The Story of Silver

by William L. Silber

  Or could it?

  CHAPTER 23

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  THE PAST INFORMS THE FUTURE

  WHEN NELSON BUNKER HUNT DIED IN OCTOBER 2014, THE NEW York Times obituary speculated that he was still a multimillionaire from trusts established by his father that had escaped the personal bankruptcy proceedings of the 1990s.1 The Times was probably right about Bunker but would have been on firmer ground discussing his brother Herbert, who had returned to the ranks of billionaires in 2013 by selling oil-rich property for $1.45 billion that he had bought a few years earlier in North Dakota.2 Bloomberg News reported Herbert Hunt’s total net worth at $4.2 billion. The Hunts survived their infatuation with the white metal, but their name is forever linked with the silver obsession that roiled the financial system and drove prices to record levels in January 1980. Investors sought refuge in hard assets like gold and silver to protect against the economic and political turmoil back then, just like they did after the 2008 financial crisis. The Hunts preferred the white metal, like Berkshire Hathaway CEO Warren Buffett, and should have been exonerated of price manipulation charges. Their disdain for the legal proceedings and evasive courtroom behavior brought a guilty verdict, forever staining their reputations despite their enduring wealth, giving new meaning to Bunker’s insight that “a billion dollars isn’t what it used to be.”

  The white metal has lured others with its shine, making a small mining industry with a sprinkling of employees into a major force in economic and political history. Silver gained its special status as currency in the ancient world because it was valuable; it remained the key medium of exchange for centuries because it never became too valuable. Alexander Hamilton, America’s first Treasury secretary, embraced silver to avoid a scarcity of circulating currency in the young Republic, but his soft-money system, designed to promote economic growth, tarnished subsequent political careers and sprayed collateral damage beyond American borders for the next two hundred years.

  U.S. Senator John Sherman, chairman of the Senate Finance Committee, used deception and misdirection to demonetize the white metal in 1873. He established gold as king of American finance, perhaps to promote his presidential aspirations, and unleashed a great deflation in the United States during the last quarter of the nineteenth century. The resulting economic turmoil fed the populist battle between the rural West and the urban East in the United States, leading to William Jennings Bryan’s 1896 presidential campaign, a referendum on the gold standard. Bryan’s electrifying rhetoric and “16 to 1” war cry to restore silver as a monetary standard failed to sway the voters, and the yellow metal retained its monetary crown, but pro-silver agitation persisted into the twentieth century with international repercussions.

  The powerful silver bloc in the U.S. Senate, consisting of the fourteen representatives of western mining states, gave the white metal inordinate sway in the upper chamber of Congress. Key Pittman, an ambitious senator from Nevada, known as the Silver State, became the influential chairman of the Senate Foreign Relations Committee in 1933, attracting the attention of the newly elected Franklin Delano Roosevelt. FDR ensured Pittman’s loyalty by supporting the Silver Purchase Act of 1934, partly reversing the Crime of 1873. The Act rehabilitated the monetary status of silver with a buying program to make the white metal 25% of America’s monetary reserves. American purchases under the 1934 Act raised the metal’s price, drove China off the silver standard in 1935, and tipped the balance of power in Japan away from the diplomats and towards the military. Japanese aggression had begun before the Silver Purchase Act, but the American program further weakened a China already divided by Mao Tse-tung’s communist insurgents. The Sino-Japanese conflict began in 1937 and escalated globally during World War II, leading to an inflationary spiral in China that fostered the communist victory in 1949.

  FDR ignored the fallout of the Silver Purchase Act on the Far East, highlighting the danger of making domestic policy without weighing the international implications, a lesson with a powerful message in the twenty-first century. Presidential tunnel vision at the dawn of the new millennium carries similar risks of international collateral damage, and as with Roosevelt’s narrow-mindedness, the wreckage from “America First” policymaking may not materialize until it is too late.

  The white metal continued to shape world events after Congress repealed the Silver Purchase Act in 1963. U.S. law still barred citizens from holding gold as an investment, so silver, which had been the metal of the people for centuries because it was cheaper than gold, became the refuge of choice against economic and political uncertainty, a storehouse of value in turbulent times. America’s money remained linked by statute to precious metals until Congress cut the remaining connections with domestic credit in 1968. And fiat currency, paper money lacking any intrinsic value, emerged after President Nixon suspended the right of foreign central banks to convert dollars into gold on August 15, 1971.

