An Address Delivered at the Conference Held at the University of Padova
on November 30, 2012
“Coin Finds and Historical-Economic Processes in the Ancient World:
Ten Years of Research 2002-2012”
The silver standard did not die a natural death. It was deliberately killed. A proper search for the assassins was never carried out. There was never a post-mortem.
In this paper we focus on the conspiracy as it might have unfolded
between the two dates: April 9, 1865 (the day General Lee of the
Confederacy surrendered at Appomattox to General Grant of the Union
marking the end of the War Between the States) and January 1, 1879
(Resumption Day, when payment of the victorious Union’s currency, the
greenback was resumed in gold specie ̶ but not in silver).
China
has been on the silver standard since time immemorial. The Chinese did
not use coins for monetary purposes such as bank reserves until the end
of the 19th century; they used the sycee, a shoe-shaped ingot of approximate size 5⤫3⤫3
inches, weighing approximately 50 taels or about 5 pounds
(avoirdupois). No one can pretend to know, however approximately, how
much monetary silver has gone into hiding in China and in India, these
two most populous countries also known as the world’s sink for silver,
over the millennia. In comparison estimates of monetary gold having gone
into hiding over the same period of time are far more reliable. Be that
as it may, the amount of monetary silver unaccounted for is probably
greater than any estimate ever made.
In the 19th century silver coins did most of the money-work in the world. The turnover of silver coinage
(the value of silver coins times their velocity) was at an all-time
high, eclipsing the turnover of gold coinage by far. Inept governments
did not follow the lead of Isaac Newton, and they tried to enforce a
rigid exchange rate between the two monetary metals (called the Mint
ratio). This system was called bimetallism ̶ a stillborn idea.
Bimetallism
did not stabilize the exchange rate. On the contrary, it has
destabilized it. The natural monetary system is based on silver and gold
valued at a variable rate,
as Newton’s monetary system in Britain did. Bimetallism was the
disease, the demise of the silver standard was the unfortunate
consequence. In the Western countries by 1879, in India by 1893, in
China, the last stronghold of silver, by 1935, silver was demonetized.
Between the two dates 1879 and 1935 the
world witnessed a most spectacular event: the collapse of the value of
silver by more than 80% in a little over half of a century. Silver
fell from $1.29/oz in 1873 to 25¢/oz in 1935. Putting it differently,
the gold/silver price ratio rose from 15:1 to more than 80:1. Never in
history, ancient or modern, have markets put such fancy values on gold
in terms of silver.
Who killed the silver standard?
All
this can be neatly explained in terms of the Quantity Theory of Money.
The richest silver vein ever, called the Comstock Lode was discovered in
Nevada in 1858. Surplus silver inundated the economy and lost most of
its value due to the oversupply and the lack of matching demand.
But
this explanation will not satisfy those of us who consider the Quantity
Theory of Money as a mere mechanical metaphor. As a theory it is bound
to fail because it is trying to give a linear explanation of highly
non-linear phenomena. January 1, 1879, Resumption Day, when the payment
of the greenback in gold (but not in silver) specie was resumed,
coincided with the date when the Latin Monetary Union in Europe closed
its last Mint to silver ̶ marking the end of the silver standard in the Western countries. The coincidence is ominous.
No
satisfactory explanation has been offered in the literature for the
fact that the closing of the Mints to the free coinage of silver was the
starting point of an unprecedented destruction of wealth world-wide,
due to the relentless fall in the price of silver during the following
55 years. To make matters worse, it was destruction of liquid
wealth. Not only did silver lose more than 80 percent of its purchasing
power; it also ceased to be a monetary metal. As a consequence, silver
became so much harder to sell. Worse still, the steadily falling price
caused panic-mining of silver. Miners were anxious to sell before the
price fell even more. As a result, almost all silver mines were mined
out prematurely. Thereafter all silver output came as a byproduct of
mining other minerals. These effects compounded and made the destruction
of monetary values, that is deflation by another name, so much worse.
