The Story of Silver

by William L. Silber

  After two Shanghai banks closed their doors Morgenthau went into emergency mode.56 On Thursday, December 13, 1934, he telephoned Professor John Henry Williams, an international economics expert at Harvard, and said:57 “I’m calling you up confidentially … the Chinese situation seems to come to a head … and over the weekend I’m going to take a hand at writing a financial program for China. … I wondered if you could come down and spend a couple of days with us and help us.” Williams agreed to join the task force, which included the distinguished University of Chicago economist Jacob Viner, but Morgenthau wanted a practitioner as well and, following his call to Williams, he telephoned Siegfried Stern, a vice president at the Chase National Bank, for an in-house recommendation:58

  MORGENTHAU (M): I’m calling you to talk to you very confidentially.

  STERN (S): Yes.

  M: We’re going to try to see if we can do something to help China with her troubles.

  S: Yes.

  M: Who in your opinion, knows the most about …

  S: We had one specialist in the bank here who handles the actual trading and exchange …

  M: It isn’t a question of buying and selling.

  S: I see.

  M: I mean a man that just deals with it wouldn’t help much, would it?

  S: Not much. … Well we have one man who has been out there for six months or so.

  M: Who?

  S: Mr. Frank, our Treasurer. I think he knows quite a little about the currency. He isn’t a trained economist.

  M: Well, we have plenty of those.

  S: Yes, plenty of those.

  M: But he knows the currency?

  S: He knows the currency. … I imagine he would be the best we have. He has had actual experience in China.

  M: What’s his name?

  S: N.R. Funck—F-U-N-C-K.

  M: Funk?

  S: Yes, Funck. Assistant Cashier

  M: Can he be here tomorrow morning?

  S: He’ll be there tomorrow morning.

  M: Fine.

  S: Alright if there is anything else we can do here, we’ll be glad to do it, Mr. Secretary.

  PAUSE …

  M: Funck?

  S: Yes, Funck … F-U-N-C-K.

  M: Right. … Thank you.

  S: Thank you. … goodbye.

  M: Goodbye.

  Morgenthau knew what he needed to help formulate a cure for China’s money troubles, and it was not a currency trader and certainly not another economist; he needed someone with practical experience, but he had trouble believing a man named Funck could be the answer.

  Henry!

  CHAPTER 8

  * * *

  BOMBSHELL IN SHANGHAI

  THE WORDS “VERY CONFIDENTIAL” TOPPED THE SEVEN-PAGE “Silver Problem” report Morgenthau’s committee of China experts completed over the mid-December weekend.1 He submitted the detailed document to the president at 2 p.m. on Sunday, December 16, 1934, but the only concrete outcome was an invitation to the Chinese to send a representative to Washington for discussions.2 Morgenthau rejected the report’s suggestion to keep the price of silver at 55¢ an ounce until reaching an agreement with China, explaining in his diary: “I had given my word to the silver senators … that I would carry out the purchase of the silver enthusiastically.”3 Morgenthau invoked a higher authority by adding, “The President also made a similar statement although I do not remember the exact words he used.”

  At a follow-up lunch at the White House, Morgenthau asked FDR whether he would like to suggest names to the Chinese for their representative, and the president said, “Yes, tell them either Kung, Minister of Finance, or T.V. Soong.”4 Roosevelt knew both were prominent in China. Soong, a forty-year-old graduate of Harvard, whose round black-rimmed glasses made him look professorial, had served as Minister of Finance immediately before H.H. Kung. He had worked in New York City at what is now Citibank and was as fluent in English as in Chinese.5 Soong had three sisters: one had married Kung (and probably helped him get the job); another was married to Dr. Sun Yat-sen, founding father of modern China, who died in 1925; and the third married General Chiang Kai-shek, successor to Sun as leader of the Republic of China, who would rule the country until the communist takeover in 1949.6 The Soongs rivaled the Roosevelts as political royalty.

