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History Lesson #3: Virginia City Silver & the US Money System

Virginia City became one of the richest places on earth in the later 1800s because of deposits of gold and especially silver. But how does that relate the U.S. being on the gold or silver standard? If at all? Nevada residents were Republican and voted in a state constitution so that Lincoln could admit Nevada as a state in 1864 and and give him more electoral vote. Was the country already preparing to go off the silver standards, making this push for statehood an effort by Nevada to keep the US on silver?

 

In its early years, the US had a bi-metallic standard defined by both gold and silver, set at a ratio of 15 to 1. This explains why gold was a much more sought after commodity. But in Virginia City, silver discovered far out-measured that ratio. The gold discoveries of 1849 reduced the value of gold, and silver coins disappeared from circulation at that time. Of course, the more you have, the less valuable it is. In 1853, the silver content of small coins was reduced below their official face value so that the public could have the coins needed to make change.

 

The Comstock's silver lode was discovered in 1859. Stock in Virginia City metals took a hit in April 1860, which to some signaled the end of that boom. But that crash related to finding little or nothing to report in some of the peripheral mining areas. The Comstock itself was still solid. One of the problems in Virginia City's rich history was that they continually needed to go deeper and deeper to find ways to access the silver lode. And that meant the need for capital -- it takes gold to find silver.

 

Those dipping stock prices didn't reflect the fact that miners were bringing up gold and especially silver at Virginia City every day. "The reality of gold and silver provided its own momentum, and mining continued despite fluctuations  in the stock market."

 

There were crooked investors, of course, those only to happy to swindle someone looking to invest with worthless mine stock. "The two mining operations, one into pockets of ore and the other into pockets of fools, paralleled each other for decades."

I wonder if that was anything like insider trading, which became illegal, eventually.

 

This doesn't sound like the atmosphere of Virginia City silver made an impact on the monetized system. In fact, the Comstock was discovered only a decade after the California gold rush, during which there was a back flow of gold seekers who followed rumors to Sun Mountain in Nevada. The gold was enough to keep them there, but the silver lode made Virginia City one of the richest mountain cities on earth.

 

Here are a couple of events relating to devaluing silver:

 

In 1853, the U.S. government moved to debase—reduce the amount of silver—in its silver coinage. While the silver dollar returned as legal tender in 1878, it didn't last long. A silver-preserving law known as the Sherman Silver Purchase Act of 1890 was repealed because it undercut gold reserves.

 

The United States abandoned the silver standard in 1861, and by 1893 had effectively moved to a gold standard. In the intervening years it had been on a virtual bimetal system; that is a currency fixed to values in both silver and gold.

 

This second source is confusing; what does it mean by intervening years? If the silver standard had been dropped as noted, the Comstock Lode would have become almost valueless. Instead, Virginia City had boom and bust years between 1860 and 1880 -- mostly boom. Because of the Comstock, though, silver flooded the market, and likely caused the move to gold standard only. But not before 1880.

 

During the Civil War, the government issued legal tender paper money that was not redeemable in gold or silver, effectively placing the country on a fiat paper system. Another source noted that, in 1879, the country was returned to a metallic standard on gold only. This makes the most sense as it marks also the end of Virginia City's final bust.

 

But why was the silver standard abandoned? Here's a possible explanation that covers Virginia City's silver becoming devalued without mentioning the silver found there.

 

A major difficulty with a silver standard is the low value of the metal. In order to maintain parity with the metal value, silver coins can become physically large and heavy.For governments and central banks, maintaining either a gold or silver standard becomes difficult as the metal's bullion value rises and falls. For example, following the California Gold Rush, the gold price in the US fell and the physical metal value of silver coins exceeded their face value. As a result, many silver dollars were taken out of the US, and melted into a more valuable ounce of silver in other countries.

 

Also, both gold and silver standards restrict financial movement and the ability of government to set interest rates. Many economists cite this as the cause of the "long depression" from 1873 until 1896, and the "Great Depression" in the 1930s.

 

Silver wasn't that valuable to begin with, and as this site noted, the gold rush in '49 also devalued gold. So when technology was needed to go deeper and deeper into the lodes, the stockholders found the process more costly than it was worth. That finally happened to the city in the late 1870s.

 

Let's look closer at Virginia City. "In the 20 years between 1860 and 1880, they mined 6,971,641 tons of pure silver. To transport this amount of silver today, it would take a freight train stretching from Madrid to Moscow."

 

Of course stockholders invested as long as they could make a handy profit, and even President Grant invested. But here's an interesting comment:

 

Most of the silver kings converted their enormous wealth into political influence. No wonder they managed to defer the adoption of the pure gold standard for the United States. To support silver mining, the Bland-Allison Act stipulated the purchase and coining of silver in the amount of two to four million dollars each month. When in 1893 Congress ceased coining silver, the Comstock Lode was depleted and the ones who made a profit invested their assets in other things.