  The worldwide experiment in pure paper money that continues today almost failed at the start. The newly designed freedom from precious metals allowed America’s central bank, the Federal Reserve System, to deliver easy credit in response to political pressure, spawning the Great Inflation of the 1970s. Expenditures on the Vietnam War and escalating oil prices deserve their share of the blame for the inflationary spiral, but an unchecked Federal Reserve dominates the record. The 1970s nearly destroyed the U.S. dollar and undermined America’s international standing, but the chaos unleashed popular support for making price stability the primary objective of an independent central bank. During the 1980s, the Federal Reserve, under the chairmanship of Paul Volcker, tamed runaway inflation and restored monetary credibility. Since then central bank independence throughout the world has replaced gold and silver as guardian of the currency.

  Will precious metals ever return to their monetary status? Not if central bankers do their job, but public support can evaporate, undermining their resolve. The U.S. Congress, for example, can abolish the Federal Reserve with a simple majority vote, suggesting that America’s central bank might run a printing press when rising interest rates bring an avalanche of protest to Capitol Hill.3 The Federal Reserve has survived the fifty-year-old trial of fiat currency, but that period is less than a heartbeat in world history. The Soviet Union’s experiment with communism challenged America for world domination for the better part of the twentieth century before expiring like the worthless paper currency of the Weimer Republic. Central bankers remain on trial, and the uncertain verdict sustains the ancient role of gold and silver as storehouses of value in the new millennium.

  NOTES

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  INTRODUCTION: OBSESSION

  1. “Lamar Hunt, a Force in Football, Dies at 74,” New York Times, December 15, 2006, p. C12.

  2. The related designation “boldest futures manipulation of the twentieth century” is from Burton Malkiel, A Random Walk Down Wall Street, rev. ed. (New York: Norton, 2015), p. 417. The peak price was an intraday high of $50.36 for spot silver (i.e., for the January futures contract) recorded on January 18, 1980, on New York’s Commodity Exchange (see New York Times, January 19, 1980, p. 36). An intraday high of $50.50 was recorded on the Chicago Board of Trade.

  3. For Bunker’s association with the John Birch Society, see Stephen Fay, Beyond Greed (New York: Viking Press, 1982), pp. 18–19.

  4. “Bankrupt Hunt Brothers Bid Adieu to Art Collections Worth Billions,” Chicago Tribune, May 10, 1990, p. C1.

  5. “Nelson Bunker Hunt, 88, Oil Tycoon with a Texas-Size Presence, Dies,” New York Times, October 22, 2014, p. A24.

  6. “Speech Concluding the Debate on the Chicago Platform,” in William Jennings Bryan, The First Battle: A Story of the Campaign of 1896 (Chicago: W.B. Conkey Company, 1896), pp. 199–200.

  7. The cash price of silver on September 12, 2008, the Friday before the investment bank Lehman Brothers announced its bankruptcy, was $10.87 per ounce. Three years later on September 12, 2011, during the height of the European sovereign debt crisis, s
ilver was $40.26 per ounce, for an increase of 370% over the three-year period. Berkshire Hathaway closed at $103,800 on September 12, 2011, compared with a price of $68,000 on September 10, 2001, an increase of less than 100%. Note: As described in “From the Author” at the beginning of this book, cash prices after the 1930s come from the Commodity Research Bureau (CRB) database (the SI-Y series), unless noted otherwise. Berkshire Hathaway stock prices are from Yahoo! Finance.

  8. I witnessed this test conducted by Donald and Angelo Palmieri of the Gem Certification & Assurance Lab (GCAL), 580 Fifth Avenue, New York City, although it was not easy for me to distinguish the colors. They also confirmed this test with a more modern X-ray fluorescence technique. For a discussion of “assaying by fire” from ancient times to the present see J.S. Forbes, Hallmark: A History of the London Assay Office (London: Unicorn Press, 1999), pp. 20–24. Also see http://www.sciencecompany.com/How-to-Test-Gold-Silver-and-Other-Precious-Metals.aspx.

