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
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
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 turnover of 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
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 of liquid
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 wealth is not quite accurate. Value was not destroyed in the
same sense of a house burning to the ground.
Rather, it looks like a clandestine embezzlement to
benefit the world’s banking establishment at the expense of account
holders. Their assets were manipulated downwards in value and ultimately
taken over by the bank. The perpetrators were not worried that the
disappearing liquid wealth would be missed and cause deflation. That was just
the point of perpetrating it. They were confident that if they replaced the
disappearing silver with bank credit based on debt, in particular, the debt
of the government, then there would be no deflation. This strongly suggests
government involvement. In all probability there was a conspiracy between an
international banking cartel and some governments (e.g., the United States
government acting either alone or in connivance with Imperial Germany).
Economic historians describe the Silver Saga as a
natural evolution whereby gold monometallism
displaced bimetallism while strangling the silver standard to death.
According to this reading of history, the market gradually eliminated silver
as money, as it has so many other challengers of gold’s supremacy in
the race for monetary hegemony. It was destiny. No need for a post mortem,
still less for a search for the assassin. What would happen if every death
due to natural causes was investigated as if it was due to violent causes? At
any rate, they claim, the Quantity Theory of Money fully explains the market
process eliminating silver from monetary circulation.
Upon closer examination the hypothesis that it was the
market rather than collusion between governments and banks that killed the
silver standard appears untenable. There were powerful pressure groups
pushing for the closing of the Mint to silver. One such pressure group
representing special interest was that of international banking houses ¾ given their well-known penchant for monopolies. They avoided public
debate. They acted behind the scenes. A monopoly of the gold standard would
mean, for them, a better handle on money-creation through their control of
the gold mines, as well as their control of public credit. If this hypothesis
is correct, then we know what sealed the fate of the silver standard.
was victorious in the Franco-Prussian war of 1870-71. The German Empire was
proclaimed at the Palace of Versailles on January 18; Paris fell to the
invading German troops on January 28, 1871. Germany was anxious to join the
gold standard club led by Britain. On November 23, 1871, Bismarck exacted a reparation of five thousand million gold francs (or one
billion gold dollars, or 200 million pounds) from France payable in four
years. Northern France was to remain under German occupation while the full
amount was settled. Arguably this was the largest amount of gold ever
changing hands directly, without involving promises to pay. One thousand
million dollars in gold (at $19.39/oz!) is an
incredibly huge sum of money by any standard. In comparison, the Lousiana Purchase in 1803 was consummated for a total sum
of $15 million in gold. The Alaska Purchase in 1867 was consummated for $7.2
million in gold. This makes the French indemnity to Germany equivalent to 66 Louisianas or 172 Alaskas.
The temptation for the Germans to increase the value of
their gold booty by fair means or foul may have been irresistible. For
example, it could be increased by demonetizing silver. That would increase
the demand for, and so also the purchasing power of gold.
France paid the indemnity ahead of schedule. The new
gold standard of the German Empire was inaugurated on July 9, 1873, when the
new gold coin, the gold mark made its debut. This was preceded by closing the
German Mints to the coinage of the silver Taler in
1871, the first overt step towards demonetizing silver.
Some historians maintain that the demonetization of
silver and the subsequent sale of melted coins by the German government on
the world market was the direct cause of the precipitous fall of the value of
silver. However, this is flatly contradicted by the fact that on February 12,
1873, the day when President Ulysses Grant signed the Coinage Act of 1873
into law, silver fetched a higher price in the market than the Mint price.
No silver was flowing to the Mint. Records of the minting of the standard
silver dollar show that there has been no demand for the monetization of
silver on private account. This situation continued for some time afterwards.
Silver mines continued selling their output on the free market. They seem to
have been unaware that silver had been effectively demonetized by Germany in
1871 and by the United States in 1873. It made no difference to them: the
market offered a better price.
The ultimate damage to the price of silver was not
inflicted by German demonetization. Nor was it inflicted by demonetization in
the United States. The market knew that demonetizations were coming and took
them in stride. There was a ready market for silver in India and China,
presumably for any amount, however large. American silver miners started to
look at the U.S. Mint as a potential market for their production in 1875, as
the price of silver in terms of the greenback was weakening. They were
shocked to find that the Mint had been closed to silver years earlier.
