The Story of Silver

by William L. Silber

  The breath of fresh air swept away Roosevelt’s anti-inflationary restraint, mostly because he had no choice.31 Political commentator Walter Lippmann remarked that the only questions left were “how inflation was to be produced and whether or not it would be managed and controlled.”32 At 10:30 the following morning, Wednesday, April 19, 1933, the president took the United States off the gold standard. He announced to more than one hundred reporters crowded into his oval study in the White House that going forward “no more licenses would be issued for export of gold.”33 Roosevelt relished the surprise during his press conference, bantering with reporters like a mischievous schoolboy, but refusing to divulge his next steps. FDR compared himself to a quarterback with a flexible game plan: “If the next play gains ten yards obviously the succeeding thrust will be a different one than … if the team is thrown for a loss.”34

  Despite uncertainty about the ultimate fate of the gold standard, financial markets responded immediately to the inflationary news. Agricultural commodities, such as wheat and cotton, had the biggest trading sessions of the year on April 19, and prices rose between 4 and 6%, but those gains paled compared with the precious metals.35 Preventing the export of gold from the United States meant that the international value of the dollar would fall, as did the British pound when it was decoupled from gold in September 1931. By the end of the day the U.S. dollar declined by 9% against the French franc, the only major currency still tied to gold, making Americans pay that much more for an ounce of the yellow metal.36 Silver jumped by more than 11% even though Roosevelt had said nothing about it; speculators expected a revised version of the pro-silver Thomas Amendment.37

  They did not have to wait long. On Thursday, April 20, 1933, Elmer Thomas introduced an amendment to the farm bill catering to FDR’s more conservative taste.38 The amendment had been rewritten by Roosevelt’s so-called “brains trust,” led by speech writer Raymond Moley, with the assistance of Nevada Senator Key Pittman, now the president pro tempore of the Senate as well as chairman of the Foreign Relations Committee.39 Pittman moderated Thomas’s demands, focusing the amendment on expanding the supply of money by the Federal Reserve, giving the president discretion to devalue America’s currency by lowering the gold content of the dollar, and by allowing foreign governments to repay World War I debts with silver valued at the premium price of 50¢ an ounce, which would then be used for silver dollars and silver certificates.40 Senate Majority Leader Robinson suggested that this would “stabilize the price of silver around 50¢ an ounce.”41

  The Washington Post described the watered down version of the Thomas Amendment as a “sop to the silverites,” but the white metal rose by a significant 9% on April 20 to over 35¢ an ounce.42 The combined 20% price increase on April 19 and 20 was more than double the percentage price increase in gold over the same period, consistent with silver’s reputation as the more volatile metal, and lessening the sting of Roosevelt’s tepid support.43 Raymond Moley credits Key Pittman with implementing the president’s program: “It was Pittman who ‘sold’ the revised amendment to Thomas. No one but a known friend of silver could have accomplished that.”44 FDR owed Pittman and would repay the debt.

  CHAPTER 6

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  SILVER SUBSIDY

  KEY PITTMAN PRACTICED THE LOW ART OF CHAMELEON POLITICS. Early in his career he campaigned for women’s voting rights in Nevada and supported a resolution in the state legislature in favor, but as a U.S. senator he voted against the national amendment. Pittman explained on the Senate floor, “I believe that [women’s suffrage] is essential for good government in our State. … I do not know whether it is essential for good government in the States of the South … [to] add to the negro vote that of the negro women.”1 Suffragettes disapproved but a hometown newspaper considered it a political master stroke: “When Nevada’s junior senator needs the votes of southern representatives for issues of vital importance to Nevada he is pretty apt to know where to find them.”2

  Pittman favored higher silver prices for his Nevada constituents, such as the Tonopah Mining Company in Esmeralda County and the Bristol Silver Mines in Lincoln County, but cared little about silver’s role in the nation’s money supply. He voted against Montana Senator Wheeler’s “16 to 1” bill in January 1933, saying it “would turn the whole East against us.”3 But he marshalled international support for silver after becoming a member of the U.S. delegation to the World Monetary and Economic Conference in London, where representatives of sixty-six countries gathered for six weeks beginning June 12, 1933, to discuss financial solutions to the depression. FDR appointed Pittman to the committee representing the U.S. without consulting Secretary of State Cordell Hull, who chaired the American delegation.4

