Is silver real money? I don’t think so. But I know that my proclamation will likely draw vociferous contradictions from others who consider themselves “hard-money advocates”.
That’s okay. Let’s look at the facts. And in order to be consistent with the introduction of my companion article GOLD IS REAL MONEY, let’s start similarly here. In this case though, I will list what silver is rather than what it is not. Silver is:
- an industrial commodity
- a semi-precious metal
- a possible investment
Gold is MONEY. Silver is an industrial COMMODITY which has been used at times as money.
Silver is used in batteries, dentistry, solar energy (photovoltaic cells), medicine, semiconductors, nuclear reactors, etc. Also, it is highly malleable (as is gold) but it has several characteristics which detract from and limit its use as money:
- it tarnishes easily and its use in coinage results in a higher amount of visible/actual wear
- it is in reasonably plentiful supply (not nearly as scarce as gold, nor as beautiful)
- its value is subject to wide (sometimes ridiculously so) changes based on economic conditions and speculation.
“The Federal Reserve Bank of the United States was established in 1913. At that time the US dollar was fully convertible into gold at a rate of (roughly) $20.00 to the ounce. You could exchange paper currency of twenty dollars for on ounce of gold in coin form whose dollar value was stamped on the coin. And the paper dollars had a statement printed on them which stated that they were convertible/exchangeable into equivalent amounts of gold.”
At that same time the US dollar was also exchangeable and convertible into silver at $1.29 to the ounce. The seemingly odd number was based on the silver content of .77 ounces in a US silver dollar ($1.29 x .77 ounces = $1.00).
In the intervening one hundred years, gold’s value as measured in continually depreciating US paper dollars is up sixty times ($1260/oz divided by $20.67/oz = 61). Silver’s value, however, as measured in the same depreciating US paper dollars is up only thirteen times ($17/oz divided by $1.29/oz = 13).
The US dollar has lost ninety-eight percent of its purchasing power since 1913. In other words, it takes (generally speaking) fifty times as many paper dollars today to purchase comparable amounts of similar goods and services you could have purchased in 1913. The sixty fold increase in gold’s US dollar price compensates quite well for the decline in US dollar purchasing power. The thirteen fold increase in silver’s US dollar price clearly does not.
For silver (or anything else) to be considered real money, it must be a store of value. According to Investopedia, a store of value is a “form of wealth that maintains its value without depreciating”. In this case, being a store of value means it must at least match inversely the decline in purchasing power of the US dollar. For this to be so, silver’s current value needs to be at least US$64.00/oz. It isn’t even reasonably close to that benchmark.
It is true that there have been a couple of times (1980, 2011) when silver reached a price level of approximately $US50.00/oz. But both of these occasions were the result of speculative excess and were short-lived.
The Gold/Silver Ratio
As far back as the early 1970s, when I purchased my first gold and silver coins, people were talking about the gold/silver ratio. Of course, just as today, there were expectations that the ratio was ‘destined’ to return to the level of 16 to 1 ($20.67 divided by $1.29) which existed one hundred years ago.
There is no fundamental reason which justifies any particular ratio between gold and silver. The gold/silver ratio that existed a century ago was more the result of political influence regarding the specific fixed price of silver per ounce.
The origins of the “political persuasion” involved came from the western mining states. And that fixed price was higher than the actual market price. Thus, in actual effect, silver was one of the first commodities to benefit from government price support. This was in the early 1900s, before the depression, and before New Deal.
Whatever the reasoning or justification behind the specific fixed price, all we need to know is what has happened since. Meaning, what has happened to the purchasing power of silver, gold, and the US dollar.
In my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold , I discussed the price history of the three items listed compared to the US dollar. Gold over the past century has maintained its value/purchasing power and the US dollar has not. If we do a similar price comparison of silver, we find that it does not maintain its purchasing power over time. Hence, it is not a store of value. Since it is not a store of value, it cannot be real money.
Does that mean silver can’t or shouldn’t be used as money? No, of course not. For one thing it is certainly a better choice than paper currency. And its use as money is evident throughout history. Two of the most recent examples are US silver coinage and British Pound Sterling. Nevertheless, silver’s role as money will likely (and should) be secondary to gold. In any case, it will not change what history has shown to be true. Silver is a commodity – with industrial uses primarily and a sometimes secondary role as money.