Today gold is the dominant monetary metal with silver often thought of as the junior partner.
However it hasn’t always been that way throughout history. Silver has a long history of use as money and it could be argued that it has been even more influential than gold.
Because silver is more abundant than gold and its value lower, it has been more effective at small day to day transactions for the large majority of citizens.
Like gold, silver has all the necessary properties of sound money. Although it is less rare than gold, it is sufficiently rare. It is also malleable, durable, fungible and divisible.
Silver has been used as money by ancient civilizations, in medieval times and in the modern day.
While it was effectively demonetised by the emergence of the classical gold standard in the 1870s it has retained is appeal amongst investors who are seeking to protect themselves by holding onto hard assets.
Table of Contents
Silver in the Ancient World
The Silver Shekel
The first historical record of silver we have is from the Ancient Sumerians.
The Sumerians used the silver shekel.
It wasn’t coined silver. Instead the term shekel refers to a unit of weight.
The shekel wasn’t a transacting currency. It was held in vaults, almost as a reserve asset, while transactions were recorded on clay tablets, which recorded the ownership of the shekels.
The Lydian Stater
The earliest coined money that we know of came from the Lydian Empire around 600 BC. The Lydians coined the stater, a gold-silver alloy (known as electrum).
What was unique about the stater was that it was the first precious metal money issued by a government in standardised form. Until that time silver had circulated as money but only in uncoined and unstandardised form.
The Lydian development spread across the Ancient World.
The Greek Drachma
The Athenians discovered a significant silver deposit at Laurion, only 50km away from Athens.
They too began to use standardised silver coins with the introduction of the drachma.
With the conquests of Alexander the Great the use of the drachma spread widely.
The Roman Denarius
Silver was also the dominant currency in Ancient Rome, mostly mined in Spain, although the Romans did also use bronze and gold at times.
The silver denarius became the dominant money late in the Roman Republic in 211BC. When it was first introduced it contained approximately 4.5 grams of silver and the coin was made up of 95% of the precious metal.
What followed over the next several hundred years is one of the most famous and devastating monetary debasements in history.
Successive Roman emperors engaged in a practice called coin clipping. They would recall the coins and then mint them into a new coin with a lower metallic content.
Without a bond market or any means of deficit financing, this was the only way that Roman governments could spend more than they earned.
By 312AD under the reign on Constantine, the precious metal content of the denarius had fallen to 5%.
The result of the monetary debasement was inflation. It was slow at first but got progressively worse. Governments then turned to price controls to attempt to restore order. Some stability was eventually restored when Constantine introduced the gold solidus into circulation. But the economic damage done by the debasement of the denarius was significant and long lasting.
Silver in the Medieval World
The Fall of Rome
After the fall of Rome in 476AD, Europe became a mostly feudal society and wealth and power shifted east.
The Byzantine Empire continued to use the gold solidus that Constantine had introduced.
The rising Arab world adopted metallic money and used the silver dirham alongside the gold dinar.
Medieval Europe still used the Roman denarius as the monetary standard, with prices being quoted in terms of denarii. However, there was an outflow of precious metal money to the Middle East, so Europe experienced a shortage of the actual metals themselves.
Some silver still circulated, as did copper, but in feudal Europe payment was often in the form of goods or labour as feudal communities operated as closed economic systems.
The Re-Emergence of Silver In Europe
Silver re-emerged in England in the late 8th century, with the pound sterling officially adopted in 928.
France followed some time later with the gros tournois issued during the reign of Louis IX (1226-1270).
Silver in Medieval China
In medieval China the use of silver was initially quite limited as copper and other commodities such as rice and silk were dominant forms of money.
However, the Yuan dynasty (1271-1368) used silver as a reserve for their issue of paper currency. Under the Yuan’s successor, the Ming (1368-1644), silver was widely used.
Initially it was banned as the government tried to force the citizens to use paper money.
But there was widespread non-compliance and silver circulated as a hard money alternative to government paper. Eventually the Ming accepted this reality, overturned the ban and accepted silver as money.