The
collapse of the silver price was a major historical event affecting the
entire globe and all trading nations of the world. It caused the
impoverishment of the indigent classes in India, China, and elsewhere in
Asia. But it also wiped out the credit-worthiness of the middle classes
in Europe that lost their landed wealth as a consequence. Monetary
historians failed to treat this aspect of the demise of the silver
standard with the seriousness it deserved. They also misdiagnosed the
deflationary bias that the monetary system showed in the first half of
the 20th century. The gold standard that arose on the ashes
of the old monetary order in the wake of the destruction of the silver
standard was less than satisfactory. Silver demonetization has made all
hoarding demand fall upon gold. This imparted a deflationary bias to the
international gold standard that enemies of sound money were able to
exploit with all consummate skill. Following a vicious campaign of
anti-gold agitation gold was also demonetized by the governments exactly
one hundred years later, in 1973. The demonetization of gold was no
less unconstitutional than that of silver a hundred years earlier. It
was also based on chicanery for good measure.
It should be noted that hoarding gold and silver is not an aberration.
It is, in fact, part of the essential mechanism regulating the rate of
interest. It will bar the banks from suppressing interest. When
depositors realize what the banks are up to, they withdraw their
deposits in the form of gold coin. The banks lose reserves and are
forced to call in loans. It will also act as a deterrent against
government profligacy. Ordinary citizens become disturbed by the
government’s overspending and serial budget deficits. In response they
show a preference for holding their liquid wealth in gold coins instead
of short-term government paper. Such hoarding demand previously fell
upon gold as well as silver. Now it was falling upon gold exclusively.
The deflationary consequences are obvious.
One
instinctively feels that there is no way self-destruction of liquid
wealth of so great a magnitude could occur spontaneously in such a short
space of time. The event could not be explained on the strength of
causality. We must invoke teleology if we really want to understand it.
Such an analysis was never carried out. Furthermore, speaking of destruction of wealth is not quite accurate. Value was not destroyed in the same sense of a house burning to the ground.
Clandestine embezzlement
Rather,
it looks like a clandestine embezzlement to benefit the world’s banking
establishment at the expense of account holders. Their assets were
manipulated downwards in value and ultimately taken over by the bank.
The perpetrators were not worried that the disappearing liquid wealth
would be missed and cause deflation. That was just the point of
perpetrating it. They were confident that if they replaced the
disappearing silver with bank credit based on debt, in particular, the
debt of the government, then there would be no deflation. This strongly
suggests government involvement. In all probability there was a
conspiracy between an international banking cartel and some governments
(e.g., the United States government acting either alone or in connivance
with Imperial Germany).
Economic
historians describe the Silver Saga as a natural evolution whereby gold
monometallism displaced bimetallism while strangling the silver
standard to death. According to this reading of history, the market
gradually eliminated silver as money, as it has so many other
challengers of gold’s supremacy in the race for monetary hegemony. It
was destiny. No need for a post mortem, still less for a search for the assassin. What would happen if every death due to natural causes was investigated as if it was due to
violent causes? At any rate, they claim, the Quantity Theory of Money
fully explains the market process eliminating silver from monetary
circulation.
Upon
closer examination the hypothesis that it was the market rather than
collusion between governments and banks that killed the silver standard
appears untenable. There were powerful pressure groups pushing for the
closing of the Mint to silver. One such pressure group representing
special interest was that of international banking houses ¾
given their well-known penchant for monopolies. They avoided public
debate. They acted behind the scenes. A monopoly of the gold standard
would mean, for them, a better handle on money-creation through their
control of the gold mines, as well as their control of public credit. If
this hypothesis is correct, then we know what sealed the fate of the
silver standard.
Whodunit?
Prussia
was victorious in the Franco-Prussian war of 1870-71. The German Empire
was proclaimed at the Palace of Versailles on January 18; Paris fell to
the invading German troops on January 28, 1871. Germany was anxious to
join the gold standard club led by Britain. On November 23, 1871,
Bismarck exacted a reparation of five thousand million gold francs (or
one billion gold dollars, or 200 million pounds) from France payable in
four years. Northern France was to remain under German occupation while
the full amount was settled. Arguably this was the largest amount of
gold ever changing hands directly, without involving promises to pay.
