For today's guest blog post I've contacted one of my "go-to" silver guru's David Morgan from Silver-Investor. The silver bug bit David as a very young man and his thirst for and knowledge of silver has only grown over the years. I asked David to give us some insight into why silver is money!
The Monetary Case for Silver (Silver Institute speech abbreviated)
Most of this research came from my friend and associate Mr. Franklin Sander’s Sanders of the Moneychanger (see www.the-moneychanger.com).
The surest way today to be laughed off the podium and out of any economics department is to declare that silver is money, and money vitally necessary to our economic survival. I should know recently a rather significant “silver” event took place in Spokane and some very notable people attended this affair including Jeff Christian from the CPM Group, The Commodities Futures Trading Commission, The Silver Users Association, and several producing silver companies along with a host of silver exploration companies. Mr. Phil Baker CEO of Hecla Mining gave the Silver Institute’s presentation due to Michael DiRenzo’s unavailability.
I was asked to do an outlook for silver and my presentation was mainly about the fundamental case for silver with some thoughts given to the possible fate of the U.S. dollar. I was the only one that even mentioned the current state of economic affairs from both a current and historic point of view. Following my presentation a listener that seemed very shaken quickly approached me. He blurted out you are NOT going to speak about silver, as money? I thought the question to be rather odd, because obviously I had not.
This dislike for any mention of silver in the monetary system has been that way since the end of the bimetallic discussion in 1873 (in the US), but not because the monometallic gold standard advocates, or inflationary fiat money advocates, had better arguments. They just bought more effective politicians.
I will prove, from logic and experience, that not only is silver money, but no sound money system is possible without it. This of course is a very tall order and perhaps it would be better said that I will present the case and you decide.
Proving from Experience
From the mists of recorded history, over 4500 years, mankind has used silver as money. Most of the time silver was used exclusively in daily commerce, some time with gold, but gold always functioning for large purchase and international trade only. MOST of the time the standard coin of the realm was a silver coin, with the gold coins valued in terms of the silver coins (symmetallism, not bimetallism).
In fact, research history and you will never find any trouble with bimetallism whatever. In a true free market system where both gold and silver are not set at a government dictated ratio but the market itself determines the correct ratio we have ample evidence this method works best. The market always quickly and successfully adjusted to changes in the ratio over a range of 2.5:1 to 16:1 -- UNTIL governments began to fix official mint ratios, late in the Middle Ages.
Allegedly, bimetallism broke down under the stress of the 19th century. Let us examine if this is true?
Bimetallism caused too much fluctuation. This argument will be found in many texts dealing with precious metal money. However, the truth: The fluctuation over a 40-year period hardly amounted to 5% at greatest. Let us put that in context with today’s monetary system where currencies can swing 5% in a day.
So much new silver was discovered that price was driven down. This argument is one widely propagated by nearly every monetary textbook in existence. Again the truth is that the ratio was trending upward (silver becoming cheaper than gold) from about 1800 to about 1840), when new gold discoveries in America (California 1848) and Australia cheapened the value of gold relative to silver. Why? Because they flooded the market with gold. So if anything was a “problem” it was new gold discoveries not more available silver.
Is there a problem with a state mandated bimetallism? Yes, because this displaces the free market altogether. Rather than learn from 4500 years of human experience and use this experiential knowledge, the state knew better and fixed the gold/silver ratio. The out is predictable in fact it gave rise to what is known as Gresham's law: cheap money drives expensive money out of circulation. The silver became worth more as bullion than it was at its face value, so coinage was melted down and disappeared from circulation.
Unless the free market remains free to determine the gold/silver ratio, state mandated ratios would always be driving one or the other metal out of circulation. Therefore bimetallism with state mandated ratios but only with state mandated ratios will deflate the money supply, proportionate to new supplies coming to market.
The U.S. never was bimetallic, but always symmetallic. Founders were too smart for anything else. US Coinage Act of 1792 made the dollar of silver (371.25 fine grains of silver) the standard coin of the realm and legal monetary unit. It also provided for gold coins, eagles, half eagles, and quarter eagles of about 1/2, 1/4, and 1/8 ounce each, to be minted. These were VALUED IN but not DENOMINATED IN dollars of silver.
Therefore, whenever the ratio changing drove one or the other metal out of circulation, the content of the gold coins could be adjusted (raised or lowered) to accommodate changing market valuation. This exact thing happened in 1834, when the gold coin size was changed (reduced), yet without cheating anyone or changing the size of the standard silver coin, the dollar, at all.
The tidal wave of silver coming out of the Comstock Lode cheapened and destabilized the value of silver so the US had to abandon silver. Truth: HALF the value of the Comstock was realized from its gold production. (Silver Bonanza, p. 24, Alexander Del Mar, Monetary crimes, p. 90).
So let history be our guide, from the mists of time until the late 19th century, the bimetallic system served mankind without any major disruptions or instabilities. Compare that to the gold standard which lasted only about 50 years, from 1873 to 1914, or 1934, depending on which date you choose. Here you will have made academics like our good Professor point out problem after problem but it rests with a mono metal standard (gold) not silver although silver certainly gets blamed.
Proof by logic
Premise: Bimetallism is necessary in a sound money system because it establishes an unchanging reciprocal standard.
In a bimetallic system, gold is valued in terms of silver, and silver in terms of gold. The standard for valuing both is OBJECTIVE. The free market is left alone to determine the correct ratio.
In a monometallic [gold] standard, gold is valued in terms of a fiat currency unit.
Therefore, a monometallic standard is already, in embryo, a fiat system, because no empirical valuation can be made for the fiat unit, which becomes the standard of value for gold.
Therefore, no sound monometallic money system can exist. Could this be a reason that mankind used it for so many millennia?
Theory versus history
The test of any theory is simply does it work or does it not? How did bimetallism, with silver as the linchpin -- work versus fiat money or monometallism? Bimetallism worked well for 4500 years, adjusted to every stress, even as the ratio grew from 2.5 to 16. Alleged instability of the 19th century was determined to be; a result of state action smothering free market adjustment. For all practical purposes no instability at all was observed when compared to monometallism or fiat currency.
Compare this to the economic history of the late 19th and whole 20th century. The monometallic gold standard lasted only from 1873 until the first crisis appeared near the founding of the Federal Reserve or it could be argued at the worldwide abandonment of gold standard in Great Depression. Whichever end date you choose, it is substantially less than 4500 years. The only conclusion to be drawn from history and theory is that a sound money system without silver and bimetallism is impossible.
We have now arrived at what is probably the culminating monetary and economic crisis of the last 200 years. It is possible we will see the death of national fiat currencies. It is also possible now with gold and silver backed electronic currencies that all national Central Bank currencies could be replaced within 24 months, once the panic starts.
But enough of history and what may or may not happen. Let us explore the present time. I interviewed Mr. Hugo Salinas Price in The Morgan Report. Mr. Price wrote and article in mid December 2004 and brought the question of silver being brought back into the monetary system. This in my view is the most significant story about silver in the past decade, in fact far more important than the announcement by Warren Buffett in early 1998 that Berkshire Hathaway had purchased nearly 130 million ounces of silver.
It is an honor to be,