In India too, silver began to be used on a larger scale, with the Delhi sultans issuing silver rupees on a large scale in 1295.
Silver in the Modern World
The Discovery Of The New World
The discovery of the New World brought massive amounts of gold and silver into the global supply.
None of the Mayans, the Inca and the Aztecs used precious metals as money. The invading Spanish found ample amounts of easily mined silver in what is now Bolivia, Mexico and Peru.
Between 1500 and 1800, production from mines in the New World accounted for about 85% of the world’s silver supply and 70% of the gold.
The Silver Thaler
In 1600 another enormous deposit of silver was found near the Czech/German border in a town called Joachimsthal.
Silver coins minted nearby became known as Joachimsthalers or thalers for short. This was translated into dollar in English.
The thaler was a popular coin, however the Spanish silver coin, the real de a ocho that became the standard currency of the day.
Silver in The United States Of America
In the colonial era of America, the 13 colonies also used silver money. This is because they were British colonies and Britain was using the silver pound sterling. Foreign coins, particularly the Spanish real de a ocho, also circulated. There were also numerous paper money issues from the colonies and the continental congress.
With the formation of the United States, the power to coin money passed to Congress and in 1792 the Coinage Act established the United States on a bimetallic standard. The silver/gold ratio was 15:1.
The Demonetisation Of Silver
There is one major flaw with the bimetallic standard. The government sets the silver/gold ratio but it can never perfectly replicate the ever fluctuating free market rate. Inevitably one of silver or gold must be overvalued and the other undervalued.
This causes a phenomenon called Gresham’s law where people will spend the overvalued money and hoard or send overseas the undervalued money where the purchasing power is greater.
The 1792 rate of 15:1 was quite accurate, however new supplies of silver came to the market faster than gold. This meant the market value of silver should have dropped but the government rate overvalued it.
So in 1834 the US government adjusted the rate to 16:1. This had the opposite effect of undervaluing silver as the market rate was somewhere in between. As according to Gresham’s law, the undervalued silver disappeared from circulation.
Britain too had experienced this phenomenon. In 1717, Isaac Newton fixed the gold/silver ratio so that gold was slightly overvalued, leading to outflows of silver and inflows of gold.
Both Britain and the US were on a de facto gold standard even though their governments recognised a bimetallic one.
The recognition of this reality led both countries to formally adopt the gold standard. Britain did this in 1816 and the US and Germany in 1873. The other major powers followed suit.
The effect of this action was to demonetise silver. It has lost its formal status as money and thus suffered a significant devaluation as compared to gold. That’s why we don’t see a gold/silver ratio anywhere near 15:1 these days.
This became known in the US as the Crime of 1873, not because of anything wrong with the legislation but because the consequences of the decision to demonetise silver were not effectively communicated.
William Silber explains in his outstanding book, The Story of Silver: How the White Metal Shaped America and the Modern World:
“The Crime of 1873 refers to legislation passed by Congress on February 12, 1873, negating Alexander Hamilton’s favorite law, that both gold and silver be monetary standards in the United States, and establishing gold as sole legal tender for all obligations. The new law omitted the free and unlimited coinage of silver dollars at the mint, an option since 1792, and restricted the legal tender status of subsidiary silver coins, like dimes, quarters, and half-dollars, to five dollars or less. The U.S. Constitution allows Congress to “coin money” and “regulate the value thereof,” so no legislator voting for the act committed a crime in the technical sense. Senators and congressmen could even make their favorite coins of Great Britain, France, Spain, and Portugal legal tender in the U.S., which they did in 1793, without violating the law. The allegations of impropriety arose because few people realized the full consequences of the shift to gold when the law was passed. Moreover, Senate Finance Committee Chairman John Sherman, who introduced the legislation, not only failed to sound the warning bell but also soft-pedaled the bill despite knowing its importance.”
A legislative battle ensued over the next quarter century over the status of silver. The anger at the Crime of 1873 gave rise to the Free Silver movement, who sought the restoration of bimetallism.
They were temporarily and partially successful with the short lived Sherman Silver Purchase Act of 1890, which compelled government silver purchases.
