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Chapter 4 - Hi$tory I - Gold and Silver (to 1914)[1]

8 min read

Let’s go into the archives. Only with an understanding of how money has evolved to the present can we envision its future and position ourselves smartly.

This history tour of money comes in three posts. The portioning is meant to make the material more digestible. The reading is not always easy going, but worth your while (ever met a writer who argued the opposite?). If you feel the material is too indigestible, maybe a stiff drink can help.

The focus is on the US dollar. For a reason. The US dollar is still the anchor of the global financial system. Its fate will affect all of us!

Like many other currencies, the dollar started life as a piece of metal. For most of human history, money was indeed synonymous with metals like gold, silver, copper, iron, bronze, or weirder tangible objects such as seashells. Actually, livestock did the job too and may still in a remote and therefore likely happy place. Your “pecuniary” perks and your “capital” are reminders that cattle[2] was money at some point.


Gold outshone other forms of money since its first proven coinage during the time of King Croesus (6th century BCE). Its “glitter” derives from a number of great qualities: it doesn’t corrode, cannot be produced out of something else as alchemists learned the hard way, and is hard to find and extract. In short, it’s like you … rare, precious, and beautiful (and also a bit useless in practice). That’s why the conquistadores and colonialists were in search of gold and its lesser cousin silver wherever their sails would carry them.

In the competition for the role of currency supremo, silver stayed in the running for the “gold medal” for long stretches of history. And for a time, held joint first place. Throughout the 19th century many currencies operated on a bi-metallic standard, meaning a currency was convertible into specified amounts of both gold and silver.

That included the dollar of the young United States. The US dollar began as a copy. The term “dollar” was adopted from the “Spanish dollar”, as the settlers in the American colonies called the Real, a Spanish Silver coin. The “Real” had been the currency of reference for world trade for two full centuries[3]. Conveniently, the US coinage act of 1792 specified the US dollar to be convertible into the same silver weight as the Spanish dollar – and a fifteenth of that weight in gold. In an act of open mindedness, the US government let the “Spanish dollar”, along with other foreign currencies, remain legal tender until 1857.

The problem was, though, that the silver-gold mint ratio wasn’t quite right. The initial 15-1 ratio of silver to gold left the gold content of the US dollar overvalued compared to silver in the international markets. In consequence, dollars were increasingly exchanged for gold to pay for international purchases from 1792 to 1834. As gold was leaving the country, the US de facto operated on a silver standard during this time[4]. In 1834, Congress changed the silver-to-gold mint ratio, with the effect that silver became overvalued relative to gold. Now the arbitrage went the other way and silver was leaving the country. As a result, the US de facto operated on a gold standard from 1834 to 1862[5].


Besides gold and silver coins in circulation, there was no single paper money for US dollars. Private banks could issue their own USD banknotes (Maybe time to take a sip?). They simply promised to redeem the notes in gold or silver at the request of customers presenting notes. This period of “Free Banking” from 1837 to 1863 led to all sorts of notes issued by funkily named banks.


















Source: “Obsolete Currency 1792-1866 - American Numismatic Association.” Accessed 1 August 2023.

A similarly confusing variety of banknotes and coins circulated in Europe. You might think that the Free Banking practice led to much fraud and abuse. Actually not. The lack of regulation made the integrity and character of bank bosses of key interest (spot a change to today?). Depositors would do proper due diligence before placing a (gold) deposit into a bank and accepting the banks’ notes in return. There was no taxpayer to bail them out.

Free Banking came to an end during America’s most dire period, the horrific American civil war. The war consumed the lives of c 2.5% of the entire population between 1861 and 1865. A collective trauma of giant proportion. The war devoured massive resources not only in men but material.

War is costly – then and now.

A new book argues that it was more “sustainable” war financing that helped tip the balance in the civil war in favor of the Unionists from the North[6]. Both warring parties issued paper money not redeemable in gold or silver. The North was more restrictive in issuing what were called “Greenbacks”. With Greenbacks FIAT money was effectively introduced, i.e., money not backed by anything other than faith in the issuer’s capacity to uphold its value. The Confederates from the South ran the money printing press more liberally, debasing their currency and subjecting their population to high inflation and sharply dropping living standards. This was not a recipe for victory.

