Backing the US Dollar with Silver: Is it Possible Today?

Many of us are old enough to remember when $1 silver certificates were a common type of dollar bill ... as opposed to federal reserve notes, which are the only bills printed today. Back in the day, these could actually be exchanged for silver coins. I did it more than once. So would it be possible to return to those halcyon days of yesteryear if only our lazy, spineless, spendthrift politicians would gird their loins and stir themselves to responsible action?

Short answer: No way, unless the denominations far exceed their silver melt value.

The days when monetary systems of nations could be based on a commodity (silver in this case) are gone and can't come back short of an apocalypse ... worse than covid-19. There's not enough silver to do it. About 30% of transactions in the US are still cash. Cash may eventually become irrelevant, but not for a while. The M1 money supply is about $4 trillion (disregarding the recent covid-19-related spike). At the current silver price of $15/oz, it would require 267 billion oz to back it up. There is 3-4 billion oz in silver bullion in the world. There's actually less silver bullion around than gold bullion. There's more silver in jewelry, tableware, and industrial applications (especially electronics) than in bullion. Some of the latter could be shifted to bullion and coins, but not much. The amount of silver in the world that is known to be in minable ores is about 16.3 billion oz (560 kilotons). The US cash economy alone is way bigger than what could be backed with all the silver in the world. Population and economic growth have left silver in the dust ... it's an economic pipsqueak in the world economy. It's essential industrially but not at all as a medium of exchange or for backing currency.

It can be argued that if the US Treasury started buying large amounts of silver, the price would rise. This is no doubt true. And at an increased price, the mass of silver required to back the dollar would be less. How much is hard to say. But even if silver reached its record price of $49 per oz, there would still not enough to back M1. The source of money to buy the silver has to be considered. Basically, it would have to come from revenue or borrowing. The US Treasury could not just issue silver certificates to buy it. Doing so would increase M1, and the existing M1 would still not be backed by silver. There's no easy way around it ... the moolah for silver would have to be from increased taxes or borrowing. Finally, a greatly increased price of silver could be ruinous for commercial and industrial users of the metal. Greatest impact would be in the electronics industry, but others like the jewelry industry would be hit hard.

It can also be argued that it is not necessary to back all of M1 with silver. Only enough needs to be backed so that the treasury doesn't run out when folks start exchanging their bills or checking accounts for silvery metal. How much is enough? Hard to say, but it would need to be a substantial percentage. If folks know there is a very limited amount compared to the cash that's out there, they'll want to get theirs while the getting's good. And there is not enough silver available to have more than a limited amount. So the system would collapse before it could really get underway.

If it were even possible to base the US dollar on silver again, it's value would be very much at the mercy of the major silver-producing nations. The US ranks only ninth in silver production and produces only 3% of the world's silver. A dollar based on silver could be manipulated easily by the major silver-producing nations ... Mexico, Peru, China and Russia. Could the US step-up silver production? Yes, a bit, but not much. The US is fifth in silver ore reserves with only 4.5% of world reserves. Any step-up in US production would still leave it far behind the biggest producers at their current level of production.

So, sadly, a return to "hard" money in the form of silver would not be possible even if politicians were willing. Of course, coins could be made with a tiny bit of silver with a melt value much lower than the denominations of the coins. But what would be the point? It wouldn't drive up the cost of making one coin much, but could cost tens of millions annually for coins in aggregate. But there wouldn't be much silver value in the coins most individuals might possess at one time. Would a dollar coin with a penny's worth of silver really be that much more satisfying to own than one with no silver? Would it persuade folks to use dollar coins in place of bills?

So how about gold? Similar arguments apply. Perhaps I'll do another post on gold.

Bimetallism? Won't work. It was tried unsuccessfully in the US in the 19th century and other countries before that. It's impossible to control the value ratio of the two metals. The constantly changing ratio plays havoc with a monetary system based on bimetallism.

