In the nineteenth century a number of currencies, among them the American dollar and the British pound, that were originally silver-based moved to first a de facto and then an official gold standard. This puzzles me because the nineteenth century, especially the latter half after industrialization really took off, was categorized by severe deflation that strongly hurt wage earners and commodity producers- the working class of factory workers and farmers whose labor became undervalued in terms of increasingly precious specie. Ordinarily the rule is that bad money drives out good; so why did gold which was almost too good replace more available silver? I’ve tried to research this and get answers that seem contradictory. I’ve read both that the closing of silver mines lead to shortage of metal to mint coins and that the exchange rate of silver to gold inflated so that no one wanted to hold silver anymore. Certainly even at the time people recognized that the gold standard favored the rich over the poor; so what happened to the silver standard?
Just a WAG, but maybe it’s because industrial applications were discovered for silver, turning it into a consumable - something that didn’t happen with gold until the electronics industry came along in the mid-20th Century. From what little I understand of economics, consumables make lousy currencies.
The Comstock Lode may have had a great deal to do with it.
What year is this?
exactly. This also became a major issue in mid 19th century, newly opened-up Japan where traditional high price of silver led to gold outflow and currency destabilization.
Sound money favors economic activity not based on uneconomic wasting of borrowed money. That’s why a whole bunch of indebted late 19th century Americans (especially farmers on the receiving end of mechanization driving down commodity prices) favored abandoning it via government manipulation of the price of silver.
It’s complicated. As I understand it, the problem stemmed partly from an increase in supply of silver coupled with governmental attempts to keep the price artificially high. Following is paraphrased from a work by George W. Hilton, the UCLA economist and social historian. It doesn’t exactly make the situation clear, but comes close to making it understandable to a layman.
The Sherman Silver Purchase act, et.al.
The U.S. had been on a bimetallic standard for most of the nineteenth century buying both gold & silver at mint prices in an approximate ratio of 16:1. Initially, this ratio overvalued gold relative to its market price so that gold, but not silver, was attracted to the mint. Silver discoveries in the western states reduced the market price of silver so that by the 1870’s silver rather than gold was attracted to the mint (because by this time the mint, still locked in to the 16:1 ratio, was forced to buy silver at more than market value).
To correct for this situation, congress passed the Coinage Act of 1873, which limited silver coinage to dollars and fractional currency, and made silver legal tender for debts only up to $5. This reduced demand for silver and caused the price to go into free fall. By 1889 the market ratio (silver:gold) was 22:1. In an effort to undo the damage to silver producers, Congress in 1890 passed the Sherman Silver Purchase act which provided for the Treasury to buy 4.5 million ounces of silver per month - approximately the nation’s entire output - at the market price. The silver was to be purchased with a new issue of paper money, the treasury notes of 1890, which were redeemable either in gold or in silver. Since most recipients preferred to take payment in gold, the result was to replace large quantities of monetary gold stock with silver. This tended to reduce the value of the dollar relative to foreign currency, and caused a net outflow of gold of $87.5 million by mid-1993. India’s ceasing to coin the silver rupee in 1893 contributed to the continued fall in the price of silver.
In June 1893 President Cleveland called a special session of Congress to repeal the Sherman act on the grounds that the nation’s gold stocks were becoming so depleted (replaced with cheap silver) that the country was in danger of having to end the convertibility of the dollar into gold. This repeal further reduced the silver:gold ratio to 27:1 and finally 32.5:1 or less than 60 cents per ounce. William Jennings Bryan’s presidential campaign of 1896 was formed around an effort to restore the 16:1 mint ratio, but it failed. The episode ended with the demonetization of silver except for subsidiary coinage in the Currency Act of 1900.
By 1900 the price of silver was so low that only the very richest deposits could be extracted profitably. The great silver-producing regions in Colorado, Nevada, Idaho and elsewhere saw a tremendous outflow of population…mines were closed and ghost towns remained. Only the increase in demand for silver brought about by various advances in technology and the advent of WW2 brought about a renewal of mining.
It’s not the Comstock Lode, guys. That wasn’t open until 1859.
Britain was on an official gold standard from after the Napoleonic Wars, and on a de facto gold standard for long before that, from around the time Isaac Newton was at the mint more than a hundred years earlier. The US was on a de facto gold standard from the Coinage Act of 1836. These are both before the big Comstock silver finds. Vast quantities of new silver helped convince people to stay on the gold standard, but it didn’t have anything to do with choosing gold in the first place.
Official US policy was originally bimetalism, with free coinage of gold and silver. This was “free” in two senses: first, that there was no mint charge for coining; second, that the mint would coin unlimited amounts of gold and silver for anyone who showed up with the bullion. The legal ratio between the two metals was set at 15:1. These minted coins were legal tender. So show up with 1 ounce of gold, and they’d essentially mint you a 20 dollar gold coin. Show up with 15 ounces of silver and they’d mint you 20 dollars worth of coins. If you were in debt twenty dollars, you could pay with either gold or silver.
