The Story of Silver

by William L. Silber

  The headline “Silver Shortage Nearing Crisis” greeted readers in the nation’s capital on January 1, 1965.37 The Washington Post story described the problem: “The demand for silver by industry has put the U.S. Treasury on the spot. It mints silver coins by the billions and is using more and more of its own stockpile to try to get ahead of the coin shortage.” The article warned “consumers simply began tapping” the Treasury when the price reached $1.293 but “if the stockpile were depleted the lid would be off.” The Post then hinted at a New Year’s resolution: “Congress … is expected to act well before the Treasury’s stockpile vanishes,” but the president would have to deliver the marching orders.

  On Thursday, June 3, 1965, Lyndon Johnson began his coinage message to Congress by reminding legislators of America’s great monetary history: “Our coins, in fact, are little changed from those first established by the Mint Act of 1792,” and “the long tradition of our silver coinage is one of the many marks of the extraordinary stability of our political and economic system.”38 He then switched to the sad facts: “Silver is becoming too scarce for continued large-scale use in coins. … We expect to use more than 300 million troy ounces—over 10,000 tons—of silver for our coinage this year. That is far more than total new production of silver expected in the entire free world this year.” He said reform was needed “to maintain an adequate supply of coins or face chaos … from using pay telephones, to parking in a metered zone, to providing children with money for lunch at school.”

  Legislation for parking spaces and lunch money had broad support in Congress and presidential politics made the Coinage Act of 1965 resemble a well-stocked smorgasbord. It recommended new dimes and quarters that looked like the old but were made of a copper and nickel alloy and no silver, pleasing the Northeast industrial users who wanted to eliminate government demand for the white metal. The new Kennedy half-dollar remained a combination of copper and silver in deference to public sentiment but reduced the white metal content from 90% to 40%. The president satisfied western preferences by keeping the cartwheel at 90% silver but left in place the Treasury’s indefinite delay in minting the silver dollars that Congress had authorized a year earlier.39 And he asked for authority to buy domestically mined silver bullion at $1.25 an ounce, spreading a safety net beneath the prevailing $1.293 price to comfort Rocky Mountain producers and to prevent a revolt by the silver bloc senators. To implement the new coinage system LBJ asked for “standby authority to institute controls over the melting and export of coins” but left the embarrassing details about manipulating the silver market to his new Treasury secretary, Henry Fowler.40

  Two months earlier, when Douglas Dillon resigned after four years in the job, the president appointed the bespectacled, white-haired Fowler as his successor. Henry Fowler, a fifty-six-year-old courtly Virginian, called “Joe” ever since classmates at Yale Law School dubbed him Gentleman Joe for his snappy dress, had served as Treasury undersecretary to Dillon, and was described as a “middle-roader both politically and economically.”41 His soft southern manners smoothed his testimony in Congress.

  Fowler appeared before Texas Congressman Wright Patman’s House Committee on Banking and Currency to promote LBJ’s Coinage Act and anticipated the contradiction of banning silver from dimes and quarters but keeping it in the half-dollar: “One reason for retaining some silver in our coinage is a desire to continue the 173-year-old tradition of American silver coinage … [but] we could, if unforeseen difficulties developed, do without the half dollar temporarily. It can be replaced in use by two quarters.”42 Fowler ignored why the same logic did not apply to the dime, which could be replaced by two nickels, and focused instead on the delicate task of keeping the old 90% silver coins in circulation alongside the new debased currency. Speculators may not have heard of Sir Thomas Gresham, but they knew the potential value of those precious dimes and quarters if the price of silver rose above $1.38¼ per ounce. The New York Times quoted Dr. Franz Pick, a foreign exchange market observer, saying that “dimes and quarters now in circulation will completely disappear, and maybe even half-dollars too.”43

  Joe Fowler revived the Democratic Party’s penchant for manipulating the price of silver but this time to keep it down rather than to perk it up: “The continued use of coins that are 90 percent silver also requires protection of this high silver content coinage from hoarding or destruction. … It will be necessary for the Treasury to protect the monetary value of our silver coinage by supplying silver to the market upon demand at the present monetary price.”44 He added clarity for Committee Chairman Patman: “Treasury had been doing this since 1963 by exchanges of silver bullion against silver certificates,” but section 6 of the new law went further, providing for “sales by the Treasury of silver in excess of what is needed to back silver certificates” with the objective of keeping the price at or below $1.293.