  9. See A.E. Feavearyear, The Pound Sterling: A History of English Money (Oxford: Clarendon Press, 1931), chap. 4; and Seymour Wyler, The Book of Old Silver (New York: Crown, 1937), p. 7. According to Thomas Sargent and Francois Velde, The Big Problem of Small Change (Princeton, N.J.: Princeton University Press, 2002), pp. 82–83, “One pound represented different amounts of gold and silver at different times,” which may be true, but both Wyler and Feavearyear confirm that Elizabeth promulgated the sterling standard of “11 ounces, 2dwt.” There are 20 pennyweights (dwt) in a troy ounce so sterling meant 11.1 troy ounces, which is .925 of a troy pound (= 12 troy ounces).

  10. Feavearyear, Pound Sterling, p. 8.

  11. Daniëlle O. Kisluk-Grosheide and Jeffrey Munge, The Wrightsman Galleries for French Decorative Arts (New York: Metropolitan Museum of Art, 2010), p. 106.

  12. William E. Brooks, “Silver,” in U.S. Department of the Interior & U.S. Geological Survey. Minerals Yearbook 2008, vol. 1, Metals and Minerals (Washington, DC: Government Printing Office, 2010), p. 68.2, available at https://babel.hathitrust.org/cgi/pt?id=msu.31293031621463;view=1up;seq=902.

  13. See Rhonda L. Rundle, “This War against Germs Has a Silver Lining,” Wall Street Journal, June 6, 2006, updated 12:01 a.m. “Now, silver is showing up as a bacteria- and odor-fighting material in a range of contemporary consumer products, from sports socks to washing machines.”

  14. Ibid.

  15. “Constantly Battling a Hidden Foe,” New York Times, October 8, 2017, p. SP1.

  16. See World Silver Supply and Demand at https://www.silverinstitute.org/site/supply-demand/.

  17. “Teheran Students Seize U.S. Embassy and Hold Hostages,” New York Times, November 5, 1979, p. A1.

  18. The price of spot silver (i.e., for the November contract on the Commodity Exchange) closed at $16.08 on November 2, 1979 (the last trading day before the hostage taking) and reached a high of $50.36 on the Commodity Exchange on January 18, 1980 (see note 2).

  19. One measure of the relative size of the gold and silver markets comes from futures markets. Data for the Commodity Exchange on December 31, 2014, show a total open interest (total number of contracts outstanding) for gold of 371,646 contracts and a total of 151,215 contracts for silver. These translate into dollar amounts as follows: Gold contracts are for 100 ounces and the cash price per ounce on December 31, 2014, was $1,184, for a total of $44 billion. Silver contracts are for 5,000 ounces at a cash price of $15.69 per ounce for a total value of $11.9 billion. These numbers are surely underestimates of the total value of gold and silver in the world, but the relative size of the two markets is confirmed by a completely different source and time period. U.S. Department of Commerce, The Minerals Yearbook: 1932–1933 Year 1931–32 (Washington, DC: Government Printing Office, 1933), p. 12, estimates the total value (at the much lower prevailing market prices) of all gold mined since 1493 as $22.9 billion versus $14.6 billion for the total value of silver.

  20. Using the same three-year time period as in the earlier note for silver, the cash price for gold on September 12, 2008 was $766 per ounce and on September 12, 2011 it was $1,814 per ounce, for an increase of 237%.

  21. See Milton Friedman, Money Mischief: Episodes in Monetary History (New York: Harcourt Brace & Company, 1994), pp. 249–60.

  22. David Ricardo, The Principles of Political Economy and Taxation (London: John Murray, 1817), pp. 506–7.

  23. I have added silver in brackets in the quote based on a footnote in ibid., p. 503: “Whatever I say of gold coin is equally applicable to silver coin; but it is not necessary to mention both on every occasion.”

  24. Among the most useful of the numerous studies of this incident are: Francis A. Walker, “The Free Coinage of Silver,” Journal of Political Economy 1, no. 2 (1893); Walter K. Nugent, Money and American Society; 1865–1889 (New York: Free Press, 1968), esp. chap. 12–13; Friedman, Money Mischief, chap. 3.

