A standard is a measure, and originally silver was used as a standard because it sat in the middle between copper and gold in terms of value. So it was the natural thing to use as a general measure.
(Imagine measuring lengths with a ruler stick. A very long ruler would be good for measuring very long things, but it would be impractical for measuring smaller lengths. Likewise, a tiny ruler would be useful for measuring small lengths, but equally impractical for measuring long ones. Therefore, a medium length ruler is the most handy to have around, as it can be used to measure both long and short. Silver, in effect, is the medium ruler.)
We've discussed this before: Silver Porridge: Not Too Hot, Not Too Cold
Measured, Not "Backed"
Originally this "silver standard" just meant that silver was used as the general measuring stick, it didn't mean that currencies were "backed" by silver. As in the sense that we think of a gold or silver standard today.
Let me explain..
Envision some ancient world where there's no official currency. People use metal coins to trade, and they can use all different metals - copper, silver, gold - whatever is convenient. In fact, it doesn't even have to be metal. Anything can be used as long as both trading parties are happy.
See here: Anything Can Be Currency In A World Without Tax
Currency takes many forms. Copper coins, silver coins, gold coins (I'm saying coins, any shape will do - it's the weight and purity that's important). Even blocks of salt. In this world silver is used as a general measure, especially by banks or traders.
If they're pricing the value of gold, copper, iron, grain, wood and everything else, it's convenient to use one commodity to do this. And again, as silver is of middling value, it's the natural choice. Gold is too expensive. How many loaves of bread would equal one ounce of gold? Likewise, copper is too cheap. You wouldn't want to buy something expensive, like a horse and chariot, with countless copper coins.
So it's not that silver is the only currency. It's just the go-to measuring stick for pricing everything else.
A peasant will still use copper to buy his bread. A pharaoh will still use gold to buy his chariot.
But then comes the official currency..
Uh oh, the pharaoh's put his chariots to good use to enforce order.
The state mints an official currency, that all trade must be conducted in and that tax must be paid in. This official currency comes in the form of silver and copper coins, pressed with the pharaoh's face.
This is where the silver standard stops simply being a measure and begins to become a standard in the "backed" sense. It happens slowly though. (It's also here that we begin to see the earliest, teeny-weeniest beginnings of state fiat.)
At first things are fine, and the copper and silver coins reflect their real world market value.
To keep it simple, let's say when the coins are minted one ounce of silver equals one hundred ounces of copper. And the markings on these newly minted coins state that a copper coin is 1/100th the value of a silver one.
Yet, in the real world - out in the open market - prices change. Copper goes up and down in relation to silver. Silver goes up and down in relation to a loaf of bread. Everything goes up and down in relation to everything else. In reality prices are never fixed.
So what happens if, a year after the coins have been minted, an ounce of silver is worth one hundred and twenty ounces of copper, not just one hundred?
Either the state has to change the coinage to reflect this new reality, or we have a situation where the official currency is out of sync with real world prices. As silver is the standard - the all-important measure - the silver coins retain their parity with the real world silver value. However, as the copper coins are valued in reference to the silver ones they get detached from their real world price.
In reality the copper in the coin is only worth 1/120th of an ounce of silver. Yet officialdom states it's still worth 1/100th of an ounce. So, in a sense, the copper coins simply become tokens (or IOUs) promising 1/100th an ounce of silver, regardless of their actual metallic value.
Of course, this example is a vast oversimplification. The earliest minted coins wouldn't have been marked to state a relative value. Such complexities only came about over time. Nevertheless, the example shows how you can move from a world where anything can be currency. To a world of minted coins of varying metal. To a world where the currency is just one metal, or backed by one metal.
Or Is It Backed ??
An interesting addendum to this is that "backed" currencies often have a tendency to be less backed.
This is an odd one, but bear with me.
Let's return to the world where there was no official currency. Let's say in this economy there are 10,000 copper coins and 100 silver coins in circulation.
Now using silver as a measure you could value this coinage in silver.
If one silver coin is worth one hundred copper coins then 10,000 copper coins = 100 silver coins in value.
So in circulation we have:
10,000 coppers coins (value: 100 silver coins) + 100 actual silver coins = value: 200 silver coins.
So the value of all the coins is 200 when measured in silver. And even though there are only 100 silver coins in reality, the value is backed by the silver and the copper.
Hence, in this old world the currency isn't backed solely by silver.
However..
Let's fast forward to our world with an official currency, where the copper coins have been debased. Or perhaps even completely replaced with steel or plastic token coins.
Imagine the same situation. There are 10,000 "copper" coins and 100 silver coins in circulation.
Again, we have:
10,000 copper coins (value: 100 silver coins) + 100 actual silver coins = value: 200 silver coins.
However, though the value is said to be 200 silver coins, it's only backed by 100 silver coins. Along with 10,000 "copper" coins - that promise the holder 1/100th of a silver coin, but that are physically worthless, as they're just plastic.




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