The gold-to-silver ratio is the amount of silver it takes to purchase one ounce of gold. Today the gold-to-silver ratio stands at approximately 50 to 1. That means, at the current price, it would take around 50 ounces of silver to buy 1 ounce of gold. (By the way, this ratio should really be called the silver-to-gold ratio because the number of silver ounces required to buy one gold ounce is, by custom, listed first; e.g., "The gold-to-silver ratio in the year 1425 was 24:1.")
Since 1687, which is as far back as the records reach, the gold-to-silver ratio has varied between roughly 14 and 100. Beginning around 1900, the ratio steadied and remained relatively flat at around 16 because many countries were using gold-and-silver-backed currencies. The United States, France, and several other countries actually assigned statutory limits on what the ratio could be. The U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which is another reason why the pre-1900 gold-to-silver ratio usually stayed between roughly 14 and 100.
"I'm falling asleep here, George. Why do I care?"
Did you know that Venice was once the financial capital of the modern world? Venice? Venice was just a medium-sized city! It did not have some huge standing army. Nevertheless, if you were a king in 1425, and you wanted to finance a war, you would probably have to borrow from a Venetian bank. If you were a merchant, and you wanted to open a trading office on Cypress, your representative (maybe one of your precious sons) wouldn't carry a huge sack of gold. He would be quickly robbed and murdered. Instead, you would go to a Venetian bank and obtain a letter of credit.
Here's why such a relatively small city could become the center of the financial world: In ancient times the gold-to-silver ratio was dramatically different in China and India than it was in Western Europe. For example, the gold-to-silver ratio in Italy might be 25:1, but the gold-to-silver ratio in India might be just 8:1. In other words, a European merchant could buy an ounce of gold in India for just 8 ounces of silver.
Arbitrage is the process of spotting a price differential in two different markets for the exact same product and then buying in one of the markets and selling it in the other.
The gold-silver trade is one gigantic arbitrage effort. Merchants would buy cheap silver in Europe and sell it for big handfuls of gold in India. Whichever power controlled the gold-silver trade became the economic powerhouse of the world, the center of lending and investment.
Before a sailing route to India was discovered around the Cape of Good Hope - the southern tip of Africa - Western trade with India was conducted across the Silk Road.
The Silk Road was a dangerous caravan trek over the mountains of Afghanistan and across the deserts of Iran and Iraq. Bandits, sandstorms, and dehydration took an enormous toll.
As soon as possible, trade goods were transferred aboard ship and (relatively) quickly sailed across the Mediterranean Sea to their final destination. In the days of the early Pharaohs, Egypt controlled the Mediterranean Sea. The opportunity to control and profit from the gold-silver trade with India made Egypt the center of the civilized world for hundreds of years.
For fifteen years the famous Carthaginian general, Hannibal, terrorized Rome and the Italian peninsula. Hannibal led an army of Spanish mercenaries and elephants over the Alps in winter and surprised the Romans. At the battle of Cannae, Hannibal surrounded 70,000 Roman legionaires and then squeezed them so tightly that they couldn't even lift their arms to defend themselves. All but 10,000 were slaughtered.
"Delenda est Carthago," said Cato the Elder after every speech. "Cathage must be destroyed." Rome and Carthage fought three long wars before Rome finally burned Carthage to the ground and slew almost all of its inhabitants. Rome tore down every building in Carthage and sowed the ground with salt, so that nothing would ever grow there.
Now it was Rome's turn to control the seas and rake in huge profits from the East-West trade. In 284 AD, for easier administration, the Roman Empire split in two, with Byzantium (later renamed Constantinople) serving as capitol of the Eastern Roman Empire (Byzantine Empire). The Western Roman Empire fell to the Visigoths in 475 AD. (As I am writing this article, I just realized that when the Empire split, the Western Roman Empire lost all of the riches that came from controlling the East-West trade. Hmmmm.)
While the Western Roman Empire was overrun by migrating German tribes, the Byzantine Empire endured for another 1,000 years. Because the Byzantine fleet controlled the Mediterranean Sea, and hence the East-West trade, including the profitable gold-silver trade, Constantinople became the largest and richest city in the Western world.
In 1488, a Portugese explorer became the first modern explorer to round the southern tip of Africa in hopes of finding a sea route to India. The Portugese founded trading colonies in India, and the wealth of this tiny Eurpean nation soared.
Holland, unfortunately, was a small country, and her small land army was no match for invading powers. Her navy, on the other hand, was powerful. The Dutch even won the Second Anglo-Dutch War against the British with victories at sea. (Until I researched this article, I never knew anyone could stand up to British sea power.)
After World War I, the U.S. Navy took over control of the seas, and, not surprisingly, New York became the financial and banking capital of the world. China is becoming wealthier, but until she controls the seas, New York will remain the banking capital.