The Story of Silver: How the White Metal Shaped America and the Modern World

ISBN-13: 9780691208695

Media Type: Paperback

Publisher: Princeton University Press

Publication Date: 01-12-2021

Pages: 360

Product Dimensions: 5.20(w) x 7.90(h) x 1.10(d)

William L. Silber is the Marcus Nadler Professor of Finance and Economics at New York University’s Stern School of Business. His many books include When Washington Shut Down Wall Street and Volcker.

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CHAPTER 1

HAMILTON'S DESIGN

Alexander Hamilton knew more about money and finance than just about anyone at the Constitutional Convention. He was born out of wedlock in the West Indies around 1755, came to New York City in 1773, where he studied at King's College, now Columbia University, and became an American patriot. He joined the New York militia to fight the British during the Revolution and served on George Washington's Continental Army staff for most of the War. Following the victory, he helped found the Bank of New York, which survives today as Bank of New York Mellon, but soon turned his attention to remedying the loose connection among the states under the Articles of Confederation. He championed the establishment of a strong central government in the Federalist Papers, authored with James Madison and John Jay, and during the Constitutional Convention proposed a lifetime term for the American president like Britain's King George III. Washington disagreed with Hamilton's royalist instincts, of course, but put his young protégé's financial skills to work by appointing him Treasury secretary in his first cabinet.

Hamilton had more success implementing British traditions in his new job. He prepared a 1791 report "On the Establishment of a Mint" that recommended defining the U.S. dollar in terms of gold and silver, like the legal bimetallic standard prevailing in England. The resulting legislation of April 2, 1792, created a number of American coins, including a silver dollar weighing about threequarters of an ounce and a ten-dollar gold eagle weighing about half an ounce. The precious metal content was specified precisely as 371.25 grains of pure silver for the dollar and 247.5 grains of pure gold for the ten-dollar eagle, and Hamilton recommended a version of Britain's Trial of the Pyx to ensure accuracy.

The British trial dates back to the thirteenth century and was designed to protect the King's currency from being debased by the Master of the Mint producing coins with less precious metal content than the sterling standard. Coins were randomly selected from the mint's production, locked in a chest (called the pyx) from one trial to the next, and were assayed by independent experts. A favorable verdict assured the public of its currency's intrinsic value, while a negative outcome led to an indictment of the Master of the Royal Mint. Giles de Hertesbergh, who became Master of the Mint in 1316, was convicted of shortchanging the currency and spent six weeks in London's Marshalsea Prison along with smugglers, debtors, and pirates.

The 1792 act followed Hamilton's proposals and required that an annual sample of coins be "assayed under the inspection of the Chief Justice of the United States, the Secretary and Comptroller of the Treasury, and the Attorney General of the United States," a jury that rivals the best of Britain, but the punitive stage of the legislation took on a distinctly American flavor. Section 19 provided that if any of the coins were "debased or made worse ... every such officer or person who shall commit any or either of the said offenses shall be deemed guilty of felony, and shall suffer death."

Capital punishment has always been serious business in the United States, with somber witnesses to executions on death row heading the list. Although no one was put to death in almost two hundred pyx trials (at least not publicly), the potential remained until President Jimmy Carter effectively ended the drama in 1977 by abolishing the U.S. Assay Commission, the agency charged with testing the coins. The Carter Administration called it a much needed cost-cutting move, but voters failed to appreciate the president's penny-pinching and, for other reasons too numerous to mention, rejected his reelection bid in 1980.

Most of Hamilton's 1791 Mint Report focused on tying the U.S. dollar to gold and silver so that anyone with either metal could bring in bullion and receive coins in exchange, which is how currency was created back then. Hamilton considered gold by itself because of its stability and "greater rarity" but concluded that eliminating either metal from coinage would "abridge the quantity of circulating medium" and expose the country to the "evils of a scanty circulation." A successful medium of exchange treads gently between scarcity and excess, like the ebb and flow of a mighty river, and nurtures commerce when the forces balance. Silver dominated as money in ancient times because it was valuable and remained the key circulating currency throughout Europe for hundreds of years because it never became too valuable. Hamilton promoted silver to avoid deflation and to sustain economic growth, and Congress made both precious metals legal tender in America, acceptable in the payment of debts and taxes. Gold's greater value made it especially useful for large business transactions, like importing a case of French champagne, while silver was better for smaller social events, like buying a round at the local tavern.

