William L. Silber on The Story of Silver

SilberThis is the story of silver’s transformation from soft money during the nineteenth century to hard asset today, and how manipulations of the white metal by American president Franklin D. Roosevelt during the 1930s and by the richest man in the world, Texas oil baron Nelson Bunker Hunt, during the 1970s altered the course of American and world history. The Story of Silver explains how powerful figures, up to and including Warren Buffett, have come under silver’s thrall, and how its history guides economic and political decisions in the twenty-first century.

Why did you write this book?

In 2014 Bunker Hunt died and when I told my children – who had worked in finance all their lives—they thought Bunker was one of the guys who kept hitting the ball into the sand in my Sunday golf group. Right then I knew that I had to write this book to at least tell the story of the greatest commodities market manipulation of the 20th century – one that was perpetrated by the larger than life Nelson Bunker Hunt – the richest man in the world who ultimately went bankrupt trying to corner the silver market with his brothers, Herbert and Lamar, in the 1970s. The Hunts drove the price of silver to a record $50 an ounce in January 1980 and nearly brought down the financial markets in the process. But the Hunt brothers were not the first nor the last to be seduced by the white metal. In 1997 Warren Buffett, perhaps the most successful investor of the past fifty years, bought more than 100 million ounces, almost as much as the Hunts, and pushed the price of silver to a ten-year peak. In 1933 Franklin Delano Roosevelt raised the price for silver at the U.S. Treasury to mollify senators from western mining states while ignoring the help it gave Japan in subjugating China. Was FDR’s price manipulation in the 1930s less criminal than Nelson Bunker Hunt’s in the 1970s? Reading this book will let you make an informed judgment and it will also show that the white metal has been part of the country’s political system since the founding of the Republic. Perhaps the most famous speech in American electoral politics, Nebraska Congressman William Jennings Bryan’s “Cross of Gold” sermon at the 1896 Democratic convention, was all about silver. Bryan’s cause, the resurrection of silver as a monetary metal, aimed to rectify the injustice perpetrated by Congress in the Crime of 1873, which discontinued the coinage of silver dollars that Alexander Hamilton had recommended in 1791. Thus, the Story of Silver spans two centuries and is woven into the fabric of history like the stars and stripes.   

Why did Bunker Hunt become obsessed with silver in the 1970s?    

A member of the right-wing John Birch Society, Bunker became the richest man in the world at age forty in 1966 when oil was discovered in Libya where he owned the drilling rights. His ultraconservative politics made him distrust government and its paper currency and favor real investments, such as oil, land, and racehorses. The Arab oil embargo in 1973 provoked an outburst of inflation and Libya’s Muammar Qaddafi nationalized Bunker’s oil fields, forcing the Texan into precious metals to protect against the declining value of the dollar. He bought silver, rather than gold, because he thought the yellow metal was “too political” and “too easily manipulated” by outside forces. Bunker worried that central bankers could sell their massive gold reserves and depress its price. Silver, on the other hand, benefited from favorable fundamentals: the demand for the white metal by industry, for use in electronics, photography, and medicine, exceeded mine production by nearly 200 million ounces a year (Warren Buffett invested in silver in 1997 for the same reason). Moreover, in 1973 the price of silver was cheap relative to gold. The price ratio of gold to silver had been about 16 to 1 for a century before the Crime of 1873, meaning that it took 16 ounces of silver to buy an ounce of gold. In 1973, before Bunker began his accumulation, the price ratio was almost 40 to 1. Bunker thought silver’s industrial uses should have boosted its price to where only 5 ounces of silver were needed to get an ounce of gold. Bunker picked 5 to 1 because it was lower than 16 to 1 but he could have gone further. In ancient Egypt silver’s scarcity and medicinal uses had made it more valuable than gold.   

Did the Hunt Brothers really manipulate the price of silver?

