Gold Versus Silver

Gold and silver price determinants

Gold and Silver Use

Gold and silver have been used as money since earliest times, by reason of their beauty, rarity, resistance to corrosion and ease by which they could be cast as bars and ingots or worked into jewellery. Silver as a medium of exchange is mentioned in the Code of Hammurabi of 1870 BC, and gold circulated as tiny cubes in China as early as 1100 BC, but it was silver that served as the main medium of exchange through China's long history till recent times, and gold that generally served the primary role in Europe, with silver as a second in command or awkward lieutenant. {1-5}

The earliest western coins were in fact in electrum, which occurs naturally in Asia Minor, and these darics were no more than crude pellets stamped with the archer and bow to denote the authority of the issuer, the king of Persia. That ingenious race, the Greeks, soon took the notion further and turned out gold and silver coins that not only circulated at the face value of the bullion they contained, but were often objects of great artistic merit, indeed some of the most beautiful coins ever produced. Silver was the metal of choice for circulating coins, gold being generally reserved for temple treasuries, to be called on in times of emergency, when troops had to be paid. Times of desperation might indeed require gold statues and ornaments in temples to be melted down. Nonetheless, to the silver coinage of Rhodes was added gold staters early in the fourth century, and the two metals remained in circulation until the death of Alexander in 323 BC, when the Macedonian Empire broke into Hellenic states each issuing their own series of coins. {1-5}


Gold was readily available to the Romans but the state first used crude lumps bronze (aes rude), which were of various sizes and bore no distinguishing mark. Later these became bars the length of a man's foot, the so-called asses: each weighed about a pound, and was marked off into 12 thumbs of inches. Weight was the important consideration, and the unit of value became the pound of bronze, the as libralis, which could be fashioned in tools, weapons and utensils. Because weighing these lumps was inconvenient, the practice arose of standardising the weights and certifying them with some authoritative device, which was often an impression of some animal.

Such bronze coins appear from 300 BC, and were joined by silver from 245 to 217 BC, the two metals being equally important. Silver predominated afterwards, and from the end of the Pyrrhic War took the form of the denarius, which was rated at 10 asses or 4 sestertii. In 217 BC the ass was reduced to a standard one ounce, and retariffed at 16 to the denarius, which itself remained the standard until the Roman Empire, when the denarius was debased and gave way to gold as the primary unit of measurement. Gold indeed had been used in Roman Republic days, and was occasionally required for taxation, but gold coinage first appeared under the financial strain of the Second Punic War (218-201 BC). Three denominations were issued, of one, two and three scruples, but values were set at so high, (at 20 sestertii to the scruple), that the products were regarded as token coinage and soon discontinued.

Gold coins were again struck by generals in the late Republic, probably from loot, to pay their soldiers. Sulla created the aureas of 168 grains of gold, and later one of 140 grains. Pompey issued his own coins at that weight. Julius Caesar's mintings were at 126 grains. No conversion rate to the denarius was instituted, however, and the coins were probably bought and sold at market prices for gold. After Caesar's death, the Senate authorized moneyers to coin gold, but issues from Rome were overtaken by provincial issues by the triumvirs and their subordinates. {1-5}

As with anything else, Gresham's Law soon operated, and the lighter aurei displaced the heavier. Debts were preferentially repaid in lighter coins, and the heavier disappeared: the coins were hoarded or melted down to make more of the lighter variety. No doubt traders noted the differences and made their local adjustments, but we have no details. With Augustus comes a splendid coinage regularized into an aureus of 126 grains, a silver denarius rated at 12.5 to the aureus, and a brass and copper coinage that may have been traded as weight of contained metal though officially rated as follows: the denarius was worth 4 brass sestertii, 8 copper dupondii and 12 bronze asses.

All denominations suffered from inflation: the coins were lighter, debased and replaced by other denominations at rates favourable to government treasuries. As the copper coinage was more in the nature of tokens, and very well made tokens at that, there was little attempt to benefit from varying prices of their contained copper, tin or lead, at least to the third century AD, when silver-washed base metal coins — the antonininus, which had replaced the denarius at two denarii for one antonininus — were minted in enormous quantities but poor workmanship. Matters were very different with precious metals, however. If gold was undervalued with respect to silver, the silver coins were preferentially hoarded or melted down to be sold for gold. If silver coins were undervalued, the gold coinages suffered the same fate. Inferior coins — excessively worn, clipped and/or debased — drove out the good, despite edicts against coin defacement and exportation.

