[Editor’s note: Footnotes in the original are omitted.]
In 1890, Congress enacted the Sherman Act or the Silver Purchasing Act of 1890. It authorized the Department of the Treasury to issue notes (Treasury notes of 1890) to buy silver. They were full legal tender and redeemable in gold or silver at the discretion of the Secretary of the Treasury.
The law ordered the Secretary of the Treasury to buy silver at the market price with Treasury notes until silver reached $1.29 per ounce, the price of silver at which the ratio of silver to gold is 16 to 1. It required him to buy 4.5 million ounces of silver each month at the market price. This silver served as a reserve for the Treasury notes. Silver dollars were only minted when necessary to redeem Treasury notes. Under the Sherman Act, the U.S. government bought 168 million ounces of silver. Of this silver, 28 million ounces were coined into $36 million silver dollars. $156 million in Treasury note were issued.
The Sherman Act sought to drive the price of silver up by having the U.S. government buy most of the silver produced in the United States. It failed in this objective. Silver continued to decline in terms of gold.
As a result of the Sherman Act, new legal tender notes, Treasury notes of 1890, flooded the markets. People began redeeming these notes in gold and exporting the gold. Large quantities of gold were shipped overseas, and the Treasury’s reserves of gold coins and bullion became dangerously low. People also substituted the new Treasury notes for gold coins in their daily commerce and exported the gold coins.
The Sherman Act differed significantly from the Bland-Allison Act in at least one important aspect. Under the Sherman Act, the Secretary of the Treasury bought a specific number of ounces of silver each month. The Bland-Allison Act required the Secretary to buy between $2 million and $4 million of silver each month. Thus, the Sherman Act was in terms of ounces of silver, and the Bland Allison Act, in terms of the cost of silver. Therefore, under the Sherman Act, “the annual additions to the currency would grow less if the price of silver fell, while by the Bland[-Allison] Act the annual additions grew larger as the price of silver fell.”
Silver dollars issued under the Bland-Allison Act did not have the same effect as the Treasury notes of 1890. During the 1880s, banks contracted their bank notes because the supply of U.S. government securities was shrinking and their prices were rising. Banks had to use U.S. government securities as collateral for their bank notes. Thus, silver dollars issued in the 1880s approximated the contraction of bank notes and merely filled the void left by bank notes. By 1890, the quantity of bank notes stabilized. The Treasury notes of 1890 were an addition to the money supply and not a substitute of one form of money for another. Being an addition, people redeemed the Treasury notes in gold and exported the gold to countries where its monetary use was more valuable. Silver dollars and Treasury notes of 1890 were legally equal to gold in the United States in purchasing power. However, gold had a higher purchasing power in the world markets than silver dollars or the Treasury notes.
Silverite opponents of the Sherman Act identified several flaws in the Act. It was written in a way to cause large quantities of silver dollars to end up in the Treasury’s vault. It required the Secretary of the Treasury to buy silver bullion and then to coin an adequate supply of silver dollars to redeem outstanding Treasury notes. (Later, when President Cleveland convened Congress to repeal the purchasing provision of the Act, he pointed to the large quantity of silver coins and bullion in the Treasury as proof that the people did not want silver money. The major reason for this large hoard of silver coins was that the Secretary of the Treasury always redeemed Treasury notes in gold unless the person redeeming specifically asked for silver. Furthermore, most people preferred using paper money rather than coins.)
Another flaw was that it set a maximum price of one dollar per 371.25 ounces of fine silver that the Secretary of the Treasury could pay for silver. However, it did not set a minimum price. Opponents saw fixing a maximum price with no minimum price as a means to suppress the price of silver. Moreover, the Act fell far short of buying the annual production of U.S. silver mines.
The Act authorized the Secretary of the Treasury to redeem Treasury notes in gold or silver instead of gold and silver. Thus, the Act gave the Secretary too much discretion.
Furthermore, the parity clause was written such that it could be construed to require the U.S. government to guarantee the bullion value in the silver dollar should its value be less than a dollar in gold. This construct made the silver dollar credit money redeemable in gold. (This construct is exactly what the pro-gold antisilverites wanted.)
Supporters of the Sherman Act believed that it would stimulate business by increasing the money supply. Moreover, it would do so without inflation.
The Treasury notes of 1890 are commonly blamed for the Panic of 1893 and the depression that followed. As more notes were redeemed for gold and the gold exported, people in the United States and Europe began to lose confidence in the U.S. dollar. They feared that the U.S. government might not continue to redeem Treasury notes and greenbacks in gold.
