The main problem with this concept is there simply isn't enough silver to go around anymore. The old "silver standards" were only maintainable by the government (and/or by all world governments via international agreements) decreeing a fixed "buy" and "sell" price for silver. In the case of your example, that sell price would be $50/ounce; the "buy" price would presumably be slightly less than this. Even discounting the argument that the modern financial system needs a bigger money supply than physical silver could possibly supply, the cold equation is that we aren't mining silver anywhere near as fast as we're reproducing. And by "we" I mean the planet as a whole.
But just taking the United States into consideration, the main problem with this scheme is, where's the silver going to come from? The US doesn't mine enough of it, and the few silver mines still operating within its territory aren't government-owned. If the government has to import or purchase billions of ounces of silver to make it work, what are they going to buy the silver with? No-one will take the old worthless paper dollars once the silver scheme is being considered.
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That is true, for the beginning. At first, people are going to hoard them. Soon after though, they will go on the internet and find out the amount of silver in them and the cost. The people will realize that its not worth holding on to, and release them into circulation.
I'm afraid they won't. Let's apply basic Gresham's Law logic. Suppose you need to buy $5 worth of groceries. You have a $5 coin containing 1/5 of an ounce of silver, and you also have a $5 paper note containing no silver whatsoever, and only a dubious promise to maybe exchange it for silver in the future. Which will you keep, and which will you spend on groceries? You'll keep the coin and spend the note, of course. So the coins will not circulate, as long as the paper notes continue to exist.
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I agree that the alloy should be just made less and less if the price goes higher. If it goes lower, the alloy of silver should increase. This way, it easily fluctuates without changing the coin.
Sorry, but that will never work. The whole point of a "silver
standard" is that the standard doesn't change. Changing the silver content changes the standard, and therefore
does change the coin. The higher silver content coins, whether new or old, would be hoarded and melted, leaving just the debased ones circulating over and over until they're worn thin. Gresham's Law again.
The only way a government could make such a scheme work in this day and age is by withdrawing all the old coins, melting them down and re-issuing the silver in coins made to the new standard. And doing this too often would be expensive, making the maintaining of the currency system unprofitable. Issuing coinage is supposed to be revenue-making for a government, via seigniorage; once it becomes loss-making, they simply stop making the coins. That's what scared the world's governments into dropping silver from the coinage, during the wild price fluctuations of the 1960s and 1970s.
Don't say "infinitely" when you mean "very"; otherwise, you'll have no word left when you want to talk about something really infinite. - C. S. Lewis
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Posted 06/15/2012 1:31 pm