  25. The highest price during this twenty-five-year period was $1.29375 in 1874 and the lowest price was $.5275 in 1897. See U.S. Mint, Annual Report of the Director of the Mint for the Fiscal Year Ended June 30, 1936 (Washington, DC: Government Printing Office, 1936), p. 88.

  26. See, for example, the reference in a speech by Representative Charles H. Grosvenor of Ohio on February 3, 1896, 54th Cong., 1st sess., Congressional Record and Appendix, 27, pt. 7, App. p. 83.

  27. I collected daily quotes published by Handy & Harman from the Wall Street Journal during the 1930s, and the data show a low of 24.25¢ per ounce on December 29, 1932. According to Herbert M. Bratter, Silver Market Dictionary (New York: Commodity Exchange, 1933), p. 99, “The New York ‘official’ price is determined and issued daily, usually in the late forenoon, by Handy & Harman, and is based upon the market prices prevailing that day up to the time of such determination for nearby delivery in New York of spot silver in round amounts of 50,000 ounces.”

  28. For a contemporary discussion, see James D. Paris, Monetary Policies in the United States: 1932–1938 (New York: Columbia University Press, 1938), pp. 48–49.

  29. Ibid., p. 42.

  30. “Pittman, Silver Pact Author, Sees Export Trade Increase,” Washington Post, December 22, 1933, p. 8

  31. For a description of Chinese silver exports see “Shanghai Silver Again Moves Out,” New York Times, September 12, 1934, p. 13 and “Lower Silver Price Seen Necessary to End Smuggling,” Wall Street Journal, p. 1. On abandoning silver, Milton Friedman argues, “If the United States had not driven up the U.S. dollar price of silver, China would have left the silver standard later—perhaps several years later—than it actually did and under better economic and political conditions,” in Friedman Money Mischief, pp. 177–78.

  32. See John Morton Blum, From the Morgenthau Diaries, vol. 1, Years of Crisis, 1928–1938 (Boston: Houghton Mifflin Company, 1959), p. 204.

  CHAPTER 1: HAMILTON’S DESIGN

  1. Hamilton refuted the alleged “monarchial” tendencies, according to Richard Sylla, Alexander Hamilton (New York: Sterling Publishing Company, 2016), p. 102.

  2. Alexander Hamilton, “On the Establishment of a Mint,” 1st Cong., 3d sess., January 28, 1791, American State Papers: Finance, 1st Cong., 3d sess., vol. 1:91–100, available at https://memory.loc.gov/cgi-bin/ampage?collId=llsp&fileName=009/llsp 009.db&recNum=3.

  3. See “Establishing a mint and regulating the coins of the United States,” 2d Cong., 1st sess., April 2, 1792. Statutes at Large, 2d Cong., 1st sess., vol. 1:246–251, available at https://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=001/llsl001.db&recNum=2. Section 9 of the act sets forth the precise grains of gold and silver that appear in the next sentence of the text as well as the total weight of each coin when an alloy metal (not specified) is added. The total weight of the silver dollar is specified as 416 grains, and, since there are 480 grains in a troy ounce, the silver dollar weighed 416/480 or .866 troy ounces. It contained 371.25 grains of pure (.999 fine silver) so the silver dollar was .8924 (371.25/416) pure. This was changed by the act of January 18, 1837, to .90 pure by reducing t
he size of the coin to 412.5 grains. Section 9 specified the ten-dollar gold eagle as containing 247.5 grains of pure gold and a total weight of 270 grains for a purity of .9166 (247.5/270) and weighing a total of .5625 troy ounces (270/480). This was later changed by a June 28, 1834 act, modified by the act of January 18, 1837, as follows: the pure gold content of the eagle was reduced to 232.2 grains with a total weight of 258, which made the eagle .9 pure gold and weighing .537 ounces (258/480). The updated details on silver appear in Dickson Leavens, Silver Money (Bloomington, Ind.: Principia Press, 1939), p. 20, and the updated details on gold are from H.R. Lindeman, Money and Legal Tender in the United States (New York: G.P. Putnam’s Sons, 1879), pp. 24–27.

  4. Hamilton’s report of January 28, 1791, “On the Establishment of a Mint,” discusses the trial of the pix [sic] in the last paragraph.