They saw the New York subtreasury settling its clearing house balances in greenbacks and Treasury notes instead of gold. When the Treasury began imposing a fee on exporting bars of gold taken from its vaults, which caused gold coins to be exported instead of gold bars, more confidence was lost. Banks began inserting clauses in loans and mortgages to require payment in gold.
The new Secretary of the Treasury fed these doubts when he expressed concerns about being able to continue to redeem Treasury notes in gold. He stated the next day that Treasury notes would be redeemed in gold under all circumstances, but the damage done could not be undone.
Furthermore, the Treasury’s gold reserve fell below $100 million, which was considered the minimum backing for U.S. notes. When the Treasury’s gold reserve fell below $100 million, the Secretary of the Treasury, as required by law, stopped issuing gold certificates. This action fed the fear that Treasury notes of 1890 would not be redeemed in gold. This news was followed by India’s abandoning the silver standard, which sent the gold price of silver down sharply.
The Sherman Act had made a mockery of the silver dollar. Treasury notes were used to buy silver bullion, which backed the Treasury notes. This silver bullion was to be coined into silver dollars for redemption of Treasury notes. However, the Act gave the Secretary the discretion to redeem Treasury notes in gold or silver. Unless the person presenting the notes requested silver, the Secretary always redeemed them in gold. Most people expected that he would redeem them in gold.
If the Act had not given the Secretary the discretion to redeem Treasury notes in gold and had required him to redeem them in silver, the drain on the Treasury’s gold reserved would have been greatly lessened. Treasury notes would have been treated like silver certificates.
In short, people feared that the United States were going to leave the gold standard. This fear resulted in the Panic of 1893. To assuage this fear, Congress repealed the silver purchasing provisions of the Sherman Act in 1893.
Silverites saw the repeal of the purchasing provision of the Sherman Act as a deliberate attempt to eliminate silver as money in its own right. Walbert expresses the real motivation for the repeal, “It appears, therefore, that the sole object of repealing the purchasing clause of the Sherman law was for the express purpose of depriving silver of its only support, thus lowering its value, and thereby furnishing reasons against its use as money.”
A year before the Panic of 1893, major New York City banks were lobbying rural banks to support them in getting the Sherman Act repealed. Coercion was used against the rural banks as the New York City banks refused to rediscount their bills unless they supported the repeal of the Sherman Act. Opportunity came for the repeal when the Panic hit a year later. (How much involvement did these banks have in causing the Panic so that they could use it to get the silver purchasing requirement repealed? Some believe that the New York City bankers deliberately caused the Panic by creating a loss of confidence in their own banks. They also sent out circulars to banks and businesses forecasting economic doom if the Sherman Act was not repealed.)
After the Panic hit and President Cleveland convened Congress to repeal the silver purchasing provision, the New York City banks applied pressure on Southern and Western bankers to support the repeal. The New York City banks informed these bankers that they could expect no money from New York until the purchasing provision was repealed. Moreover, the New York City banks appeared to have conspired not to lend to merchants until the silver purchasing provision was repealed. They had plenty of money in their vaults for loans.
The Panic of 1893 ended with the repeal of the silver purchasing provision of the Sherman Act. A depression which lasted until June 1894 followed. Another depression occurred from October-December 1895 to June 1897 (some place the end as early as October 1896). (Some economists consider the entire period 1893-1897 as a major depression.)
As a result of the Panic, business activity slackened, and the demand for money fell. Excess money accumulated in bank vaults. This excess money became available for speculation in the stock and commodity markets. This speculation led to a rise in commodity prices in the United States. Consequently, commodities were imported and gold was exported, which caused gold reserves to shrink even more. The Secretary of the Treasury was forced to pay out more currency than he received — thus, contributing to the inflation. He sought to raise the gold reserves of the U.S. government by selling bonds. However, this action created concerns that the Treasury might not be able to continue redeeming paper money in gold. People began redeeming their paper money at an accelerated rate because they feared that the U.S. government was on the verge of bankruptcy.
(The major argument for the repeal of the silver purchasing provision was to stop the drain of gold from the Treasury and the country. However, the drain continued unabated. About the repeal of the Sherman Act and the gold drain, Walbert states:
It was further stated that the repeal of the Sherman law was necessary to prevent the exportation of gold from the United States. This was another hypocritical plea to aid in the passage of the repeal, for, in a single year after that act was consummated, one hundred and twenty millions of dollars in gold were drawn out of the Treasury by that set of knaves who had urged repeal as a means to protect the gold reserve.)Moreover, when the New York City banks bought the bonds, they did not buy them with their gold. They redeemed Treasury notes for gold and used that gold to buy bonds. “Therefore, while these banks were demanding issues of bonds to maintain the public credit, they utilized this very issue as a means to further deplete the Treasury of its gold.”