One thousand million dollars in gold (at $19.39/oz!) is an incredibly
huge sum of money by any standard. In comparison, the Lousiana Purchase
in 1803 was consummated for a total sum of $15 million in gold. The
Alaska Purchase in 1867 was consummated for $7.2 million in gold. This
makes the French indemnity to Germany equivalent to 66 Louisianas or 172
Alaskas.
The
temptation for the Germans to increase the value of their gold booty by
fair means or foul may have been irresistible. For example, it could be
increased by demonetizing silver. That would increase the demand for,
and so also the purchasing power of gold.
France
paid the indemnity ahead of schedule. The new gold standard of the
German Empire was inaugurated on July 9, 1873, when the new gold coin,
the gold mark made its debut. This was preceded by closing the German
Mints to the coinage of the silver Taler in 1871, the first overt step
towards demonetizing silver.
Some
historians maintain that the demonetization of silver and the
subsequent sale of melted coins by the German government on the world
market was the direct cause of the precipitous fall of the value of
silver. However, this is flatly contradicted by the fact that on
February 12, 1873, the day when President Ulysses Grant signed the
Coinage Act of 1873 into law, silver fetched a higher price in the market than the Mint price.
No silver was flowing to the Mint. Records of the minting of the
standard silver dollar show that there has been no demand for the
monetization of silver on private account. This situation continued for
some time afterwards. Silver mines continued selling their output on the
free market. They seem to have been unaware that silver had been
effectively demonetized by Germany in 1871 and by the United States in
1873. It made no difference to them: the market offered a better price.
The ultimate damage to the price of silver was not
inflicted by German demonetization. Nor was it inflicted by
demonetization in the United States. The market knew that
demonetizations were coming and took them in stride. There was a ready
market for silver in India and China, presumably for any amount, however
large. American silver miners started to look at the U.S. Mint as a
potential market for their production in 1875, as the price of silver in
terms of the greenback was weakening. They were shocked to find that
the Mint had been closed to silver years earlier.
The anatomy of a murder
Here
is the step-by-step chronology of the passage of the bill that was to
become the Coinage Act of 1873. It eliminated the standard silver dollar
by default, in failing to mention it. This removed the authority to mint any more. The removal was unconstitutional.
Since that coin was the only silver coin that could be struck in
unlimited amounts for private account, it also meant the demonetization
of silver by the United States of America, following the example set by
Germany.
(1) In
1868 senator John Sherman of Ohio sponsored a bill that, among other
things, proposed that the Mint be closed to the coinage of the
Constitutional silver dollar, thus demonetizing silver in the United
States. Although there was no opposition, the bill died in committee
because the Senate was busy with other things, such as the greenback
inflation struggle. Note the early date 1868!
(2) Secretary
Treasury Boutwell sent the bill (that was to become the Coinage Act of
1873 omitting the standard silver dollar) to Congress on April 25, 1870
with his strong recommendation for passage.
(3) The Senate passed the bill on January 10, 1871 by a vote of 36 to 14. Among the ayes
were the two senators from the silver state of Nevada. (At the time
Nevada was the only silver state as it had been admitted to the Union in
1864. Colorado was the second admitted in 1876, followed by Montana,
Idaho and Utah admitted between 1889 and 1896).
(4) The
House passed the bill on May 27, 1872, by a vote of 110 to 13. Support
among representatives from the silver state of Nevada was again
overwhelming.
(5) President
Grant signed the bill into law on February 12, 1873. It is important to
note that all the details, including the entire text of the bill, were
in the public domain as early as April, 1870.
