Silver has been considered an object of intrinsic value since ancient times. The Romans understood it to have antibacterial properties, a trait that was used by American pioneers who put silver dollars in their water and milk to prevent spoilage and infection. The use of silver as money is at least as old; evidence suggests mankind has been refining silver since at least 3000 B.C. Silver used to be a currency in the United States, but today is virtually absent from circulation. The historical value of silver can be traced in absolute terms as well as in fixed dollar terms.

Coinage Act

Among the earliest acts of the U.S. Congress was the exercise of its Constitutionally granted right of fixing currency and coinage. The Coinage Act of 1792 defined a dollar as 27 grams of silver, or roughly 86.8 percent of a troy ounce. With silver trading now at about $14 per ounce, that same 27 grams would be worth about $12.15. Looking at it another way, today’s dollar is only worth about eight cents in 1792 terms. The Coinage Act also defined the dollar in terms of gold, 1.7 grams to be precise. Because dollar notes could be exchanged for silver or gold and converted between metals, it was known as a bi-metallic currency.

Steady-dollar

The easiest way to understand silver prices prior to the creation of the U.S. dollar is to use a steady-dollar reference point. A graph showing 600 years of silver prices (see References below) adjusts prices into terms of 1998 dollars. Seen from this perspective, it’s clear that though the nominal price of silver is fairly high (roughly $14 per ounce as opposed to one dollar per 27 grams), silver is actually undervalued compared to historical norms. As we’ve seen, the value of a dollar has changed dramatically over time, especially in the last half of the twentieth century. Using a steady-dollar benchmark accounts for inflation and smooths out these differences.

Supply and Demand

Prior to the twentieth century, the major influence on the price of silver was supply and demand. Demand was fairly constant, growing or receding at roughly the pace of worldwide economic development. Supply, however, was subject to discovery, mining and refinement. Each major discovery of silver increased the available supply and tended to gradually erode the value of silver. This is precisely what led to the revaluation of the dollar in 1843. Increased supply of silver led savvy traders to exchange their silver for gold, threatening a run on gold supplies.

The Silver Bubble

Until June 24, 1968, U.S. dollars were silver certificates that could be redeemed for an actual silver dollar. A few years later, President Nixon ended the redeemability of dollars into gold. Since that time, inflation has wreaked havoc on the value of the dollar, which has fallen precipitously, while the value of silver has tended to increase. In 1980 the price of silver catapulted to over $20 per ounce, an all-time high. The spike occurred in response to reports that the Hunt brothers, sons of H.L. Hunt, had amassed about half the world’s available supply of silver, some 200 million ounces. The Hunts’ attempt to corner the market ultimately failed as they were convicted of market manipulation. The silver bubble burst and the price returned to below $4 per ounce, still high historically in nominal terms, but low in steady-dollar terms. Since the dollar has fallen further as silver has traded back above $10 per ounce, it remains at historically low steady-dollar prices.

Gold/Silver Ratio

Until June 24, 1968, U.S. dollars were silver certificates that could be redeemed for an actual silver dollar. A few years later, President Nixon ended the redeemability of dollars into gold. Since that time, inflation has wreaked havoc on the value of the dollar, which has fallen precipitously, while the value of silver has tended to increase. In 1980 the price of silver catapulted to over $20 per ounce, an all-time high. The spike occurred in response to reports that the Hunt brothers, sons of H.L. Hunt, had amassed about half the world’s available supply of silver, some 200 million ounces. The Hunts’ attempt to corner the market ultimately failed as they were convicted of market manipulation. The silver bubble burst and the price returned to below $4 per ounce, still high historically in nominal terms, but low in steady-dollar terms. Since the dollar has fallen further as silver has traded back above $10 per ounce, it remains at historically low steady-dollar prices.

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