  The Nevada senator led a one-man cavalry charge for the white metal during the London meetings that summer. James Warburg, a Wall Street adviser to FDR and financial consultant to the American delegation, noted that Pittman “was really a wild man when drunk, but he was drunk so often that he was often wild. … If he ever got the idea that you weren’t on his side God help you because that was the end.”5 At one point during the meetings Pittman brandished a bowie knife while chasing a technical adviser down the corridor of the Claridge Hotel, the preferred lodging for visiting dignitaries, because the man showed inadequate enthusiasm for silver.6 In one of the sessions Pittman’s insistence on an agreement caused the German representative Hjalmer Schacht to wave his hands in surrender and say, “All right, we agree about silver.”7

  The press was less graphic, perhaps because they feared the senator from the Wild West, and simply credited Pittman’s “unsleeping efforts for silver.”8 The silver treaty signed on Saturday night, July 22, 1933, promoted higher prices by restricting sales of silver by countries that were disposing of the demonetized white metal, such as India, and capped the output of producing countries, such as Australia, Mexico, and the United States, by requiring those governments to buy excess production from domestic mining companies.9 The agreement, which the respective governments had to ratify before April 1, 1934, was considered by many “the only tangible result of the World Monetary and Economic Conference.”10 Pittman said, “This is the biggest thing that has ever happened in my life.”11 The market for silver bullion responded favorably within a day of the signing, rising a significant 5% from 35.5¢ an ounce to over 37¢.12

  Pittman’s victory fell short of Burton Wheeler’s goals, and the Montana senator denigrated the London proposals as “the most backward step that has been taken by the United States since the demonetization of silver in 1873.”13 Wheeler then repaid Pittman for abandoning “16 to 1” by adding, it is “a sad commentary” on the United States delegates’ “grasp on the fundamentals underlying the money questions.”14 The ever practical Pittman avoided a confrontation and asked Farm Credit Administrator Henry Morgenthau Jr., a Roosevelt confidante who would soon become Treasury secretary, to convince FDR to avoid a formal Senate vote on the London treaty. Pittman suggested a presidential proclamation: “The instrument is not a treaty, or even an agreement that requires ratification by the United States Senate. It is simply a written memorandum of agreement.”15

  FIGURE 7. FDR gives his neighbor Henry Morgenthau a lift.

  The president enjoyed driving a loophole in the law and was often helped by Morgenthau, his former neighbor in Dutchess County, New York. Henry Morgenthau was born in 1891 on Central Park West in New York City to a wealthy family but loved the land more than his father’s real estate empire and could afford to follow his heart. He bought several hundred acres in Fishkill, New York, near Roosevelt’s Hyde Park estate, and became a farmer, although his bald pate and pince-nez made him look anything but.16 Like Roosevelt, Morgenthau was active in Democratic politics. They both supported Woodrow Wilson in 1912, although the two men did not meet until 1915, when Roosevelt tried unsuccessfully to convince Morgenthau to run for county sheriff.17 Henry was flattered and contributed time and money to Roosevelt’s successful campaign for govern
or of New York in 1928. FDR said that Henry was the only man he knew who had made a profit farming and appointed him conservation commissioner for New York state.18 The relationship between the two men was far more intimate than the title implied. When Morgenthau asked Roosevelt for the most opportune time to discuss a new funding request, he answered, “While I am shaving.”19 Henry arrived days later to discuss his project just as FDR lathered up.