25
years later, in 1895, Senator John Sherman, who was the sponsor of the
bill in the Senate, in a famous speech of his entitled On the Crime of 1873 stated that, while the bill was pending in Congress for as long as three years,
“it
was carefully considered in both houses and special attention was
called to the omission of the standard silver dollar, and to the reasons
for this omission… It is strange that the very men who supported and
urged this coinage law of 1873 and demanded the exclusive coinage of
gold are the very men who now [in 1895] demand the free coinage of
silver…
Later in that speech Sherman related that his colleagues, Senators Jones and Stewart of the silver state of Nevada, were
“urgent
and honest in saying that gold was the best and only standard of
value“. However, they changed their minds when production from the
Comstock Lode in Nevada [discovered in 1858] increased greatly, and the
first signs of weaknesses in the silver price started to show after
1874. Then they wanted a market for their silver. They wanted themselves
and their friends to pay existing debts and obligations, that had been
contracted on gold basis, in silver; but took care in their own
contracts to stipulate that debts owed to them were payable in gold.” (The World’s Famous Orations: John Sherman, http://bartleby.com)
Smoking gun
In
1873 neither silver nor gold coins circulated in the United States,
although the Mint was open to both metals. The country was on the
‘greenback standard’: irredeemable paper money issued by the Union to
finance its efforts in the War Between the States, which circulated at a
discount of about 13 percent to silver. It was understood, however,
that gold payments on the notes would be resumed (as indeed it happened
on January 1, 1879) and the greenbacks would ultimately be withdrawn
from circulation pursuant to the Resumption Act of 1875. The question
whether resumption was to be extended to silver payments as well was
bypassed in silence.
The prospect of resumption could be the smoking gun prompting the international banking houses to commit the crime. On April 9, 1865 (the day of Appomattox) an incredible opportunity to grab and usurp monetary powers presented itself. Obviously, resumption
was coming, followed by a great increase in demand for gold and silver.
This could be exploited most effectively for private gain if silver
could somehow be eliminated as a monetary metal. The thing to do for the
banking houses was to initiate an arbitrage operation of selling
silver- mining shares against buying gold-mining shares in anticipation
of the demonetization of silver.
Such
an operation would take a number of years. By 1873, eight years later,
following the German Empire, silver also had been demonetized in the
United States through the back door, so to speak. Of course, speculators
would start dumping silver in large quantities and selling it short,
causing the price of silver to fall precipitously as early as 1868, when
Senator Sherman spilled the beans in proposing the demonetization of
silver. That never happened, making the whole affair very suspect. The
evidence appears to suggest that, far from being ‘an honest mistake’,
the omission of the standard silver dollar from the Coinage Act was a
deliberate act to destroy individual property rights ̶ possibly in collusion with Germany.
These
two parvenu countries might have wanted to get the best mileage out of
their respective victories in the battlefield. The indemnity of one
thousand million dollars in gold exacted by Germany from France would be
that much more valuable, in view of the falling commodity price level
in terms of gold. On the other side of the water the banks could greatly
enrich themselves by making the mortgages on land in the former
Confederacy, assets that they now controlled and which had been
denominated in silver, payable in gold. The extra value would come out
of the hide of the victims of the War Between the States. The
coincidence of interest of the two countries is telling. The would-be
perpetrators of the crime had reasons to make speculators behave
differently from the norm.
Circumstantial evidence
The
banking houses in the United States were apparently playing a
duplicitous role. As observed above, there was a possibility for
profitable arbitrage in the market for mining shares. The banks would
bet against silver while getting ready to profit from a prolonged
decline in the price of silver afterwards. It was not in their interest that the decline start immediately. They
needed time, possibly years, to complete their arbitrage operations in
mining shares. They wanted to get rid of their silver mining shares and
replace them with gold mining shares. It is a plausible assumption,
therefore, that the banks temporarily supported the price of silver
(which they would have to do in the normal course of their business
anyhow) but with the ulterior motive of preparing for the final assault
on the silver price later. They succeeded in fooling the speculators not
to place their bets against silver.
