The Story of Silver

by William L. Silber

  When Morgenthau told the president that he wanted to “drop the price of silver,” Roosevelt stunned him with a detailed suggestion of how to do it.77 Henry thought that FDR must have been “getting a little tired” of paying up for silver without getting any concrete benefits now that China refused to tie the yuan to the dollar. The president suggested that, instead of the usual daily procedure, which was for the United States to specify a price at which it would buy silver in the London bullion market and accept all offers at that price, America turn the tables on the sellers. He told Henry that going forward tell London “that you are ready to buy [say] two million ounces and that they [italics added] should quote you a price and … you will let them know whether or not you accept the offer.” Perhaps the president had learned a thing or two about trading from his losses in the live lobster market because the new tactic worked to perfection.

  The free market price of silver had remained virtually unchanged at a little over 65¢ an ounce for almost four months, from Tuesday, August 13, 1935, through Saturday, December 7, 1935.78 The U.S. Treasury had pegged the price by absorbing record volumes thrown onto the market by Mexico and India liquidating excess inventories of the white metal and by Japan selling the silver smuggled out of China. Beginning Monday, December 9, 1935, FDR’s new defensive strategy allowed the price to find its natural level and silver collapsed to a shade under 50¢ an ounce by Tuesday, December 24, 1935. Speculators and smugglers were grateful for the Christmas holiday, which put an end to the nearly 25% rout in prices over the two-week period.

  Newspapers identified the U.S. Treasury as the culprit in the silver crash. A Wall Street Journal headline read, “Silver Collapses as U.S. Treasury Removes Support.”79 Morgenthau remained silent, so rumors spread that the Treasury was refusing to buy the “large quantities of silver which had been smuggled from China to Japan,” and that it refused to buy from China itself “which was selling to acquire dollar or sterling balances with which to stabilize its currency.”80 The press urged Morgenthau to hold a news conference to discuss the situation, but he released the following statement instead: “The Treasury is still fulfilling the provisions of the Silver Purchase Act and will not discuss day-to-day developments in the world’s silver markets, nor the tactics we will employ in meeting the situation.”81

  Henry Morgenthau had spent eighteen months servicing FDR’s silver interests in the Senate and knew not to implement the new plan without first covering that most important base. Before the collapse in silver had gathered steam, he met with Key Pittman to describe what was coming. After hearing the plan Pittman asked one question: “You are not thinking of changing the domestic price?”82 Morgenthau smiled, knowing that the 77¢ subsidized price paid under the December 1933 proclamation would look even better to domestic miners if the free market price declined. He said, “I had no such intention.” Pittman replied, “I do not care what you do with the world price as long as you leave the domestic price alone.”

  His change of heart was too late to save China. Roosevelt’s program to please the silver bloc seems to have been misdirected but the damage was done. Worldwide buying of the white metal under the Silver Purchase Act had helped Japan subjugate a weakened China. The Asian giant might have succumbed to Japanese aggression or to communist forces even with its silver-backed currency, but FDR deserves blame for his willingness to sacrifice China by focusing on domestic considerations without weighing international consequences.

  CHAPTER 9

  * * *

  SILVER LINING

  WEST POINT BECAME THE FORT KNOX OF SILVER ON WEDNESDAY, July 6, 1938, when a fleet of ten trucks arrived at 3:30 in the afternoon carrying 114 tons of the white metal belonging to the U.S. Treasury.1 The trucks had left the New York Assay Office in lower Manhattan early that morning, travelling fifty miles north along the scenic Hudson River to the U.S. Military Academy, each truck loaded with about 320 standard, one-thousand-ounce silver bars. Members of the Coast Guard, a unit of the Treasury Department back then, armed with submachine guns and side arms, rode shotgun on each vehicle. There was, however, little threat of anyone hijacking a truck’s $137,000 payload; a bar of pure silver, unpolished and gray, about a foot long and slightly thicker than an ordinary brick, weighs almost seventy pounds. The only tempting cargos were Spanish and Chinese silver coins, also belonging to the Treasury. A daily caravan over the next few months would transfer 45,000 tons of the white metal accumulated by Henry Morgenthau under the Silver Purchase Act to the new depository at West Point, a secure one-story facility about the size of a football field, with a two-foot-thick steel door, built for safekeeping America’s silver reserves.2 The new vault, which would eventually hold 70,000 tons of silver worth about $1 billion at prevailing prices, was protected by armed Treasury guards twenty-four hours a day, who could summon assistance from the nearby military barracks.

  Unearthing silver from the mines of Mexico and Nevada and reburying the hoard in a reinforced-concrete building promoted full employment in the mining industry, a worthwhile objective for the likes of Key Pittman, but a travesty according to George Roberts, editor of the Monthly Economic Letter published by the National City Bank of New York. Roberts wrote that purchases of silver by the U.S. Treasury initially succeeded in raising the price of the white metal, just like the silver senators intended, but the price increase “attracted huge quantities of secondary silver from all over the world” that ultimately neutralized the price jump.3 Secondary silver refers to any source of the white metal other than the newly mined variety, such as scrap reclaimed from the jewelry industry and bullion from melted coins. According to Roberts, price increases brought secondary supplies to the bullion market from silversmiths and coin hoarders, which eventually overwhelmed the manipulations. Silver sold for about 45¢ an ounce before the Silver Purchase Act of June 1934 and returned to that level at the end of January 1936, a testimony to the power of the ancient forces of supply and demand.

