By David Morgan Precious Metals Analyst

“We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied soon.” — Robert H. Hemphill, Credit Manager of the Federal Reserve Bank, Atlanta, GA

This article is about silver’s monetary role throughout history, though it should be read as an overview since much more complete works exist on this subject. It is truly impossible to discuss silver as money without mentioning gold’s role as well. At times countries have been on a gold standard or a silver standard or a dual standard. My aim with this piece is to encourage readers to consider the role they believe silver has in today’s economy. Is silver a monetary metal? Is it an industrial commodity? Is it both?

In this brief preface, two ideas are pertinent to all. First, the above quote from Robert Hemphill will be meaningful to you only if YOU give it meaning. To wit, only when you are able to prove to your own satisfaction that a debt-based monetary system poses no threat to your financial well being and will be able to endure through your children’s lifetime will you feel secure. Second, consider how you might protect yourself if you turn out to be wrong. In other words, if you were to allocate a mere 5% of your investment portfolio to silver, just how badly could you be hurt? Sure, if silver were to go to zero, you’d lose 5% of your total investment base – but, were silver to reach its former highs, your small allocation might prove a highly welcome asset in a not-so-certain world. With this background let us begin.

Economists seem as a whole to be totally perplexed by money. Even free market economists usually insist that some sort of government control is needed for money. These same economists seldom consider that government control of money is interference in the free market! Historically, money was one of the first things controlled by government. In my opinion, however, the free market is best at determining money.

Gold and Silver are Assets, Not Liabilities

An argument often mentioned about gold is that it is the only asset that is not simultaneously someone else’s liability. This is fiction not fact. Silver, copper, iron, or even cotton, tobacco, or cornmeal would be able to perform the same function. In other words, nearly any commodity that is totally owned by someone is an asset and not a liability.

Many different goods have been used as money throughout history. Throughout centuries, only two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities. In a free market, the medium of exchange is developed by people and their economic interactions. This is what establishes what money is. It is not established by a government calling bits of paper “money.” A most important truth is thus established, MONEY IS A COMMODITY! “Learning this simple lesson is one of the world’s most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a ‘claim on society’’; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange.” 1

The shape of the money unit makes no difference. If copper is the money for example, then all copper is money, whether it is a pipe, chunk, bar, coin, or picture frame. This is not to say that some shapes are not more convenient than others. The free market will determine if a coin is to carry a premium over another form of the same metal.

Another area that can be simplified is the money supply question. It cannot be estimated how much effort and nonsense has been written on this subject. The question is really how much money does the world need? Can the free market determine the correct amount of money? For this illustration let us use one commodity established by the free market as money. For this example I will use silver. The first point is that the money supply is the total weight of silver existing. Changes in the money supply would be determined by the same factors as other goods. Increases would come from increased mine supply and decreases from being used up by wear and tear, industry, or loss. So, what should the money supply be? Only a few have suggested the obvious, let the market itself decide.

Money Is Different

Money differs from all other commodities and this difference must be fully understood. When the supply of any other good increases, this is beneficial as more goods mean an increased standard of living. Consumer goods are used up, capital goods are used up, but money is not used up. Its function remains and it is still available for further transactions. Let us suppose for example that we were able to double the money supply (amount of silver), would we be twice as rich? Absolutely not. What makes one rich is an abundance of goods. What limits that abundance is a scarcity of land, labor, or capital. Thus, an increase in the supply of silver only dilutes the worth of each ounce, whereas a fall in supply raises the power of each silver ounce to do its work. “We come to the startling truth that is does not matter what the supply of money is. Any supply will do as well as any other supply.”2 The free market will simply adjust by changing the purchasing power or effectiveness of the silver unit.

Gold is mentioned first in the Bible. The first reference I could find to money was in Genesis 44:8 – “Behold, the money, which we found in our sacks’ mouths, we brought again unto thee out of the land of Canaan: how then should we steal out of thy lord’s house silver or gold?” The first monetary transaction recorded in the Bible is also in Genesis. Abraham weighs 400 shekels of silver to pay for his wife’s burial. This is the same Abraham all three major religions of the world express as a link to the God in which they believe. Judaism, Christianity and Islam all refer to the “God of Abraham.” This reference to silver in Genesis applies universally, across cultures, and throughout the ages.

