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Form P. R. 511 TO GvFff1. n..>>pg FROM REMARKS: Attached is a memorandum, prepared at ay request under Burke Knappfs direction,that you may be interested in having,to bring you up to date on the silver picture• CHAIRMAN'S OFFICE © B O A R D OF G O V E R N O R S • F THE FEDERAL RESERVE SYSTEM Office Correspondence Q Chairman Eccles From Date Mary Maroney Subject: September 9, 1945 Silver The attached memorandum is in response to your request for information on recent developments in silver. SILVER DEVELOPMENTS IN UNITED STATES 1941-1943 The war has effected a complete reversal in the supply position of silver* The industrial demand for it as a substitute for the scarcer metals, aluminum, copper, nickel, and tin, has overshadowed its monetaryaspect and the huge stocks accumulated by the Treasury under the Silver Purchase Act and the domestic silver subsidy program are now found to have some useful purposes* Shortly after the outbreak of war in Europe the Governments of Great Britain and India imposed controls on the movement of silver, particularly imports* The United States market was thus insulated from these customarily active centers of speculation and hoarding and was affected only by increasing industrial demand* Consumption in both civilian and war industry rose but it was not until the end of 1941 that the market showed any tendency to take stock of a growing shortage of supplies. On November 19, 1941, the United States Treasury as part of an over-all program of mutual cooperation between the Governments of the United States and Mexico concluded an agreement to purchase directly six million ounces of silver a month from Mexico* (No change was made in the Treasury's buying price for foreign silver which had remained at 35 cents since July 10, 1939#) This action, intended only as a gesture of goodwill, suggested to the market that the industrial supply was to be deprived of six million ounces a month which otherwise would have gone into consumptive channels* This supply, it should be noted, was constituted wholly of foreign silver which was available to consumers at 35 cents an ounce as compared with the price of 71*11 cents which the Treasury pays under the terms of the silver subsidy legislation for domestic silver. To retain control of Mexican silver against the Treasury^ offer, the market price was raised to 35-3/8 cents and Mexican silver continued to go into consumptive channels. In the spring of 1942, however, the increas- ing demand was instrumental, in persuading some consumers to go to Mexico to buy in order to escape the informal rationing of supplies which was being enforced by bullion dealers here. This action in turn was followed by the licensing of imports for essential purposes by the War Production Board and the application of price controls by the Office of Price Administration. In August 1942, the Office of Price Administration lifted the ceiling price for foreign silver to 45 cents. This temporarily eased the situation by bringing into the market silver which had been withheld in anticipation of higher prices. Meanwhile the Tar Production Board had begun to restrict the use of foreign silver to priority needs. The Treasury also had taken cognizance of the growing scarcity by leasing to the Defense Plant Corporation its wfreew, i.e., unmonetized silver bullion for nonconsumptive purposes and by agreeing to the postponement of deliveries on its current purchases of domestically mined silver. The! release of Treasury silver for industrial uses has been carried still further in 1943 by the enactment of the Green Act which permits the sale of the Treasury1 s free silver at 7U11 cents an ounce for certain consumptive purposes approved by the War Production Board and the use for nonconsumptive purposes of the monetized bullion, i.e., the metallic cover for silver certificates. The Treasury stocks made available by the Green Act appear to be far in excess of the probable consumption notwithstanding the fact that the latter has risen rapidly in the last year and a half# Consumption in 1942, including coinage requirements, is estimated at 194 million ounces as compared with 135 million ounces in 1941* ufaile estimates prepared by the War Production Board in April of this year place the maximum consumption in 1943 at 270 million ounces* On July 12, 1943, when the Green Bill was enacted, the Treasuiy stocks included 1,525 million ounces held as security for silver certificates and 1,252 million ounces of «freett silver in the General Fund* Of the latter amount 700 million ounces had already been transferred to the Defense Plant Corporation in accordance with the agreement of May 6, 1942, but if the need arose this amount could now be charged against