The Silver:Gold Ratio, 1687-2011

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From the Archives : Originally published March 16th, 2013
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Category : History of Gold

We have something special this week: the open market value of silver, compared to gold, over a period of over three centuries. The location is London.

For a long time, silver and gold were, in a sense, two versions of the same thing, just like one dollar bills and twenty dollar bills are today. Their ratio of value was not perfectly stable, like the 20:1 ratio of $1 bills and $20 bills, but it was quite stable between about 16:1 and 15:1. Both silver and gold served as metallic money side-by-side, with silver used for small scale transactions and gold for larger. You couldn't use just gold, because you can only make a gold coin so small. Even a tenth-ounce gold coin, which is a very small coin, would have a value today of about $160. Remember that people were poorer then too. Just as $160 is "a lot more money" in El Salvador today than the same $160 in San Francisco, compared to prices and wages and so forth, a tenth-ounce gold coin was "a lot more money" in those pre-industrial days than it is today for us living in the U.S.

This 15:1 or 16:1 silver:gold ratio goes waaaay back, to Roman times and before.

Even a tenth-ounce silver coin (roughly the U.S. silver dime) was quite valuable in those days, worth about $10 in today's money. ($160 for a tenth-ounce gold coin and a 16:1 silver:gold ratio works out to $10.) Thus, we move on to copper coins.

Over time, particularly in the 1870s, banknotes, token coins and bank deposits replaced silver for small-scale use. You didn't need silver dollars anymore, because you had a $1 paper dollar bill, and you could redeem $20 of these paper banknotes for a gold coin containing nearly one ounce of gold. Silver was "demonetized" in the 1870s. This was apparently something that humans just did collectively. Governments had to follow along, with official policy catching up to market reality. This was true even though some large countries, notably India and China, remained on silver-only monetary systems up through the early 20th century. Humans have always wanted their money to be as definite as possible, so when "bimetallism" was no longer needed for practical reasons, it was dropped. Silver coins still existed, but they had become "token coins," just like our coins today, whose value is related to their exchangeability for paper dollars and so forth, not the market value of contained metals.

Because of the "demonetization of silver" in the 1870s, silver is not useful today as the basis of monetary systems, although it was in the past. You would end up with the same problems that China had in the 1870-1940 period.

Note how the "silver bubble" of 1980 barely even shows up on this chart. The "spike" you see is actually in the late 1960s, when silver gained quite a bit of value vs. gold. The reason for this, I think, is that in the U.S. (and perhaps elsewhere), people were not able to own gold bullion. It had been banned in 1933. However, they could see that the U.S. government was on a path toward devaluation and a floating currency, which indeed happened in 1971. You could acquire silver coins like dimes and quarters, a perfect hedge. There was no downside because you would buy the quarter for $0.25 and it would always be worth at least $0.25. No risk! However, there was the upside that the silver quarter would be worth more than $0.25 in the future, which in fact was the case. Because of this, the value of silver rose and the U.S. government discontinued silver coins in 1964. The production cost exceeded $0.25. Apparently the bull market in silver continued a few more years, especially as devaluation loomed. In 1974, it became possible for U.S. citizens to own gold again, so there was less need for silver.

Today, nickels are in a situation similar to silver quarters in 1960. They will always be worth at least $0.05. However, today's nickel (75% copper, 25% nickel) is actually worth a bit more than $0.05 in metal value alone.

Including minting costs, the cost of production is more than $0.05. Probably, the penny and nickel will be discontinued soon, or the nickel will become a steel/zinc coin. So, you could hoard nickels, and have all the upside of currency debasement with no real downside. However, it is a lot harder to hoard nickels than silver quarters, due to their very small value. Some financial sophisticates have indeed hoarded millions of dollars of nickels, but even for them it is more of a stunt than real investing I think. But, maybe $10,000 of nickels? Could make sense for a small investor.

The red line in the chart is a 16:1 silver:gold ratio, and the green line is a 15:1 ratio.

Data and Statistics for these countries : China | El Salvador | India | All
Gold and Silver Prices for these countries : China | El Salvador | India | All
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Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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"large new deposits of silver were found"? So what was found by ECB that enabled them to cough up an extra trillion euros for failing European economy?
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"The red line in the chart is a 16:1 silver:gold ratio, and the green line is a 15:1 ratio." This is the wrong way round: swap "red" and "green".
This article brings up several questions as to the "validity" of the statements made herein. Nathan, you state: ~ Silver was "demonetized" in the 1870s. This was apparently something that humans just did collectively. ~ In reality, silver was NOT demonetized until 1964: but the REAL point I'd like to make is: humans DID NOT - collectively - demonetize Silver. The REMOVAL of silver - demonetizing - from the monetary system was FORCED on humans by The FED and the US Treasury.

Going a little further with your tale, Nathan, I come to: ~ Because of the "demonetization of silver" in the 1870s, silver is not useful today as the basis of monetary systems, although it was in the past. You would end up with the same problems that China had in the 1870-1940 period. ~ My correction to those statements is, firstly, the amount of silver in the world is finite, while the amount of paper is infinite; meaning silver would ALWAYS be the better monetary standard. Secondly, the problem China had between 1870 and 1940 was an OPIUM problem; NOT a Monetary Silver problem. Yes, I know there was a Japanese Invasion problem, and a problem with the British being so offensive in that Boxer Rebellion thing, but laying the Chinese problems on Silver is a Great Disservice to the Truth of The Matter.

