History of Gold/Silver Ratios

February 24, 2008

Elaine Meinel Supkis

Since there is so much confusion being sown across the spectrum concerning what is 'money' and what is a mere commodity and how these things interface with each other, my usual method is to time travel. To go flying into the past to peer into the minds of our predecessors. Reading news papers in the raw pays off. First, it humbles us. Far from having better and better analysis of facts at hand today, I see no improvement at all in this regard. Also, the leaders and thinkers in the past were neither stupid nor gullible. Some were giants such as the incredible genius, Benjamin Franklin. My favorite Founding Father. Today, we should discuss the history of paper credits which are our dollar bills, the minting and holding of gold and silver and how this played out politically. And I marvel at the 16-1 gold to silver ratios. This is has been utterly undone in the last 35 years since Bretton Woods II. And it matters a lot. Gold and silver are not only not money anymore, they have no obvious relationship with each other, either.

First, the Wikipedia article about silver and gold standards:

From 1792, when the Mint Act was passed, the dollar was pegged to silver and gold at 371.25 grains of silver, 24.75 grains of gold (15:1 ratio). 1834 saw a shift in the gold standard to 23.2 grains, followed by a slight adjustment to 23.22 grains in 1837 (16:1 ratio).

In 1862, paper money was issued without the backing of precious metals, due to the Civil War. Silver and gold coins continued to be issued and in 1878 the link between paper money and coins was reinstated. This disconnect from gold and silver backing also occurred during the War of 1812. The use of paper money not backed by precious metals had occurred under the Articles of Confederation from 1777 to 1788 when paper money became referred to as "not worth a continental". This was a primary reason for the "no state shall require anything but gold and silver as tender in payment of debt" clause of the Constitution.

In 1900, the bimetallic standard was abandoned and the dollar was defined as 23.22 grains of gold, equivalent to setting the price of 1 troy ounce of gold at $20.67. Silver coins continued to be issued for circulation until 1964, when all silver was removed from dimes and quarters, and the half dollar was reduced to 40% silver. Silver half dollars were last issued for circulation in 1969.

Gold coins were withdrawn in 1933 and the gold standard was changed to 13.71 grains, equivalent to setting the price of 1 troy ounce of gold at $35. This standard persisted until 1968. Between 1968 and 1975, a variety of pegs to gold were put in place. The price was at $42.22 per ounce before January 1, 1975[citation needed] saw the U.S. dollar freely float on currency markets.

According to the Bureau of Printing and Engraving, the largest note it ever printed was the $100,000 Gold Certificate, Series 1934. These notes were printed from December 18, 1934 through January 9, 1935, and were issued by the Treasurer of the United States to Federal Reserve Banks only against an equal amount of gold bullion held by the Treasury. These notes were used for transactions between Federal Reserve Banks and were not circulated among the general public.
*snip*
According to an evaluation of data from the U.S. Department of Treasury, the cost of goods and services remained relatively consistent between 1635 and 1913, around a level of roughly 25 times the buying power of the U.S. dollar in 2006

The first troubling thing is right here: the severing of the historic silver/gold ratios of 16/1. Gold prices on Friday were $944.95 per ounce. Silver was only $18.02 per ounce. This is nearly 54X differential! Gold has obviously gone stratospheric here. If the traditional ratio were in force, gold should be only $288.32 an ounce right now.

The Price Ratios of Gold/Silver and Price of Gold, 1687-2006

Year.......Ratio......Offical Price......Real Price
...........Gold/Silver....Gold..............Gold
1687.......14.94

1700.......14.81

1800.......15.68-------$19.39

1862.......20.67-------$15.35......$23.42 Civil War
1863.......20.67-------$15.37......$30.02
1864.......20.67-------$15.37......$42.03
1873.......15.93-------$20.67......$23.24

