The Story of Silver

by William L. Silber

  Key Pittman was right about silver serving as China’s money, but loin cloths went beyond his expertise. Silver had been the main Chinese currency for at least a thousand years though almost none of the white metal was produced domestically.2 China was a major buyer of America’s silver exports after the Great War, taking between 10 and 75% of U.S. bullion shipments abroad.3 And China had imported silver during the sixteenth and seventeenth centuries, for example, by exchanging silk and tea with English and Portuguese merchants for silver coins, including the famous Spanish pieces-of-eight, which circulated throughout the world and had been legal tender even in the United States.4 Until 1933, however, the main Chinese medium of exchange was the “tael,” a measure of weight roughly the equivalent of an ounce, rather than a standardized coin.5 Bullion shaped like a shoe, sometimes called shoes of sycee, containing about fifty tael, were used for large transactions, although the precise size and worth of the silver sycee varied across the country.6 The disparity in value, a boon to Chinese bankers, hindered internal commerce and provoked domestic discord.

  The yuan, a standardized silver coin, was first introduced into China in May 1910 and became the official monetary unit by proclamation of the Chinese Ministry of Finance in Nanking, the nation’s capital, on April 6, 1933.7 The government’s effort to unify the currency and to stabilize the economy came too late. China’s currency is still called the yuan, but the silver content disappeared in 1935 when China was forced off the silver standard, a victim of efforts by Pittman and FDR to “do something more for silver.”

  The president inadvertently began the second leg of his silver program with gold. On Monday, January 15, 1934, Roosevelt asked Congress for legislation to transfer gold held by the Federal Reserve to the U.S. Treasury, the last step in nationalizing the yellow metal.8 No private citizen in America would be permitted to own gold except for artistic or industrial purposes, such as jewelers for making bangles or earrings and dentists for implanting fancy false teeth (gold inlays have been a status symbol to eastern Europeans for centuries and to jet-setting celebrities, like Madonna and Justin Bieber, in the twenty-first century).9 The law would forbid Americans from investing in gold, not to mention speculation, and would remain in force for forty years.10 FDR also asked Congress to restrain within narrower limits his authority to devalue the dollar granted by the Thomas Amendment of May 1933, a clever tactic to broaden support. And Roosevelt hailed silver as an important monetary metal, saying, “I look for a greatly increased use,” but recommended no action until we “gain more knowledge of the results of the London agreement and of our other monetary measures.”11

  Congress gave the president everything he asked for by passing the Gold Reserve Act on Tuesday, January 30, 1934.12 FDR raised the price of the yellow metal to $35 an ounce the following day but ignored the Thomas Amendment’s authorization to “fix the weight of the silver dollar … at a definite fixed ratio in relation to the gold dollar … and to provide for the unlimited coinage of such gold and silver.”13 For the twelve months ending January 31, 1934, the prices of gold and silver had increased by 70%, the yellow metal from $20.67 to $35 an ounce and the white from 25.875¢ to 44¢ an ounce, leaving the price ratio between the two unchanged at about 80 to 1. To Burton Wheeler that meant no progress at all and he was joined in that sentiment by almost half the Senate.

  Wheeler had challenged Roosevelt’s request to put silver on the back burner in a proposed amendment to the president’s gold bill that would have required the Treasury to buy silver until it purchased one billion ounces or until the price rose to restore the 16 to 1 ratio.14 World annual silver production averaged about 250 million ounces, so the price impact of buying a billion ounces at the proposed rate of ten million per month would have been substantial.15 Wheeler added that raising the price of silver would be “like putting a tariff wall against China” because the price of its currency would rise with silver and make Chinese imports more expensive.16 A Senate supporter chimed in, “It will mean something in terms of trade, business and improvement, and it will mean something to the American people.”

  Forty-five senators voted against the amendment and forty-three voted in favor, including Key Pittman, who ignored Roosevelt’s opposition to the program’s mandatory provision and sided with his fellow silverites.17 The press reported that Wheeler’s supporting remarks before the final roll call contained “no flaming oratory [like Bryan’s] … Cross of Gold” and added that a senator complimented him on “making such a conservative speech that those who vote against the measure are made to look like radicals.”18 The president’s slim two-vote victory emboldened the silver bloc in the Senate and raised the white metal to the top of FDR’s shopping list.