  When Morgenthau conveyed the president’s preference for Kung or Soong to the Chinese ambassador to the United States, Alfred Sao-ke Sze, he responded with: “What would the Japanese [think] if one or two such prominent men would come over here?”7 Ambassador Sze’s question stunned Morgenthau into saying, “I know nothing about world politics,” which may have been true but was certainly nothing for a Treasury secretary to confess unless it was to a priest administering last rites. Morgenthau claims that when he repeated the Sze conversation to Roosevelt, the president was equally surprised that the Chinese were worried about what Japan would think. The truth is they both knew.

  Morgenthau and Roosevelt were warned about Japan by William C. Bullitt, a charming and debonair upper-class Philadelphian, Yale educated, who had been a special assistant to Secretary of State Cordell Hull, and now served as America’s ambassador to the Soviet Union.8 Bullitt had worked on Russian matters with Morgenthau and had cultivated a special relationship with Roosevelt through extensive personal correspondence from Moscow, encouraged by the president’s words: “I am anxious to hear all that has happened. Do write.”9 The ambassador visited China and Japan on his return trip to Washington in late 1934 after FDR confirmed, “I think it is a fine idea for you to come back via the Far East where you will be able to get at least a cursory view of things in Siberia, Manchuria, China, and Japan.10 A confident Bullitt arrived in Washington in December and shared his insights about the Far East in a long and delicate telephone conversation with Morgenthau:11

  MORGENTHAU (M): How are you?

  Bullitt (B): How are you, old scoundrel—I called you three times.

  M: Are you talking from the State department?

  B: No, I’m not. … Why, do you want to say anything?

  M: Well, I’ll just ask you this. … How critical do you think the Chinese situation is?

  B: Extremely.

  M: Extremely.

  B: I can tell you very, very briefly. … I have this from ten or fifteen people. … They expect or fear … a collapse before the Chinese settlement day, which is the 1st of February. … My secretary has just handed me something … an opinion of … a competent banker in that entire country—would you like me to read it to you for a second?

  M: I’ve got plenty of time.

  B: Well, just let me read you this. … Very much disturbed about the present financial situation in China … the foreign banks in Shanghai and throughout China were withdrawing from all commitments which were throwing an unprecedented strain on the Chinese banks … the flow of silver out of the country was beginning to make everyone extremely nervous … there was already a flight of capital from the country and it was impossible to say when a panic might start … we can’t stop the export of silver … because the Japanese are smuggling it out by way of the [Tientsin] Railway.

  M: Let me ask you this. How much of what you’re telling me have you had a chance to tell the president?

  B: I’ve talked at great length about that—much more than on anything else, but I don’t remember how specifically I went into this particular thing. I may have explained it fairly well. We were talking about different aspects of the Far East thing.

  M: I’ve been terribly embarrassed about the thing—I’ve been just directed as an agent … [but] to sum up my feelings … I was on the pay of the Japanese [and] I’ve been earning my pay.

  The “thing” that embarrassed Henry was his role as purchasing agent for silver to bring it to one-quarter of U.S. monetary reserves as proposed by the Silver Purchase Act of 1934. He felt as though he was working for Japan by buying the white metal, driving up its price, and encouraging renewed Japanese aggression by weakening the Chinese economy.
In 1931 Japan had invaded China’s province of Manchuria, established a puppet state called Manchukuo, and then withdrew from the League of Nations after the League condemned its conquest. Perhaps Morgenthau was guilty of excessive enthusiasm in implementing America’s silver policy, but FDR deserved greater blame. The president had given a juicy subsidy to the silver senators in his 1933 proclamation, called a Christmas present by Key Pittman, but he now gave the Nevada senator the final say over how to deal with China’s troubles. When Pittman heard that T.V. Soong might visit the United States he told Morgenthau: “It should be understood that he is not coming here to discuss our silver policy.”12 Henry delivered Pittman’s message to FDR and the president then said it was “much better that Soong did not come.”13

  FIGURE 8. FDR holds Pittman close while talking to Vice President Garner.