1879.......18.39-------$20.67......$20.67 Inflation ends

1889.......22.10-------$20.67

1893.......26.49-------$20.67

1902.......39.15-------$20.67
1903.......38.10-------$20.67

1919.......18.44-------$20.67 WWI Ends

1929.......38.78-------$20.67 Great Depression
1930.......53.74-------$20.67
1931.......71.25-------$20.67
1932.......73.29-------$20.67
1933.......69.83-------$20.67
1934.......72.36-------$35.00
1935.......54.19-------$35.00
1936.......77.09-------$35.00
1937.......77.44-------$35.00
1938.......80.39-------$35.00
1939.......88.84-------$35.00
1940.......99.76-------$35.00 WWII
1941.......99.73-------$35.00 Silver Weakest

1968.......18.29-------$35.00 Vietnam War
1969.......23.16-------$35.00.....$41.51

1973.......38.21-------$42.22.....$97.81 Bretton Woods II

1980.......29.66-------$42.22......$612.56

1987.......63.84-------$42.22......$447.95 Plaza Accords

1991.......89.83-------$42.22......$363.29
1993.......83.85-------$42.2........$360.91

2000.......55,96-------$42.22......$280.10
2001.......61.95-------$42.22......$272.22

2006.......54.41-------$42.22......$610.00 Iraq War Rages
2008.......59.00-------$42.22......$950.00+

*Note: from 1879 to 1967, the price of gold was government regulated and matches the government numbers EXCEPT for during the Civil War. 1864 it run up to $42.03 an oz, a 100% hike over pre-Civil War prices. Returned to 'normal' in 1877.)

It always pays to look at several things at once which is why I put this partial chart together. We all read many things about money and the economy but when I actually look at some relationships we often don't talk about, we see some interesting trends over the centuries. Generally speaking, from 1600 to 1873, the official price of the English Crown and then the new United States were not only one and the same but quite stable. The ratios between gold and silver were set in stone, it seemed. Indeed, the early revolutionaries, when debating the value of the new mint, believed that the ratios would be stable forever.

The US as well as England went through several bank collapses and bad times but the ratios moved against each only slowly. Gold very gradually increased its value against silver. Generally, it was between $14-16 an ounce of gold to $1 an ounce of silver in the distant past then---boom! The Civil War sends the ratio reeling. After the panic of 1973, gold's ratio with silver is set at 16/1 which cannot hold. It never returns. Hereafter, the ratio between the two metals diverge for good. For 59 long years, the official price of gold sits at $20.67 an ounce. The 'street price' is identical. But look at the silver ratios! They rise to a 38/1 level at the time of the 1903 panic. WWI brings the ratios back into classic levels but only momentarily. But in 1929, it takes off again. This signals a collapse of the currencies used by people. Most people do business with money based on silver, not gold. So the real inflation rate is often expressed in the deterioration of the value of silver. During the Great Depression, the ratio of silver to gold value sees its greatest ratio differentials in our history. Obviously, things are falling apart even as interest rates were in the 0.03% range, the true nature of this deflation of the coin versus the value of gold is quite striking. The government dealt with this by basically preventing gold markets from functioning in an inflationary way, they kept gold at an artificial level and kept it there for another 40 years. The illusion of stability is betrayed by the fluctuations in this ratio. After 1968, it falls apart, rapidly. Before 1968, the Treasury used Fort Knox to keep the ratios at the 16/1 level and this drained 3/4ers of the gold from our reserves. Then the government threw in the towel. They decided to go for a free-for all market model.

The result is obvious. After 1972, they decided to let currency traders and interest rates set by the Federal Reserve determine the value of the dollar and this has been a very bumpy ride since then. The ratios of gold to silver have been well over 30/1 since then. And this, with silver disappearing as a part of the currency. The 'silver' coins are barely washed with any silver at all at this point. Which is a gross debasement if we look at how the ratios have risen during this!

