Throughout history, governments hoarded silver as a store of wealth and as a means of payment. Silver was the first currency of international commerce and the foundation of almost all modern currencies (including the US Dollar). Armies were paid in silver and wars were fought over it. Silver’s monetary role was so important that the word for money is “silver” in both French (argent) and Spanish (plata) while the Chinese word for bank is literally translated as “silver house”. The dollar sign itself is believed to stand for “Unit of Silver”.
Silver was the most common measure of wealth and governments jealously stockpiled it. The United States silver and gold reserves helped make the US dollar the most widely accepted currency in the 20th century and, for much of its history, it acted as a restraint on the excessive issuance of new, fiat currency.
The Gold and Silver Defaults
By 1968, the United States Dollar was backed by about 1,540 million troy ounces of silver which could be redeemed by anyone through silver certificate dollar notes. Each one dollar note was exchangeable for 0.77 oz t of silver from the US Treasury, resulting in a 1.29 USD per oz valuation.
It all ended with the Vietnam War, which being unpopular with voters, was financed mostly with debt rather than war taxes, causing a large increase in paper dollars without a corresponding increase in gold/silver reserves. As silver appreciated due to currency printing the threat of a massive dollar to silver conversion loomed as a value exceeding USD 1.29 would mean an arbitrage profit for the converter.
To stem the tide of physical conversions, the United States defaulted on their Silver Certificate promises in 1968 citing “gold backed” Federal Reserve Notes as the alternative. It was a poor substitute however as it was illegal for US citizens to own physical gold at the time (read about Executive Order 6102) thereby making convertibility to gold possible only for foreign governments.
However by 1971 foreign governments increasingly requested their USD reserves to be converted to physical gold as a hedge to the inflating USD. These redemption requests prompted the US to default on its currency’s gold backing as well, setting the stage for today’s fiat currency and unrestrained issuance of US debt.
Massive Debt Expansion and the End of Governmental Silver Reserves
With the removal of gold and silver backing requirements, whenever the US Government adds to its massive debt burden, the Fed is ready to bail them out by printing money and buying the newly issued treasury bonds as their role of lender of last resort, which is increasingly the case.
The fact that these gold and silver defaults did not seriously undermine the acceptance of the currency, illustrated just how essential the USD had already become in the world economy. It signalled the beginning of 45 years of exploding US debts (a 7,800% increase as of 2016), enormous unfunded liabilities, and an self-reinforcing debt and devaluation spiral which is only now starting to undermining the faith in this, once rock-solid, currency.
After the Silver Certificate default, the US Treasury and most other central banks sold their silver hoards into the open market, causing a large influx of silver supply. The supply was consumed due to the electronics revolution in the 70’s, 80’s, 90’s and beyond, causing most of this silver to be essentially destroyed.
It is interesting to know that a typical computer keyboard has a few grams of silver. However, the low price of silver made it unprofitable to recycle such small amounts of silver. Over time, the once mighty governmental silver reserves was literally thrown into the trash in the form of tiny electronic components. Today’s governmental reserves are long exhausted and government mints are now buying silver on the open market.
By 1968 only about 2 Billion Dollars, about 1.54 Billion oz, were backed by silver with the majority of currency being FED notes.
A textbook example on how "bad money draws out good" (Gresham's law).
Silver’s re-emerging monetary role
Thomson Reuters's World Silver Survey 2016 estimates that the “identifiable worldwide above ground silver reserves”, silver in the form of bullion as a store of value, are 71,578 tons of silver, valued around 38 billion USD. Such bullion reserves are very little (just 0.52% by value) compared to the estimated 183,600 tons worth of equivalent gold reserves, valued around 7,344 billion USD...
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