The Roman Empire was largely self-sustaining, but coins did leave its confines to pay for eastern imports of silk, spices and luxury goods. Silver was the preferred medium of exchange in China, and Roman gold and silver coins circulated in India, both probably by value of contained metal than by any formal exchange rate. From Augustus to Nero, the denominations held firm, but the aureus was subsequently reduced in weight, and the denarius increasingly debased with lead. Even the reigns of Claudius and Nero saw much counterfeiting, and a wide circulation of privately-made tokens, often of lead. Diocletian revised the monetary system entirely, and Constantine the Great replaced the aureus with the solidus, a thinner coin containing 70 grains of gold. Thereafter, to the end of the western empire and through the Byzantine Empire, the solidus maintained its importance. It was unit with which all produce was valued, though most individuals probably never saw one. Bronze coins minted for everyday purposes grew more martial in appearance but smaller in size, eventually disappearing altogether in the west as the centralising empire shrank into self-contained feudal estates relying on tithes and barter.


Bar the gold penny of Henry III in 1257, unpopular and struck in small quantities, the medieval gold coinage of England begins with the florin of 1343. Unfortunately, these one, half and quarter florin issues were over-valued with respect to silver and so disappeared. A year later saw the introduction of the noble, a handsome coin of 129 grains that proved acceptable, though it was debased by stages to 68% of its original value by 1460. Debasement was inevitable as both gold and silver coinages suffered from two problems. First was the varying exchange rates between the two metals that saw coins of one metal hoarded or melted down, despite savage penalties. Often the coins were spirited abroad if higher prices merited the risks involved. The second problem was the poor conditions of coins circulating, which commonly suffered abrasion, sweating, clipping, boring, scraping and counterfeiting. Indeed European medieval coinages generally saw three phases: commercial expansion, marked by increase in the money supply and rising prices. Then would come a period of steady production of precious metals, with a struggle between rival states for possession of these sources. Finally would develop a volatile period of shifting exchange rates between the metals, and so currency instability. {1-5}

Thereafter, from the discovery of New World bullion sources to the end of the seventeenth century, both gold and silver coins were minted, and both were legal tender. But Gresham's Law operated as noted, and the circulating coinage was not in good condition. Many pieces were simply silver-plated iron, brass and copper, and in fact valued at half their supposed silver content or face value. The recoinage of 1696-9 raised the gold-silver value ratio from 15 to 1 to 15.5, and even this small change brought many foreign gold coins into the country for reminting as English denominations. The silver coinage was melted down and/or exported. The previous bimetallism was effectively replaced by a gold standard, and continued so for the next hundred years until specie payments were suspended during the Napoleonic Wars. Sir Isaac Newton as Master of Mint had adjusted the value ratio to 15.21, but the imbalance continued. Crown pieces had almost disappeared by 1760, for example, though they had been minted from 1695 in quantities to the value of 1.5 million sterling. Of half crowns, some 2.5 million pounds sterling's worth, only imperfect copies remained, and smaller denominations were practically worn flat.

Between 1793 and 1797, the sovereign was replaced by the guinea, but the bullion losses continued just the same. Banks, however, both the Bank of England and country banks serving local communities, issued banknotes, which were not legal tender but were redeemable for specie on demand. {1-5}

Indeed it was Charles II's default of 1672 and his son's Catholicism that led to the triumph of the credit system. The 'glorious revolution' of 1688 put a Dutch king on the English throne, and a Dutch monetary system into effect. With the establishment of the Bank of England, set up with 1.2 million pounds by wealthy London merchants, the king needed no longer to petition Parliament for funds but could draw on the Bank for loans, paying the 8% interest charge through Parliament-regulated excise duties and taxation. The Bank also received a 4,000 pounds annual management fee, and a royal charter allowing it to take deposits, issue bank notes and redeem bills of exchange. In this way a privately owned bank converted the sovereign's person debt to a public debt, and eventually, when the Bank was given the sole right to issue bank notes, into a national currency. Loans not paid off were transferred to a national debt, a safe mechanism while a strong and stable government paid interest on that debt. {1-5}