  Roberts also negated the claim by silverites like Senator Burton Wheeler that Treasury purchases of the white metal expanded money and credit, an important objective during the Great Depression. The Treasury paid for bullion under the Silver Purchase Act either by creating silver dollar coins containing about three-quarters of an ounce of silver or by issuing silver certificates in one-dollar, five-dollar, and ten-dollar denominations. The Treasury’s certificates closely resembled Federal Reserve notes issued by America’s central bank, the dominant form of money in the United States, except the label “Silver Certificate” instead of “Federal Reserve Note” appeared at the top. The different types of money were equally accepted everywhere, such as paying for groceries at the local supermarket or settling obligations with the IRS, and were used interchangeably except for silver dollar coins, which were too bulky to carry. Roberts claimed that “the new silver certificates in circulation simply have taken the place of some other kind of money.”4 Congressional testimony by Treasury Secretary Morgenthau confirmed that silver dollar coins were in circulation only in “the Rocky Mountain States [where] the miners still carry ‘cart wheels’ as they call them,” but everywhere else “we have replaced Federal Reserve notes with silver certificates.”5

  Silver certificates issued under the Silver Purchase Act felt just like crisp Federal Reserve notes, smelled the same, and had pictures of Lincoln and Hamilton gracing the five-dollar and ten-dollar bills, respectively. But there was a difference: Treasury currency carried a claim to silver held at West Point while Federal Reserve notes did not. A person with a one-dollar silver certificate could demand from the U.S. Treasury a silver dollar coin containing .77 ounces of silver, which translates into getting an ounce of silver at the official mint price of $1.29.6 A ten-dollar Treasury certificate would exchange for ten silver dollar coins, of course. No one chose to exercise the exchange option back then because buying silver at about 45¢ an ounce in the bullion market was cheaper. But this option to get the underlying metal gave silver certificates a whiff of pr
e-1933 American currency, when all dollar bills could be exchanged for gold at the rate of $20.67 per ounce.7 If silver prices rose above $1.29 in the bullion market, however, that faint silver lining would suddenly become valuable because holders of Treasury certificates could earn a profit by exchanging the paper for coins at the Treasury and then selling them as bullion. It was as though an invisible silver thread were woven into Treasury currency, which might someday spring to life; until then the white metal remained sealed in the West Point crypt.

  FIGURE 9. A $10 bill distinguished by “silver certificate” across the top.

  The Washington Post lampooned the silver vault at West Point as “an enduring memorial to the world’s most efficient racket,” explaining that it is a “monument to the Senate rule which enabled the representatives of seven states to hold up the country for a selfish subsidy” and that “few of their [Senate] colleagues were aware that jelly-making was listed by the Commerce Department as more important than silver mining.”8 Some evidence suggests that the Silver Purchase Act stimulated faster economic recovery from the Depression in the silver states—Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, and Utah—but the white metal mattered little to the overall American economy.9 During the robust five years before 1929, total mining production contributed less than 3% of economic activity in the United States and silver amounted to less than 1% of that.10 For example, iron mining contributed an average of $700 million to U.S. income per year; copper, $263 million; lead, $93 million; zinc, $80 million; and silver averaged $37 million dollars per year.

  World War II changed everything.

  On Monday, January 5, 1942, a month after Japan attacked the United States at Pearl Harbor, President Roosevelt outlined a plan in his Annual Budget Message to Congress to defeat the Axis powers: “Powerful enemies must be out-fought and out-produced. … We must out-produce them overwhelmingly, so that there can be no question of our ability to provide a crushing superiority of equipment in any theatre of the world war. And we shall succeed.”11 Ten days later FDR issued an executive order establishing the War Production Board (WPB) to mobilize America’s resources to win the war.12 At that time more than 1.5 billion ounces of silver bullion were stacked like bricks of gray clay in the West Point depository waiting to serve the country, but the humble copper penny stood first in line.13

  The president’s executive order conferred broad authority on the WPB to “exercise general direction over the war procurement and production program,” and the Board quickly responded with instructions as nit-picking as the tax code to economize on war material.14 On Tuesday, January 27, 1942, the WPB set the standard by warning that “fewer newspapers are in prospect for America” because “copper and bronze parts in [paper] mills’ equipment are wearing out faster than shortages in these materials will permit their replacement.”15 The Board’s obsession with the base metals, such as copper, nickel, lead, and zinc, continued the following day when it lowered by 50% the production of “lamps designed primarily for Christmas trees or for advertising” in order to save an estimated 221,000 pounds of nickel, 295,000 pounds of copper, and 2,874,000 pounds of brass.16 The WPB valued the giant savings in brass because the shiny alloy combines some zinc with mostly copper. The press also reported that the Board secured the agreement of shoe manufacturers to use “substitute metals instead of brass eyelets,” which made Christmas lights seem important by contrast, until the news article confirmed that the eyelet substitution “will save enough brass to make one million artillery shell cases a year.”17