  After arriving in Washington in March 1933, Roosevelt appointed Morgenthau the first director of the newly established Farm Credit Administration (FCA), but as in New York his duties extended well beyond his title. In October 1933, six months after FDR had taken America off the gold standard, the president decided to push the country towards devaluation by buying gold in the bullion market. Congress had not yet changed the official $20.67 price of the yellow metal and Undersecretary of the Treasury Dean Acheson questioned the legality of Roosevelt’s plan.20 Morgenthau consulted his legal counsel at the FCA and proudly disclosed a favorable ruling to FDR. He summarized the discussion in his diary: “Called on the President at Hyde Park and showed him a longhand memo by Herman Oliphant suggesting various ways the President might, through an Executive Order, have a free gold market in this country.”21 After reading the memo Roosevelt raised the stakes a notch: “I have a method of my own to break the law which I think is much simpler.”22

  Morgenthau’s eyes widened at Roosevelt’s words, but he listened to the subterfuge of using the Reconstruction Finance Company (RFC), a government corporation established in 1932 to support banks, to buy gold. It may have been simpler, but it was no less controversial to Acheson, who wanted the president to write a letter absolving him of the personal risk.23 According to Morgenthau, “The President and Acheson almost came to blows,” but FDR withheld firing him on the spot, waiting a month before forcing his resignation.24

  Morgenthau then enlisted the attorney general in getting a favorable ruling for the president’s plan, and FDR announced the gold-buying program in a fireside chat on Sunday, October 22, 1933: “I am going to establish a government market for gold in the United States. Therefore, under the clearly defined authority of existing law, I am authorizing the Reconstruction Finance Company to buy gold newly mined in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President. … We shall also buy or sell gold in the world market.”25 The Reconstruction Finance Company began buying gold at ever-increasing prices beginning Wednesday, October 25, 1933.26

  Roosevelt’s emphasis on the legality of his gold plan, as subtle as a sledgehammer, became the template for ratifying without Senate approval Pittman’s London silver program. On Thursday evening, December 21, 1933, the president announced: “Under the clear authority granted to me by the last session of Congress, I have today, by proclamation, proceeded to ratify the London agreement with regard to silver.”27 Roosevelt’s proclamation authorized the Treasury to pay 64.5¢ per ounce for all newly mined domestic silver and to coin the bullion into standard silver dollars.28 The new program gave miners a subsidy of 50% above the prevailing market price of 43¢ an ounce, leading Key Pittman to say he “never took part in any legislation that gave me more satisfaction and happiness.”29

  Bullion dealer Handy & Harman immediately began posting two prices for silver: the Treasury’s price for new U.S. production and a free market price for everything else, such as foreign silver destined for manufacturing or the arts.30 The free market price rose to 44.25¢immediately after FDR’s announcement because the proclamation not only subsidized miners but also diverted the supply of American silver away from industry. The overnight price increase of almost 3% is significant compared with normal daily price changes, but it is much smaller than the price jumps earlier in the year following favorable government initiatives.31 The withdrawal from commercial use of U.S. silver production, totaling about 20% of world output, should have had a bigger price impact.32 And it did, except a leak in the chain of command produced a response before the December 21 announcement.

  The Washington Post headline, “Gold Plan Aids Speculations in U.S. Silver,” appeared on Tuesday, November 7, 1933, six weeks before the silver proclamation and two weeks after FDR’s fireside chat announcing the gold-buying program.33 The newspaper reported that “silver prices have pushed up to the best level in three years … [and] the new upturn has been accompanied by rumors that Washington might do something for silver.”34 It was more than rumor. At noon on Thursday, October 26, during his daily meeting with Morgenthau, Roosevelt confided, “I am worrying about silver … we have entered into a gentlemen’s agreement to buy a certain portion of world’s supply of silver each year and I have not the faintest idea what we have done about it.”35 FDR suggested that they discuss it with Senator Pittman, but Morgenthau, like the perfect handyman, replied, “Leave it to me and I will take care of it for you.”