Let's take a look at Britain's gold history, the strength of their empire and its total collapse showing up quite clearly:

History of British gold:
Year.....Official.....London Market
1718---- 4.25---- £ 4.31

1800---- 4.25---- £ 4.26

1811---- 4.25---- £ 5.19.......War against Napoleon
1812---- 4.25---- £ 5.48
1813---- 4.25---- £ 5.76
1814---- 4.25---- £ 5.21
1815---- 4.25---- £ 4.99

1932---- 4.25---- £ 5.90.......Great Depression
1933---- 4.25---- £ 6.24
1934---- 4.25---- £ 6.88
1935---- 4.25---- £ 7.11
1936---- 4.25---- £ 7.01
1937---- 4.25---- £ 7.04
1938---- 4.25--- £ 7.13

1939---- 4.25---- £ 7.72.......World War II
1940---- 4.25---- £ 8.40
1941---- 4.25---- £ 8.40
1945---- 4.25---- £ 8.40
1946----£ 8.40
1949---- £ 8.40

1950---- $ 34.71......London Market ends

1974---- $ 159.26
1975---- $ 161.02
1976---- $ 124.84
1977---- $ 147.71
1978---- $ 193.22
1979---- $ 306.68
1980---- $ 612.56
1981---- $ 460.03

2006---- $ 603.77

The Bank of England kept rates on this very short leash. During the War with Napoleon, as usual, the value of street gold shot up while the bank struggled to keep the value under control. This shows clear inflation. The government dealt with this by deflating the entire economy after the war and many people suffered greatly in that depression. Most wars after this has featured attempts at preventing a wholesale depression afterwards. The US was the most successful at this, post-WWII. A great deal of this was due to the GI Bill and the housing bills encouraging home ownership.

In the case of the English empire, from the House of Brunswick's ascent till the Great Depression, the authorities there used some rather brutal methods to keep the pound/gold balance at £4.25 an ounce. This required some heroic measures after WWI bankrupted England. Deals were made like the Barfour Accords which handed over real estate in Palestine which England just seized from Turkey to harsh taxes on salt in India. But England slid into a long depression after WWI. By 1930, she was totally exhausted and out of gold. The gold/pound connection was cut right at the same time the US was enforcing similar gold/money rules used by England for much of their imperial rule.

After WWI, with the failure to keep the Suez Canal and India, the British Empire pretty much expired and so did any connection of the pound to gold. The Bretton Woods I Accords tried to prop up the pound but note how they don't even try the fiction of having their money connected to any metals at all. It is now denominated in dollars. Sic Transit Gloria.

Back to the US: the connection between war and inflation is little appreciated. Here are some other very old news paper stories about all this:

Here is an early Civil War news story, published: January 5, 1862
Copyright © The New York Times

This is how it all began. The National Debt was anathema before the Civil War. The bitterness from the Continental Congress and the War of 1812 was sufficient to prevent Presidents and Congress from voting for war money all the time. Note the 6% bond exchange.

The Fall in Gold and the Prices of Goods.
New York Times,
September 28, 1864, Wednesday

What springs out of our minds here is the reason why this inflation/gold bubble/crash happened. The Civil War was raging. The US had to create paper money to pay for this. The original paper moneys were actually supposed to be a sort of war bond with a 6% interest bearing only this got out of hand and was impossible for the Treasury to put it together. At the very top of this story here is a real 25¢ paper money issued under the 1864 laws. This money was the true ancestor of our modern dollar. Instead of collecting interest, one had to simply use it or if one were paid with this, one could park it at a bank and collect interest set by the Treasury. This was how they managed the 6% business. If one used the money, then the price of goods went up and money lost value. But if one saved money, the value of the money would go up and the money would gain value. But the fly in this ointment is the eternal fly that always gets stuck in all ointments: the interest rates set by the government are soon outstripped by the desire so print as much money as possible to pay for the wars so the inflation rate outstrips whatever level is set. So if the government pays 6% via the savings accounts holding this paper, inflation ends up running at 25-50%.