  The copper component of munitions, from full-metal-jacket bullets to cannon shells, made the red metal a priority in the early stages of the war and brought the WPB into conflict with civilians of both sexes by banning “copper and copper base alloy in the manufacture of slide fasteners (zippers), hooks and eyes, brassiere hooks, snap fasteners, and grippers.”18 In case a fashion designer tried to beat the ban, the Board also forbade any “other garment closures … including buckles, corset clasps, [and] garter trimmings.”19 The public’s willingness to sacrifice and undress encouraged the U.S. Mint to start replacing the familiar copper penny with a steel coin but that became a disaster.20 The zinc-plated 1943 steel penny created a backlash from the start: its white coating made it resemble a dime, allowing the unscrupulous and unpatriotic to pay a penny for 10¢ worth of fruit at the corner stand; and the steel coins confused bubble gum vending machines because the new pennies were often rejected as worthless slugs.21 The complaints brought an unceremonious halt to the experiment after 700 million of these steel imposters were coined and, in an incestuous twist, were replaced by new copper pennies made from discarded cartridge shells unsuitable for recycling as munitions.22

  The use of copper electrical wiring in almost every civilian and military appliance, from refrigerators to radios, heightened the critical shortage of the red metal and opened the way for silver, a better but more expensive conductor of electricity, to join the war effort. The U.S. Treasury owned more than 1.3 billion ounces of “free silver” that had accumulated over the years in the General Fund and was not needed to back Treasury certificates.23 Officials at the War Production Board asked Henry Morgenthau to consider lending this silver to “industrial defense plants, both government and privately owned, in substitution for copper.”24 The Washington Post syndicated columnist Ernest K. Lindley urged that “silver can be put into a uniform” and added “the law requires the Government to amass the silver … but does not specify where it shall be kept.”25 Instead of West Point the government could “store it in electric equipment, like that at … Niagara Falls.”

  Morgenthau would soon tell Congress, “We would be in favor of striking all silver legislation off the books and make it possible for us to make use of the silver … for war purposes.”26 He responded quickly to the more limited request from the War Production Board.27 On Wednesday, April 1, 1942, he wrote to Attorney General Francis Biddle for a formal legal opinion and attached a lengthy memorandum from Treasury’s General Counsel Edward Foley that concluded “It is within the President’s powers … to direct that ‘free silver’ contained in the available stocks of the Government be transmitted to industrial plants engaged in defense production for use … in a manner which will permit substantially all of it to be returned at the termination of the war.”28 Biddle concurred on Tuesday, April 7, and Donald Nelson, chairman of the War Production Board, announced that same day to the press that 40,000 tons of Treasury silver would be loaned for use in defense plants.29 Nelson assured the public that the silver would be used “as ‘busbars,’ the main conductors of electric generating plants,” and “the silver would be 100 per cent recoverable and could be replaced by copper when the emergency is over.”30

  Transfers of silver from the West Point depository began with 4.8 million ounces shipped to the Defense Plant Corporation on Monday, June 29, 1942, but the program mushroomed to highest priority on Saturday, August 29, 1942, with a letter from Secretary of War Henry Stimson to Treasury Secretary Morgenthau.31 Stimson, a blue-blood Republican who had been Secretary of War under William Howard Taft, was seventy-three years old when Roosevelt appointed him to the job, but he still had the energy of a marine recruit. He was especially proud of his service as an artillery commander in World War I and still enjoyed being called Colonel Stimson by those who knew him best. Stimson wrote a three-page letter to Morgenthau that included the following:

  “In an effort to conserve critical materials and at the same time expedite construction of a war project, the Manhattan District of the Corps of Engineers requires 6,000 tons of silver to be used as a substitute for copper in the construction of that project. … The War Department has obtained clearance for the tonnage required from the War Production Board. … The transfer proposed herein is in general accord with the procedure recently followed by the Defense Plant Corporation. … Any silver received by the War Department will be returned in the quantity, form and fineness in which … it was received. … The Wa
r Department will take reasonable precautions [to] … maintain such mechanical or custodial safeguards … to protect such silver.”32

  Stimson added one clarification in his letter, translating the War Department’s request of 6,000 tons of silver into the Treasury’s preferred measure, 175,000,000 troy ounces, but left the time and place of delivery to be determined by “written notice signed by the District Engineer, Manhattan District, Corps of Engineers.”33 The Treasury would carry the silver on its books after it was withdrawn from the West Point depository and, unlike the publicity accorded earlier deliveries to the Defense Plant Corporation, agreed with Stimson’s request for silence on its cooperation with the District Engineer.34 Henry Morgenthau had no training as a nuclear physicist but he just became a silent partner in the top secret atomic bomb program, although he did not know it because Stimson insisted that he had no need to know.35 It was still early in the war, before Winston Churchill’s famous “end of the beginning speech” in November 1942, and an allied victory was still very much in doubt. The birth of the Manhattan Project brought a glimmer of hope, a silver lining, in the race for atomic weapons between scientists in America and Germany that the United States could not afford to lose.