The anatomy of a murder
is the step-by-step chronology of the passage of the bill that was to become
the Coinage Act of 1873. It eliminated the standard silver dollar by default, in
failing to mention it. This removed the authority to mint any more. The removal
was unconstitutional. Since that coin was the only silver coin
that could be struck in unlimited amounts for private account, it also meant
the demonetization of silver by the United States of America, following the
example set by Germany.
(1) In 1868 senator John Sherman of Ohio sponsored a
bill that, among other things, proposed that the Mint be closed to the
coinage of the Constitutional silver dollar, thus demonetizing silver in the
United States. Although there was no opposition, the bill died in committee
because the Senate was busy with other things, such as the greenback
inflation struggle. Note the early date 1868!
(2) Secretary Treasury Boutwell
sent the bill (that was to become the Coinage Act of 1873 omitting the
standard silver dollar) to Congress on April 25, 1870 with his strong
recommendation for passage.
(3) The Senate passed the bill on January 10, 1871 by a
vote of 36 to 14. Among the ayes were the two senators from the
silver state of Nevada. (At the time Nevada was the only silver state as it
had been admitted to the Union in 1864. Colorado was the second admitted in
1876, followed by Montana, Idaho and Utah admitted between 1889 and 1896).
(4) The House passed the bill on May 27, 1872, by a
vote of 110 to 13. Support among representatives from the silver state of
Nevada was again overwhelming.
(5) President Grant signed the bill into law on
February 12, 1873. It is important to note that all the details, including
the entire text of the bill, were in the public domain as early as April,
25 years later, in 1895, Senator John Sherman, who was
the sponsor of the bill in the Senate, in a famous speech of his entitled On the Crime
of 1873 stated that, while the bill was pending in Congress for
as long as three years,
“it was carefully considered in both
houses and special attention was called to the omission of the standard
silver dollar, and to the reasons for this omission… It is strange that
the very men who supported and urged this coinage law of 1873 and demanded
the exclusive coinage of gold are the very men who now [in 1895] demand the
free coinage of silver…
Later in that speech Sherman related that his
colleagues, Senators Jones and Stewart of the silver state of Nevada, were
“urgent and honest in
saying that gold was the best and only standard of value“. However,
they changed their minds when production from the Comstock Lode in Nevada
[discovered in 1858] increased greatly, and the first signs of weaknesses in
the silver price started to show after 1874. Then they wanted a market for their
silver. They wanted themselves and their friends to pay existing debts and
obligations, that had been contracted on gold basis, in silver; but took care
in their own contracts to stipulate that debts owed to them were
payable in gold.” (The World’s Famous Orations: John Sherman,
1873 neither silver nor gold coins circulated in the United States, although
the Mint was open to both metals. The country was on the ‘greenback
standard’: irredeemable paper money issued by the Union to finance its
efforts in the War Between the States, which circulated at a discount of
about 13 percent to silver. It was understood, however, that gold payments on
the notes would be resumed (as indeed it happened on January 1, 1879) and the
greenbacks would ultimately be withdrawn from circulation pursuant to the
Resumption Act of 1875. The question whether resumption was to be extended to
silver payments as well was bypassed in silence.
The prospect of resumption could be the
smoking gun prompting the international banking houses to commit the crime. On April 9, 1865 (the day of Appomattox) an incredible opportunity to
grab and usurp monetary powers presented itself. Obviously, resumption
was coming, followed by a great increase in demand for gold and silver. This
could be exploited most effectively for private gain if silver could somehow
be eliminated as a monetary metal. The thing to do for the banking houses was
to initiate an arbitrage operation of selling silver- mining shares against
buying gold-mining shares in anticipation of the demonetization of silver.
an operation would take a number of years. By 1873, eight years later,
following the German Empire, silver also had been demonetized in the United
States through the back door, so to speak. Of course, speculators would start
dumping silver in large quantities and selling it short, causing the price of
silver to fall precipitously as early as 1868, when Senator Sherman spilled
the beans in proposing the demonetization of silver. That never happened,
making the whole affair very suspect. The evidence appears to suggest that,
far from being ‘an honest mistake’, the omission of the standard
silver dollar from the Coinage Act was a deliberate act to destroy individual
property rights ̶ possibly in collusion with Germany.
two parvenu countries might have wanted to get the best mileage out of their
respective victories in the battlefield. The indemnity of one thousand
million dollars in gold exacted by Germany from France would be that much
more valuable, in view of the falling commodity price level in terms of gold.
