The History of "Gold" Is Really The History Of The Gold/Silver Complex

New York (Dec 26)  Sometimes, funny-money promoters like to dangle the idea that the “gold standard,” in U.S. or world history, was a short-lived episode dating from about 1870 to 1914, a period of only forty-four years. I take a rather different viewpoint, that gold (and its adjunct, silver) was the primary basis of monetary affairs around the world for millennia, stretching up to 1971.

When we look at the history of monetary arrangements, we find that gold and silver were usually used together, in what I sometimes call the “gold/silver complex.” The reality was that silver and gold traded in a tight band with each other, a few percentage points around 15.5:1 (fifteen and a half ounces of silver was equivalent in value to one ounce of gold). Thus, as a standard of value, both gold and silver were virtually identical, differing by only this slight drift. This stable value relationship made possible the bimetallic systems that were common in the 18th and 19th century, up until the 1870s.

Silver and gold were different metals, but in terms of a “standard of value,” they were virtually identical for centuries. Governments normally treated them as being effectively interchangeable, in a formal bimetallic system, as was used by the United States and most European countries. It was only after silver’s value decoupled from gold in the 1870s, for the first time in millennia, that governments had to make a choice of one or the other, because they could no longer be treated as interchangeable. Most chose gold monometallism. India and China mostly stayed with silver.

In practice, we find that societies before 1870 tended to drift between poles of the “gold/silver complex.” Sometimes they were overwhelmingly silver-centric, such as Britain between 800 A.D. and 1660, or China after 1450. Others were dominated by gold to the near-exclusion of silver, such as Byzantium (the continuation of the Roman Empire) from 350 to 1350, or Egypt during the Old Kingdom. Still others used both gold and silver regularly, but tended to focus on one or the other as a unit of account. Somewhere in the middle was formal bimetallism, where both gold and silver were recognized as being equivalent. In the fourth century BC, Athens was silver-centric, Persia was gold-centric, and Macedon had formal bimetallism. Britain was silver-centric before 1717, bimetallic with a gold bias after 1717, and used gold as the sole standard but with significant use of silver coins after 1816.

Many books have been filled with the details of these drifts between the two poles of the gold/silver complex. In the broader picture, however, these minutia are not really so relevant. Even if a country was focused almost entirely on silver, as China was before 1870, the value of the currency would be almost identical to the value of a currency that used a monometallic gold basis. Thus, in practical terms, a gold-only standard and a silver-only standard were not much different.

In the longer view, silver’s value did drift in a broader range. For example, in 1500, the gold:silver ratio was about 1:10.7 in Europe. In 1700, it was 1:16 in Spain. The declining value of silver in Europe was due to the enormous output of the Spanish silver mines in Bolivia and Mexico. But even in this extreme case, this migration happened over the course of two centuries. What people actually experienced was a very slow drift, averaging 2% per decade. Thus, in practical terms, gold and silver were largely interchangeable even then, similar to if the euro:dollar rate crept slowly from $1.40/euro to $1.428/euro over the course of ten years.

When I talk about the history of the “gold standard,” I am really referring to this gold/silver complex. While global gold monometallism was indeed largely a reaction to the silver disruption of the 1870s (and also the widespread use of banknotes instead of coins), the history of the gold/silver complex stretches back, unbroken, into antiquity.