I could go on and on and on with the Gross Misinterpretation of Reality in this article, but I already have a job with PLENTY of work to do besides correct other's errors. Getting the oil changed in my tractor and getting those flats of bell peppers started has become important at this moment. Still, thanks for raising my blood pressure and stirring my imagination.
Your statement that silver is superior to paper because the supply of silver is finite while the amount of paper is infinite would only hold water if (and only if) the value of our already existing paper money would take a beating because large new forests had been discovered....Oh, and by the way, Lewis was correct about silver being demonetized in 1873. You could look it up. Yes, there were coins that continued to contain silver until 1964, but that was owing to the cheapness of the metal. When it went up in value, they stopped using it. To go with the 1964 date, to be consistent, you would also have to claim that copper, zinc, steel, brass and nickel are, or were, all money.
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Very funny Cadaver. You believe: ~ Yes, there were coins that continued to contain silver until 1964, but that was owing to the cheapness of the metal. When it went up in value, they stopped using it. ~ The truth of the matter is: the value of PAPER went down so low that it made SILVER "appear" to become VERY valuable. In reality, relevant to everything else such as a bushel of wheat or a gallon of gasoline, the value of SILVER remained the same. Only against PAPER did silver value change.

Currently, the value of paper is also dropping and dropping and dropping against even the lowly COPPER penny; so yes, all the lower metals are also a better standard of MONEY than paper. As for the fantasy of silver being UNIVERSALLY demonetized in 1873; I could easily shred that Tale of Terror - or - we could go with the OBVIOUS and look at all that Silver Money that was minted after 1873 ! ! Hellooooooooooooo . . .
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Nowhere did i say UNIVERSALLY. i was talking about America, as you were doubtlessly aware.

Demonetized means to lose status as legal tender. Silver was legally demonetized back then. It is an indisputable fact. It is useless to belabor indisputable facts. But don't believe me. i could be making it all up. Look it up for yourself. Should you do so, you will find that silver was not only demonetized, but it was also not holding its own against the items you mentioned. Nor could it be that it was paper that was losing value, for America remained on a gold standard until the final link was broken in 1971. Paper was used before that, yes, but until then it always represented a certain amount of gold. And as you well know, 1964 came 7 years before 1971.

In effect, what you are attempting to do is to win your point by altering the meaning of words and misrepresenting the historical record. From reading your previous posts, i would not have thought that you would resort to such obsfucation.

You are perfectly free to believe that as a representation for money, metal beats paper. Make your case without distorting the facts and you may well convince me. But you will never do so by resorting to a revisionist history of the subject.
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Yes, historically 16:1, and around that (maybe 19:1) in the Earth's crust. But does that mean silver is under-valued relative to gold or that gold is over-valued relative to silver? That's the question.

To be fair the talk had a lot of focus on China and Britain, where it seems silver played a part in the coinage of those countries until much later than 1870. To have the context shift suddenly to the USA was not as obvious to me Vox. Since Britain was the major financial player up until after WWII there is no reason to shift context to the USA when speaking generally or universally. Australia's last silver coins were minted in 1969, just for the record.

Yes Vox. vast amounts of silver were discovered and mined from the USA which did indeed distort supply at the time. Vast amounts of gold were brought back by the Spanish from the "new world" earlier with a similar effect. However we must also acknowledge that as history continues a) the total above ground gold increases by maybe 1% per year and b) the chances of finding some "mother load" that could distort this ever-growing hoard diminishes with every passing year. For gold, that is, since silver is largely "consumed" (although historically not until the industrial revolution). In short I accept that supply changes happened - when humanity was still in an age of discovery and colonies - but don't hold much chance of it happening again on that relative scale - at least until we can lasso a solid gold asteroid or two.

Gold and silver were probably better money for the world at large, but we are not in that age now. Paper would be great money if we could trust ourselves, let alone our leaders. Nowadays its cheap to make, easy to win and easier to lose. But hey, at least we have a middle class.
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Mr. Lewis fed us a line of hooey, telling us that with the introduction of paper dollar bills, people just did not want to have silver ones anymore. The facts are that large new deposits of silver were found in the west and that severly depressed its value. And that is one of the chief reasons why commodity based currencies do not work. Those who advocate for a return to the gold standard never mention this dirty little secret. But dem's da facts. Ignore history and you repeat the mistakes.
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You are right that a currency based on precious metal is subject to inflation if there is a big increase in the supply of that metal. Indeed, this happened during the mid-to-late 16th century in Europe, when the Spanish imported silver plundered from the Americas. But this inflation was mild in comparison with that of the fiat currencies of the 20th century. It is less of a risk now because, despite ever-advancing technology in exploration, development, and mining over the past century, there has been no dramatic increase in supply. In fact, supply has generally lagged real economic growth. So the expectation for a world using gold or silver as currency is a gradual decrease of the price level.
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"large new deposits of silver were found"? So what was found by ECB that enabled them to cough up an extra trillion euros for failing European economy? Read more
coney - 3/24/2015 at 10:55 AM GMT
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