Silver Standard

The silver standard is a monetary arrangement in which a country's government allows conversion of its currency into fixed amounts of silver and vice versa. Under the silver standard, the determination of a currency exchange rate has a basis on the economic difference for a set 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.

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. The silver standard officially came to an end when China and Hong Kong abandoned it in 1935. At this time, the adoption of the gold standard began.

For the first 40 years of its existence, the U.S. operated on a bi-metallic system of gold and silver. However, silver coins were the favored currency, and domestic purchases made with gold were rare. The Founding Fathers wrote a bi-metallic gold-silver standard into the United States Constitution. 

The Coinage Act of 1792 defined a dollar in regards to silver. A dollar was to be 371.25 grains of silver, equivalent to about three-fourths of an ounce. This measure was in harmony with the Spanish milled dollar, popular and used at the time as a standardized currency. In 1834 Congress adjusted the silver-to-gold ratio from 15-1 to 16-1. This adjustment made gold cheaper relative to the world market price ratio. Silver exportation grew, and by 1850, silver coins all but disappeared in the U.S. Gold then 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, issued fiat money with no convertibility into silver, gold or any other metal. In 1873, Congress moved to sideline the silver dollar. This change sparked the Free Silver Movement, which demanded to allow the supply of silver coins to increase based on demand. In 1878, due to the Free Silver Movement, the silver dollar was 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.

Congress authorized the Federal Reserve in 1913, as a lender of last resort. The Federal Reserve would not function as a central bank and would not replace gold and silver as money. The Federal Reserve Notes in circulation today while carrying the name dollars are not Constitutional dollars. Instead, they are bank notes accorded legal tender status by government fiat.