  Senator Pittman may have had more on his mind than T.V. Soong. On January 2, 1935, the Chicago Daily Tribune headlined: “Mining Deals by Pittman and Baruch Bared.”14 The article reported that the Nevada senator together with Bernard M. Baruch, “the Wall Street speculator and economic adviser to President Roosevelt,” have joined with others to purchase “rich gold and silver mining properties in a new California bonanza. … This action by two New Deal leaders places them in a position to profit handsomely from the New Deal’s own monetary manipulation.” Pittman and Baruch had “quietly purchased mining properties” two weeks earlier, and the newspaper quoted estimates by engineers that the mine would earn a profit of $13 per ton of ore compared with $7 without the New Deal gold and silver programs. Pittman confirmed the reports to the Tribune and said that he, Baruch, and their associates “have not given any interviews on the new gold and silver discovery lest the announcement attract a flood of poor persons seeking to get rich quick.”

  Key Pittman succeeded in disinviting T.V. Soong but could not silence the former Chinese finance minister, who was still very much in the public eye. He was now running the China Development Finance Corporation, an entity designed to attract foreign capital to promote China’s industrialization, and had met William Bullitt during his trip to the Far East.15 Soong knew of Bullitt’s relationship with FDR and sent him a note on January 31, 1935, knowing it would be shared with Roosevelt (which it was). Soong wrote that he was “taking a hand in [the] currency and financial problems because of the extreme gravity [of the] situation.”16 He explained that a “currency collapse while unfortunate need not be so disastrous, but … with Japan now pressing for [a] showdown … in order to dominate China, [our] Government would then have to choose between accepting a Japanese loan under onerous political and economic conditions or [face] the emergence of provincial governments … under Japanese protection.” Soong concluded with a request for American aid to mitigate the silver problem “in view of the impending danger to China and the world.”

  Soong may have been overly dramatic, perhaps because he had studied in the United States and watched too many westerns, but his warning reflected Japanese gunfire. A week before his message to Bullitt a four-thousand-strong Japanese-Manchukuoan force, supported by Japanese aircraft, attacked three towns in the Chahar region of Inner Mongolia, a Chinese province adjacent to Manchukuo, killing forty-four Chinese citizens.17 Although the attack was labelled a border dispute and came after Japanese foreign minister Hirota called upon China to join Japan in “safeguarding the peace of East Asia,” the New York Times suggested that it gave the Chinese reason to “reflect on past Japanese advances” and to fear “that Japan’s next objective is the absorption of all Inner Mongolia into the Manchukuoan Empire.”18

  The Japanese wanted more than Inner Mongolia, which was just a small piece of territory in a giant jigsaw puzzle of intrigue. Following the attack, they sent Minister Akira Ariyoshi and two military attachés to Nanking to confer with General Chiang Kai-shek, the first meeting for the Generalissimo with the Japanese minister since the Manchurian conflict of 1931. The press reported that the Japanese wanted the two countries to form an “economic bloc” which, “if consummated, would be highly prejudicial to commercial relations with American and European nations.”19 As an incentive the Japanese offered to “extend financial assistance to China with the purpose of offsetting the adverse effects of American silver policy.” High Chinese officials refused to speak publicly but journalists leaked private comments that this arrangement “would amount to China’s submission to Japan’s claim of military and economic hegemony in Asia.”

  The Japanese understood that the worsening silver crisis would bring the Chinese government into conflict with its citizens. Silver ornaments dominated the accumulated wealth in China and the central bank needed to replenish the depleted stock of the white metal that had been smuggled out of the country. The Finance Ministry issued regulations to get families to exchange their silver plaques, vases, trays, dishes, and jewelry for standard Chinese silver dollars at the below-market official rate.20 The Chinese elite might prefer capitulation to Japan to losing their favorite silver heirlooms.