Hamilton agonized over the relative gold and silver content of the dollar, knowing that incorrect ratios resulted in circulation of the overvalued coin while the undervalued would remain bullion. This well-known pitfall, called Gresham's law after Sir Thomas Gresham, who helped Queen Elizabeth I reestablish the purity of the British pound, goes by the popular phrase "bad money drives good money out of circulation." Sir Isaac Newton, the great scientist who had a second career as Britain's Master of the Mint in the early eighteenth century, fell victim to Gresham's law by inadvertently overvaluing gold and driving silver out of circulation. Many doubt that Gresham ever said the phrase, but history has been kind to Sir Thomas and his law just as it has been to Mr. Murphy and his law — If anything can go wrong, it will — whether or not he said it.

A simple example illustrates Gresham's law. Suppose jewelers and silversmiths are willing to pay one dollar per ounce of gold or silver bullion and the mint follows suit and establishes a dollar coin containing an ounce of either metal. Owners of bullion would come to the mint to have the metal assayed for free and receive a dollar coin, so both metals would circulate as currency. Now suppose gold bullion rises in value to $2 per ounce because doctors say that eating gold flakes for breakfast makes you skinny. The mint continues to pay one dollar for either metal because that is the legal definition of each coin but now everyone hoards gold and brings only silver to be coined. Gold would no longer serve as currency because it is more valuable as a diet supplement.

Both coins circulate under a bimetallic standard, avoiding the "evils of a scanty circulation," only when mint prices reflect market values. After much discussion Hamilton proposed a price ratio of fifteen-to-one at the mint because gold bullion was worth about fifteen times an equal weight of silver in 1791. The precious metal content of each coin in the 1792 Coinage Act resulted in a mint price of $1.29 per ounce of silver and a gold price fifteen times larger, $19.39 per ounce. These relative prices worked perfectly for about ten years, until the market value of gold relative to silver rose to almost 16 to 1, and citizens hoarded the yellow metal and brought only silver to the mint, just as Gresham predicted.

The emergence of a silver standard from the framework of bimetallism probably displeased Hamilton, but not for long. He was killed in America's most famous duel on July 11, 1804, by Aaron Burr, the sitting vice president of the United States. Bad blood had soured their relationship over many years. Hamilton supported Thomas Jefferson over Burr in the contested presidential election of 1800 and the former Treasury secretary supposedly denigrated the vice president, who ran for governor of New York in 1804. But the underlying tension probably began much earlier: Burr had studied at the College of New Jersey, now Princeton University, making the King's College (now Columbia)-educated Hamilton a natural Ivy League rival.

Hamilton could not amend his handiwork but Congress did it for him in 1834 (with further adjustment in 1837) by redefining the gold content of the dollar and increasing the mint price per ounce to $20.67. The new mint price ratio of gold to silver of 16 to 1 ($20.67 divided by $1.29) overvalued gold compared with the bullion market and encouraged Americans to turn the yellow metal into coins, which they did. Going forward gold served as the primary medium of exchange in America even though both silver and gold were legal tender, acceptable in payment of debts and taxes. Silver was relatively more valuable as bullion than as coins at 16 to 1, with an average price in the metals market greater than the mint price of $1.29 per ounce in every year from 1834 through 1873. The highest annual average price per ounce of silver was $1.36 in 1859, when the discovery of the giant Comstock Lode was publicized, marking a peak in value for the white metal. The average yearly price of silver would fall well below that level for the next hundred years and make the 16 to 1 price ratio a distant memory.