  Roosevelt followed up by supporting the Silver Purchase Act introduced in the Senate on May 22, 1934, saying “it would be helpful to have legislation broadening the authority for the further acquisition and monetary use of silver.”19 Key Pittman negotiated the compromise bill permitting, but not requiring, the president to purchase silver bullion until it comprised one-fourth of the combined value of gold and silver reserves for America’s money and to issue paper dollars called silver certificates redeemable in the white metal.20 In addition, the bill authorized the president to nationalize at his discretion all the silver bullion in the United States as had been done with gold. Henry Morgenthau, who had become Treasury secretary in January 1934 and would implement the purchase program, said that he would buy surplus stocks of silver and treat the “permissive provisions” as though they were mandatory. According to Colorado Senator Alva Adams, a moderate in the silver bloc, “This is the longest step taken for the rehabilitation of silver since its demonetization in 1873.”21

  Alva Adams correctly identified the importance of the Silver Purchase Act, especially its proposal to make the white metal 25% of America’s monetary reserves. Even Alexander Hamilton, who had established American bimetallism by defining the dollar in terms of both gold and silver, had never set precise targets for the two metals. He just wanted both gold and silver to back the dollar to avoid the “evils of a scanty circulation.” The Silver Purchase Act marked a rebirth of bimetallism that exceeded the reach of the original.

  The price of silver jumped from 43.75¢ an ounce to 45.125¢, a significant increase of more than 3%, when a detailed description of the Silver Purchase Act surfaced two weeks before the bill was introduced.22 The U.S. Treasury would need to purchase more than a billion ounces of the white metal to make silver a quarter of total monetary reserves, but a flexible timetable restrained the price increase.23 Treasury Secretary Morgenthau said, “What we want is a rise in the price of silver, but we don’t want a sensational price rise, because the worst thing that could happen would be to have silver go up and then have a collapse.”24 The secretary was just a farmer from Fishkill, but he could have taught the professionals how to manipulate prices.

  Roosevelt helped Morgenthau smooth the uptrend. The president had insisted on a 50% excess profits tax on transactions in silver bullion as part of the Silver Purchase Act, forcing speculators to mask their speculations.25 In addition, section 3 of the act prevented the Treasury from paying more than 50¢ an ounce when acquiring silver bullion held in the United States, blunting the upside pressure. Key Pittman did not care because newly mined domestic silver still received the 64.5¢ an ounce promised in the December 21 proclamation. And before Roosevelt left Washington for a summer vacation beginning Monday, June 30, 1934, he left further instructions to prevent speculators from capitalizing on the government’s purchase plans.

  FDR would be gone for six weeks, travelling aboard the 10,000-ton navy cruiser, USS Houston, to visit Puerto Rico, the Virgin Islands, the Canal Zone, and Hawaii. The warship was outfitted especially for the president, including accommodating his tall frame with a seven-foot-four-inch-long bed which had been tested for durability by a number of adventurous midshipman until a sign was prominently posted, “Lay off this bed, please.”26 The press reported tha
t the ship contained the latest wireless communications facilities for the chief executive so that “within a few minutes he can dispatch any orders he may choose to give after receiving information.”27 Roosevelt could govern from the high seas, but he prepared in advance for silver in a memo dated June 28, 1934, two days before his departure. The president instructed Morgenthau to implement section 7 of the Silver Purchase Act and to nationalize the white metal when the free market price reached 49.5¢ an ounce.28

