Money Mischief_ Episodes in Monetary History - Milton Friedman [63]
The price of silver tells the same story. From 1670 B.c. to 1873, the year in which the United States and France demonetized silver, the yearly average price of gold never rose above 16 times the corresponding price of silver. The lowest recorded price ratio is a trifle below 9 in about 50 B.c. (Warren and Pearson 1933, p. 144.) Remarkably, the price ratio ranged between 9 and 16 for more than three millennia. From 1687, when continuous annual estimates begin, to 1873—years when silver was unquestionably the dominant monetary metal—the range is much narrower, between 14 and 16.* The situation changed drastically after 1873. From then to 1929, the ratio varied between 15 and 40 and was mostly in the high 30s, except for a few years during and just after World War I. The drastic fall in the price of silver during the Depression raised the ratio to 76 in 1933. The silver purchase program lowered the ratio temporarily to 54 in 1935, but then it rose to an all-time high of over 100 in 1940 and 1941. It fell to a low of 18 in 1970 because the United States pegged the price of gold at $35 an ounce, while inflation was pushing up the price of silver along with the prices of other commodities. After the price of gold was set free in 1971, the ratio rose again, fluctuating considerably. Currently it is around 75 to 1.
Many forces other than the silver purchase program affected the use and price of silver during those troubled decades, notably the change in the character of monetary systems around the world, ending in the adoption of fiat money standards after 1971. Yet there is little doubt that the initial rise in the price of silver occasioned by the purchase program played a significant role in reducing the monetary demand for silver, which ultimately drove its price below the level that would otherwise have prevailed.
Figure 1
Real Price of Silver, 1800–1989 (in 1982 dollars)
Nonetheless, as Figure 1 shows, in a long view the silver purchase program shows up as only a minor bubble. The figure plots the price of silver, adjusted for changes in the general level of prices, from 1800 to 1989.* At 1982 prices, the real price of silver ranged between $10 and $18 from 1800 to 1873, when the demonetization of silver in the United States and other countries started the price on its long slide. The slide turned into a rout in the early 1890s, when first the repeal of silver purchase legislation and then the defeat of Bryan ended any realistic chance that silver would be remonetized. The 1934 silver purchase program stopped the rout, but only temporarily. The price decline did not really end until the 1960s, when the increasing use of silver in photography and other industries came to the rescue. The ill-fated speculation on silver by the Hunt brothers, who lost much of their fabulous fortune in the venture, drove the price to historically unprecedented levels, which averaged nearly $25 over the full year but reached a much higher peak during it. Silver then declined to the earlier levels.
Effects on Other Countries
The high price the United States offered for silver affected many other countries. Although silver had lost out to gold in the 1870s as the major monetary metal, centuries of silver dominance left many countries with a large silver coinage. After the shift to gold, the face value of the silver coins was set above the market value of the silver they contained; they were token coins. But as the United States drove up the price of silver, that situation changed, and coins in many countries became more valuable as metal than as money and so were consigned to the melting pot.
The same phenomenon had occurred in the United States during the greenback inflation of the Civil War, which caused an acute shortage of minor coins and a re-sort to postage stamps—"shinplasters"—as a substitute. The nickname stuck even after the post office started