Economics and The Public Welfare

Chapter 54

The Silver Legislation of 1934

For a long time we have had a group of Senators from silver-producing States who have been alert to take advantage of every opportunity to increase the demand for silver and the price of silver in the interests of the silver mining industry. They constituted a very important element in the silver movement at the time of the Bland-Allison Act of 1878, of the Sherman Silver Bill of 1890, and, of course, in the Free Silver Movement of 1896. Senator Teller of Colorado withdrew from the Republican Convention in 1896 after the gold standard plank was adopted, and the Silver Republicans played an important role in the campaign of 1896. The silver forces in the Senate were strong enough, even after the defeat of the Free Silver Movement in 1896, to prevent affirmative gold standard legislation until 1900.

Flare-up of Silver Senators in 1918. In the years that followed, they were relatively quiescent, but the movement was not dead. In 1918 it came vigorously to life when the Pittman Act was passed—which Act allowed us, to be sure, to sell the silver in the United States Treasury securing the silver certificates (with a retirement of the silver certificates) to meet the urgent need for silver in India and other parts of Asia; but (here was the triumph of the silver forces) which also required us to repurchase an equivalent amount of silver at $1.00 an ounce when the price of silver in the world’s market should go low enough to permit this. We had a great opportunity to purify our currency by eliminating silver, except as subsidiary coin. But the silver Senators were strong enough to prevent this.

Silver Interests See Their Great Opportunity in 1933. Always in times of depression inflationist political forces grow active, and always the silver Senators have been alert to take advantage of such a situation. In the great depression of 1931-1933, the silver interests saw their great opportunity. Senator Key Pittman of Nevada was their leader. Senator Elmer Thomas of Oklahoma, not a silver State, was the leader of the inflationists. Senator Thomas was in favor of inflation by any means whatever—greenbacks, bimetallism, silver, open market purchases of Government securities by the Federal Reserve banks, debasement of the gold dollar, anything. President Roosevelt, also, was interested in every kind of monetary experiment. The farm forces in Congress, led by Senator Thomas, were sympathetic, and the stage was set. There was, moreover, a kind of sadism in the attitude of the Administration and the inflationist forces. Banking opinion was strongly against silver legislation and strongly against the big inflationist movement. The bankers were in disgrace, and it was fun to humiliate and distress them further.

Senator Key Pittman’s Triumph in London Conference. Senator Pittman was a member of the American delegation to the World Economic Conference at London. He had the one triumph of that Conference. He succeeded in the negotiation of an agreement among the sixty-six participating nations to the effect that these governments would abandon the policy of issuing silver coins with a fineness below .800, and would substitute silver coins for low-value paper currency when conditions should permit. Moreover, the United States entered into a supplemental agreement between the chief users and chief producers of silver, under which India was to limit her sale of her silver to 35 million ounces a year, and under which the major producing countries agreed to absorb and keep off the market for a period of four years silver in the amount of 35 million ounces. The share to be absorbed by the United States was 24,421,410 ounces.

Silver in Thomas Amendment. We have seen that the Thomas amendment to the Agricultural Adjustment Act of May, 1933, contained silver provisions, including the provision that foreign countries debtor to the United States might pay their debts in silver, and a provision under which President Roosevelt on December 21, 1933, authorized the mints to accept domestically produced silver for coinage into silver dollars. Under this order of the President, the Government retained half of the silver presented for coinage as “seigniorage,” but in effect the silver producers received for their silver legal tender money at 64 1/2¢ per ounce, which was high above the world market.1

Silver Purchase Act of 1934. But the silver interests were far from satisfied. This was their great opportunity. Further silver legislation was presented, and on June 19 the President signed the Silver Purchase Act of 1934.

This Act directed and authorized the Secretary of the Treasury to buy silver at home and abroad until one of two objectives should be reached: (a) until the Government’s stock of silver reached 25% of the total monetary stock of gold and silver; or (b) until the price of silver should reach $1.29 per ounce. The Act also authorized and directed the Secretary of the Treasury to issue silver certificates, the face value of the certificates to be not less than the cost of all the silver bought under the Act. Silver certificates were made legal tender, and were redeemable on demand in silver dollars. The Act also authorized the President to “nationalize silver,” that is to say, to compel all holders of silver in the country to sell their silver to the Government at a price set by the Government.

