There’s a fascinating article at United States History entitled, “The Silver Question”.  It’s fairly short and I recommend you read it.

That article points out that monetary inflation isn’t new or unintended.  I was surprised to read that special interests have advocated that government adopt inflationary policies since the early 1800s.

But, what’s really surprising, is the article’s claim that physical silver coin was originally advocated as a means to inflate the gold-based monetary system.  The silver coin was added to the money supply for the purpose of increasing the money supply; thereby inflating and devaluing the gold-based dollar; and making it easier for debtors to discharge their debts by providing a mass of new, cheaper currency—silver coins.

This implies that silver has never been a true equivalent to, or substitute for, gold since silver was more inflationary than gold.

•  I’m going to pull one paragraph from that article and draw some inferences.

“Efforts to induce inflation into the American economy, the panacea of debtors, had been present from earliest times [in American history].  Some of this enthusiasm was devoted to paper money schemes, such as the land bank ideas of colonial times and the greenback agitation of the post-Civil War era.  Others hoped to lessen debtors burdens by enacting programs dealing with the nation’s coinage.”

The “programs dealing with the nation’s coinage” were proposed laws to allow and/or increase the use of silver coins.

Special interests (debtors; people who want more than they have currently earned) have advocated inflation since the early 1800s.  The purpose for that inflation was to enrich borrowers (and rob creditors) by allowing borrowers to repay their debts with cheaper, inflated dollars.  By favoring borrowers with inflationary silver, it was apparently sensed or understood that ordinary people would borrow more, spend more and thereby “stimulate” the economy.

Apparently, they had QE even in the 1800s.  Nothing new under the sun, hmm?

Of course, there were always “paper money schemes” to promote inflation.  However, the gist of “The Silver Question” article is that an increase in physical silver coinage was often advocated as a means to cause the inflation that gold would not allow.  Debtors whined that there just wasn’t enough gold to be inflationary.

Physical silver however was plentiful and cheap and was therefore deemed to be inflationary—not as inflationary as paper currency, but more inflationary than gold.

Based on the article’s claim, we could draw an hypothetical spectrum where:

1)  Physical gold was “real money,” in part, because it was the least inflationary and most stable store of value.  If you borrowed 5 ounces of gold, you were obligated to repay 5 ounces of gold, plus interest.  Under such agreement there was little opportunity for inflation (or deflation) to occur.

2)  Physical silver was not quite “real money” because its use tended to be inflationary. If you borrowed 5 ounces of gold (which was relatively hard to come by) but could repay the debt with, say, 80 ounces of silver (which was comparatively easy to come by) you could repay your gold debt with cheaper silver and thereby rob your creditor.  That’s inflationary.  (“Inflation” is a fancy word for government-sanctioned robbery of producers, savers and creditors.)

3)  Paper dollars were “currency” rather than real “money” and, because they could be easily printed with only paper and ink, were potentially more inflationary than cheap silver.

4)  Digital dollars of the sort used today are also only a “currency,” can’t redeemed by the issuer, can’t be deemed to be real “money,” and–because the creation of digital dollars doesn’t even require paper or ink, they have the highest potential for causing inflation.

That hypothetical “spectrum” suggests a few more possibilities:

1)   Within the context of American history, silver has probably always been more inflationary than gold.

2)   Since the nation was founded, our national government has regularly caused inflation to favor borrowers.

3)  We’ve had episodes of deflation, but inflation has been generally predominant.

4)  If, from early on, silver was injected into the American economy in order to inflate the money supply, the real “money supply” was composed only of gold.  I.e., the only “real money” is gold

Written by Alfred Adask

Adask’s Law

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