The Comstock Lode, centered in Virginia City, Nevada, a rocky outcropping in the middle of nowhere, produced more silver in its first ten years of operation than America had ever seen. Thousands of settlers from across the country, plus immigrants from countries such as Ireland, France, Germany, and China, swarmed into the barren wasteland to seek their fortune, transforming the slopes of Mount Davidson into the bustling metropolis of 30,000 called Virginia City. The steep grade of the mountainside made daily life an adventure, frequently forcing citizens to take cover when they heard the rumble of runaway wagons rolling down C Street in city center. But vigilance and perseverance paid dividends to those who survived the dust and dirt of frontier living. Mining companies such as Keystone, Ophir, Yellow Jacket, and Uncle Sam (of course) extracted about $30 million in silver from the Comstock Lode from 1861 through 1870 compared with less than $2 million produced in the entire United States from the founding of the Republic until then.

This mining bonanza had a much broader impact on American life than simply turning a few pick axes into silver spoons. It launched the career of America's most famous nineteenth-century humorist, Samuel Clemens, who took the name Mark Twain as a reporter for Virginia City's Territorial Enterprise; it brought Nevada into the Civil War on the Union side as America's thirty-sixth state on October 31, 1864; and a century later it spawned the NBC TV hit western Bonanza, which aired from 1959 through 1973 and whose title references the giant discovery in the region called the Big Bonanza. Some blame the Comstock Lode with triggering a collapse in silver prices that ultimately led to the 1896 presidential candidacy of William Jennings Bryan and the confrontation between East Coast bankers and midwestern farmers. The evidence shows that the Virginia City mines were a sideshow.

Despite the jump in silver production from the Comstock Lode during the 1860s the price of bullion remained remarkably constant, averaging between $1.35 per ounce in 1860 and $1.33 in 1869. The 50% price decline during the remainder of the nineteenth century began in 1873, when silver fell below $1.30 per ounce for the first time in almost thirty years, and continued to slide like those runaway wagons in Virginia City. The year 1873 was the date of an alleged crime, when Senator John Sherman, chairman of the Senate Finance Committee, guided the Coinage Act through Congress, eliminating the silver dollar as legal tender in the United States. Silver's vulnerability began with the California gold rush a generation earlier, and Sherman fed the avalanche with deliberate deception.

SOLVING THE CRIME OF 1873

Republican John Sherman of Ohio spent almost half a century in Washington, D.C., as an influential legislator and cabinet member. He was elected to Congress in 1854 and then to the U.S. Senate in 1861, becoming a staunch supporter of Abraham Lincoln during the Civil War. He would later serve as secretary of the Treasury under Rutherford B. Hayes and as secretary of state under William McKinley but is most famous for sponsoring what became known as the Sherman Antitrust Act passed in 1890, the favorite legislation of trust-busting President Teddy Roosevelt. Few remember Sherman's role as chairman of the Senate Finance Committee in the alleged Crime of 1873, which is exactly what he wanted.

Sherman was born in Lancaster, Ohio, in 1823, one of eleven children, to Charles and Mary Sherman. His father was a successful lawyer who died when John was six years old but still served as an example. John became a lawyer like his father and then used his legal training, like many before and since, to launch a political career. He accumulated considerable legislative power during his tenure in Washington and twice pursued, but failed to become, the Republican presidential candidate. Throughout his career, he suffered in the shadow of an older brother, Civil War General William Tecumseh Sherman, who replaced Ulysses S. Grant as Commanding General of the Army after Grant became president. General Sherman had gained fame for his brutal "march to the sea" through Georgia during the war but soon became an engaging and entertaining public speaker. He turned down subsequent requests to become a presidential candidate by famously saying, "I will not accept if nominated and will not serve if elected." Sibling rivalry aside, Senator Sherman, known as the "Ohio icicle" for his austere personality, would have denied allegations of deception in the Coinage Act of 1873, but public admiration for his gregarious brother, called "Cump" by family and friends, must have encouraged the cover-up.