  Peter Dominick, the tall and athletic Republican senator from Nevada, warned that the Johnson administration’s efforts to suppress the price of silver were doomed: “The law of supply and demand wants to raise silver prices substantially” and the current situation resembles “an overheated pressure cooker with a blocked release valve.”45 But Democratic Committee Chairman Patman, perhaps unfamiliar with the warning whistle of the stainless steel cooking pot, ignored the potential explosion. He had known LBJ ever since the president’s father, Sam Johnson, had shared a desk with Patman when they both served in the Texas legislature. The chairman considered LBJ “one of the most loyal friends I ever had.”46 He accepted the administration’s plan and led Treasury Secretary Fowler on a duet defending the new law.47

  PATMAN: Mr. Secretary … we would not debase our coinage at all by this bill because the monetary value attributed to silver is merely that accorded by the people’s elected representatives.

  FOWLER: That is correct sir.

  PATMAN: So, these coins, regardless of the commodity value of the metal that is in them, will have the stamp of the United States recognizing that each coin is legal tender for the payment of all debts, public and private.

  FOWLER: Yes, sir.

  PATMAN: I know one fellow who owed a considerable amount as alimony, about $1,500, and he took it all in pennies and delivered it to his former wife.

  Fowler ignored Patman’s Texas humor and simply assured the chairman that the Coinage Act of 1965 made subsidiary coins legal tender, ending an ambiguity that had plagued small change for almost a century.48 He also understood the reason for Patman’s responsive reading of the virtues of fiat currency. Three months earlier Patman’s House Committee on Banking and Currency, and its Senate counterpart, had urged passage of an administration bill to remove the required 25% gold backing for Federal Reserve deposits, freeing the central bank’s credit creation ability from external restraint.49 A vigilant Senator Dominick had warned back then:50 “It is an obvious first step toward a completely managed monetary system … making the value of the dollar thereafter subject to the arbitrary decisions of the fiscal managers.” Dominick acknowledged “there may be valid objections to a complete return to a gold standard” but urged “a gold reserve high enough to give stability and firmness to an expanding currency and to provide a series of warning lights against inflation.” Dominick supplemented his argument with an analogy to congressional control of the national debt ceiling: “While the Congress has traditionally given in to the administration by repeatedly increasing the debt limit, it has in recent years become more and more obstinate about doing so. The very nature of this situation has forced upon the administration certain fiscal restraints and requirements for justification of its economic policies.”

  Dominick, a Yale Law School graduate like Fowler, made considerable sense. The Johnson administration had convinced Congress to remove monetary speed bumps by passing the Coinage Act of 1965 and by eliminating gold backing against Federal Reserve deposits.51 The central bank could now pursue an easy monetary policy to accommodate fiscal deficits without braking to explain. In a ret
rospective on the Great Inflation of the 1970s, Harvard’s Robert Barro, an influential monetary economist, referred to “the removal of silver from most United States coins minted after 1964 … as one of President Johnson’s most significant policy moves.”52 Barro dignified this obvious exaggeration by adding that he said it “only partly in jest” and explained that the demonetization of silver was a “continuation of the well-established tendency of all unrestrained monarchs to secure revenue by debasing the currency.”

  Debasing the monetary standard leads to inflation, but economic circumstance and a history of price stability can often delay the consequences. A mid-1965 Wall Street Journal article warned, “Inflation’s bag of tricks includes the fact that it doesn’t necessarily explode into a wage-price spiral the moment or the year the government lights the fuse.”53 President Johnson had loosened the restraints on monetary expansion and speculators would roil the silver market in response, but few politicians listened to the subsequent warning whistle.