Silver has had a monetary function far longer than gold, being used as the most common medium of exchange in everyday commerce since well before the time of Christ. In this article, my aim is promote an understanding that silver retains a vital monetary purpose and is, in fact, more crucial to mankind than ever before. This is true both financially and socially – financially because of the problems associated with a fiat money system and socially because silver is crucial to our modern way of life.

Three metals have a history of monetary usage – gold, silver and copper. Silver has been most useful because gold is simply too rare for common daily transactions. Gold has been reserved primarily for final payment in large bank-to-bank or nation-to-nation dealings. Copper has been used mainly as a medium for very small exchanges. (As an interesting sidelight, note that even copper is debased out of the currency system in periods of extreme inflation. The U.S. government now makes the penny with a zinc alloy because it was losing money on the minting of copper pennies.)

Silver IS Money

After my first article about silver’s role as money [link], I received many letters verifying my contention. Indeed, silver’s monetary role has been so universally recognized throughout history that the very word for silver is money in many languages. In Italian, Spanish and French the words for “money” and “silver” can be interchanged. In Hebrew, the word kesepph means both silver and money. Even in early American slang, the word silver was often used to signify payment: “Grease my palm with silver!” To be precise, among more than 250 million people in 51 countries, the word for money is identical to the word for silver. Many Africans and Asians refer to both silver and money as “argent,” while Spanish-speaking people the world over use “plata” to mean silver, money or both.

Before moving ahead, it might be interesting to look back for a moment. The following was written over two decades ago, but still deserves careful contemplation. “Most of the gold that has been mined from the ground is now stored in the ground – in bank vaults. Industrial demand for gold today, even though it is growing, is small compared to existing stocks. Consequently, within our lifetime – and possibly within this decade –silver could become more valuable ounce-for-ounce than gold. Of course, both will become more valuable in terms of paper money by a large multiple because of the accelerating and uncontrollable worldwide paper-money inflation that lies ahead.”3

As I’ve noted before, this is beyond what I expect. However, the current relative values for gold and silver should definitely favor silver in the long term.

A Brief Review of Silver’s Recent Monetary History

Silver was the primary commercial money for most of the world’s people from earliest recorded history until the past century. Silver’s price for most of the 19th century was fixed at the coinage value of $1.29 per troy ounce. During the great silver boom of the 1860s, which vastly expanded the silver supply, the world became flooded with silver coinage. Silver simply became overabundant relative to gold and, as a result, almost all European nations abandoned a bi-metallic standard, officially adopting a gold standard.

Another key point in silver’s monetary history came during the deflation, devaluation and Depression of the 1930s. Silver’s price fell lower and lower, finally bottoming at 25 cents in 1933. However, the Thomas Act of 1933 allowed foreign debtors to pay the U.S. in silver coin at 50 cents per ounce, twice the unofficial price, and silver soon strengthened worldwide. The price rallied to 44 cents by the end of 1933, a 75% increase above the Depression low, but it could still be said that silver was clearly in a state of monetary confusion. (The Thomas Act also authorized a reduction in the gold content of the U.S. dollar. At the request of insolvent bankers, all banks were closed, an embargo was put on gold sales and the dollar was allowed to float.)

The next major monetary adjustment for silver resulted from another political action. The Silver Purchase Act of 1934 directed the Secretary of the Treasury to purchase silver both at home and abroad until the market price reached the official monetary price of $1.29 per ounce. This political action quickly inspired still another political action. The U.S. Treasury issued an edict that taxed domestic silver transactions at 50 percent in order “to capture the windfall profits created by the Treasury.” Over the next four years, the U.S. acquired 3.2 billion ounces of silver – including the physical confiscation of so much actual silver stock that it became impossible for the Commodity Exchange of New York (Comex) to function.