In 1864, the inflation caused the value of gold to become a bubble. The number of these paper dollars needed to buy gold coin more than doubled. From $20 to $42. In less than a year and a half. The government passed laws very swiftly to deal with this in a draconian way which led to many people losing their fortunes. If they used their government bonds to buy gold, that is. I think this is a dynamic we can trust, is a powerful force in speculative markets. The price of gold was part of the inflationary bubble hitting the price of food and other goods needed for survival. The value of other goods suffered while the price ratio differential between say, bread and a saddle or milk and a dress suddenly went haywire. If this ratio were say, 100 loaves of bread for one jacket, it suddenly becomes 50 loaves for a jacket. This leads to economic chaos as we can clearly see today.

Bubbles deform price relationships. Wars and famine do the same, with a vengeance. The government always squelches gold/food/fuel bubbles because if they do not, civilizations collapse. The tools used to enforce this over the centuries has been varied but often involve a certain amount of theft and violence. Note in the story above, the speculators did NOT have the sympathy of the masses but rather, anyone restoring the old value ratios was considered wise and a great leader. It wasn't till 1879 that the government regained its iron grip on the gold currency and it resumed its value set at $20.67 per ounce. This caused great financial distress in the West and was the inspiration of Bryant's 'Cross of Gold' speeches that rang across the land for 25 years to the great fury of the banking interests in New York City.

Here is an article about the debate over the use of silver or gold as the basis for our paper currency: Published: November 27, 1889
Copyright © The New York Times

Published: September 26, 1889
Copyright © The New York Times

One of the complaints by the New York banking community was the cost of minting silver coins only to then squirrel them away in vaults and not let them circulate! All this, to keep down the gold/silver ratios. Very few gold coins were being minted, usually, the gold was stored as bars as we all know, as this is still done at Fort Knox today. Note here that the article talks about Mr. Knox, by the way. Isn't that amusing? Note that the NY pro-gold people call money backed by silver, 'worth mere waste paper'! This old newspaper article is a good read if we want to understand the mindset of Victorian bankers. They were rather angry about the artificial attempts at lowering the gold/silver ratios. They knew silver was 'inflated' and worth less than gold. Or rather, gold is supposed to be a storehouse against inflation.

But governments need stability while expanding spending. This is why the New York bankers went off to Jekyll Island to get a new deal going, the Federal Reserve. This way, they could latch onto Fort Knox and all that gold, etc. And control the gold/silver ratios to their own benefits, etc. And fund wars their way, not using public spending. They would be the ones doing the loans. This is why the US government had to resort to 'war bonds'.

Next, I should compare the British and American inflation/interest rates/gold/silver charts. There are some interesting facets to that but I am a bit ill today with the good old flu. Hope there are not a lot of mistakes in this story.

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Comments

[milo]

ask me why i feel as if im begging to be bled to poverty by going to a doctor to see about a "mole" that appeared a little while back on my face?

[milo]

or trying mexico

[Al]

Hope you feel better soon.

[leadfoot]

Elaine, I quote from above:
"Note that the NY pro-gold people call money backed by silver, 'worth mere waste paper'!"

The way I read this is that they are reluctant to issue more silver unless the paper is retired. He states that if that does not happen then we are 'issuing mere waste paper' against silver which "has some intrinsic value". I get just the opposite meaning. He is stating that there is 'no' intrinsic value to paper. The problem they are faced with here is the continued production of silver coming from Nevada, Utah..well, the west, that has to be bought in order to keep the western expansion going, thereby the justification of the railroads etc, etc. The big worry was that if they kept the price high they could be 'ambushed' by other nations with large silver hordes. Correct me if I'm wrong....again!

BTW, the thing they feared they used on China. They, the big bankers and money men, flooded China with silver at some point in the 1800's or early 1900's if my history is correct. I'm sure you know a lot more of that history than most, certainly more than I.

