Silver Standard: What it Means, How it Works, Example

What Is the Silver Standard?

The silver standard is a monetary system in which the value of a country's national currency is backed by silver. It is similar in nature to its famous counterpart, the gold standard. 

The typical method for implementing a silver standard is to allow units of national currency to be converted into units of silver at a fixed exchange rate. In addition to silver and gold, countries have also incorporated so-called bimetallic standards, which allow conversion into either of the two precious metals.

Understanding the Silver Standard

The purpose of the silver standard is to ensure the purchasing power of a national currency is maintained. For proponents of the silver standard, allowing currency-holders to exchange their currency in favor of physical silver serves as a counterbalance against the tendency of governments to degrade the value of their currency by printing money.

After all, since silver is finite and must be physically mined and minted, governments under a silver standard are limited in their ability to create new currency because they must ensure that all new currency is backed by an appropriate amount of silver.

The use of the silver standard has been widespread throughout history, although the practice fell sharply out of favor during the 20th century. In the United States, the national currency functioned on a bimetallic basis for the first 40 years of the country's existence. During this period, silver coins were considered the favored currency, while gold coins were rarely used.

This changed, however, in 1834, when the United States Congress adjusted the price of silver-to-gold ratio from 15:1 to 16:1. This adjustment led to a rise of silver exports, causing silver coins to largely disappear from the United States. In response to this shortage, gold became the principal form of currency.

Another significant milestone occurred in 1862, when the government issued fiat money with no convertibility to silver, gold, or any other metal. Although fiat money is the norm in today's monetary system, this was a radical move at the time, and it was met with vocal opposition. In 1879, Congress responded to this criticism by freezing the amount of fiat money in circulation, capping it at $347 million.

In the end, however, the United States would come to fully embrace the system of fiat currency. In 1971, Nixon responded to the growing instability of the then-prevailing Bretton Woods monetary system by finally and fully severing the convertibility of the U.S. dollar (USD) to precious metals. This trend was echoed by a growing number of other countries, such that today there is not a single country in the world that operates on either a silver standard or a gold standard.

Real World Example of the Silver Standard

The silver standard is believed to date back to ancient Greece, where silver was the first metal used as a measure of currency. After the fall of the Roman Empire, the adoption of the silver standard was widespread and included its use in China, India, Bohemia, Great Britain, and the United States.

In the end, however, all countries would come to adopt the fiat currency system. In the United States, the gold standard was abandoned by Richard Nixon in 1971, whereas the silver standard officially came to an end when China and Hong Kong abandoned it in 1935.