The pro-silver argument was that bimetallism would expand the currency supply of the country and allow for easier credit, particularly after the economic suffering caused by the Panic of 1893. The movement felt that ideological adherence to the gold standard was causing the people to suffer.
This became the dominant electoral issue in the 1896 Presidential race between Democrat William Jennings Bryan and Republican William McKinley.
Bryan’s defeat and McKinley’s victory resolved the debate for the time being and the gold standard prevailed.
Silver in the 20th Century
Silver in 20th Century China
Even after the major powers moved onto the gold standard in the 1870s, China remained on a silver standard long into the 20th century.
In 1912 the last of the imperial dynasties fell and China became a republic. Their money was a combination of uncoined silver, the tael, and foreign coins. China did not mint its own coins but large amounts of foreign silver had flowed in during the last few hundred years.
One of the first actions of the new Republican government was to issue a new silver currency, the yuan. This issue began in 1913 with the coin being 0.72 of an ounce with 89% purity. This circulated alongside tael and foreign coins in what was known as an informal silver standard.
There was no central bank back then and China’s banking system was dominated by private banks. Although they could issue banknotes these depended on the creditworthiness of the bank and were convertible into silver.
When the nationalist government emerged in 1927 on of their key aims was to bring the money supply under government control.
They set up a Western style central bank in 1928 and in 1933 issued a new silver yuan. This yuan was standardised at 26.697g and become the currency of the entire country in a formal silver standard.
Staying on the silver standard had been detrimental to China in the late 19th century as other countries moved to gold. The drastic fall in the price of silver relative to gold lowered the wealth of the country significantly.
The nationalist government had intended to eventually move from a silver standard to a gold standard. However in the 1930s, as the Western powers moved off the gold standard, China decided it would skip that step and go straight to fiat.
In 1935 China abandoned the silver standard and adopted the paper fabi. This became legal tender and all silver had to be handed in to the authorities.
The 1934 Silver Purchase Act
In the US, Franklin D. Roosevelt came into office in 1933 and he would quickly make major upheavals in the precious metals markets. It is rather well known that he raised the price of gold from $20.67 to $35 per ounce and decreed that gold could not be held by private citizens.
What is less well known is that a remnant of the free silver movement still existed and put pressure on Roosevelt to remonetise silver back at the former ratio of 16:1. Roosevelt declined to do this. (Although when gold was repriced, silver appreciated by the same percentage leaving the ratio unchanged at 80:1.)
However, Roosevelt did sign into law the Silver Purchase Act, intended to provide support to domestic mining interests.
William Silber describes the significance:
“[It] permitt[ed], but [did] not require, the president to purchase silver bullion until it comprised one-fourth of the combined value of gold and silver reserves for America’s money and to issue paper dollars called silver certificates redeemable in the white metal. In addition, the bill authorized the president to nationalize at his discretion all the silver bullion in the United States as had been done with gold. Henry Morgenthau, who had become Treasury secretary in January 1934 and would implement the purchase program, said that he would buy surplus stocks of silver and treat the “permissive provisions” as though they were mandatory. According to Colorado Senator Alva Adams, a moderate in the silver bloc, “This is the longest step taken for the rehabilitation of silver since its demonetization in 1873.”…The government takeover of silver bullion in the United States rippled the market like a giant rock thrown into a small pond.”
From 44c per ounce at the time of gold’s repricing in January 1934, silver reached a free market price of 81c in April 1935 before declining to trade in a 71 – 77c range for about a month and then dropping to approximately 65c for the rest of 1935.
There was also a subsidised government price implemented by the act. For purchases of existing silver, the government would pay no more than 50c an ounce but for newly mined domestic silver the government would pay 64.5c an ounce. This was soon increased to 71c an ounce in April 1935.
By January 1936, the free market price had returned to 45c an ounce.