The problem was that the market exchange rate was different from the legal exchange rate, because France also relied on bimetalism, and France used a legal conversion rate of 15.5:1. France had more economic clout at the time, and the market followed the French standard.
So let’s say I’m 20 bucks in debt, and I am in possession of one ounce of gold. I can go to the mint and get a coin that will legally discharge that debt, in exchange for my entire ounce of gold. Or I can go to the market, get 15.5 ounces of silver in exchange for my gold, and then take 15 of those ounces of silver to the mint in order to get 20 dollars worth of coins to discharge my debt. And if I do it that way, paying with silver, I still have half of ounce of silver left over after the debt is discharged.
The Coinage Act of 1834 changed things, because the pols were out to bury the second Bank of the United States and its silver-based notes. Instead of setting the legal ratio at 15.5:1 to match the market set in France, they made the legal ratio to 16:1. Now gold was the cheaper metal to get hold of. If I had a 20 dollar debt, and 16 ounces of silver in my possession, I could take the 16 ounces in total to the mint and get 20 dollars worth of coins in exchange for the entirety of my metal, OR I could take the 16 ounces of silver to the market to get 1.03 ounces of gold, and then take one ounce of gold to get a 20 dollar coin, and pay the debt. Afterward, I would have about 0.03 ounces of gold left, and the debt would be entirely discharged.
Gold was chosen in both Britain and the US because it was the “cheaper” metal – that is, cheaper when considering the difference between the market rate and the legal rate.
Other countries fell in line with gold not for any especially good reason, but mostly because Britain had chosen gold (by sheer legal coincidence), and Britain was the supreme power of the 19th century. The new German Empire after 1871 chose a gold standard. After losing the war in 1871, France also abandoned bimetalism and went on gold exclusively. They sold off their massive silver reserves, and suddenly silver became very cheap. Big silver finds were important, but a big part the huge influx of silver was France choosing gold exclusively, thus dumping all the silver into circulation at once.
The US arguably could have done well in the beginning, if they’d chosen silver quickly and then stuck with it. Politically, that’s not what happened. In the “Crime of 1873”, the US ended the free (unlimited) coinage of silver, and the political strife of the last quarter of the 19th century was thus set in motion.
To sum up: gold was originally chosen out of the sheer dumb luck of the original legal equivalence. Then later on, everyone stuck with gold because they didn’t want a big inflationary upheaval that would come from changing back to silver. Silver interests managed limited silver purchases on occasion, but they never got back to free silver coinage after 1873.
I did some brief googling, but can’t really find the answer - where has all the Silver gone? Gold is stockpiled by pretty much every nation, but who has all the Silver?
Sounds like bimetallism, and the fiction that the silver/gold ratio could be permanently fixed, is what did silver in. Once silver production (being the less rare metal) outpaced gold production, the price dropped too far, gold became favored, and the death blow was when national currencies started demonitizing silver, dropping the demand and therefore the price still more.
As I said earlier, a pity given that the economies of the US and Britain in the nineteenth century were desperately deflated. A global silver standard might have literally changed history. The government shenanigans with regard to the money supply rather skewers the notion held by some that specie is somehow immune to government manipulation.
Another question: apparently the move away from silver began much earlier than I had thought, well before the Industrial Revolution got under way. What caused that?
That is exactly right.
Exactly what you’d expect.
Early on, they established a legal exchange rate between gold and silver. The market changed, but the law didn’t. Gold production became higher than previously and gold became the “cheaper” money (compared to the legal rate!), and the English became a gold-using nation. Isaac Newton had the task of recoining the realm, but he couldn’t alter the market forces. The gold stayed, and the silver left. It took a long while, but the pound “sterling” eventually became officially defined as a weight of gold after Napoleon. Merely official acknowledgement of a process already underway in Newton’s time.
Now, the French managed a true bimetalism for quite a long time in the 19th century. But this is because they had the willingness to manipulate the market, and the economic clout to pull it off. They did this by taking all that excess silver off the market, and putting it in vaults. The silver was mined out of a hole in the the ground and, eventually, transported to France where it was put into a new man-made hole in the ground. Since all of that new silver didn’t circulate, the French were able to maintain their 15.5:1 exchange rate, even after discoveries like the Comstock radically increased silver production. The French were successfully bimetallic until they got whooped on by the Prussians. That’s when they lost control of the market, things came unravelled, and they joined the gold club.
And more gold demand meant more deflationary pressure in the late 19th century, until the South African discoveries and the arsenic mining process. William Jennings Bryan eventually got the inflation he claimed he wanted, it just took a while.