  Early Wednesday afternoon, November 1, Morgenthau reported back to FDR, “We were about ready to go ahead on silver but instead of taking it up with [Undersecretary of the Treasury] Acheson, I suggested that we get the Attorney General to rule on it first and then tell Acheson about it afterwards.”36 Roosevelt broke into a grin, “You Devil—you are just as bad as I am.” And Henry said, “Well, who taught me?” Roosevelt roared, “That will be simply grand. Go ahead and get the information and let me know.” Morgenthau then spoke to Ugo Carusi, special assistant to the attorney general, who agreed to assign the task “in strict confidence.”

  Later that evening Morgenthau met with Key Pittman for an all-night discussion of silver. He told the Nevada senator about his marching orders from FDR and the forthcoming ruling by the attorney general. Morgenthau made the following entry in his diary: “I impressed on [Pittman] the importance of secrecy. However, there must have been a leak earlier in the day as metal stocks went up 4 to 6 points.”37

  Between FDR’s fireside chat on Sunday, October 22, 1933, and the Washington Post rumor article on Tuesday, November 7, 1933, the price of silver rose from just under 37¢ an ounce to 41.5, a significant increase of more than 12%.38 The gold-buying program accounts for part of the jump, and part belongs to anticipation of a policy to “do something for silver,” which was announced on December 21, 1933, with a further increase in price.

  Key Pittman called Roosevelt’s December 21 proclamation “a Christmas present.”39 He should have added: Christmas came early this year.

  The new silver program triggered all-night celebrations in the once-proud mining camps of the Rocky Mountain states. Jesse McDonald, president of the Colorado Mining Association, called the program “the best news the silver camps have had in years.”40 In Leadville, Colorado, unemployed miners from surrounding silver-rich settlements like Aspen joined the locals to toast “Roosevelt, silver, and Santa Claus.” Wild talk of “going back to the hills” to earn millions coaxed revelers into the streets, firing six-shooters into the air to sound the revival. In Tonopah, Nevada, Key Pittman’s territory, the hoopla was more restrained:41 free drinks kept everyone inside the saloons, where the local women climbed atop the bars to dance with their men. The town would have paraded had there been a town band.

  But not everyone celebrated. Senator Elmer Thomas of Oklahoma, author of FDR’s favorite amendment, said the new program “is good as far as it goes … it will satisfy the silver miners and help foreign trade a little but it is not enough. … Congress undoubtedly will demand further action if the government’s moves do not restore commodity prices.”42 Roosevelt’s least favorite Democrat, Senator Burton Wheeler, said he would offer another bill for the free coinage of silver at 16 to 1: “This proclamation is in no wise a substitute for those who believe that commodity prices must be raised by means of reflation. … The remonetization of silver … would immediately raise the price … throughout the world to $1.29 … [and] American manufacturers would no longer have to fear the competition of depreciated currency of the Orient.”43

  Burton Wh
eeler’s reference to the Orient meant China, a relatively new interest for the Montana senator, but Nevada’s Pittman had been a China watcher ever since joining the Senate Foreign Relations Committee and had used that country to advance his recent pro-silver arguments. Pittman had pointed to America’s declining trade with China during the first two years of the depression and wrote: “The chief cause for the abnormal and sudden decrease in our commerce with China during the latter part of 1929 and 1930 was the … unprecedented fall in the price of silver … [which is] the only money in China.”44 But his claim that China would benefit from higher silver prices ignored the relative prosperity that country enjoyed during the early years of the depression. China experts like Sir Arthur Salter, former head of the League of Nations economic section, had explained that the Asian country had escaped the worst of the depression precisely because the decline in silver helped it avoid domestic deflation.45

  The test would come soon enough.

  CHAPTER 7

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  CHINA AND AMERICA COLLIDE

  PITTMAN FANCIED HIMSELF AN EXPERT ON CHINA’S MONEY AND shared his perspective with his Senate colleagues: “The people of oriental and tropical countries are suspicious of paper money. They have always used silver as money because it is practically indestructible. They preserve it by burying it in the ground, by manufacturing it into jewelry, and wearing it as ornaments, and by carrying it in their loin cloths. They contend that paper money is subject to destruction, and when placed in their loin cloths, in a very few hours it is in a condition beyond circulation.”1