the monetized bullion thereby releasing for sale an equivalent amount of wfreew silver. Within recent months the factor of increasing foreign demand has become more prominent. On July 2, 1943 the arrival in the United Kingdom of 3 million ounces of silver from the United States was announced* The silver came from the Treasury1 s wfreew stock under a Lend-lease arrangement* Although no other transactions of the nature have been disclosed it is assumed that future withdrawals are quite likely* in view of Secretary Morgenthau's statement of last December that Treasury Mfreew silver would be loaned to friendly foreigi powers provided that such nations agree to return it ounce for ounce after the war* On August 17, 1943, the Finance Minister of Mexico, Senor Eduardo Suarez announced that increased coinage and industrial demands in Mexico necessitated the suspension of shipments to this country until April 1944# According to press reports, part of the increased industrial demand in Mexico stems from a shortage of silverware here* Our manufacturers who are working on non-war orders are not allowed access to foreign supplies or to the Treasury "free11 silver; they are permitted to use newly mined domestic silver only to the extent of fifty per cent of their normal consumption in 1941 or 1942, -whichever is larger# As a result of this situation some of our large retailers, unable to meet expanded consumption with the amount of non-priority articles permitted to be produced, have been placing orders for hollow ware and costume jewelry in Mexico. Confirmation of this development is to be found in reports from manufacturers here that they have received offers from Mexican producers to purchase idle machinery and equipment. The Mexican Government has recently imposed a tax of 8*41 pesos per kilogram (approximately $1.75) on the export of silverware and jewelry. Formerly these items had enjoyed free export. The increased coinage is attributed to hoarding by the public as well as the melting down of coin by speculators who have been realizing more from the silver content than from the nominal value of the coin* At the time of the passage of the Green Bill, Representative Celler served notice that upon the reconvening of Congress he expected to press for the repeal of the Silver Purchase Act. House calendar* He has a bill to that effect on the In the present situation it does not appear that there is much ground for criticizing the policy since it has had some fortuitous results# It is to be noted, however, that the difficult price relationships of foreign and domestic silver have not been particularly changed — foreign silver being acquired at 45 cents and domestic silver at 71*11 cents an ounce. Since all the Treasury1 s stock which is being sold for industrial consumption is being turned over at the latter level, industry, in large measure, is adapting itself to the price which, in pre-war years was definitely uneconomic. - 5 Meanwhile there is a very good prospect that a considerable portion of our "surplus" silver will be used up* A calendar of events and pertinent tables are attached* -1 Calendar of Silver Developments in United States under War Conditions Foreign Silver November 28, 1941 Market price increased 3/8 cent to 35~3/8 cents to divert Mexican production from U* S. Treasury, which on November 19, 1941, agreed to purchase 6 million ounces monthly at 35 cents an ounce* May 6, 1942 Bullion dealers ration sales for all purposes other than war and essential manufactures, as demand exceeds imports* Domestic Silver U* S* bans silver exports to Europe* Unannounced embargo on shipments to Spain, Portugal, Switzerland, Sweden, Vichy-France, Turkey, and French Africa, in order to keep metal from Axis industry* Treasury leases **free silver" stocks to Defense Plant Corporation, placing at its disposal 1*4 billion ounces for nonconsumptive war uses* May 6, 1942 May 11 & 18, 1942 0* P* A* freezes market price at 35-3/8 cents* Ceiling applied to transactions in bullion and semi-fabricated products beginning May 11; to articles sold at retail beginning May 18* July 21, 1942 W* P* B* makes imports subject to license to prevent purchases in Mexico by private manufacturers at prices in excess of U* S* ceiling of 35-3/8 cents. July 29, 1942 Effective October 1, W* P* B* prohibits use of silver in all manufactures not bearing a priority rating of A-3 or higher, in order to conserve stocks* August 4, 1942 Treasury permits postponement of deliveries of newly mined silver for which it holds contractsf in order to divert supplies to market for non-priority manufactures# Foreign Silver August 5, 1942 Domestic Silver 0+ P « A . applies ceiling of 35^3/8 cents to all imports to discourage speculative withholding by foreigners in anticipation