[leadfoot]

I guess I'm missing something here as I'm trying to get the jest of the article. Is it that us gold & silver 'bugs' are going to get trapped in a downward spiral of the PM's? The only way that can happen is if the 'cartel' sells huge amounts of gold and gets China to flood the silver market. This could happen, and may, but I don't think the time is right for us 'bugs' to get slaughtered....we're not fat enough yet. If the prices continue to roll upward I'm pretty sure 'da boys' will be sharpening their knives.

So Elaine, where is the smart place to put your cash in the next year or two? Don't answer until you are in top form.

Hope you get well soon. Take a little honey and apple cider vinegar 3X per day. Trust me, it really helps. 1tbs honey, 3tbs vinegar, 1/2 cup warm water....whiskey is optional.

[Elaine Supkis]

I certainly had very odd dreams last night! But despite the technicolor funny stuff defying gravity, etc, I did get sleep which helps a ton.

About gold: when we look at the long, long history, we see several inflationary peaks in gold. Each one corresponds with wars.

The US gold/silver ratio see-saw of value always sees gold rising against silver during wars. The US has been in perpetual war which we call the Cold War and then when that ended, we went into a very hot series of wars with all of the Muslim world. Sure enough, the gold/silver ratios takes off and is heading towards 100/1 which is where the authorities must move to right things again.

They always do this in various brutal ways, of course. Right now, they are determined to have NO precious metals of any sort as 'money'. If the US could present our money as based on all things in the US as the above article from 1889 mentions, we will be swamped due to the fact that the dollar is the world currency.

Namely, our nation can't turn our 'paper' [it isn't paper at all, it is pure numbers on computers at banks!] into a surety based on our entire property and lands of the US due to the overhang being about $500 trillion phantom dollars. This sudden balloon of dollar derivatives has turned our money into an inflationary machine that is definitely a danger.

But gold can't inflate faster than this derivative bubble! Thus, I must warn everyone, government get VIOLENT. And steal stuff. The sole form of good wealth always lies in the Land and the People. All great leaders know this. They can dump a financial system---we call this 'revolution'--and start anew but this always involves a certain degree of disorder to put it mildly.

This is why sober assessment of values and relative prosperity is so important. The US wanted to run a very expensive imperial Cold War and then tragically, a series of hot imperial wars of conquest, all while ignoring the need to increase SAVINGS during wars!

The US saved money during WWI and WWII and became stronger. We spend money and ceased saving as the Cold War turned into the hot Middle Eastern wars. We save less and less now.

Putting savings into gold, like people did in the Civil War, ended badly for the people doing this because the government switched to silver. See? And enforced savings via turning paper money into war bonds. Why did they stop doing this and start inflating the currency?

Because after discharging the Civil War debts, we went to war with Spain over CUBA. And got bogged down in the Pacific trying to conquer Spanish territories over there. The financial costs created a huge row in the US. Huge. This is why we didn't want to go into WWI and had to be dragged into that mess. Ditto, WWII.

[2012MIHOP]

On the flipside of the money equation I have recently learned that my wonderful bank has a fantastic new anti-fraud system!

This system is so fantastic that it puts a hold on legitimate debit card transactions that occur outside my "home" area as defined by my bank! Thanks to this fantastic system, I recently learned that my cell phone provider does its billing in the great state of Kentucky!

This after my bank couldn't be bothered to send me a new debit card prior to the expiration of the old one and I had to call and REMIND them!

Isn't nude capitalism wonderful?

[Elaine Meinel Supkis]

Yes, I noticed this too. The government also wants to interfere and all this makes it harder and harder to access one's account while traveling! I remember when I could go far from home and not carry money. Who wants to do that while traveling?

My daughter had this happen recently, too. Last time I was in NYC, I brought cash. Like this is 1965 or something. What next, Traveler's Checks again?

[buy viagra]

That kind of activities doesn't have any sense

[cash for gold]

That thing will almost certainly be gold. Investing in gold can take several forms. The simplest and purist is investing in gold bullion and coins.

[Krugerrands]

I get also amazed at 16/1 ratio of gold and silver.It means most of the investors invest in gold rather that silver.Am i right?