Should the Silver Standard Accompany the Gold Standard?
Several important reasons exist to have the silver standard accompanying the gold standard. However, the old bimetallic standard with a legally fixed ratio or exchange rate between the two metals should not exist. The markets should determine the exchange rate between the two.
A silver standard easily accomplishes what gold cannot. Precious metal coins should be in a convent denomination sufficiently small enough to pay the daily wage of a common labor or migrant field worker with one or more coins.
The daily wage of a common laborer is less than a pennyweight of gold. Two pennyweights is about the practical limit of the minimum size of a gold coin. A two-pennyweight coin is about the size of a dime.
Silver coins can easily fill this void. In silver, a day’s wage for a common laborer would be a little more than 20 pennyweights (one ounce) of silver.
A common laborer should be paid in true, full-bodied, full-weight, money, and not in token coins or credit money, which is what he would receive under the gold standard. He should be able to carry true, full-bodied money in his pocket and have true money to spend if he so desires, and not just token coins or credit money. A silver standard provides him this service.
Another advantage of having both standards is that one metal, silver, provides convent coins for small value. The other, gold, provides coins for large value. The tendency would be to price cheap items in silver and expensive items in gold. Sliver coins are likely to circulate more than gold coins.
Historically, silver has been better suited for trade (buying and selling of goods and services), and gold, for commerce (large-scale exchanges of goods). Silver seems more suited for industrial and agricultural areas, and gold, for the commercial and financial arenas. However, the markets should determine which products and services are priced in terms of silver and which in terms of gold. To allow coins of both metals to circulate freely gives the people the advantage inherent in both metals.
If only gold were money, then token and paper money would be needed to buy most items. Most common items are priced below two pennyweights of gold. Gold coins could not be used to buy these items individually, or if used, the change would not be in gold coins. However, if silver were money, silver coins (as silver money and not as subsidiary coins for gold) could be used to buy most of these items. Some items would be priced below two pennyweights of silver, and token coins would be needed to buy then individually.
Perhaps the most important reason for having both the gold and silver standards is that together they make replacing commodity money with fiat money more difficult. When the silver standard accompanies the gold standard, it protects the gold standard from deteriorating into fiat currency. “Gold must be priced in something other than gold, otherwise every sale of gold would have to end up as exchange of amounts of gold. . . .” To maintain an honest monetary system, this something has to be a monetary metal in its own right. Silver is the most appropriate commodity money for this purpose. When both metals are money, each metal in the form of bullion can be priced in terms of the other metal. Otherwise, under a monometallic standard, the monetary metal in bullion form is priced in paper notes or token coins, which introduces a fiat unit of accounts. The gold and silver standard is much more effective at protecting the integrity of the money than either standard alone.
A historical example of a dual monetary system occurred in the United States between 1862 and 1879. During this era both U.S. note (greenback) dollars and gold dollars circulated as money. Both were used for purchases and wages. Because U.S. notes were not redeemable in gold, no fixed exchange rate existed between fiat U.S. notes and gold coins. However, in most of the United States, U.S. notes were used for the payment of debt because they had legal tender status and were less valuable than gold.
Moreover, many third world countries operate with a dual monetary system. Many use the U.S. dollar and a local currency; sometimes a relatively strong regional currency is also used. They function with little difficulty going between currencies even without modern technology. Also, stores along the U.S.-Mexican border accept both Mexican pesos and U.S. dollars. With today’s technology, conversion between gold and silver should be without difficulty. If an item were priced in silver, it could easily be bought with gold and vice versa.
To ensure that both full-weight silver and gold coins circulate and that one does not become subsidiary to the other, the government needs to undertake several actions. First, it should levy some taxes, fees, and fines in silver and others in gold. Furthermore, it should not accept the payment of gold for taxes, fees, and fines levied in silver and vice-versa. Also, it should not fix, either formally or informally, a ratio between gold and silver or even give the appearance of setting such a ratio.
1. J.N. Tlaga, “Gold Standard = Fiat in Disguise,” Jan. 19, 2002, http:// www.gold-eagle.com/editorials_02/tlaga011902pv.html, Aug. 8, 2007.
Copyright © 2011 by Thomas Coley Allen.
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