Silver acquired by the Silver Purchase Act was stored in a vault at West Point and the government issued silver certificates which circulated as currency:
William Silber explains:
“The Treasury paid for bullion under the Silver Purchase Act either by creating silver dollar coins containing about three-quarters of an ounce of silver or by issuing silver certificates in one-dollar, five-dollar, and ten-dollar denominations. The Treasury’s certificates closely resembled Federal Reserve notes issued by America’s central bank, the dominant form of money in the United States, except the label “Silver Certificate” instead of “Federal Reserve Note” appeared at the top. The different types of money were equally accepted everywhere, such as paying for groceries at the local supermarket or settling obligations with the IRS, and were used interchangeably except for silver dollar coins, which were too bulky to carry…Silver certificates issued under the Silver Purchase Act felt just like crisp Federal Reserve notes, smelled the same, and had pictures of Lincoln and Hamilton gracing the five-dollar and ten-dollar bills, respectively. But there was a difference: Treasury currency carried a claim to silver held at West Point while Federal Reserve notes did not. A person with a one-dollar silver certificate could demand from the U.S. Treasury a silver dollar coin containing .77 ounces of silver, which translates into getting an ounce of silver at the official mint price of $1.29. A ten-dollar Treasury certificate would exchange for ten silver dollar coins, of course. No one chose to exercise the exchange option back then because buying silver at about 45¢ an ounce in the bullion market was cheaper. But this option to get the underlying metal gave silver certificates a whiff of pre-1933 American currency, when all dollar bills could be exchanged for gold at the rate of $20.67 per ounce. If silver prices rose above $1.29 in the bullion market, however, that faint silver lining would suddenly become valuable because holders of Treasury certificates could earn a profit by exchanging the paper for coins at the Treasury and then selling them as bullion. It was as though an invisible silver thread were woven into Treasury currency, which might someday spring to life; until then the white metal remained sealed in the West Point crypt.”
The government subsidised price of 71c an ounce continued until 1946 when it was raised again to 90.5c and ounce. However this act also required the Treasury to sell silver at that price.
While the market price was below 90.5c there was no risk of a run on the government’s silver stockpile. However when the market price broke above 90.5c then it became profitable to buy silver from the Treasury at the subsidised price. This began a run on the government’s silver.
JFK and Silver
In 1961 President Kennedy suspended government sales of silver.
He then began the process of demonetising it. In his economic report to Congress in January 1962, the President explained:
“Silver—a sick metal in the 1930s—is today an important raw material for which industrial demand is expanding steadily. It is uneconomic for the U.S. Government to lock up large quantities of useful silver in the sterile form of currency reserves. Neither is any constructive purpose served by requiring that the Treasury maintain a floor under the price of silver. Silver should eventually be demonetized, except for its use in coins.”
At that time there were $2.1 billion dollars of silver certificates, backed by 1.7 ounces of silver bullion. Silber describes it as a “small but integral part of America’s money.”
Kennedy was met with significant opposition. Most of the opposition came from the same line of thinking as William Jennings Bryan and the free silver movement, as well as from silver mining states concerned about mining interests such as Nevada.
But there was also a concern about the move away from hard money. Congressman Compton White of Idaho articulated this position:
“I oppose this demonetization because … [it] would be a triumph for those who advocate a monetary system based solely on fiscal credit. Ancient and modern history have repeatedly proved that money systems based solely on the promissory notes of governments, which continued to spiral themselves deeper into debt, have ruined not only the economy of those countries, but their political systems as well.”
Nevada Senator Alan Bible agreed. Before the Senate Banking Committee he explained:
“The framers of our Constitution recognized that gold and silver were metals of intrinsic value and should be used in our monetary system, and the history of all nations will show that, wherever these basic metals have been done away with, the historical experience is inflation and the value of the currency goes down. I know of no exception to this historical fact. … I believe removal of silver from our silver certificates will be an inflationary move on the part of our Government. … History will again show that paper money is not valued by other nations of the world.”
At the time, the Federal Reserve was required to hold a 25% gold reserve for all notes issued, which was a handbrake on the reckless use of the printing press. But in the 1960s gold was coming under attack as well as there was a genuine concern that the demonetisation of silver would eventually lead to the demonetisation of gold.