Finally, in January 1895, the Secretary of the Treasury entered into an agreement with a syndicate of bankers led by J.P. Morgan and August Belmont, both of whom were associates of the Rothschilds. (Belmont was acting on behalf of N.M. Rothschild & Sons.) The bankers would buy $65,117,500 of bonds paid for with gold. (They bought $62,315,500.) Half of this gold was to come from Europe (this part of the agreement was later ignored, which caused a reduction in the U.S. money supply). The bankers were to use their influence to prevent the withdrawal of gold from the Treasury. These bankers made the exporting of gold unprofitable by controlling the rate of foreign exchange. This agreement improved the situation temporarily. However, the threat of war between Great Britain and Venezuela in 1895 led to more redemptions and exports of gold. Finally in August 1896, the monetary system stabilized and the export of gold ceased. $33 million in gold had been withdrawn in excess of that needed for export.
Were banks deliberately withdrawing gold from the Treasury to force the U.S. government to sell bonds to restock its gold reserves? An editorialist of the New York World, which was an advocate of the gold standard, believed that they were. He wrote:
The banks have no apparent use for gold.As a result of the Sherman Act, between July 1890 and July 1893, $156 million in Treasury notes were issued, and $160 million in gold were exported. The gold reserve of the Treasury fell from $184 million to $84 million (October 1893). In 1893 the United States government held $150 million less gold than it would have if the Sherman Act had not been enacted. From 1890 to 1896, the net export of gold was $269 million.
They have absolutely no obligations of any kind, near or remote, which are payable in gold.
Nevertheless these banks are hoarding gold in large quantities, at a time when to do so is to subject the Government to heavy and needless expense.
Thus the clearing house banks of New York alone, hold over $81,000,000 in gold for which they have no use. . . .
If they should turn it into the Treasury and take greenbacks instead, they would be in every respect as well equipped as now to meet their obligations, while the Government would not have to issue another $100,000,000 of bonds, which it will cost the country $220,000.000 to pay, principal and interest.
Are they serious expecting gold to go to a premium?
Or are thy and the banks all over the country in a tacit “combine” to compel repeated bond issues for their speculative profit? These banks ought to answer these questions.
A criticism that the silverites hurled at President Cleveland was that the Treasury held $147,000,000 in silver dollars and bullion when he convened Congress to repeal the silver purchasing provision. At the same time money brokers and banks in New York City were buying silver dollars and silver certificates at a premium. To the silverites this was proof that whatever the cause of the problem was, it was not too much silver money in circulation. This was proof that too little was in circulation. The real reason that the Treasury held so much silver was to back silver certificates and Treasury notes in circulation. (President Cleveland implied that the Treasury held this silver because people did not want silver money.)
The silverites opposed the Treasury selling bonds to replenish its gold reserve. They claimed that the Treasury had an abundantly available surplus of specie. In the Treasury was nearly $300 million in silver. The Secretary of the Treasury just needed to use silver.
Furthermore, failure to use silver violated the policy set out in the Sherman Act, which was “to maintain the two metals at a parity.” It also violated the policy of the Act of 1893, which “‘declared that the efforts of the government should be steadily directed to the establishment of such a system of bimetallism as will maintain at all times the equal power of every dollar coined or issued by the United States in the markets in the payment of debts.’”
The Sherman Act added a great deal of money to the U.S. economy that was not needed. It caused silver to be used domestically and gold to be exported. Without the Sherman Act, any shortage of money in the United States would have been overcome by the importation of gold.
Most of the gold withdrawn from the Treasury came from the redemption of greenbacks. As the Treasury was short on gold, it was forced to payout these greenbacks as quickly as they were received. These greenbacks were soon redeemed again. Thus, the Treasury was in a cycle of having to redeem continuously the same greenbacks.
Although the greenback appeared to be the culprit causing the Treasury’s loss of gold, it was not. The real culprit was the inflation caused by the Treasury notes of 1890 and the U.S. government’s deficit.
About the role of silver in the Panic of 1893, Fels writes:
How much difference did silver make? An element of speculation must enter into any judgment, but the following three statements seem justified, (1) The threat to the gold standard made the contraction more rapid and violent during the months of March through August. (2) If the silver problem had never entered the picture at all, the contraction after August would have been more rapid. This follows from the fact that money stringency bunched failures that would have occurred sooner or later anyway. (3) The silver situation probably resulted in deeper contraction by causing failures among firms and banks that could have survived if the kind of money market characteristic of cyclical contractions had prevailed. The evidence for this lies in the high ratio of assets to liabilities among the failures.The Sherman Act suffered the same constitutional flaws of the Bland-Allison Act. Under the Constitution, the U.S. government has no authority to issue paper money, to buy and coin silver on its own account, or to act as a deposit bank.