With the Union prevailing the impetus for centralization of monetary affairs was back. A law creating a national bank system was passed in 1863. Out went Free Banking and in came chartered banks permitted to issue dollar notes under stricter federal regulation. In 1873 the government reaffirmed the metallic standard of the US dollar and achieved basically full gold backing of all USD notes in circulation by 1879.  This marked the beginning of the true gold standard period.

With gold money, America joined the winning team. The British had bet on gold for a long time … and won. The Brits had fully adopted the gold standard already in 1717, when the head of the Royal Mint, an individual named Isaac Newton (better known for his exploitations in his hobby “physics”) specified the amount of gold corresponding to one British Pound. Apart from a hiatus during the Napoleonic wars the tie of the pound to gold held until World War I. In 1844, the Bank of England, the world’s first “central bank”, became the sole issuer of Pound coins and notes. These in effect were the equivalent of the Master and Visa cards for the 19th century globetrotter!

Eventually, all continental European powers joined the gold wagon, ditching silver in the 1870s. The Germans effectively adopted the gold standard after defeating the French in a short war in 1871. Extracting large reparation payments from the French in gold facilitated fixing the Mark to gold. The French, Belgians, Italians, and the Swiss, fixed their respective francs and Liras to equivalent amounts of gold. With the value of silver dropping, anyone wanting to redeem their francs opted for gold. So effectively, most of Europe was on a gold standard in the last quarter of the 19th century.

In Asia, it was the Japanese who first tied their new currency, the Yen, not only to silver but also to gold in 1871. Other Asian nations continued to operate on a silver standard … and lost out. When silver production was higher than the economy’s growth rate, inflation ensued. “Silver” countries like Russia and China suffered the consequences. By the end of the 19th century, India’s silver backed rupee had lost over half its value since 1870 compared to gold backed pounds. The decline of the rupee showed in lower tax collection for the British colonial masters. They in turn sought to compensate that by raising taxes on the Indians, which lead to growing unrest.

Coincidence or causality?

One thing is for sure: The period from the 1870s to the start of World War I in 1914 was a “golden” one on either side of the Atlantic. Indeed, Americans refer to the last quarter of the 19th century as the “gilded age”. High population growth, giant leaps in technological advance and huge development of infrastructure helped produce stellar economic growth. Massive rail works connected all corners of the country and bridges spanned mighty rivers (The Brooklyn Bridge was completed 1883). Electrification allowed for erecting tall buildings with elevators. The Wright brothers got the first engine propelled plane off the ground in 1903. Industrialists like Carnegie, Vanderbuilt and Rockefeller emerged fabulously wealthy from this period.


Europeans refer to the pre-WWI period as the “Belle Epoque”. It delivered a stunning increase in the quality of life for the masses. Sanitary installations, and so better hygiene and health, central heating, and electric lighting became ubiquitous in cities. Otto Benz built the first combustion engine car in 1886. A construction boom created beautiful architecture in cities. Not all was for maximum utility though: the Eiffel tower in Paris (1889) and railways in the Swiss mountains (Jungfraubahn 1896) were as much about show as practical purpose.

Explosive growth of global trade distributed the riches near and far: a leap in communication through cable and telephone fueled trade. And everybody operated on the same money – gold. This took out currency risk and created full transparency in commercial transactions.

But the golden times did not last. All hell was about to break loose in Europe in 1914. And, as a consequence, money would never be the same.




[1] For more information on the history of money see Ammous, Saifedean. The Bitcoin Standard: The Decentralized Alternative to Central Banking. Wiley, 2018   It’s a great book. My strong recommendation to read the book is NOT investment advice or a recommendation to invest in Bitcoin or other cryptocurrencies.

[2] Pecus is Latin for cattle, caput refers to the head of cattle in Latin

[3] “From the Spanish dollar to the US dollar.” Iberdrola, Accessed 1 August 2023.

[4] Elwell C. K. (2011), Brief History of the Gold Standard in the United States, Congressional Research Service, 7-5700, R41887

[5] ibid

[6] Foner, Eric. “The Hidden Story of the North's Victory in the Civil War (Published 2022).” The New York Times, 8 March 2022, Accessed 1 August 2023.

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