JFK repealed the Silver Purchase Act in 1963 but did not live to see the complete demonetisation of silver. However, his successor Lyndon B. Johnson continued where Kennedy left off. In the Coinage Act of 1965 LBJ oversaw the removal of silver from the dime and the quarter and a reduction of silver from 90% to 40% in the half dollar.
Harvard economist Robert Barro commented that this was a:
“Continuation of the well-established tendency of all unrestrained monarchs to secure revenue by debasing the currency.”
In 1968, silver certificates were no longer redeemable in silver bullion. They remained legal currency but could only be exchanged for federal reserve notes rather than hard money. When they ended up in the Treasury they were exchanged for federal reserve notes and removed from circulation.
Those who were worried about the future of both precious metals in US money were ultimately proven right when President Johnson removed the reserve requirement for gold in 1968 and President Nixon ended the convertibility of dollars to gold in 1971.
Silver After 1971
Silver was no longer money in the formal sense in the US. But it was still attractive as a store of wealth and a hedge against inflation. It was also particularly attractive as it wasn’t until 1974 that President Ford reversed FDR’s ban on US citizens owning gold. So for as long as gold was banned, silver was the option people turned to for inflation protection.
As inflation raged in the 1970s and into the early 1980s both gold and silver went on a massive bull run with silver significantly outperforming gold, peaking at a little of $50 per ounce in January 1980.
William Silber notes:
“Silver had outperformed gold, in part, because it was the metal of the people, the same reason it dominated as the medium of exchange throughout the world until the nineteenth century. Few cared that the white metal no longer served as currency as long as it remained a rock-hard asset to protect against inflation.”
That price rise was followed with a dramatic crash and multi decade bear market that continued until prices started rising again in the 2000s and exploded during the GFC before collapsing once again.
Why Buy Silver
We are still living in the post 1968 era for silver where it has been completely demonetised. Unlike gold, silver does not form the basis of central bank reserves.
The market determines the price of silver, not any government. Its price is driven partly by its industrial use but also by its role as a monetary metal and protector from inflation.
Silver is much more volatile than gold and this was proven in the 1970s and 1980s as it was again in 2008-2011.
While there is a plausible scenario where gold might be remonetised if governments and central banks need to restore some hard money status to their fiat currencies, I personally don’t see the same in store for silver.
Nevertheless, the fact that silver was money for thousands of years means it has retained that monetary status despite its rejection by governments. The free market performance in two massive bull runs since its demonetisation, during times of crisis and uncertainty, attests to the fact that the market still ascribes silver a monetary status even if governments do not.
Silver is something that should be considered by an investor with an understanding of monetary history who wants to protect themselves from the debasement of fiat currency but desires the explosive upside potential that gold does not offer.
However, given the more volatile nature than gold, you should be careful when investing in silver and be prepared for significant price drops. Be cautious not to buy towards the top because of FOMO and greed and be aware that depressed prices can remain depressed for a long time.
It pays to always keep an eye on the gold/silver ratio to see when silver is over and under valued against gold.
How To Buy Silver
Physical silver is easily purchased at any number of precious metals dealerships.
You can also purchase an ETF such as SLV. This is a way to get exposure to the price without cost of transporting, storing and insuring the physical metal. The downside is that you own a financial instrument and don’t have rights to delivery.
“Silver gained its special status as currency in the ancient world because it was valuable; it remained the key medium of exchange for centuries because it never became too valuable.”– William Silber
Silver has a long history as money going right back to some of the earliest ancient civilizations.
Despite debasement and shortages and bans, silver retained its status as money for a very long time.
Our 50 year experiment in fiat currency is a very short timeframe in the history of money and we are yet to see fully how the consequences will play out.
The existence of fiat currency depends purely on the confidence the public has in the monetary stewardship of the central banks and that confidence could evaporate rapidly in difficult circumstances.
Despite no longer being formally considered money by governments, silver is still considered a monetary metal by the markets and still offers protection from monetary debasement.
Silber, William L. The Story of Silver : How the White Metal Shaped America and the Modern World. Princeton, New Jersey: Princeton University Press, 2021.