Enjoy your old silver coins and newer silver bullion and commemorative coins ... I do, but forget the metal for buying groceries or paying the mortgage.

Cal

References:

silver reserves, 2018 data: investingnews.com, 3 Jun 2019; their cited source is USGS.

silver production, 2017 data: wikipedia.com 30 Nov 2018; their cited source is USGS.

 

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Very interesting post! Shocking to see how much has changed since the US ditched the silver standard.

 

You can't have a currency tied to other countries monetary systems or precious metals. End of story.

If Russia has a stockpile of silver or gold, you want them influencing our monetary policy ?

Plus, you lose monetary flexibility and economic and price adjustments must be made "internally" instead of "externally" in response to an exogenous shock.

 

Just imagine how handcuffed the world would be right now if you had to have PMs to do something

 

It was one of the reasons The Great Depression came about....too many countries tried to defend their currencies and maintain tight money policies.

 

Governments can't afford to have honest money. How can you create trillions of dollars if your hands are tied.

 

It's not about "honest" money. In the past, an information gap existed but that isn't the case today with TV, the internet, etc.

What happened in South American and European countries with the debasement of the currency can't happen today.

 

Not to mention small countries aren’t comparable to super powers.

 

Creating debt, then selling it to other entities/countries is not honest money. The technology has nothing to do with it. All Treasury Bonds are is the promise to tax citizens to pay for current spending with future income.

 

Backing money with precious metal is not an effective strategy. All it can do is put a limit on the amount of money can be in circulation. That can be a good or bad thing. Having too little money in circulation can choke the economy. Having too much can result in in flation.

Being able to convert paper into silver does not fix anything. It does not stabalize the value of the dollar. Economists call it "the commody theory of money," and it's not valid. If the dollar is worth more than the silver you can get for it, no one will convert it. If it's worth less than the you can get for it, people will rush in to redeem it.

That's what happened in 1969 when coin dealers were paying a premium for all silver certificates and redeeming them. Some foolish people held on to their worn silver certificates because they were going to "rare" given all of the redemptions. They didn't become "rare." Their value only fell back to $1 when you could no longer redeem them.

 

As long as the Treasury bonds are backed by a robust economy and "full faith and credit" then it's not a problem.

The United States, as a Reserve Currency, must be willing to issue debt AND run trade deficits.

 

Let's hope the Chinese don't lose the faith. Russia already did.

 

It doesn't matter, neither country is trusted with Big $$$.

You have to be an open, transparent democracy to be a reserve currency and neither is even remotely qualified on those counts.

 

I hope you are right. At any rate, Russia, with an economy slightly smaller than Italy, is trying to be “the mouse that roars” when it thinks the ruble could be the reserve currency.

 

You mean to tell me countries don't want reserve currencies from countries run by dictators?

 

When I used to get a call at 2:50 PM on a Friday, 10 minutes before the Fed Wire closed, someone wanted interest over the weekend.

They also wanted to make sure that they got their money back 1st thing Monday morning.

If I had invested in any Russian money market investments, I would have been fired Monday afternoon !!

 

Not unless you like Roach Motels....you can go in, but can't get out !

 

It's almost like you cant trust them at all

 

Most people don't understand that you need LIQUIDITY to move big sums for super-wealthy investors or large institutions.

You can't buy $2 billion or $10 billion or $25 billion of any kind of fixed-income investment and hope to not move the market. The only 2 bond markets globally that trade in sufficient size (and are big enough in the aggregate) are the U.S. Treasury and Mortgage-Backed Security sectors.

They each trade about about $500 billon and $300 billion a day.

The next largest is way down the list, maybe $40 billion a day (either British Gilts or the entire U.S. corporate market). I haven't checked the rankings lately. But the point remains: you can't put $10 billion into a market that is $40 billion. $300 billion or more, you can.

 

You ask if it's possible? Anything is, but short of a long term deflation in the World economy, it probably won't happen, at least not for the present.