Silver Certificates, Past and Present

Throughout history, regardless of what governments have said, precious metals have been viewed by the people as real money. Even in today’s global dot-com economy, studies show allocating between 7 and 16 percent of your assets in gold, silver, and platinum maximizes gains while minimizing risk. But many investors feel gold has already had its major bull run, and thus silver is the precious metal of choice.

There are numerous bullish signs for silver. It is more rare and in greater demand for industrial use today than at any time in history. There is a large concentrated short position in the futures market. Silver leasing, which artificially suppressed the price of silver for nearly a decade, is a thing of the past. And the historical silver-to-gold ratio is near all-time highs, meaning it takes more silver to buy an ounce of gold today than almost any other time in history—and many experts think we’re due for a correction.

But the main drawback for individual investors who want to own real silver is the storage costs. Historically, this problem has been answered with silver certificates, which are paper notes entitling the bearer to a specified weight of silver. Many U.S. dollars were once silver certificates, and these old notes continue to trade as collectibles. But there are also privately issued, redeemable silver certificates in circulation today, offering a more portable alternative for people who want to own silver.

Early U.S. Silver Certificates

Upon inception as a nation, the United States was on the bimetallic, gold and silver, standard, and this monetary system was orchestrated by the nation’s first Treasury Secretary, Alexander Hamilton. However, because the market values of gold and silver fluctuate independently of one another, this system was not very stable. In fact, by the end of the Civil War, silver had depreciated versus gold to such an extent that the bimetallic standard had essentially given way to a monometallic, silver standard. Gold’s market value was higher than the government tried to dictate, and thus, citizens took it out of monetary circulation.

Then in 1873, Congress passed the Fourth Coinage Act, taking the U.S. off the nominal bimetallic standard and instituting our first gold standard. Unfortunately for some folks, this led to a major contraction of the money supply, which was particularly painful for debtors, most of who were subsistence farmers. This led to the Populist Revolt—the first, and to this date, only, broad political movement based on monetary theory. In fact, the politics of the post-Civil War, pre-World War I era were largely dominated by monetary policy debates pitting goldbugs vs. bimetallic or silver enthusiasts.

Eventually, a compromise was reached. The silver advocates did not get the “free and unlimited coinage of silver” they wanted, but they did get silver certificates. U.S. government silver certificates were issued from 1878 through 1957, and remained in circulation until 1968. That year, all silver redemptions were halted, and thus, surviving silver certificates issued by the U.S. Treasury are no longer convertible into silver—although the certificates do have collectible value.

Modern Silver Certificates

Silver certificates are still issued and circulated by various private banks and investment companies. Although these certificates may not be legal tender, they do legally entitle their bearers to a stated amount of silver, which is stored in a secure location, and is usually redeemable on demand.

The benefits of these silver certificates are obvious: First of all, they outsource the task of storing and protecting the underlying silver bullion or coinage. If you were to own a substantial amount of silver bullion that you stored yourself, you alone would be responsible for keeping it secure. You would probably have to buy a safe and take out additional insurance against potential theft. With silver certificates, the holding company takes care of these tasks for you. Secondly, there is the issue of actually procuring the silver in the first place. Silver is heavy and thus expensive to transport. Silver certificates are much more easily traded among investors.

The drawback of silver certificates versus bullion or coinage is the certificates are only as good as the issuer. If the private bank or institution issues silver certificates went bankrupt, holders of the certificates probably will not receive the full face value of his or her notes.

There is, however, one government-backed series of silver certificates still being issued: The Perth Mint Certificate Program (PMCP). The PMCP is owned by Gold Corporation, a precious-metals refining, minting, and trading company, which is wholly owned by the government of Western Australia (the equivalent of a state government). The PMCP also issues gold certificates, and today, these gold and silver certificates are the only government-guaranteed precious-metals certificates in the world.

The Liberty Dollar

The most notable private currency issued in the United States is the Liberty Dollar. Liberty Dollars are issued in both gold and silver, and in coinage and certificate form. For example, Liberty Services, Inc.—the issuer of Liberty Dollars—produces a “twenty dollar” silver certificate equal to one ounce of silver. The silver is stored by the Sunshine Mint in Coeur d’Alene, Idaho.

One immediate problem with these silver certificates is the arbitrary price. Currently, Liberty Dollar silver certificates are marked with a $20 face value, but are redeemable for only one ounce of silver. Since the current price of silver is roughly $13 an ounce, this means Liberty Dollar silver certificates come with a $7 premium, which is subject to change with the price of silver. For example, if silver jumped to $15 an ounce, then the Liberty Dollar silver certificate would have just a $5 premium. If silver fell to $8 an ounce, then the premium would be $12.

It is this dollar-denomination that many hard-money enthusiasts take issue with. Since the purpose of precious metals is to hedge against inflation, and the U.S. dollar is inherently inflationary, a disconnect between the face value of Liberty Dollars and the value of the underlying gold or silver will always exist. In fact, when Liberty Services, Inc. first issued silver Liberty Dollars, they were valued at $10 an ounce, rather than $20.

Final Thoughts

Silver certificates are an excellent method of investing in silver without the encumbrances of actually holding it. But whereas coins and even old silver certificates may have numismatic value, newly issued silver certificates do not, so you should not pay a significant premium for them. Also, keep in mind that certificates carry their own risk with them and are only as good as the issuer. For this reason, Perth Mint silver certificates should be given preference over those of other issuers, but if practical, real silver in coin or bullion form is the safest, most secure way to invest in silver.