Silver as Money
Money-substitutes, bank
notes and bank deposits, were originally backed by physical silver, and
were switched in favour of gold-backed money-substitutes over the last
two centuries. It was a process that happened first in England, starting
with Isaac Newton’s declaration in 1717 that silver would be exchanged
at the Royal Mint in the ratio of fifteen and a half ounces to one of
gold. While Newton was a towering genius in physical science, he didn’t
understand markets, and that an inflexible bimetallic standard not
adjusting for the subjectivity of prices would be problematic.
Market preferences in
subsequent years deemed gold preferable to silver at Newton’s exchange
ratio, because British merchants tended to pay for imports from the
Continent with silver while hoarding gold. This might have been due to
the convenience of gold for merchants’ dealings, or it could equally
have been due to price arbitrage. For whatever reason, Britain moved
towards gold and finally adopted it as the government’s preferred money
when the first sovereigns were issued in 1821.
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