From 1934 until 1955, the Treasury support price for silver remained above the actual market price. After 1955, however, the market price began exceeding the Treasury price, with silver users (largely in the photographic and electronics fields) buying silver from both domestic mines and the Treasury.

Faced with dwindling supplies and increasing market prices for silver, the Coinage Act of 1965 moved through Congress, boosted by a letter dated June 3, 1965, from President Lyndon Johnson, which declared his support for the elimination of silver from coinage in the United States. “There is no dependable or likely prospect that new, economically workable sources of silver may be found that could appreciably narrow the gap between silver supply and demand,” Johnson wrote. “The optimistic outlook is for an increase of about 20 percent over the next four years. This would be of little help. Further, because silver is produced chiefly as a by-product of the mining of copper, lead and zinc, even a very large increase in the price of silver would not stimulate silver production sufficiently to change the outlook.”4

Significant Points About Real Money and Silver

First, silver again lasted longer than gold as a medium of exchange (real money), surviving until 1965, whereas gold ceased to circulate among the people in 1933, being reserved for balance-of-trade payments until the gold window was closed in 1971.

Second, to properly understand what President Johnson did, you need to know something about the rule of law. A contract is sacred and cannot be broken – but Johnson essentially urged Congress to break the contract with the American people that’s printed on all silver certificates. Some Americans, aware of what was really going on, saved every 90%-silver coin they could get their hands on.

Third, it is a total fallacy that there is too little gold or silver left for it to be used as money. This is something I hear over and over – and it is completely erroneous. The correct observation is that too many paper claims have been issued against the currently existing amount of real money.

Finally, in a true gold standard, many financial planners would be out of business. As absurd as this sounds, follow the logic. If the monetary system were based on honest weights and measures, you would know, when you first entered the work force at, say, 20 years of age, exactly how much you would need to save by age 65 for retirement. Why? Because your purchasing power would remain constant. Under an honest monetary system, interest rates are stable and long-range planning is simplified. In a true gold standard, purchasing power actually increases slightly over time so that an ounce of gold would buy slightly more after 35 years than it did when you originally entered the work force.

Obviously, a true gold standard is not perfect, and there are still the problems associated with human interaction. However, it is the most just of all recognized monetary systems. And, the potential buying power of gold has importance for determining silver’s usage as money. For example, if gold reaches a price in U.S. dollars of $2,000 per ounce, then the smallest practical coins, being the one-tenth ounce pieces, would have a value of roughly $200. This is far too large for a great many daily transactions – e.g., buying bread, milk or gasoline. If coins were to be used in commerce, they would have to be made of something less valuable than gold.

In consideration of silver’s monetary role, we need to examine historic ratios between the values of gold and silver. Historically, silver was valued at approximately 1/16th the price of gold. Only in recent history has the gold/silver ratio risen above the “classic” 16:1. If we use the classic ratio, then one troy ounce of silver would be worth $125. A silver dime is 7/100th of an ounce, so a dime would have the purchasing power of about nine paper “dollars.” This seems crazy, but it actually is normal from a historic point of view. A menu in the 1850s might offer a meal for 5 cents. If you worked as a miner during the great silver rush in Virginia City (Comstock Lode), you were paid two silver dollars per day as wages. The five cents would be 1/40th of a day’s wage. Taking that to the present time, a person making $5.00 an hour ($40 a day) is able to buy a 99-cent hamburger at several fast food outlets. This is equivalent to the 1/40th comparison.

Under a 100%-reserve gold standard, the monetary role of silver might be so great that silver coin and bullion would constitute as much as one third of the overall supply of money. This estimate is consistent with the fact that today, paper currency in denominations of $100 and less, together with subsidiary coin, constitutes on the order of a third of the overall quantity of money, while checking balances constitute the rest. Under a 100%-reserve gold standard, silver coins would take the place of most of today’s paper currency and would have a buying power ranging from today’s $10 bills up through today’s $100 bills.

