserve Act and the Silver Purchase Act of 1934, the domestic economy was taken off the gold standard and placed on the silver standard for the first time. 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.^[6]

This meant that for every ounce of silver in the U.S. Treasury's vaults, the U.S. government could continue to issue money against it. These silver certificates 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, silver began to flow out of the Treasury at an increasing rate. To slow the drain, President Kennedy ordered a halt to issuing $5 and $10 silver certificates in 1962. That left the $1 silver certificate as the only denomination being issued.

On June 4, 1963, Kennedy signed Public Law 88-36, which marked the beginning of the end for even the $1 silver certificate. The law authorized the Federal Reserve to issue $1 and $2 bills, and revoked the Silver Purchase Act of 1934, which authorized the Secretary of the Treasury to issue silver certificates (by now limited to the $1 denomination). Because it would be several months before the new $1 Federal Reserve Notes could enter circulation in quantity, there was a need to issue silver certificates in the interim. Because the Agricultural Adjustment Act of 1933 granted the right to issue silver certificates to the president, Kennedy issued Executive Order 11110 to delegate that authority to the Treasury Secretary during the transition

Silver certificates continued to be issued until late 1963, when the $1 Federal Reserve Note was released into circulation. For several years, existing silver certificates could be redeemed for silver, but this practice was halted on June 24, 1968

Finally, President Richard Nixon announced^[7] 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. This announcement was part of the economic measures now known as the "Nixon Shock".

Due to the monetary policy of the U.S Federal Reserve, calls for a return to the gold standard have returned. Some states have chosen to use a loophole in the Federal Reserve act that gives individual states the right to issue currencies of gold or silver coins or rounds. This was done because the Federal Reserve act does not allow them to print their own currency if they wished. As of January 2012, Utah allowed the payment of debt to be settled in silver and gold, and the value of the American silver or gold rounds used was pegged to the price of the given precious metal. Payment in some cases can be requested to be made in silver or gold rounds. As of 2011, eleven other U.S states were currently exploring their options to possibly make similar changes like Utah.^[8]

See also

References