  CHAPTER 13

  * * *

  PSYCHIATRIST’S MELTDOWN

  THE MARCH 1965 ISSUE OF FORTUNE MAGAZINE, THE MONTHLY business publication most famous for ranking America’s largest companies, called the Fortune 500, did not belong on Henry Jarecki’s desk. He was a thirty-two-year-old psychiatrist at Yale Medical School, who had published research studies in the Journal of Nervous and Mental Disorders and had pioneered the use of drugs such as Tofranil for depression and Thorazine to help patients overcome delusions. Nevertheless, Henry, a six-footer with well-endowed eyebrows, remained fixated on the Fortune article with the playful title “Our Silver Dolors,” a lamentation on the sorrows of the white metal.1 It began, “The U.S. economy is literally running out of silver, and the U.S. Treasury doesn’t have much time left in which to do something about it.” The article reminded readers that former Secretary of the Treasury Douglas Dillon “had miscalculated the extent of the coin shortage” and pointed out the stupidity of Congress authorizing the mint to issue 45 million new silver dollars: “From the Treasury’s point of view this had to be madness.”2

  Henry knew that his older brother Richard, a physician who made a living as a professional gambler, had been collecting silver certificates, exchanging them for cartwheels at the Treasury, and selling them at a profit to Las Vegas casinos for use in slot machines. Henry mailed the article to Richard after the Treasury renewed its ban on cartwheel production, but what he got in return, a shoebox filled with cash, changed his life forever.3 A confident Henry would abandon his medical career like his brother, become a multimillionaire when silver exploded above the historic $1.293 to a new all-time high in 1967, and then continue the confrontation between East and West by battling the oil-rich Hunt family of Texas for control of the white metal. Henry Jarecki’s transformation from pioneering psychiatrist to precious metals arbitrageur was no surprise to those who had watched him grow up.

  Henry was born in 1933 in Stettin, Germany, a thriving seaport about one hundred miles northeast of Berlin that became part of Poland after World War II.4 His father, Max Jarecki, was a forty-year-old dermatologist with a medical degree from Heidelberg University when he married Gerda Kunstmann, the twenty-one-year-old daughter of shipping magnate Arthur Kunstmann. The marriage did not last. Gerda disappeared for three weeks on an African safari with a young shipping executive when Henry was a year old. After the divorce, Gerda took Henry and his brother Richard, who was eighteen months older, to live with her parents in their mansion on Falconwood Street in Stettin. The Nazi regime had just come to power in Germany, but the family fortune and Arthur Kunstmann’s status as a former president of the German Shipowners Association shielded them from the early brutality. Those happy days dominated Henry’s memory except for the incident with the family chauffeur, a man by the name of Streussel, who had entertained Henry and his brother during his downtime until he quit to join the Nazi Party. When Henry and Richard saw Streussel on the street a few days later, they ran up and hugged him but were rebuffed with, “Get away from me, little Jew boys.”5

  Henry left Germany with his family in 1937, moved to London, where he became fluent in English, and then came to the United States after his mother remarried. Henry’s father, Max, was already in America, and Henry spent his formative years shuttling between his father, who lived in Asbury Park, a small seaside town in New Jersey, and his mother, who settled in the Forest Hills section of Queens in New York City. Both parents doted on him. Max introduced Henry and Richard to skat, a German card game they often played through the night. Henry struggled to stay awake and track his wins and losses, learning a lesson he never forgot: “He who keeps score will win.”6 His mother wanted him to be a movie star and sent him to audition for the show Quiz Kids.