Moving back to the theme of synthetic (fiat) money, problems compound one upon another. Holders of the U.S. debt become restless and irritable being forced to pile up dollars that are now starting to lose value relative to their currency. As the purchasing power of dollar falls, they become increasingly unwanted by foreign governments. But they are locked into a system that offers little in the way of relief. The long run problem (we have almost finished the race) is that these other countries will not sit by forever and watch their currencies become more expensive and their exports hurt for the benefit of America. As the dollar depreciates further, there will be competition. This will lead to exchange controls, currency blocs, and all types of economic warfare. In a strategic move during the current global tensions, it is even conceivable that a country could throw in the towel and exchange U.S. debt for gold. This would in my view have more of an effect upon America than nearly anything else. Certainly, if this takes place during a time when the “war on terrorism” is in full fervor, it will be blamed on our enemies.

It’s Time for Re-Evaluation

In conclusion, I must agree that money is the most important subject intelligent persons can investigate and reflect upon. Our civilization stands at a very important point. Many are looking at the leadership in America not only on the political front, but also on the corporate level. Scandals are daily news, the dollar has come under attack, and “money” has disappeared from many investor portfolios. As important as money is to the lifeblood of a modern society, it appears to me that something more important has been lost. Integrity and honesty are in extremely short supply today. As I have stated before, when you can lie about money, you can lie about anything.

All of monetary history teaches us that a dishonest money system leads to the very problems we are witnessing today, yet we fail to look at the root cause. The root cause is accepting anything other than gold and/or silver as money. Plain and simple. The history of money teaches us that civilizations fail for this lack of knowledge. The Roman Empire fell as a result of debasement of the money supply. Marie Antoinette lost her head because of debasement. Following a paper money failure, Napoleon came to power and immediately installed a metal standard. In the last century, Hitler came to power after the paper money debacle in Germany.

It is time to be honest with yourself. Is the crumbling financial system due to improper accounting methods? Greed? Lies? Perhaps the unit of account itself is at fault. Is a dollar really a dollar? What we consider to be money, is it really money? This begs the question, if the basic unit of account is merely a fiction, is not the entire structure unstable?

Is your monetary future based on facts, mere faith – or total fiction? – David Morgan

A final note on investing in precious metals:

It is well understood that the most important investment to be made in either silver or gold is in the actual metal itself. This point has been made several times, but it bears repeating. There have been many times in the monetary history of the world when only the real metal is of any practical value. For example, when the “boat people” were leaving Viet Nam, gold coins could buy passage – but those who tried signing the back of their stock certificates as a means of payment are still waiting for the boat. Most investors know that, in order to build a well-structured metals portfolio, you need a hierarchy. First, real metal, bought and paid for; secondly, the shares of top-tier mining companies; and, lastly, investments with extreme leverage, but only for those with adequate risk capital.


1 Rothbard, Murray, What Has Government Done To Our Money, Praxeology Press, Auburn, Alabama, 1990, p.19. 2 Ibid., p.30-31. 3 Smith, Jerome, Silver Profits in The Eighties, ERC Publishing, New York, NY, 1982, p.xvi. 4 Johnson, President Lyndon, Letter to The Congress, June 3, 1965.

© 2002 David Morgan July 12, 2002

Originally published in Financial Sense Online


David Morgan has been a private economist for over two decades. His background in engineering with an advanced degree in Economics/Finance gives a unique perspective to the financial markets that pure business majors often miss. He applies the discipline of logic to verify the basics of economic law. Mr. Morgan has been published in The Herald Tribune, Gold Newsletter, Resource Consultants, Contact, News Gurus Magazine, Common Ground, and The Idaho Observer.

His work has appeared on the internet at, 321Gold, Le Metropole Cafe, Goldseek, Gold-Eagle, and Silicon Investor. He has been interviewed on Don McAlvany’s radio talk show, Financial Sense Newshour, Hard Money Watch, Truth Radio and appeared on television. He hosts a weekly precious metals wrap-up on internet radio every Saturday with Jim Puplava. Mr. Morgan was published in the global investor regarding ten rules of silver investing. Currently, he is speaking with a publisher regarding a book on silver.

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