Sunday, May 3, 2015

Silver prices went up because of technological change?

I'm a little closer to my four o'clock target today.

Okay, here's what I've been thinking: The U.S. government debased its silver coinage in the mid-1960s, not because they were trying to make a profit on it and not because they were trying to screw anybody over, but because their hand was forced. The price of silver was rising, and it was reaching the point that the silver in a dollar coin was worth more than a dollar.

If that happened, the coins would have been hoarded, or melted down for the silver, and either way would have disappeared from circulation. So the government was in a position where it had to do something to preserve its coinage.

Now you might say that the reason the price of silver was rising was because prices in general had been rising. Because of inflation, in other words. Well, yeah, that's what I was thinking, too.

But then I found Henry E. Hilliards's short PDF titled Silver, which I summarized yesterday:

Technological change led to increased demand for silver, which drove up the market price of silver until it interfered with the monetary standard price that had been in use by the U.S. government. At that point, the US was forced to debase its silver coinage.

Hilliard went into some detail:

At a market price above $1.29 [per ounce of silver], a profit could be made by redeeming the silver certificates... In addition, at a market price above $1.38, a profit could be made by melting U.S. circulating coinage for its silver content.

Those numbers stand, no matter the reason for the rise of silver prices. Perhaps the reason was technological advance and the growing industrial demand for silver. Perhaps the reason was just plain inflation. And that's where I left off yesterday:

I'm wondering whether the increase in silver prices was a relative increase (the price of silver increased relative to other prices in general) or whether it was part of an overall increase in prices.

Hilliard's PDF includes a table of silver prices (annual averages) that covers the period from 1900 to 1998. Ooh, that's a lot of data. I couldn't resist. I copied and pasted it into Excel (and formatted it into one column). Then I went looking for measures of the general price level to compare to Hilliard's silver prices. I found numbers for the Consumer Price Index all the way back to 1800 at the Minneapolis Fed. And I found numbers for the GDP Deflator easily back to 1900 at the ever-reliable MeasuringWorth.

After a little more copy-and-paste-ing, I was ready to work through the agony of Excel's "ribbon" menu and generate this graph:

Graph #1: Silver Prices (blue) compared to the GDP Deflator and CPI-U
The three lines are indexed; all three start at the value 1.0 in the year 1900.You can see from 1900 to the mid-1960s a slow but persistent rise in the general price level (red & green lines) as compared to the price of silver. Pegged by government decree, the price of silver lagged behind other prices.

Silver prices increased because the demand for silver increased because of technological change? Sure, why not. But that's not the only reason silver prices had to increase. Silver prices had to increase because there was an increase in the general price level. You know: inflation.

Graph #1 shows the big picture. I took a subset of that data and made another graph, in order to see some of the detail Henry Hilliard described in his PDF. I started the second graph at 1947 (because a lot of FRED datasets start at that date) and stopped it at 1972 (before silver prices went really crazy):

Graph #2: Silver Prices (blue) compared to the GDP Deflator and CPI-U
This time the three lines all start out at the value 1.0 in 1947. This time the three lines run close together until the early 1960s. But you can see, from 1958 to 1961, the blue line runs on the low side. The timing of this pretty well corresponds to the description Hilliard gives:

Through the first half of the 1950’s, the market price remained below $0.91, so domestic mine operators sold their silver to the Treasury. In the second half of the 1950’s, the continued increase in industrial demand for silver and static mine production resulted in the market price increasing to $0.91 and Treasury silver sales being the largest source of silver for industrial consumers...

So I think Hilliard's description of what happened to silver prices is pretty good. I expect he's right, also, about technology and the demand for silver. But he left out the part about inflation and prices going up.

Now, maybe you have noticed that what I'm saying -- the price of silver increased because prices in general were rising -- undermines the view that the government's hand was forced. If the price of silver went up because of technological advance, well, there was nothing the government could do about that. But if the price of silver went up because prices in general were going up, that was the government's own fault. Right?

That's what most people would say. I want to say something different. I want to say we didn't have inflation because the government was "printing money". We had inflation despite the government's efforts to prevent it. (If you remember Romer & Romer's 2002 evaluation of the 1950s, they say economic policy in the 1950s was as good as "modern" policy, much better than the pro-inflation policy of the 1960s.)

If the inflation that forced the debasement of U.S. coinage was due to private sector credit expansion rather than to the government issuing money, then we are in some measure justified in saying that debasement occurred because the government's hand was forced. I will ultimately argue that this, the forcing of government's hand by private sector credit expansion, this is a recurring problem. It can be used even to explain the fall of Rome.

U.S. economic policy restricts the quantity of money to fight inflation, but encourages credit-use to promote growth. U.S. economic policy is a tangle of self-contradiction. I'm gonna go look for graphs now that might show it was the growth of private-sector credit, not the growth of government-issue money, that was responsible for inflation, even in the 1950s.


The Excel spreadsheet is available on Google Drive.


Gobanian said...

I think this explains what happened to silver prices.

The Arthurian said...

Oh yeah, the Hunt brothers. I remember them in the news! Thanks for the link, Gobanian.

I thought it was odd, in the Henry Hilliard PDF, there was only one sideways mention of the Hunt brothers:

"There are two types of markets for silver—physical markets and futures exchanges. It is possible for these markets to overlap if the buyers of futures contracts take delivery of silver metal when the contracts mature. A notable example of this was in the early 1980’s when two buyers and their associates took delivery of millions of ounces of silver when their futures contract matured."