  Newspapers sometimes exaggerate the facts to promote sales but on Sunday evening, February 17, 1935, two weeks after the meetings between General Chiang and Minister Akira, William Bullitt brought a message to Roosevelt from Ambassador Sze confirming the substance of the negotiations between China and Japan. Bullitt arrived at the White House unannounced, which was unusual even by Bullitt’s self-assured standard, but not as unusual as what he told FDR, who was meeting with Morgenthau. He said that the Chinese ambassador had shown him “a very confidential cable which he did not feel he could show the State Department” but asked Bullitt to get the information to the president. Morgenthau just listened but said to himself, “This procedure seemed most irregular and I should think would be frowned upon by Hull” (probably the understatement of the year).21

  Bullitt relayed details of the telegram to the president like a secret agent, saying it was meant for FDR even though it was sent to Ambassador Sze from Finance Minister Kung. It confirmed the earlier note from Soong and said that Japan was offering a “large loan” as part of an extensive “so-called economic cooperation which amounts to economic domination particularly [in] North China.”22 The message added that Japan would help make “joint representations against American silver policy.” The president thanked Bullitt for the information but waited until the following day, at a lunch with Hull and Morgenthau at the White House, to discuss the contents. He told Cordell Hull all about Bullitt’s conversation of the previous night, perhaps to take the secretary of state down a peg, which delighted Morgenthau who considered Hull soft on Japan, and then said, “In view of the information that Bullitt has brought us, I am now convinced that I am right that somehow or other our silver policy is hurting Japan.”23 FDR then nodded towards Morgenthau, “I have told this to Henry and other people but nobody seems to know why it should hurt Japan, but I maintain that it does.”

  No one understood the president’s argument because it made no sense. Japan had crafted a plan to exploit China’s weakness inflicted by the Silver Purchase Act and agreed to fight the American program to wrangle further concessions from China. The Japanese preferred victory by appeasement to bloodshed just like most neighborhood bullies. FDR had deluded himself in the service of Key Pittman and the silver senators but would recognize his error too late.

  Skyrocketing silver prices in mid-April 1935 inflamed China’s troubles after the State Department rebuffed its appeal for American aid.24 The free market price had already advanced from 55¢ an ounce on January 2, 1935, to 61¢ on April 1, 1935, thanks to Henry Morgenthau. He had been an aggressive buyer of the white metal since the 1934 Silver Purchase Act proposed that America’s monetary reserves consist of three-quarters gold and one-quarter silver. However, after accumulating all U.S. mine production at a monthly rate of 3.5 million ounces and buying an average of 25 million ounces per month on the London bullion market, Morgenthau’s objective remained unfulfilled.25 He still had over a billion ounces to buy and on Tuesday, April
9, 1935, speculators pushed Handy & Harman’s free market price to 63¢ an ounce, almost equaling the subsidized 64.5¢ offered to newly mined domestic silver under FDR’s 1933 proclamation.26 The press reported that Treasury Secretary Morgenthau gave “official assurance that whenever the world price exceeded the Treasury price to domestic producers, the latter would receive the world price”27 Traders bid up the free market price to over 64¢ on Wednesday, April 10, in a significant response to Morgenthau’s pledge.28 It was just the beginning.

  A speculative frenzy greeted the president’s announcement late that Wednesday evening that going forward the subsidized price for newly mined domestic silver would be 71¢ an ounce.29 Buyers loved FDR’s revised proclamation and pushed up the free market price over the following two days to 68.5¢, a significant jump that brought silver to its highest level in almost ten years.30 FDR’s subsidy adjustment confirmed the power of the silver bloc in the Senate and suggested a game of leapfrog between the two silver prices. Morgenthau inadvertently fed the speculation when he justified the president’s action by saying to reporters that American silver mining interests “were entitled to that price.” When asked, “Why?” in a follow-up question, Morgenthau answered, “Because.”31

  The press recognized the fallout for China. An April 12 headline in the Manchester Guardian sounded the alarm: “Higher U.S. Price for Silver ‘Bombshell’ to Shanghai.”32 The Wall Street Journal explained “that drastic action by China will be necessary to stem the deflationary effect … discussions are being heard on the possibility of China cutting loose altogether from the silver standard.”33 And the Boston Globe added a new wrinkle of concern: “The heavy buying of silver for American account last year and early this year has swept the market almost bare of supplies and made speculative manipulations that much easier.”34