  Morgenthau viewed the president’s memo like a blueprint for acquiring an estimated 100 million ounces of silver bullion sitting in speculator vaults, the first step in making silver a quarter of total U.S. monetary reserves. On Wednesday, August 1, 1934, he wrote in his diary that when silver exceeded 46¢ an ounce, he would “personally take charge of the buying and expected to run it up to 49½ cents and then nationalize.”29 When prices advanced to 48¢ the following week the Wall Street Journal correctly identified Morgenthau’s fingerprints: “Renewed government activity is believed to be responsible. … There has been no public demand for silver … [because] under the terms of the Silver Purchase Act an upper limit of 50 cents per ounce has been placed upon official purchases.”30 And at 11 a.m. on Thursday morning, August 9, Morgenthau made a bid of 49.5¢ for silver in the New York market, which triggered the order to nationalize the white metal.31

  The government takeover of silver bullion in the United States rippled the market like a giant rock thrown into a small pond. The U.S. Treasury had pushed silver to the highest level since 1929 and bullish speculators had made a bundle. The nationalization order ended trading in silver futures contracts on New York’s Commodity Exchange and would not be resurrected for thirty years, but anyone betting on further price increases could turn to the London bullion market, which is where Morgenthau would direct his purchases of silver to expand its backing of U.S. currency (the act’s 50¢ price limitation applied only to domestically held bullion). Key Pittman hailed the nationalization order as “a process that will hasten the complete absorption of the silver surplus in the world [and] … as this surplus is absorbed … the price of silver will steadily rise until it reaches $1.29.”32

  Handy & Harman continued to quote prices in the United States for industrial uses, which mirrored the free market price in London and also reflected the demand for silverware and decorative items by American households. The press assured the public that the government would not confiscate “silver coins, silverware, bric-a-brac, antiques, [or] golf cups.”33 As a result, the nationalization order stimulated record retail sales of sterling silver tea services, ash trays, vases, and flatware, as consumers scrambled to beat expected price increases and tried to stash some bullion for a rainy day in the dining room cupboard, just like in the Middle Ages.34 Wall Street hailed the Silver Purchase Act as a boon to silverware companies such as Gorham Manufacturing and International Silver, but the reception was less welcome in Shanghai, where the fallout from rising silver prices worried Chinese government officials.35

  The formal protest from China’s Finance Minister H.H. Kung, delivered less than two months after Roosevelt’s nationalization order, arrived through normal diplomatic channels on Secretary of State Cordell Hull’s desk. The message was described in the press as written in “frank terms,” which in diplomatic language means a tirade.36 Kung, known as “Chauncey” during his student days at Oberlin and Yale, was a brother-in-law to Chinese leader General Chiang Kai-shek, so his missive carried even more weight than his title implied.37 He wrote that the U.S. program presents “a potentially serious monetary situation resulting from the present rise in the price and the drain of silver” and urged “American cooperation to prevent a further rise in the price.”38 This objection may have been a surprise to those who had heard Key Pittman claim that higher silver prices benefited China because of its huge reserves of the white metal, but that argument had been dismissed earlier in the year as “not economically sound” by Li Ming, chairman of the Bank of China.39 And Ming was right.

  Higher silver prices threatened to deflate the Chinese economy with two puncture holes. Higher world prices for the white metal encouraged speculators to withdraw silver from Chinese banks for profitable sale in London. Silver reserves in Shanghai, in fact, declined to new 1934 lows a month after the U.S. nationalization order, and with fewer reserves the banks would curtail lending and discourage business activity.40 The rise in silver prices also lowered Chinese exports. The yuan, which was linked to silver just like the dollar was to gold, became more expensive in the foreign exchange market as the white metal increased in value. The appreciating yuan meant that Chinese goods cost more to Americans and Europeans, which curtailed sales abroad and increased unemployment in China’s export industries. Princeton economist Richard A. Lester analyzed the record and concluded, “An increase in the value of silver … would blight their commerce.”41 Countries battled for a share of world trade with competitive devaluations during the Great Depression and viewed an appreciating currency like a deadly plague. The contemporary press confirmed that everyone understood this: “The Chinese may be peculiar, but economic laws are no respecters of nationality. Like other people, they find their ability to export reduced by the higher exchange value of their currency.”42

  The Washington Post chided the silver bloc in the Senate: “Those philanthropic members of Congress who strove so valiantly to aid the Chinese by increasing the price of silver and presumably increasing Chinese purchasing power have been cruelly rebuffed by the very people whom they sought to benefit.”43 But not everyone was convinced. Raymond Moley, a charter member of FDR’s brains trust who had been an undersecretary of state until mid-1933, wrote that the protest “reflects the point of view of a very small minority of the Chinese people. … It is still believed that the increase in the value of silver … affords a genuinely improved position to the masses of the Chinese.”44 Perhaps Moley believed what he said but more likely it was another installment payment to Key Pittman for implementing FDR’s version of the Thomas Amendment.

