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In today's musing, I review the history of gold, silver,
and fiat currency as money in the United States of America. I document how
various wars, panics and depressions, Congressional acts, and executive
orders have affected the US dollar prices of precious metals and resulting
gold-silver ratios.
This musing covers the period from 1792 when the United
States government first established a national currency backed by gold and
silver until August 1971 when Nixon floated the US dollar against gold and
world currencies.
In a subsequent musing, I will document the record of
gold-silver ratios in the floating fiat currency market from late 1971 to the
present.
Let's review the history of gold and silver as money in
the United States of America from 1792 until 1971. This 179-year history is
largely a record of government attempts to control the supply and demand of
silver and its US dollar price in relation to the set price for gold.
Note that gold and/or silver were commonly used as real
monetary instruments or "specie" by many governments from the 1700s
thru the late 1900s.
In 1787, the United States Constitution gave Congress the
power to coin money and to regulate its value.Furthermore, this iconic
document prohibited the States from making "any instrument other than
gold or silver a tender in payment of debts".
A bimetallic monetary standard was formalized in 1792
with the Mint Act. It set the gold to silver price ratio at 15:1, deeming
gold to be valued at $19.39/oz and silver at $1.29/oz. The Coinage Act of
1834 devalued silver; gold was set at $20.65/oz while silver remained at
$1.29/oz, for a ratio of 16:1. Gold remained fixed within a few
pennies of this price until the havoc of the Great Depression 100 years
later.
In 1859, the Comstock Lode was discovered in Nevada and the US silver
supply increased significantly within just a few years. Although the
increasing amount of silver did not have an immediate impact, it eventually
led to oversupply and debasing of the silver price during the 1870s.
To finance the Civil War against the Confederacy in the 1860s, the Union
printed volumes of currency without backing by precious metals. The result
was severe indebtedness and a soaring silver price that reached $2.94 in
1864. Silver remained historically high for over a decade and its price
relationship with gold was negatively skewed.
The Coinage Act of 1873 effectively de-monetized silver in the US, created
weakness in demand, and along with significant Comstock Lode production, led
to a steady declining price. By 1877, the silver price was lower than its
previous fiat of $1.29.
Subsequently, the Sherman Silver Act of 1890 attempted to boost the price
by requiring the government to buy silver and mint coins. This ill-conceived
action and a run on gold by foreign investors were significant contributors
to the Panic of 1893 when silver lost 16% for the year.
The Gold Standard Act of 1900 completely abandoned bimetallism. From 1900
to 1933, the US dollar was fully backed by gold and paper notes could be
exchanged for gold on demand. Silver continued onits steady decline that
ultimately lasted from 1864 until the end of World War II.
During the stock market bubble of 1907 and the two-year depression it
begat, silver lost 29%.
With exception of four years during and after World War I when war debts
piled up again, silver continued to decline in price. It lost 26% in the wake
of the Crash of 1929 and reached its nadir of 25 cents at the depths of the
depression in 1932. The price of gold, though supposedly still fixed at
$20.65, averaged $26.33/oz in 1933 as bank runs and failures led to zero
confidence in the dollar as money.
The US government attempted to solve its problem via Congressional acts in
1933 and 1934 that ended conversion of paper notes into gold and made
ownership of gold coins and bullion illegal. Roosevelt drastically lowered
the amount of gold backing the US dollar and set the price at $35.00/oz, a
devaluation of nearly 70%.
With the Bretton Woods agreement in 1944, all major industrialized
countries adopted the United States dollar as the world's reserve currency
backed by gold. All international settlements were in dollars, other
currencies were fixed to the dollar, the dollar was pegged to gold at $35,
and foreign governments could convert dollar reserves into gold at that rate.
The average price of gold then remained in the $34-35 range until 1968
with one exception, averaging $31.69/oz during the severe recession of 1949.
Meanwhile, the price of silver steadily increased post-WWII. It gained 58%
in 1945 and continued to increase in price to the early 1960s. It was
artificially capped at the historic price of $1.29/oz by US government sales
from 1963-1966 to discourage hoarding and/or melting of coins. The Coinage
Act of 1965 ended the minting of silver dimes and quarters in the United
States and debased the silver content of half dollars from 90% to 40%. Silver
was eliminated from this coin in 1970.
