How silver investing's money motive got hamstrung
150 years ago in the US and India...
I'M CONSTANTLY reading books on the history of both gold and silver as money.
A book I recently picked up on the history of silver currency in
India relates more the actual operational use of money in
their marketplace. The Indian peoples in the 19th century had no confidence
in paper money. Though it was in use, it was not readily acceptable outside
of the larger cities. Because of this silver was prominent in India.
Gold of course was of higher value than silver. Yet
silver was the metal used more commonly for regular day-to-day business
transactions than any other method in that time. The Indian people did love
gold and esteemed it highly, but their preference to use silver for
transactions outweighed the demand for gold.
Gold still came into the marketplace, just not at
the same pace. Between 1836-1891 there would be 2.21
times mores silver than gold imported into India by value.
Back then, in the 19th century, the Indian
subcontinent was still under British colonial control. In essence they did
most of their business through Great Britain. The technology shared and
developed by the British helped the country modernize, notably with the
addition of train lines which would support India's economic growth into the
future. But the one complication in modernization was the country's greater
use of silver over gold. This caused trade deficits moving forward.
Why? Great Britain had been on a Gold Standard legally
since 1816 and effectively since Sir Isaac
Newton got his sums wrong 100 years earlier and cut the price of silver to
15.5 from 12 ounces per ounce of gold. So all
accounts for Pounds in reality were denominated in gold. Invoices for the
services provided by the rail developments were of course in Sterling, which
although its name came from silver now meant being payable in gold, or
gold-backed paper Pounds. Hence the Indians suffered when the value of silver
fell versus gold. Because any debts to the colonial mother country were due
in kind.
Oddly, India's silver money trade balance problems
really began with big trade surpluses. During the Civil War of the United
States of America between 1861 and 1865, the Indian sub-continent – which was
rich in natural resources – filled the gap of need for many of the products
that traditionally were imported from the US into the United Kingdom. India
enjoyed a tremendous boom in exports, and so its balance of currency,
received in gold and silver, grew. But the traditionally greater demand for
silver to use as money for domestic commerce would soon affect them
negatively. Because silver money was slowly being devalued and then rejected
by the world's rising power, the United States of
America.
Already, on 3 March 1849, Congress
authorized America's first $1 gold coin,
and launched the $20 gold coin, making both "legal tender for all sum
whatsoever". This bill effectively de-monetized silver, but many people
in the US were unaware of this change, and continued to use silver coins
concurrently with paper money. There is no doubt however that the Bank of
England in London had held sway over John Sherman, the politician behind the
bill, in its goal of bringing other countries onto Great Britain's
mono-metallic standard.
Even though this bill had been passed, the next
half-century would see new bills attempt to reintroduce silver as an
acceptable form of payment and currency in the US. Firstly, because it was
then (as now) a major producer of silver, the US had a big "silver
lobby" active in Washington DC. Secondly, silver money continued in wide
use amongst ordinary people.
In the year 1873 however, another currency law – the
Fourth
Coinage Act – reaffirmed gold's place as the
monetary standard, by ending the ability of silver owners to have their metal
turned into coins by the Mint. Again, John Sherman
was closely involved. Major uproar followed from the
silver lobbyists, who called it the "Crime of 73".
A bill finally passed in 1891 was again unsuccessful
in reintroducing
silver as the main money standard,
but the Sherman Silver Act (yes, him again) did add government support for
the silver industry. Because it set the official price of silver at 15.988
ounces per ounce of gold, and confirmed that the US government would continue
to buy silver at that ratio to use for payment of debts. Five years later,
however, the US would officially and irrevocably join the gold standard. By
government order, silver perpetually lost its place as money on the books of
the United States in 1896.
Since the US was a still a major silver mining
producer, a surplus of silver developed, as it was no longer needed for
payment of government debts. This lowered the price of silver against gold,
and back in India – as US manufacturers and commodity producers also rejoined
the international markets after the Civil War – traders suffered losses in
exchanging their silver for gold.
Looking back, it's interesting to note that, time
and again, as European and then the US nations came to stop using gold as
their monetary standards in the 20th century, their central banks continued
to hold large quantities in reserve. But silver had already been demonetized
a century earlier, while gold ruled as money. And just as central banks
coordinated to end the use of silver money in the late 19th century, so they
have since coordinated to use only gold as their reserve commodity today,
reflecting ideals which have now become permanent in our modern monetary
structure.
Because of this deep history and practice, there
will always be a monetary uptake on gold that is missing in the silver
market. Currently central banks hold over a trillion dollars in gold reserves
basis today's $1250 per ounce price. None holds any sizeable or strategic
silver reserves.
This missing volume of official purchases in silver
precipitates the much higher gold-to-silver price ratios we are now
accustomed to in this modern age. Currently around 64 ounces of silver per
ounce of gold, over the last twenty years the ratio has traded primarily
between the ratio of 30 to 90, a wide berth with opportunities to profit from
short term imbalances in price moves.
Can silver once again regain a place in the fabric
of the global monetary system? Is there any mechanism even remotely
considered to put such an action in place? At this time it does not appear to
be in the cards for silver.
Though many in the Western world still view silver
as having a quasi-monetary value, its core value right now lies in its demand
for industry and personal consumption as jewelry. Yet on the continent of
India, where people today continue to have a high regard for both gold and
silver over paper money, the question is not even viewed as a concern. Just
because the central banks don't hold any investment silver bars does not mean it is not a good vehicle as an alternative asset.
Indeed, from my vantage point, it may be beneficial. Because unlike gold, which
suffered from heavy central-bank selling in the late 1990s, silver cannot
face the same concerns about government's interfering in price action by
reducing stockpiles.