If
the demonetization of silver was not the result of a long-term market
process (as suggested by virtually all economists) then the question is:
what was it the result of? This question has never been answered
satisfactorily. My answer is that it
was the result of the collusion of banks to manipulate the silver and
gold market secretly, and carefully coordinating it with their
manipulation of the market for mining shares.
Leads and lags
To prove my theory I worked out a research program. It involved compiling the daily closing prices of eight series as follows:
(1) asked price of silver
(2) bid price of silver
(3) asked price of gold
(4) bid price of gold
(5) average asked price of silver mining shares
(6) average bid price of silver mining shares
(7) average asked price of gold mining shares
(8) average bid prices of gold mining shares
in
the United States for the ten-year period from 1868, the year when the
idea of demonetizing silver first surfaced in Senator Sherman’s
committee, to 1878, the year when the Latin Monetary Union decided that
the silver price has been mortally wounded, was beyond hope of
recovering, and closed its last Mint to silver.
From
the eight price series above one can obtain four series of key
price-spreads by taking differences as shown by tabulating them in the
following table:
PRICE-SPREAD SERIES
Next,
one calculates the standard deviation from the means for each of the
four price-spread series. By well-known theorems of mathematical
statistics the standard deviation filters out ‘noise’, that is, random
causes of price variations, but catches singular irregular causes (e.g.,
discovery of a major gold or silver ore deposit or, most especially,
concentrated efforts to manipulate prices).
One
is looking for leads and lags. In particular, if arbitrage from
silver-mining shares to gold mining-shares did lead arbitrage from
silver to gold, and the latter did lag the former, then this would not
be a random event. It would be conclusive proof that arbitrageurs were
acting in unison to bring about a collapse of the silver price for
maximum private gain.
When
I wanted to carry out my research project, I found that it was beyond
my meager resources. Rather naively I assumed that most of the work had
already been done, some of the price series had been compiled and some
of the standard deviations from the means calculated. The collapse of
the silver price after 1875 was so spectacular, it was such a
precipitous and momentous event, involving the international monetary
system, the wealth and welfare of so many people, literally changing the
course of history, that some researchers at least could have questioned
the ‘conventional wisdom’. They could have rejected the market-process
hypothesis. These researchers should have started looking for evidence
of active connivance between governments and banks during the
intervening 140 years. This, however, does not appear to be the case.
Everybody without exception has accepted the pat explanation for the
silver price collapse in terms of the Quantity Theory of Money. Yet it
is possible that 1875 marks the year when the conspirators completed
their program of arbitrage from silver mining shares to gold mining
shares; and started their follow-up program of arbitrage from silver to
gold. It is not impossible to find out the truth about it some 140 years
later.
Researchers
of today would have to start from scratch. This is a task I can no
longer undertake, in view of my advanced age. But I would certainly
encourage the younger generation to do it. I hope that my tentative
research plan is going to be helpful to them. I have no doubt whatsoever
that this would be a worthwhile project.
I
call attention once more to what above I have called ‘circumstantial
evidence’ of monetary mischief. In the absence of mischief the silver
price ought to have started its descent much earlier, several years
before 1875 ̶
possibly as early as 1868. Speculators (as distinct from bankers) must
have been watching the political wrangle over silver starting in 1868.
It appears that speculators missed their opportunity to sell silver short.
This would be rather uncharacteristic of their trade, an assumption we
can safely dismiss. A more plausible assumption is that the conspiring
bankers met the speculators’ short selling head-on. They bought silver.
As pointed out already, they needed time to complete their program of
arbitrage in the mining-share market for monetary metals. Once it was
completed, after they have sold their quota of silver mining shares and
bought their quota of gold mining shares, they would be the first to
dump their silver and let speculators do the rest. Of course, the
duplicity of their conspiracy makes the detective work so much harder.
Monetary mischief
There
is no doubt that the U.S. Congress grossly exceeded its authority when
it passed the Coinage Act of 1873. In signing it President Grant shared
responsibility for making the unconstitutional bill the law of the land.