On the other side of the water the banks could greatly enrich themselves by
making the mortgages on land in the former Confederacy, assets that they now
controlled and which had been denominated in silver, payable in gold. The
extra value would come out of the hide of the victims of the War Between the
States. The coincidence of interest of the two countries is telling. The
would-be perpetrators of the crime had reasons to make speculators behave
differently from the norm.
The banking houses in the United States were apparently
playing a duplicitous role. As observed above, there was a possibility for
profitable arbitrage in the market for mining shares. The banks would bet
against silver while getting ready to profit from a prolonged decline in the
price of silver afterwards. It was not in their interest that the decline start immediately. They needed time, possibly
years, to complete their arbitrage operations in mining shares. They wanted
to get rid of their silver mining shares and replace them with gold mining
shares. It is a plausible assumption, therefore, that the banks temporarily
supported the price of silver (which they would have to do in the normal
course of their business anyhow) but with the ulterior motive of preparing
for the final assault on the silver price later. They succeeded in fooling
the speculators not to place their bets against silver.
If the demonetization of silver was not the result of a
long-term market process (as suggested by virtually all economists) then the
question is: what was it the result of? This question has never been answered
satisfactorily. My answer is that it was the result of the collusion of banks to
manipulate the silver and gold market secretly, and carefully coordinating it
with their manipulation of the market for mining shares.
Leads and lags
To prove my theory I worked out a research program. It involved compiling
the daily closing prices of eight series as follows:
asked price of silver
bid price of silver
asked price of gold
bid price of gold
average asked price of silver mining shares
average bid price of silver mining shares
average asked price of gold mining shares
average bid prices of gold mining shares
in the United States for the ten-year period from 1868,
the year when the idea of demonetizing silver first surfaced in Senator
Sherman’s committee, to 1878, the year when the Latin Monetary Union
decided that the silver price has been mortally wounded, was beyond hope of
recovering, and closed its last Mint to silver.
From the eight price series above one can obtain four
series of key price-spreads by taking differences as shown by tabulating them
in the following table:
Next, one calculates the standard deviation from the
means for each of the four price-spread series. By well-known theorems of
mathematical statistics the standard deviation filters out
‘noise’, that is, random causes of price variations, but catches
singular irregular causes (e.g., discovery of a major gold or silver ore
deposit or, most especially, concentrated efforts to manipulate prices).
One is looking for leads and lags. In particular, if
arbitrage from silver-mining shares to gold mining-shares did lead arbitrage
from silver to gold, and the latter did lag the former, then this would not
be a random event. It would be conclusive proof that arbitrageurs were acting
in unison to bring about a collapse of the silver price for maximum private
When I wanted to carry out my research project, I found
that it was beyond my meager resources. Rather naively I assumed that most of
the work had already been done, some of the price series had been compiled
and some of the standard deviations from the means calculated. The collapse
of the silver price after 1875 was so spectacular, it was such a precipitous
and momentous event, involving the international monetary system, the wealth
and welfare of so many people, literally changing the course of history, that
some researchers at least could have questioned the ‘conventional
wisdom’. They could have rejected the market-process hypothesis. These
researchers should have started looking for evidence of active connivance
between governments and banks during the intervening 140 years. This,
however, does not appear to be the case. Everybody without exception has accepted
the pat explanation for the silver price collapse in terms of the Quantity
Theory of Money. Yet it is possible that 1875 marks the year when the
conspirators completed their program of arbitrage from silver mining shares
to gold mining shares; and started their follow-up program of arbitrage from
silver to gold. It is not impossible to find out the truth about it some 140
Researchers of today would have to start from scratch.
This is a task I can no longer undertake, in view of my advanced age. But I
would certainly encourage the younger generation to do it. I hope that my
tentative research plan is going to be helpful to them. I have no doubt
whatsoever that this would be a worthwhile project.
I call attention once more to what above I have called
‘circumstantial evidence’ of monetary mischief. In the absence of
mischief the silver price ought to have started its descent much earlier,
several years before 1875 ̶ possibly as early as 1868. Speculators
(as distinct from bankers) must have been watching the political wrangle over
silver starting in 1868. It appears that speculators missed their opportunity to sell
silver short. This would be rather uncharacteristic of their
trade, an assumption we can safely dismiss. A more plausible assumption is
that the conspiring bankers met the speculators’ short selling head-on.
silver. As pointed out already, they needed time to complete
their program of arbitrage in the mining-share market for monetary metals.