As the US balance of trade became increasingly negative and the dollar
weakened in the late 1960s, gold and silver increased in value. With the
dollar severely overvalued with respect to gold and other major currencies,
the Bretton Woods agreement began falling apart when West Germany left in
early 1971.
In a series of three dollar devaluations from August 1971 to August 1973,
Nixon raised the price of gold against the world's reserve currency. His
first order ended the conversion of US dollars into gold by foreign governments,
mainly France and Switzerland, thus halting depletion of Fort Knox gold
reserves.
With the last order, the Bretton Woods Agreement was finally scuttled and
major currencies and
gold were allowed to float freely on world exchanges.
And at that juncture, the world money game became a new paradigm. Since
demise of the gold standard in 1971, precious metals prices have soared and
so has the gold-silver ratio.
The following three charts illustrate the record of permutations in the
precious metals-backed US monetary system from 1792 to 1971. As discussed
above, here are the yearly average prices of gold and silver in United States
dollars and the gold-silver ratio:
 
The Au:Ag chart warrants detailed discussion:
The historic gold-silver ratio of 15:1 was set by the government from
1792-1833 and increased to 16:1 in 1834. During and after the War of 1812,
precious metals prices rose as fiat currency was created to finance war
costs, accounting for the blips in those years.
Massive inflation of the currency supply occurred during and after the
Civil War. Although the gold price remained set at $20.65, silver prices were
significantly higher and the ratio reached an historic low of 7:1 in 1864.
Silver was higher priced and ratios were less than 16:1 until 1877. With
the de-monetization of silver in 1873, its price was allowed to float
resulting in the Au:Ag ratio averaging about 20:1 until the Panic of 1893
when it spiked sharply upward.
With gold still fixed at $20.67 an ounce and silver prices significantly
lower and vacillating , the ratio maintained a level in the 30-40 range until
the costs of war once again wreaked havoc on the monetary system from
1916-1919.
The stock market crash of 1929 and the ensuing depression caused a
plummeting silver price. The gold-silver ratio was wildly volatile and in a
parabolic spike, went over 80 in 1932. When Roosevelt devalued the dollar by
raising the gold price to $35/oz ounce in 1934, a new relationship with much
higher ratios was established. Silver prices were generally under 50 cents
and the yearly Au:Ag ratios were anomalously high during the depression and
World War II.
The all-time high for gold to silver reached 98 in 1939.
The Bretton Woods Agreement in 1944 and the end of WW II in 1945 resulted
first in a steep drop and then continuously declining ratio in the late 1940s
to early 1960s as silver prices increased without pause. By 1963, they had
reached their contained metal value in US coins. To prevent hoarding of coins
and melting them into bullion, government silver sales from 1963-1966 kept
the price at $1.29/oz and the gold-silver ratio at 27:1.
When coinage of silver was abandoned post-1965, its price climbed
significantly and Au:Ag averaged less than 20:1 from 1967 to 1970. With a
single two-month exception, it has never seen those low levels again.
But let's save further discussion for next week.
In that missive, I will document nearly 45 years of a post-gold standard
economic paradigm in which the world's reserve currency is backed by nothing
but an insolvent, debt-ridden government's promise to pay.
Que lastima!
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment: Steve Sweeney is the research assistant for MercenaryGeologist.com.
The Mercenary
Geologist Michael S. "Mickey" Fulp is a Certified
Professional Geologist
with a B.Sc. Earth Sciences with honor from the University of Tulsa, and
M.Sc. Geology from the University of New Mexico. Mickey has 35 years
experience as an exploration geologist and analyst searching for economic
deposits of base and precious metals, industrial minerals, uranium, coal, oil
and gas, and water in North and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for over 20
years, specializing in geological mapping, property evaluation, and business
development.In addition to Mickey's professional credentials and experience,
he is high-altitude proficient, and is bilingual in English and Spanish. From
2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile,
and British Columbia.
Mickey is well-known and highly respected throughout the mining and
exploration community due to his ongoing work as an analyst, writer, and
speaker.
Contact: Contact@MercenaryGeologist.com
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