The Commodity Futures Trading Commission (CFTC) argued that during the second half of 1979, the Hunt brothers and their Arab collaborators coordinated a scheme to drive up silver prices in the futures markets by purchasing over 200 million ounces of the white metal, more than the combined annual output of Canada, Mexico, Peru, and the United States, the four largest noncommunist producing countries. They pressured the market by controlling more than 40% of silver in exchange warehouses and by taking delivery of almost 50 million ounces of bullion. But the alleged manipulation was not the classic corner of futures markets, where the longs prevented the shorts from delivering. As silver prices accelerated in December 1979, for example, even the CFTC said that the shorts “anticipated no difficulties in making delivery on their positions.” Moreover, the Hunts denied manipulative intent, dismissed any coordination, even among themselves, and justified their demand for silver as a hard asset to protect against global risks in the second half of 1979, when inflation reached double digit levels, Iranian terrorists invaded the United States embassy in Teheran and seized American hostages, and when the Russians invaded Afghanistan.  Disentangling the impact of the alleged manipulators from legitimate speculation took extensive litigation in this case. In a civil trial in 1988 a jury easily concluded that the Hunts conspired with others to manipulate but disagreed about the impact on prices. The jury had to distinguish between the defendants’ accumulation and the unsettling news of 1979. The CFTC argued that gold prices reflect political and economic turmoil and silver increased twice as much during 1979, providing a benchmark for damage calculation for the jury. But that ignores the historical evidence that the white metal is normally twice as volatile as the yellow. For example, during the European debt crisis following Lehman’s bankruptcy in 2008, silver rose 400% and gold increased by 250% and none of that disparity came from manipulation. That evidence came too late to exonerate the Hunts.  

How did FDR’s silver subsidy help Japan subjugate China in the 1930s?

During the Great Depression, after the price of silver hit a record low of 24¢ an ounce, Democratic Senator Key Pittman of Nevada, the powerful chairman of the Senate Foreign Relations Committee, urged President Roosevelt to reverse the Crime of 1873 and restore the white metal’s full monetary status. In exchange, Pittman promised the support of fourteen senators from western mining states for Roosevelt’s controversial New Deal legislation. FDR agreed and responded with a series of purchase programs for silver by the U.S. Treasury that ultimately doubled the price of the white metal. The higher price attracted silver from the rest of the world, especially from China, whose currency was backed by the precious metal, and ultimately forced China to abandon the silver standard when that country was most vulnerable. It was 1935 and China, led by American ally Chiang Kai-shek, faced an internal threat from Mao Tse-tung’s communist insurgents and an external threat from Imperial Japan. Roosevelt’s Treasury secretary, Henry Morgenthau, worried that China’s insecure government, weak economy, and susceptibility to Japanese aggression made her especially vulnerable to the dislocations arising from American silver policy. Morgenthau was right to worry. Roosevelt’s pro-silver program to please western senators helped the Japanese military subjugate a weakened China and boosted Japan’s march towards World War II, demonstrating the danger of formulating domestic policy without considering international consequences.  It is a cautionary lesson for putting America First today, especially since the fallout from such narrow-minded policymaking may not materialize until it is too late, just like in the 1930s.

Was the Crime of 1873 really a crime?

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, such as 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 technically committed a crime. 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’s removal of the silver dollar from the Coinage Act of 1873 eroded the value of the white metal, cutting its price in half by the mid-1890s, and altering the course of American history. Twenty-five years of price deflation during the last quarter of the 19th century increased the burden of debts like mortgages which remained fixed in dollar terms even though home prices declined. The drop in wages and agricultural prices launched a generation of social combat, pitting “silverites” against “goldbugs,” debtors versus creditors, and midwestern farmers against East Coast bankers, all combining to darken the political landscape like a dust storm. Many consider L. Frank Baum’s children’s story, The Wonderful Wizard of Oz, which has entertained millions since it was published in 1900, an allegory of the contemporary class warfare. William Jennings Bryan capitalized on the social upheaval, captured the Democratic nomination for the presidency in the 1896 election with his Cross of Gold speech promoting the monetary status of silver and easier credit. Bryan lost to William McKinley, leaving silver a second class monetary metal until Key Pittman and Franklin Roosevelt joined forces to rescue the white metal in the 1930s.  

Should investors own silver today?

The worldwide experiment in fiat currency, pure paper money, that began on August 15, 1971, when President Nixon suspended the right of foreign central banks to convert dollars into gold, 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 and nearly destroying the U.S. dollar. But the chaos unleashed popular support for making price stability the primary objective of an independent central bank. Since then, central bank independence throughout the world has replaced gold and silver as guardian of the currency. And if central bankers do their job that arrangement will continue, but public support can evaporate, undermining banker 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. The Federal Reserve has survived the fifty-year 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 Germany’s 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.

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 (Princeton) and Volcker (Bloomsbury). He lives in Teaneck, New Jersey.