  Secretary of State Cordell Hull responded to Finance Minister Kung’s protest note with a diplomatic dance worthy of Fred Astaire: “In conducting operations under the Silver Purchase Act this government, while necessarily keeping within the general purposes of enactment, will give the closest possible attention to the possibilities of so arranging the time, the place, and the quantity of its purchases as will keep in view the considerations put forward by the Chinese Government.”45 Hull juggled his words to satisfy both the Chinese and the silverites in Congress, but the secretary of state had little influence implementing the Silver Purchase Act. Treasury Secretary Morgenthau controlled the program and the two cabinet members disliked each other.

  Hull, a tall Tennessee lawyer known for his patient political skill, was said to carry “a long knife” by those who knew him well.46 Hull resented Morgenthau’s encroachment into State Department turf and his influence with Roosevelt: “The Secretary of the Treasury … often acted as if he were clothed with authority to project himself into the field of foreign affairs and inaugurate efforts to shape the course of foreign policy. … I mentioned this habit to the President from time to time; but Mr. Roosevelt had a way of quietly easing by such complaints relating to his intimates.”47 Morgenthau thought that Hull favored Japan over China in the Far East by deferring to the Japanese Amau Doctrine, articulated in April 1934, asserting Japan’s interest in any developments in China.48 A month after the Japanese declaration Hull wrote, “It is and has been the policy of the United States … to cooperate with the efforts and professed desire of the Japanese Government to strengthen the traditional relations of friendship between the two countries.”49 He then rebuffed a suggestion by Morgenthau’s economic emissary to China, Yale Professor James H. Rogers, with the following note to the State Department’s consul general in Shanghai: “Please inform Rogers urgently that discussion with Chinese officials of [a] possible loan involves traversing delicate political groun
d … he should under no circumstances receive or discuss any proposal for [a] loan.”50

  Morgenthau wanted to balance the scales. He telephoned Roosevelt on Monday, November 26, 1934, when the free market price of silver approached 55¢ an ounce, and reminded FDR that the president had wanted silver “to be 64½ cents by the time Congress met.”51 Morgenthau then told him that the silver purchase program was doing “everything possible to help Japan” by “deflating China.” He said that silver was “being smuggled out of Shanghai” and asked for permission to abstain from bidding “above 55 cents for silver for the rest of the week” until they had a chance to talk. FDR agreed to the temporary halt and Morgenthau wrote in his diary that he wanted to ask the president to “think over the idea that we should tell China that when silver reached 64½ cents that we would try to stabilize it” and that he would “try and sell this idea to the silver block senators showing them that contrary to their prognostications our export business with China has been falling off.”

  In the beginning of December the New York Times headlined “Deflation in China Gains Momentum” and explained that the country is “slowly being drained of its circulating medium.”52 The Chinese Ministry of Finance had levied a silver export tax to curtail outflows but an estimated $50 million of the white metal had been smuggled out of China in less than two months, and many observers blamed Japan, but high world prices also attracted legitimate American business to the silver-backed “yuan dollar.”53 Goldsmith Brothers Smelting and Refining Company in Chicago paid the 10% tax and imported twelve tons of Chinese coins engraved with the revered likeness of Sun Yat-sen, founder of the Chinese republic, which were then unceremoniously melted into silver nitrate used to manufacture movie film and electrical circuitry.54 Dealers commented: “The total cost of refining and shipping charges for Chinese and other foreign metals is not sufficiently large [to discourage] silver purchases abroad.”55