This is the first of a series of articles about the history of the gold /silver price ratio. The objective is to discover what the (hypothetical) ratio should be between the two. The current ratio is between 60 and 75; this would seem to me to be a temporary abnormality of the market. During these articles, I shall look at this famous ratio from different angles. Although a historic ratio of 15 is generally postulated by many authors, this ratio of 15 is rarely justified or explained. In these articles, I hope to discover a natural ratio between the gold and silver price and to help to clarify the various factors which underlie it. The avenues of research are numerous, and I begin with the one which seems to me the simplest - that of history. I shall look at other periods of history later.
I. The legal relationship.
Numismatics is of interest in examining the legal relationship between the price of gold and silver. This is not to delve too deeply into this area; we aim simply to determine the legal ratio between gold and silver coins -
- The gold sovereign.
A gold sovereign coin weighs 7.988 grams (with 11 parts in 12 of gold).
A sovereign is equal in value to 20 schillings of silver.
One schilling is equal in value to 5.23 grams of silver.
20 schillings are equal in value to 104.6 grams of silver.
Thus 104.6 grams of silver is equivalent to 7.32 grams of gold.
Thus, the monetary relationship between gold and silver, as established by the law of 1816, gives a ratio gold / silver of 14.29.
- The franc, or Louis d’or.
In France, monetary rules were laid down in the law of March 28th, 1803. The basic units of currency were the 1-franc coin, 200 of which contained 5 grams of silver in 900/1000(??); and the gold 20 franc coin (louis d’or), 155 of which weighed 1 kilogram. Thus 3100 (155 x 20) gold francs equaled 200 silver francs – yielding a ratio of 15.5.
The ratio between the gold /silver price was thus set at 15.5, in France, according to the law of 1803 and applied in England and France, from the beginning of the 19th century onward.
- In the United States of America, the legal ratio between the gold /silver price was set at 15.5 to the same time.
II. The end of bi-metalism.
The 19th century is the period when the very long-established ratio of 15 between the price of gold and silver is displaced. Throughout the previous three centuries, this ratio of 15 - or less - had prevailed globally. I shall examine this period in more detail in the next article on the same subject.
The ratio of 15 seems to be a sort of natural balance between the price of gold and silver. This balance was broken at the end of the 20th (19th???) century, with the depreciation of silver.
This depreciation resulted from several factors:
- The end of bi-metalism - silver was no longer a specie metal. This factor seemed to lead all the others
- The increase in production of
silver in the United States.
- The sales of silver by Germany, which had furthermore a very strong psychological impact. Germany was in a different situation from the other countries, because it went from a silver mono-metalism to a gold mono-metalism. This was unique, because other countries went from bi metalism to the gold standard. It thus had large inventories to be sold – and the threat of the sales depressed prices more than the sales themselves.
- The sales of silver by the Scandinavian countries.
During the first two thirds of the 19th century, the ratio of the price of gold and silver is close to 15. This ratio resulted from the legal relationship (as in France, England and the USA). The end of the century is marked by the almost generalized abandonment of bi-metalism by all of these countries. It is the deathblow for silver – forces acted at the same time on the supply (increase of production) and the demand (abandonment of bi-metalism). It was at this point that silver shed its crown of laurels.
This article is the first piece of a puzzle. Once all the pieces are joined together, we shall have a precise picture of the ratio of the price between gold and silver, and we shall be better able to understand the ratio today, and can more easily imagine what it will be tomorrow.
Dr Thomas Chaize