Once it was completed, after they have sold their quota of silver mining
shares and bought their quota of gold mining shares, they would be the first
to dump their silver and let speculators do the rest. Of course, the
duplicity of their conspiracy makes the detective work so much harder.
is no doubt that the U.S. Congress grossly exceeded its authority when it
passed the Coinage Act of 1873. In signing it President Grant shared
responsibility for making the unconstitutional bill the law of the land. The
Act nowhere mentions the Constitutional standard silver dollar, the only coin
cited by the Constitution ̶ as if no such coin has ever existed.
Consequently the interpretation arose that there was no authority for coining
it by anyone after the Act became law.
contrast with the logical interpretation of the Constitution is striking.
According to the Constitution the standard silver dollar can be minted in unlimited
quantities for the account of anyone tendering the silver to the
Mint. Not only is the standard silver dollar to serve as a yardstick but,
even more importantly, it is there to test the material, silver,
out of which the yardstick is made. If you eliminate it or obstruct its
availability, then the standard silver dollar obviously cannot discharge that
function. It makes no sense to tie the access to it to permission from
Congress, from the President, from the Secretary of the Treasury, or anyone
else. In legal matters the Constitution takes precedence until amended. This
is a clear case of usurpation of powers. The standard silver dollar had to go because the
public was to be deprived of a means to test the monetary quality of silver.
The Constitution guarantees the right of the individual
to take silver to the Mint in unlimited quantities. Only in this way can we
be certain that silver is sufficiently inelastic to serve as the yardstick of
value. If the flow of silver to the Mint was orderly, then the yardstick
would be satisfactory. But if the Mint were inundated with silver and could
not be kept open for that reason, it would be proof that silver was no longer
suitable to serve as material out of which the monetary yardstick could be
made. It would show that silver had a rubber-like quality: it was much too
elastic. It would show that silver has failed the test. It hasn’t got
the quality every monetary metal must have: the quality of having constant
As a matter of historical
record silver has never been put to the test.
There has never been a run on the Mint by owners of silver bullion
wanting to turn their metal into silver coin before it was too late. In every
instance the run on the Mint occurred, it was not because people feared that
the price of silver would collapse. It was because inane government policies made
silver-to-gold arbitrage risk-free. People bought silver abroad
in exchange for melted U.S. gold coins. They wanted to get more gold coins at
the U.S. Mint for their silver ̶ as was their right to do under
bimetallism. Then they wanted to export the gold coin, since it was worth
more abroad, and they wanted to continue this arbitrage indefinitely for the
risk-free gain it afforded them.
When the Mint was closed to silver, it was a protective measure taken by
the government in trying to prevent further losses to its gold reserve. It was not a
failure of silver. It was a failure of bimetallism. The
solution was not the demonetization of silver: it should have been the
abolition of bimetallism.
have never been a conspiracy theorist. I never joined latter-day crowds
crying “stop the manipulation of the silver and gold price by unlimited
naked short sales!” I know full well that the present low price of
silver is a remnant of the tragic outcome of the Silver Saga that started
some 145 years ago at Appomattox. The prospect of Resumption of specie
payments after the War Between the States created an incredible opportunity
for monetary mischief. The circumstantial evidence is that the opportunity
was fully exploited by an international banking cartel to sabotage the
international monetary system. This observation does not make me a conspiracy
theorist. I am offering a detailed plan to find out, some 145 years after the
event, using the method of standard deviations from the means borrowed from
mathematical statistics. We owe it to ourselves to do the necessary research.
The world economy, sagging as it is under the weight of its debt tower and
fast depreciating irredeemable currencies, is clearly on its way to
self-destruction. The forcible elimination, first, of silver and then, a hundred
years later, of gold from the monetary system removed the only ultimate
extinguishers of debt we have. In consequence, total debt can only grow,
never contract. The process is hidden since the unpaid and unpayable debt is accumulating as ‘sovereign
debt’ of governments. The world is deluding itself that sovereign debt
can increase indefinitely as governments can extend its maturity
indefinitely. In 2008 we had the wake-up call that it cannot. Unless we stop
the proliferation of debt, the world is facing prolonged deflation,
depression, continuing capital destruction, bankruptcies and unprecedented
unemployment. It is leading to a breakdown of law and order. It could spell
the end of our civilization.