of higier prices. August 28, 1942 0. P. A. fixes price for newly mined domestic silver at 71.11 cents plus transportation charges. The inclusion of the latter gives market buying price advantage over Treasury buying price. August 29, 1942 0. P. A. permits sellers of semi-fabricated products to increase price 36-1/3 cents to 71.11 cents, the rely passing along to customers the increased cost of the use of newly mined domestic in place of foreign silver. August 31, 1942 0. P. A. lifts price 9-5/8 cents to 45 cents after Governments of the United States and Mexico agree on such price for imports into this country. September 15, 1942 Growing tightness in supplies increased by two factors: (1) intimation by W. P. B. that war needs might necessitate conservation controls; (2) intimation by Senator McCarran that he planned to introduce legislation that would increase price from $.71*11 to $1*29 an ounce* Rationing of supply by dealers. September 17, 1942 Sale of silver from Treasury stock. 5 million ounces of silver "ordinary", i.e., silver which was not acquired under monetary legislation, offered for sale at 45 cents for use in war production. Domestic Silver Foreign Silver November-December 1942 Metals Reserve Corporation stockpiles silver to take t p strong reversal in supplies brought out i by 45 cent price. December 14, 1942 Secretary of Treasury announces that the U* S* will lend-lease silver to friendly foreign powers for return after the war on an ouncefor-ounce basis. February 23, 1943 W* P* B« outs non-essential manufactures by 50 per cent in an order limiting the amount of domestic silver available for such products to one-half the amount consumed in 1941 or 1942, whichever is larger* March 23, 1943 0. P. A. 71*11 in factured includes July 2, 1943 Treasury lend-leases silver to United KingdomAnnouncement of arrival in United Kingdom of 3 million ounces from Treasury's stock of Hfree1* silver, to b e returned ounce for ounce at end of war* July 12, 1943 Enactment of Green Bill, making available to consumers approved by the War Production Board the "free" silver stocks of the Treasury at 71*11 cents an ounce and liberating for non-consumptive uses the stock of monetary silver, i*e*, the metallic cover of silver certificates* permits increase of 36 cents to price of finished articles manufrom newly mined silver* Order 12 specified lines of silverware * •I ^ M Foreign Silver July 29, 1943 W* P* B* restricts use of foreigi silver to manufacture of items bearing preference rating of AA-5 or higher as result of greatly curtailed imports. August 9, 1943 ¥* P. B* restricts the use of Treasury silver made available by Green Act to the manufacture of engine bearings, official military insignia, brazing alloys, and solders* 0* P. A. permits increase of 36-1/& cents to 71+11 cents in prices of silver scrap derived from use of newly mined domestic silver* August 13, 1943 W* P. B. requires inventoiy reports of foreign silver from manufacturers whose stocks of metal have been rendered idle by W. P. B. orders restricting usej silver to be moved into essential permitted use. August 17, 1943 Announcement that shipments from Mexico will be suspended until April 1944 in order to meet increased coinage and industrial demands in Mexico. September 6, 1943 W. P. B. prohibits use of foreign silver in manufacture of brazing alloys or soldersT Domestic Silver I. War Production Board Estimates of April 28, 1943 (Millions of ounces) Supply: Domestic Production Imports Total Estimated receipts from scrap, Metals Reserve Company stocks, and reserves of "silver ordinary" Total 45 70 m 47 152 Consumption: Essential Non-essential Total Potential additional consumption: Essential Foreign industrial and coinage requirements Total II. 139 30 159 40-50 40-50 249-269 Domestic Production (Millions of ounces) Period 1942 1943 January-June 30 21 July-December 25 Total 55 United States Silver Imports Ill (Millions of ounces) Imported from: Period Canada Mexico 1942 - January - June Dece®ber July All Other Total 7 7 58 32 8 3 4 3 3 3 60 48 14 Total 70 11 7 6 108 5 SO 6 9 2 42 1948 - January - June IT* Peru Other Latin .America Components of United States Silver Stock (Millions of ounces and dollars) December 31, 1941 Ounces Dollars Silver coin in circulation outside Treasury Silver held in Treasury: Against silver certificates In General Fund: Subsidiary coin Bullion at cost * ** July 31. 1943 Ounces Dollars 403 557 524 720 1,516 1,960 1,520 1,966 3 1,353 4 *662 26 **1,250 36 *590 At cost va lue 700 million ounces of this amount held by Defense Plant Corporation* Silver Acquired by Mints and Assay Offices V* (Millions of ounces) Period 1942 - January - June July - December Total 1943 - January - June Newly mined domestic 28 Foreign 14 20 48 5 14 —