The Crime of 1873 refers to legislation passed by Congress on February 12, 1873, negating Alexander Hamilton's favorite law, that both gold and silver be monetary standards in the United States, and establishing gold as sole legal tender for all obligations. The new law omitted the free and unlimited coinage of silver dollars at the mint, an option since 1792, and restricted the legal tender status of subsidiary silver coins, like dimes, quarters, and half-dollars, to five dollars or less. The U.S. Constitution allows Congress to "coin money" and "regulate the value thereof," so no legislator voting for the act committed a crime in the technical sense. Senators and congressmen could even make their favorite coins of Great Britain, France, Spain, and Portugal legal tender in the U.S., which they did in 1793, without violating the law. The allegations of impropriety arose because few people realized the full consequences of the shift to gold when the law was passed. Moreover, Senate Finance Committee Chairman John Sherman, who introduced the legislation, not only failed to sound the warning bell but also soft-pedaled the bill despite knowing its importance.

Sherman said on the Senate floor during an early discussion of the Coinage Act, "This is a bill to codify the mintage laws of the United States. It does not adopt any new principles; it makes but very few changes in the general laws, except to transferring the head of the Minting Bureau to Washington." Sherman should have stopped after the first sentence, which accurately described the legislation. More than fifty of the sixty-seven sections of the Coinage Act of 1873 deal with the minting process, including the salaries and responsibilities of the assayer, melter, refiner, and coiner, as well as administrative matters, such as making the mint a bureau within the Treasury Department rather than a free standing agency. Much of the associated debate in Congress focused on whether the mint should charge a fee for coining bullion. These housekeeping details on minting pushed the legislation's substantive change in the monetary standard beneath the radar of even sophisticated observers, like Francis A. Walker, a professor of political economy who had been lecturing on the topic of money at Yale in 1873. An avid newspaper reader with close friends in New York business circles, Walker confesses not to have "learned of the demonetization of the silver dollar" until long after it had happened.

The word "crime" to describe the 1873 Act was first used by George M. Weston, secretary of the U.S. Monetary Commission of 1876, who wrote, "It is impossible to doubt that the laws of the country have been tampered with. Who the perpetrators of this crime were is not likely ever to be satisfactorily known." Senator John P. Jones of Nevada called it a "grave wrong" to remove silver as a monetary standard "under the guise of regulating the mints of the United States." Others called it a "fraud" and "conspiracy," but Professor Walker, who would become president of MIT as well as the founding president of the American Economic Association, set the proper tone of condemnation: "No man in a position of trust has a right to allow a measure of such importance to pass without calling attention sharply to it, and making sure that its bearings were fully comprehended. And no man who did not know that the demonetization of silver by the United States was a measure of transcendent importance, had any right to be on such a committee or to put his hand to a bill which touched the coinage of a great country."

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Table of Contents

From the Author xiii

Main Characters xvii

Introduction Obsession 1

Chapter 1 Hamilton's Design 10

Chapter 2 Solving the Crime of 1873 17

Chapter 3 Free Silver 27

Chapter 4 Seeds of Roosevelt's Manipulation 38

Chapter 5 FDR Promotes Silver 45

Chapter 6 Silver Subsidy 52

Chapter 7 China and America Collide 60

Chapter 8 Bombshell in Shanghai 71

Chapter 9 Silver Lining 90

Chapter 10 Costly Victory 99

Chapter 11 JFK's Double Cross 104

Chapter 12 LBJ Nails the Coffin Shut 119

Chapter 13 Psychiatrist's Meltdown 131

Chapter 14 Battle Lines 146

Chapter 15 Nelson Bunker Hunt 150

Chapter 16 Heavyweight Fight 165

Chapter 17 Saudi Connection 175

Chapter 18 Silver Soars 183

Chapter 19 Collapse 202

Chapter 20 The Trial 224

Chapter 21 Buffett's Manipulation? 236

Chapter 22 Message from Omaha 242

Chapter 23 The Past Informs the Future 249

Notes 253

Selected Bibliography 317

About the Author 327

Illustration Credits 329

Index 331