By Antal E. Fekete
THE INCREDIBLE COLLAPSE OF THE VALUE OF SILVER COINS
IN THE 19TH CENTURY
̶ DON’T BLAME COMSTOCK! ̶
Antal E. Fekete
An Address Delivered at the Conference Held at the University of Padova
on November 30, 2012
“Coin Finds and Historical-Economic Processes in the Ancient World:
Ten Years of Research 2002-2012”
The silver standard did not die a natural death. It was deliberately killed. A proper search for the assassins was never carried out. There was never a post-mortem. In this paper we focus on the conspiracy as it might have unfolded between the two dates: April 9, 1865 (the day General Lee of the Confederacy surrendered at Appomattox to General Grant of the Union marking the end of the War Between the States) and January 1, 1879 (Resumption Day, when payment of the victorious Union’s currency, the greenback was resumed in gold specie ̶ but not in silver).
China has been on the silver standard since time immemorial. The Chinese did not use coins for monetary purposes such as bank reserves until the end of the 19th century; they used the sycee, a shoe-shaped ingot of approximate size 5⤫3⤫3 inches, weighing approximately 50 taels or about 5 pounds (avoirdupois). No one can pretend to know, however approximately, how much monetary silver has gone into hiding in China and in India, these two most populous countries also known as the world’s sink for silver, over the millennia. In comparison estimates of monetary gold having gone into hiding over the same period of time are far more reliable. Be that as it may, the amount of monetary silver unaccounted for is probably greater than any estimate ever made.
In the 19th century silver coins did most of the money-work in the world. The turnoverof silver coinage (the value of silver coins times their velocity) was at an all-time high, eclipsing the turnover of gold coinage by far. Inept governments did not follow the lead of Isaac Newton, and they tried to enforce a rigid exchange rate between the two monetary metals (called the Mint ratio). This system was called bimetallism ̶ a stillborn idea.
Bimetallism did not stabilize the exchange rate. On the contrary, it has destabilized it. The natural monetary system is based on silver and gold valued at a variable rate, as Newton’s monetary system in Britain did. Bimetallism was the disease, the demise of the silver standard was the unfortunate consequence. In the Western countries by 1879, in India by 1893, in China, the last stronghold of silver, by 1935, silver was demonetized. Between the two dates 1879 and 1935 the world witnessed a most spectacular event: the collapse of the value of silver by more than 80% in a little over half of a century. Silver fell from $1.29/oz in 1873 to 25¢/oz in 1935. Putting it differently, the gold/silver price ratio rose from 15:1 to more than 80:1. Never in history, ancient or modern, have markets put such fancy values on gold in terms of silver.
Who killed the silver standard?
All this can be neatly explained in terms of the Quantity Theory of Money. The richest silver vein ever, called the Comstock Lode was discovered in Nevada in 1858. Surplus silver inundated the economy and lost most of its value due to the oversupply and the lack of matching demand.
But this explanation will not satisfy those of us who consider the Quantity Theory of Money as a mere mechanical metaphor. As a theory it is bound to fail because it is trying to give a linear explanation of highly non-linear phenomena. January 1, 1879, Resumption Day, when the payment of the greenback in gold (but not in silver) specie was resumed, coincided with the date when the Latin Monetary Union in Europe closed its last Mint to silver ̶ marking the end of the silver standard in the Western countries. The coincidence is ominous.
No satisfactory explanation has been offered in the literature for the fact that the closing of the Mints to the free coinage of silver was the starting point of an unprecedented destruction of wealth world-wide, due to the relentless fall in the price of silver during the following 55 years. To make matters worse, it was destruction ofliquid wealth. Not only did silver lose more than 80 percent of its purchasing power; it also ceased to be a monetary metal. As a consequence, silver became so much harder to sell. Worse still, the steadily falling price caused panic-mining of silver. Miners were anxious to sell before the price fell even more. As a result, almost all silver mines were mined out prematurely. Thereafter all silver output came as a byproduct of mining other minerals. These effects compounded and made the destruction of monetary values, that is deflation by another name, so much worse.
The collapse of the silver price was a major historical event affecting the entire globe and all trading nations of the world. It caused the impoverishment of the indigent classes in India, China, and elsewhere in Asia. But it also wiped out the credit-worthiness of the middle classes in Europe that lost their landed wealth as a consequence. Monetary historians failed to treat this aspect of the demise of the silver standard with the seriousness it deserved. They also misdiagnosed the deflationary bias that the monetary system showed in the first half of the 20th century. The gold standard that arose on the ashes of the old monetary order in the wake of the destruction of the silver standard was less than satisfactory. Silver demonetization has made all hoarding demand fall upon gold. This imparted a deflationary bias to the international gold standard that enemies of sound money were able to exploit with all consummate skill. Following a vicious campaign of anti-gold agitation gold was also demonetized by the governments exactly one hundred years later, in 1973. The demonetization of gold was no less unconstitutional than that of silver a hundred years earlier. It was also based on chicanery for good measure.
It should be noted that hoarding gold and silver is not an aberration. It is, in fact, part of the essential mechanism regulating the rate of interest. It will bar the banks from suppressing interest. When depositors realize what the banks are up to, they withdraw their deposits in the form of gold coin. The banks lose reserves and are forced to call in loans. It will also act as a deterrent against government profligacy. Ordinary citizens become disturbed by the government’s overspending and serial budget deficits. In response they show a preference for holding their liquid wealth in gold coins instead of short-term government paper. Such hoarding demand previously fell upon gold as well as silver. Now it was falling upon gold exclusively. The deflationary consequences are obvious.
One instinctively feels that there is no way self-destruction of liquid wealth of so great a magnitude could occur spontaneously in such a short space of time. The event could not be explained on the strength of causality. We must invoke teleology if we really want to understand it. Such an analysis was never carried out. Furthermore, speaking of destruction of wealth is not quite accurate. Value was not destroyed in the same sense of a house burning to the ground.