From 1797 to 1821, England was therefore on a de facto paper standard. Many factors contributed to this emergency device, but all revolved around the changing fortunes of war. A heavy demand was placed by the Government on the Bank of England for equipment and mercenary payments, which led to large bullion transfers abroad. Conversely, particularly during the early part of war, though France appeared to be winning, there was a drain of bullion back to England after the disastrous French experiments with paper-based inflation. By 1797, the English coinage was truly in a bad way, and the Earl of Liverpool's recommendations were that gold, and only gold, should be the measure of property and instrument of commerce. Silver and copper coins should be struck, but not made legal tender above the nominal value of the largest gold denomination in circulation. The recommendations were adopted, and in 1820, after a paper money regime of a quarter century, England came back to a gold standard, one which it embraced for 93 years, until the 1914 outbreak of war. Specie payments in gold were maintained, coins were struck in gold and that metal flowed freely in and out of England as trade required. {1-5}


Matters were hard fought in the nineteenth century in the USA between those favouring a gold standard and those who argued that both gold and silver had a role to play. Gold was supported by east coast bankers who wanted America to be fully integrated into the world economy, with the dollar in fixed relation to the English pound. Silver was advocated by hard-pressed farmers, steel companies, businessmen, and those who'd seen their debts increase as a result of deflationary gold standard policies. Silver was anyway needed for everyday transactions, was mined in many areas, and so could serve to expand the local economy. Nonetheless, the North had funded the Civil War by a $150 million (later increased to $450 million) issue of Greenbacks, and these were redeemed with gold under the Specie Resumption Act of 1875, which brought the economy back under international banking influence. The Sherman Silver Act was repealed, a run on the US Treasury's gold reserves was possibly engineered by J.P. Morgan and others, and in the contraction of bank credit following the financial panic of 1893, a severe economic depression arrived.

Some 15,000 businesses, 74 railroads and 600 local banks failed. Unemployment reached 14.5-25%, and the stock market crashed. However detrimental to the country at large, the events offered investment opportunities to banking, railroad and industrial interests, which saw considerable consolidation in the hands of ever more wealthy families. The pre-eminence of finance in America life was re-established with the Gold Standard Act of 1899. {6-7} As President F.D. Roosevelt remarked in 1933: 'The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the Government ever since the days of Andrew Jackson.' {8}

The Gold Standard

The gold standard was the world's first attempt at a universal currency, establishing the city of London as a centre of financial services, a reputation it still enjoys today. The 1870-1914 period of the gold standard was a period of wealth and stability for members of the club, in which there were few examples of currency manipulation, inflation or balance of payment problems. {9, 11} Simple telephone calls enabled financial centres in Paris, New York and Buenos Aries to conduct business with a reasonable amount of confidence. Currency was underwritten by gold reserves, and any profligacy corrected by gold flows. Countries could not therefore run the large trading deficits of today. Several nations, including England and the Netherlands, had used a gold standard previously, but the club was joined by Germany and Japan in 1871, France and Spain in 1876, Argentina in 1881, Russia in 1893 and India in 1898 and the USA in 1900. {9}

The Bank of England gold reserves were never large. They were increased in the second half of the nineteenth century, but at no point between 1850 and 1890 exceeded 4% of the liabilities of Britain's domestic bank deposits {8} From the 1880s to 1914 the Bank of England's reserves fluctuated between an average of some 20 million pounds and 40 million pounds — much smaller than those of the Bank of France (120 million), the Imperial Bank of Russia (100 million) and the Austrian Hungarian Bank (50 million). Though Britain was the world's largest trading nation, and that trade was in sterling, such was the vitality of its industries and the faith in its institutions, that more was unnecessary, and would have been 'barren' — i.e. earned no interest. {9} Gold entering Britain was therefore not hoarded but put to good use, though business instabilities were intensified. {14-15}

In general, however, the gold standard never worked entirely as claimed, i.e. gold outflows led to deflation and then to trade recovery through lower-price exports. Convertibility was promised, but only part of the currency was in practice backed by gold {16} because severe deflation would create dangerous levels of unemployment and civil unrest.