 

The Bland-Allison Act, which allowed for a liberal use of silver coinage during the Panic of 1873, was passed by two Senators, Bland of Missouri and Allison of Iowa. But this enabled Virginia City to keep digging. Late in 1874, and into the next year, there was great stock excitement in San Francisco and Virginia City, due to the developments in the Consolidated Virginia and California mines, where astonishing rich deposits of ore were opened into view, sending stock from $50 to $1,000, seemingly overnight. The same happened at the Ophir Mine, and all along the Comstock.

 

There was great speculation -- sell now and triple your investment, or wait?

 

On very critical occasions, either when stocks are rapidly rushing or when they are rapidly 'tumbling,' then is a grand charge made upon all the bulletin-boards as soon as it is known that the reports have arrived. Dry-goods clerks -- yardstick in hand and scissors peeping from vest pocket -- come running out bareheaded and bald-headed to catch a glimpse of the bulletin; barkeepers in their white aprons come; bareheaded, bare-armed and white-aproned butchers smelling of blood come; blacksmiths in leather aprons and hammer in hand, flour-dusted bakers, cooks in paper caps, cobblers, tinkers and tailors all come to learn the best and the worst.

 

Everywhere they talk stock.

 

Bill Stewart was Nevada's famous "silver senator." He ran as a Silver Party candidate in 1892 and 1898 because he opposed the Republican Party's position on demonetizing silver, though he ultimately rejoined the Republican caucus in 1899. Seems by this time, though, he should have known he was kicking a dead horse. But this demonstrates the continued desire of the locals to hit it big once more.

 

The move to a sole gold standard was fiercely opposed by many in the United States; the "free silver" movement included the eventual Secretary of State – William Jennings Bryan. He famously decried the move in a speech on July 9th, 1896. The Cross of Gold speech supported bi-metallism and was concluded with the infamous line: "You shall not crucify mankind upon a cross of gold".

 

Throughout the late 19th century, there were efforts to re-monetize silver. A quantity of silver money was issued; however, its intrinsic value did not equal the face value of the money, nor was silver freely convertible into money. In 1900, the United States reaffirmed its commitment to the gold standard and relegated silver to small denomination money.

 

Throughout the period under which the United States had a metallic standard, paper money was extensively used. This use of paper money is entirely consistent with a gold standard. Much of the money used under a gold standard was not gold, but promises to pay gold. To help ensure that the paper notes issued by banks were honored, the government created the national bank system in 1863.

 

So it appears we were on the gold standard exclusively between 1879 and 1933, when FDR took us off. In 1913, it created the Federal Reserve System to help ensure that checks were similarly honored. The creation of the Federal Reserve did not end the gold standard.

 

But to understand how we're not on any standard now, there's this:

 

The gold standard is a monetary system in which a nation's currency is pegged to the value of gold. In a gold standard system, a given amount of paper money can be converted into a fixed amount of gold. Countries on the gold standard can't increase the amount of paper money in circulation without also increasing their reserves of gold.The gold standard is a monetary system in which a nation's currency is pegged to the value of gold. In a gold standard system, a given amount of paper money can be converted into a fixed amount of gold. Countries on the gold standard can't increase the amount of paper money in circulation without also increasing their reserves of gold.

 

FDR's move to get us out of the Depression by taking us off the gold standard is considered to have been a smart move. Abandoning the gold standard allowed countries to print more money. And that means more money than we have anything of value to back it up.

 

Obviously, Virginia City would have lost its great wealth much sooner, if the silver standard had not been upheld as long as 1878. The final blow to the city was the decision to go exclusively on the gold standard, removing the value needed to invest in new technology for the continued depth needed to reach the silver.

 

Whether anyone understood the reason we stayed on the bi-metal standard long after silver flooded the market, it appears very relevant to the continuing wealth of Virginia City between 1860 and 1880.

 

References:

 

 https://fas.org/sgp/crs/misc/R41887.pdf. 

 https://www.usmoneyreserve.com/blog/when-did-us-go-off-silver-standard/ 

 https://coinsweekly.com/virginia-city-where-monetary-history-was-written/. Two photos saved from this site for the book, Mckay Villa and Sutro tunnel.

 https://www.senate.gov/senators/FeaturedBios/Featured_Bio_Stewart.htm.  

DeQuille, Big Bonanza, 305-307.  

https://www.u-s-history.com/pages/h718.html. 

 https://www.bullionbypost.co.uk/index/silver/silver-standard/#:~:text=The%20United%20States%20abandoned%20the%20silver%20standard%20in,fixed%20to%20values%20in%20both%20silver%20and%20gold.

 https://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard

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