The one redeeming feature in this appalling legislation was certain discretion given to the Secretary of the Treasury, which meant, practically, that he could pull up if he got too much frightened.

The Silver Scandal of 1934. We had in connection with this one of the most scandalous episodes in the history of the country—speculation in silver on the basis of inside information by Governmental “insiders” and their friends and political associates. Exposure was made in one case only, apparently, that of a clergyman who was alleged to have made a “nice” profit for his church by silver speculation.

Acting under the power to nationalize silver, the President on August 9, 1934, issued an order requiring the delivery to the Treasury, within a ninety-day period, of all silver in the United States at a price of 50.01¢ per fine ounce, a price high above the market on that date. The order did not apply to silver coins or manufactured silver articles or newly mined domestic silver, but rather to the stock of silver held by speculators in the country. The order was highly profitable to the bull speculators in silver.

Silver Legislation Weakens Public Credit. The silver legislation contributed to the gloom of 1934, and the action of the President especially contributed to the weakening of the public credit which culminated in the panic in Government bonds in September of 1934. The dollar weakened in the foreign exchange markets, and some gold was exported before the exchanges recovered.

Causes Major Crisis in China. The Treasury promptly began to buy silver in accordance with the provisions of this Act. One of the theories behind the Act had been that raising the price of silver would help China and improve our Far Eastern market. What happened was that our aggressive purchases of silver pulled silver out of China, reduced the silver reserves of the Chinese banks, tightened the money market, and led to a major crisis in China. The Chinese Government appealed to the American Government to cease these silver purchases, but without result. China first established a customs tax on exports of silver, but this proved ineffective, and in November of 1935 China finally abandoned the silver standard. We were playing recklessly with the welfare of foreign countries as an incident to the iniquitous triumph of a special interest in the United States, as well as playing recklessly with the stability of our own currency.

Volume of Silver Purchases—Rising Price of Silver. Silver purchases were made on a great scale. The Government silver stock at the close of 1934 reached 1,003,000,000 ounces. Meanwhile gold had continued to come into the country and we were still far from the 25% goal. Our gold holdings at the end of the year amounted to $8,238,000,000. Consequently the Administration was faced with the necessity of acquiring an additional 1,122,000,000 ounces of silver 2 to comply with the provisions of the law.

Purchases of silver continued in 1935. The world price rose. It reached 64.5¢ in April of 1935. On April 10 the President raised the Treasury’s buying price of domestic silver to 71.11¢ per ounce. The market price continued to rise, pushed up by speculative purchases.

Injures Mexico. A New York bank was visited at about this time by officials of the National Bank of Mexico, who were gravely apprehensive that the continued rise in silver would make Mexico’s silver coin worth more as bullion than as coin. They wondered also if anything could be done to stop our Government from further buying, as they dreaded the money market disorder that would come from the melting down of Mexican coins for export as bullion. Nothing, however, could be done.

The Treasury and the speculators went on forcing up the price of silver. The Treasury price went to 77.57¢ per ounce on April 23, 1935. Speculative forces pushed the price still higher to 80¢, but the Treasury by this time had had enough. It refused to raise its price further and it ceased aggressive purchases of foreign silver. The world price of silver dropped to around 45¢ by the end of the year, and continued close to that figure during 1936. But the Treasury 3 continued to buy silver from the domestic producers at the 77.57¢ figure set on April 23, 1935.

New Silver Certificates Add $1,300,000,000 to Excess Reserves. Silver certificates issued against the silver purchased by the Treasury appeared on a great scale. In December of 1942 the total of silver certificates outstanding was $1,751,000,000, representing an increase of roughly $1,300,000,000 from early 1933. The additional silver certificates constituted net additions to the reserves of the member banks of the country, and were responsible for $1,300,000,000 of the excess reserves of the member banks, which we shall later discuss.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.