In the Gold Exchange Standard, introduced in the 1920s, there were too many war debts to fully back the currency with gold, the various contrivances could not paper over the difficulties, and gold shortages created a blight on growth and prosperity through money shortages. {11} Gold in fact only nominally backed American currency. Currency was in the hands of the Federal Reserve System, created in 1913 to bail out defaulting banks. Most countries indeed came off the gold standard during W.W.I when they needed to print large amounts of money to support war efforts. The new gold standard agreed by participating countries at the Genoa Conference of 1922 was a nominal one, which simply accepted that foreign exchange balances would be treated as gold for reserve purposes. Gold was in fact valued at US$20.67/ounce, but gold coins and bullion no longer circulated, and any exchange of gold for paper currency was in minimum quantities, typically 400 ounce bars, which largely restricted use to inter-bank dealings. International dealings became unstable under this 'gold exchange standard', as regulation was dependent on countries playing by certain rules. Not all could afford to. The French franc crashed in 1923. Britain returned to the pre-war gold parity, a massively deflationary measure that created widespread business failures and added millions to the unemployed. In time, of course, accumulating trade surpluses by the more successful countries led to demands to 'see the money', i.e. hand over the gold.

Both America and Britain found their gold reserves being rapidly depleted, and it was to sever this difficult relationship that Roosevelt in 1933 took gold out of contention. Gold was forcibly purchased from US citizens at its existing price, and its ownership (beyond a few trifling exceptions) made illegal. Banks were temporarily closed and confidence restored by having their accounts audited. When the gold price was finally set at $35/ounce, the dollar had been drastically devalued, and American exports made more competitive. Yet, for all so controversial a measure, the effect was short-lived, and US full unemployment had to wait to W.W.II. {17} The Bretton Woods accord of 1944-5 fixed exchange rates and achieved price stability for twenty years.

But then came the UK sterling crisis of 1967, when many factors (rising unemployment, balance of payment problems, French actions, currency adjustment to possibly join the EEC) caused the British Government to devalue the pound sterling from $2.80 to $2.40 to the dollar. Bretton Woods no longer seemed so secure, and there was a rush to buy gold, particularly from the London Gold Pool, which saw large outflows. By March 1968, sales of gold were running at thirty metric tons an hour, and the Pool shortly afterwards collapsed. A new international reserve asset was conjured up by the IMF a year later: special drawing rights (SDR: essentially a paper exercise that shared responsibilities among IMF members according to their assets) but the period to 1971 was one of great uncertainty. President Nixon's announcement on August 15, 1971 was part of a New Economic Policy of immediate wage and price controls, a 10% surtax on imports and the closing of the gold window (the mechanism whereby the dollar was converted into gold by foreign central banks). {17}

It was none too soon. Trade deficit with Japan and Europe had reduced US gold reserves to 9,000 metric tons by 1971 (and those in the UK were only 609 metric tons). Nixon's intention was to make American exports more competitive by lowering the value of the dollar, and the surtax was to be removed once that had been achieved. The Japanese allowed the yen to float, when it rose 7% against the dollar. With the 10% surtax, the American dollar had been devalued by 17% against the yen, so helping to reverse the trade deficit. Canada and the European countries particularly disliked the surtax, however, which they saw as creating severe unemployment in their respective countries, and, after much haggling, the G10 meeting agreed a 9% devaluation of the dollar against gold, a revaluation of European currencies against the dollar of 3-8%, and a removal of the surtax if countries kept exchange rates within a 4.5% trading band. Again, though popular at the time, the Nixon plan did not bring lasting success. Other countries made their own adjustments and within two years the USA found itself mired in recession. {17}


By controlling the money supply, the gold standard aimed to give confidence and long-term stability. If technology increased a country's output, prices would have to fall because the money supply remained fixed. But with lower prices, exports to a second country would rise, and that second country's purchases would have to be settled in the gold. Gold would then flow back to the first country, increasing the money supply and so the price of goods. With reduced gold holdings, and so money supply, the second country's goods would fall in price, making them more competitive, until trade flows were in proper balance again. Central banks were also expected to adjust the discount rate (rates at which the central banks lend to member banks), raising them to encourage gold inflows (i.e. provide a better return for deposits), and lowering them to facilitate gold outflows. {9}

Britain largely played 'by the rules' over the 1870-1914 period, but France and Belgium also manipulated gold flows by selling government securities, and/or resisted interest rates rises that would make domestic goods more expensive. {10} Countries also suspended convertibility during wartime emergencies: USA 1862-1879, and Britain 1797-1821 and 1914-1925. {9}

References and Further Reading

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