The preceding paragraph regards the silver problem as the variable, holding everything else constant. If one reverses the procedure, holding silver constant and inquiring how much difference the underlying business situation made, one might easily come to a different conclusion. The monetary and fiscal policies actually pursued, together with the banking structure, might have produced panic and severe depression in any event. The argument must be a bit arbitrary, since the result would have depended on how the President and Congress reacted to the emergency; but in the political situation of 1893 nothing short of disaster would probably have sufficed to make effective action possible. In this sense, one can assign the leading role to monetary factors, which would have caused strong firms to fail had there not been plenty of weak ones.
The silver dollars minted under the Bland-Allison Act and Sherman Act and the Treasury notes of 1890 were forms of fiat money. The silver content of the silver dollar was worth less than a dollar. The U.S. government bought silver on its own account and issued the silver coins. It decided how many to issue instead of the markets.
Opponents of silver blamed silver for the economic problems of the 1880s and especially the 1890s. They saw silver as a threat to the gold standard.
Friedman and Schwartz show that “until 1886, silver grew fairly slowly and the greater part of the increase in high-powered money consisted of gold. From then until 1893, silver grew rapidly, replacing gold almost entirely as a source of additional high-powered money. Thereafter, both silver and gold as well as total high-powered money fluctuated about a nearly constant level.”
From 1879 to 1893, the total of silver and Treasury notes of 1890 out-side the Treasury grew some $500 million, which is a measure of the strength of the silver forces. These purchases added to high-powered money and so contributed to an expansion of the stock of money. This is the effect that contemporaries pointed to as constituting a threat to the gold standard. But it is clear that the direct effect of the silver purchases on the stock of money did not, in fact, threaten the maintenance of the gold standard. In the first place, the growth in silver currency was offset to some extent by a reduction in national bank notes outstanding, a reduction enforced by debt retirement. In the second place, and more important, total high-powered money grew from 1879 to 1893 by $740 million or by $240 million more than the silver currency. In the absence of the silver purchases, the gold stock — or perhaps some other component of the money stock — would have risen more than it did.The threat to the gold standard came primarily from the actions of foreigners. Friedman and Schwartz note:
The threat to the gold standard came from the effects of the silver purchases on the willingness of foreigners to hold dollars. This evidence of the power of the silver forces discouraged the inflow of capital or produced speculative capital outflows of substantial magnitude and kept alive the possibility of very much larger outflows. The smaller inflows or actual outflows made for a lower rise in high-powered money than would otherwise have occurred, so that in their absence the growth in silver currency would have been a still smaller fraction of the total growth in high-powered money. Together with the measures taken in fear of potential outflows, they enforced monetary deflation to produce the requisite adjustments in the balance of payments. Paradoxically, therefore, the monetary damage done by silver agitation was almost the opposite of that attributed to it at the time. It kept the money stock from rising as much as it otherwise would have, rather than producing too rapid an increase in the money stock.After the 1896 election and the defeat of the silverites, the clamor for the free coinage of silver faded away as the economy improved. Prices rose as the world gold stock grew. In 1900, the free coinage of silver and the silver standard was finally killed with the Gold Standard Act.
1. Richard T. Ely, An Introduction to Political Economy (Revised edition; New York, New York: Eaton & Mains, 1901), p. 188. White, p. 204.
2. Davis Rich Dewey, Financial History of the United States (1922; reprint. New York, New York: Logmans, Green and Co., 2005), p. 438.
3. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), p. 168.
4. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; reprint. Merlin, Oregon: Walter Publishing & Research, 1997), p. 288.
5. Ibid., p. 281.
6. Ibid., pp. 281-282, 285-286.
7. Ibid., pp. 300-301.
8. Ibid., p. 306.
9. Ibid., p. 335.
10. Joseph French Johnson, Money and Currency: In Relation to Industry, Prices, and the Rate of Interest (Revised edition; Boston, Massachusetts: Ginn and Company, 1905), pp. 356-359. Walbert, pp. 337-340. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), pp. 211-212.
11. White, p. 211.
12. Walbert, pp. 333-334.
13. Johnson, pp. 358-359.
14. Walbert, p. 273.
15. Dewey, p. 452.
16. Ibid., p. 452.
17. White, p. 209.
18. Johnson, p. 359.
19. Rendigs Fels, American Business Cycles 1865-1897 (Chapel Hill, North Carolina: The University of North Carolina Press, 1959), p. 188.
20. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), pp. 128, 131.
21. Ibid., p. 128.
22. Ibid., pp. 131-132.
Copyright © 2010 by Thomas Coley Allen.
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