WHAT IS 'Silver Standard'

Silver standard is a monetary system in which a country's government allows its currency to be freely converted into fixed amounts of silver, and vice versa. Under the silver standard, an exchange rate is determined by the economic difference for a fixed amount of silver between two currencies. The use of a silver standard was widespread over centuries before being abandoned globally in the early 20th Century.

BREAKING DOWN 'Silver Standard'

The silver standard is believed to date back to ancient Greece, where silver was the first metal to be used as a measure of currency. The silver standard was subsequently adopted following the fall of the Roman empire including in China, India, Bohemia, Great Britain and the United States. The silver standard officially came to an end when it was abandoned by China and Hong Kong in 1935, when the gold standard was adopted.

The silver standard in the United States

For the first 40 years of its existence, the U.S. operated on a bimetallic system of gold and silver. But silver coins were the favored currency, and domestic purchases made with gold were rare. The Founders wrote a bi-metallic gold-silver standard into the United States Constitution. The Coinage Act of 1792 defined a dollar in terms of silver. A dollar was to be 371.25 grains of silver, equivalent to about three-fourths of an ounce, in harmony with the Spanish milled dollar. In 1834 Congress adjusted the silver-to-gold ratio from 15-1 to 16-1. This made gold cheaper relative to the world market price ratio. Silver began to be exported and by 1850, silver coins all but disappeared in the U.S., then gold became the principal form of currency.

The U.S. abandoned the gold standard briefly during the Civil War. And in 1862 for the first time, it issued fiat money with no convertibility into silver, gold or any other metal. In 1873, Congress moved to sideline the silver dollar. That sparked the Free Silver Movement, which stood for allowing the supply of silver coins to be increased in accord with demand. In 1878, the Free Silver Movement got the silver dollar restored as legal tender. In 1879, Congress froze the amount of paper money in circulation at $347 million, where it remained for about a century.

When Congress authorized the Federal Reserve in 1913, it was deemed a lender of last resort. The Federal Reserve wouldn't function as a central bank and wouldn't replace gold and silver as money. The Federal Reserve Notes in circulation today that are called dollars aren't Constitutional dollars. They are bank notes accorded monopoly legal tender status by government fiat.

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