  Henry never made it to the movies but managed to graduate from high school at age sixteen. His first major disappointment came when the University of Michigan rejected him because of poor grades, but he fought back. He reapplied after doing well on the College Board exams and was accepted. Henry enjoyed campus life, especially the women, the beer, and the leftist youth organization Young Progressives of America (in that order), but the outbreak of the Korean War in 1950 interrupted his carefree ways. The draft of eighteen-year-olds into the army forced Henry to accelerate his medical school plans to avoid military service.

  American medical schools had quotas for Jewish students back then, so Henry turned to his father’s alma mater, Heidelberg University, to pursue a six-year MD program. The holocaust was a fresh wound in 1950, a barbarity that would dissuade many American Jews from buying anything made in Germany, but Henry embraced the thought of studying there. His fond childhood memories made him feel as though he were “going home” and guilt-ridden Germans made it easy, but above all “it was a practical decision.”7 It allowed him to study medicine, which pleased his father, and kept him out of the army, which made Henry happy.

  Henry studied physiology, chemistry, and anatomy at Heidelberg, just like every other future doctor, but a foray into arbitrage, buying a commodity where it is cheap and simultaneously selling where it is expensive, supplemented his medical education, earned spending money, and made him happier than most other medical students. During vacations he would buy British gold sovereign coins in Switzerland at their intrinsic metallic value and sell them at a 10% premium in Germany, where the coins were in short supply because such cross-border transactions were forbidden to German citizens. Henry referred to this straightforward arbitrage as “fixing up asymmetries,” but it really verged on smuggling except for the power of his American passport.8 A more elaborate scheme that really was smuggling involved Nescafé coffee, which sold for the equivalent of five marks per can in Basel but would fetch eight marks in Heidelberg. Henry identified a loophole in the customs inspections process that allowed him to ship suitcases filled with cans of coffee between the two cities duty free, earning three marks per can.

  Henry observed that when customs inspectors boarded a train at the crossing between Switzerland and Germany they would go from one compartment to another demanding that each traveler remove their bags from the overhead rack and open them. But the customs agents never looked at the overhead rack and asked, “Who owns the yellow valise?” And that procedural error sparked a plan. Henry would buy cans of Nescafé in Basel, stuff as many as would fit in a tattered old suitcase, and put the bag on the train to Heidelberg. He would then call his partner in Germany and say, “Grandma is arriving on the 4:40 in the second compartment of the third car. Please help her off.”9

  After six profitable years in Heidelberg, Henry received his MD degree, and married Gloria Friedland, a former classmate at Michigan, who had been working for the U.S. military newspaper Stars and Stripes in Germany. Henry says, “She was a civilizing influence on me.”10 The couple returned to America, where Henry was offered a residency in psychiatry at Yale Medical School. He jumped at the opportunity, even though his father would have preferred that he become a real doctor rather tha
n a psychiatrist. He recalls, “Psychiatry wasn’t very scientific back then,” a lesson he learned personally from one of his first patients at the West Haven Veteran’s Administration Hospital.11 A young man came in for a scheduled consultation, sat down in a chair in front of Henry, bent his head between his knees, and rocked back and forth like a mystic at prayer. Henry asked, “What’s the matter?” The patient lifted his head, looked at him and said, “How should I know, Doc? Am I a mind reader?” The response stunned Henry and set the tone for his views of psychiatry. “We don’t know why people get depressed … and the patient knew I didn’t know.”

  Soon after that encounter the lure of an arbitrage like Nescafé coffee diverted Henry’s attention. He discovered that used Mercedes cars in Germany cost $12,000 and could be sold in the United States for $22,000, so he went into the import-export business again, but this time it was perfectly legitimate (which he didn’t mind).12 The proceeds from the Mercedes arbitrage dwarfed his resident’s salary and pleased Henry: “Much of my relationship with money is about the satisfaction and excitement I get from earning it, especially when … it helps fix asymmetries in the world.”13 But his supplementary activities came to a premature end after his Yale department chairman Fritz Redlich asked him somewhat dismissively, “Are you really dealing cars on the side?”14