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When I talk about a gold standard throughout history, I also mean
gold-and-silver standards, and even monetary systems which were 95%+ silver,
as was the case in places like China.
In practice, most day-to-day transactions were done with silver coins. Gold
was much too valuable for small transactions, although very handy for large
commercial transactions. An ounce of gold today is worth $1,250. When was the
last time you carried a $1000 bill? We don't even make them anymore. There's
a $100 bill, which is actually quite popular worldwide, but hardly used in
the U.S. Our smallest bill is a $20 bill. If you were going to buy a house,
you might want to use a hundred one-ounce gold coins, weighing about 7 lbs,
instead of 1500 oz. of silver, which weighs about 105 lbs. However, if you
were going to buy some socks, you wouldn't want to pay with a one-ounce gold
coin or even a tiny tenth-ounce coin.
This problem -- of gold's excessively high value for small transactions --
was resolved through the widespread use of gold-linked paper bills. You could
use a $1 bill instead of a 1/20th oz. (or 1/1000th oz.) gold coin. Thus,
people didn't need silver anymore.
For most of human history, silver has traded around 12-16 oz. of silver per 1
oz. of gold. This ratio changed slowly. It didn't bounce around, 12:1 one
month and 15:1 the next month. For example, in 1789 U.S. Congress declared
that the official silver:gold ratio would be 15:1, reflecting a market price
of about that ratio. Over a few decades, the actual market price drifted
closer to 16:1, so to reflect this, Congress changed the official ratio to
16:1 in 1835. This was the only change in the official gold/silver ratio
until silver was effectively demonetized in the 1870s.
You can go back to historical times, and find that this ratio is about the
same. Plato mentions a 12:1 ratio, and at the death of Alexander the Great it
was 12.5:1. During later Roman times, it was 15:1. This still seems like it
varies a fair amount. But this is over several centuries. For any one
person's lifetime, the ratio would be very close. It might drift from 15:1 to
16:1, or from 12:1 to 12.5:1. In other words, practically unchanged.
Thus, gold and silver were practically the same, just like $1 bills and $20
bills.
The important part of this graph is not the prominent blue line, but
rather the light yellow line. This shows the gold/silver ratio going back to
1344. So you can see, it was very stable.
Here's a closeup of the last couple hundred years. Once again, very
stable, to begin with. The "decline" you see in the gold/silver
ratio in the 1860s was actually due to the depreciation of the
"greenback" paper dollar during the Civil War. The gold/silver
ratio didn't actually change then (I don't think) from its prewar 16:1 ratio.
It is a statistical error.
The big change came in the 1870s, the "demonetization of silver."
This was apparently a natural market (human) phenomenon, not a government
edict, although governments soon reflected market reality in their official
policy, which in turn accelerated the process. Bimetallism had long had minor
but irritating problems with the slight variation in the gold/silver ratio.
The advancement of the gold-linked-paper system, and payment by bank transfer
and so forth, had eliminated the need for the use of silver coins as
small-value money. You could use a $1 bill instead. In effect, silver was no
longer used as a "monetary commodity" and became more like an
industrial commodity, although one with some remaining monetary
characteristics. From the mid-1870s onward, silver begins to vary wildly in
value compared to gold, for the first time in history.
Silver coins were still used, but they became "token" coins, with a
commodity value less than their monetary value. A $0.25 coin (quarter)
was valuable in the 1920s, 1930s or 1940s primarily because four of them
would make a dollar, and the dollar was then worth 1/20th oz. of gold, or
1/35th after 1933.
The point is, when I talk about a "gold standard" I also
include within that gold and silver bimetallism, and also systems which were
primarily silver-based. Until the 1870s, they were effectively the same.
Nathan Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has appeared
on financial television in the United States, Japan, and the Middle East.
About the Book: Gold: The Once and Future Money (Wiley, 2007, ISBN:
978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all
major online booksellers, and direct from the publisher at
www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.
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