The Act nowhere mentions the Constitutional standard silver dollar, the
only coin cited by the Constitution ̶ as if no such coin has ever existed. Consequently the interpretation arose that there was no authority for coining it by anyone after the Act became law.
The
contrast with the logical interpretation of the Constitution is
striking. According to the Constitution the standard silver dollar can
be minted in unlimited quantities for
the account of anyone tendering the silver to the Mint. Not only is the
standard silver dollar to serve as a yardstick but, even more
importantly, it is there to test the material,
silver, out of which the yardstick is made. If you eliminate it or
obstruct its availability, then the standard silver dollar obviously
cannot discharge that function. It makes no sense to tie the access to
it to permission from Congress, from the President, from the Secretary
of the Treasury, or anyone else. In legal matters the Constitution takes
precedence until amended. This is a clear case of usurpation of powers.
The standard silver dollar had to go because the public was to be deprived of a means to test the monetary quality of silver.
The
Constitution guarantees the right of the individual to take silver to
the Mint in unlimited quantities. Only in this way can we be certain
that silver is sufficiently inelastic to serve as the yardstick of
value. If the flow of silver to the Mint was orderly, then the yardstick
would be satisfactory. But if the Mint were inundated with silver and
could not be kept open for that reason, it would be proof that silver
was no longer suitable to serve as material out of which the monetary
yardstick could be made. It would show that silver had a rubber-like
quality: it was much too elastic. It would show that silver has failed
the test. It hasn’t got the quality every monetary metal must have: the
quality of having constant value.
As a matter of historical record silver has never been put to the test. There has never
been a run on the Mint by owners of silver bullion wanting to turn
their metal into silver coin before it was too late. In every instance
the run on the Mint occurred, it was not because people feared that the
price of silver would collapse. It was because inane government policies made silver-to-gold arbitrage risk-free. People
bought silver abroad in exchange for melted U.S. gold coins. They
wanted to get more gold coins at the U.S. Mint for their silver ̶
as was their right to do under bimetallism. Then they wanted to export
the gold coin, since it was worth more abroad, and they wanted to
continue this arbitrage indefinitely for the risk-free gain it afforded
them.
When
the Mint was closed to silver, it was a protective measure taken by the
government in trying to prevent further losses to its gold reserve. It was not a failure of silver. It was a failure of bimetallism. The solution was not the demonetization of silver: it should have been the abolition of bimetallism.
Conclusion
I
have never been a conspiracy theorist. I never joined latter-day crowds
crying “stop the manipulation of the silver and gold price by unlimited
naked short sales!” I know full well that the present low price of
silver is a remnant of the tragic outcome of the Silver Saga that
started some 145 years ago at Appomattox. The prospect of Resumption of
specie payments after the War Between the States created an incredible
opportunity for monetary mischief. The circumstantial evidence is that
the opportunity was fully exploited by an international banking cartel
to sabotage the international monetary system. This observation does not
make me a conspiracy theorist. I am offering a detailed plan to find
out, some 145 years after the event, using the method of standard
deviations from the means borrowed from mathematical statistics. We owe
it to ourselves to do the necessary research. The world economy, sagging
as it is under the weight of its debt tower and fast depreciating
irredeemable currencies, is clearly on its way to self-destruction. The
forcible elimination, first, of silver and then, a hundred years later,
of gold from the monetary system removed the only ultimate extinguishers
of debt we have. In consequence, total debt can only grow, never
contract. The process is hidden since the unpaid and unpayable debt is
accumulating as ‘sovereign debt’ of governments. The world is deluding
itself that sovereign debt can increase indefinitely as governments can
extend its maturity indefinitely. In 2008 we had the wake-up call that
it cannot. Unless we stop the proliferation of debt, the world is facing
prolonged deflation, depression, continuing capital destruction,
bankruptcies and unprecedented unemployment. It is leading to a
breakdown of law and order. It could spell the end of our civilization.
Note. A fuller version of this address is posted on my website www.professorfekete.com under “Scholarly Economics”.Source
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