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-X F E DE RA L R E S E R V E BANK OF SAN F R AN CI SC O * // MONTHLY REVIEW I N THI S I S S U E Mr. Roosa on World Liquidity . . i n New Luster for the White Metal I. Crime of 73: Case Closed . 119 II. Comstock Revisited . . . . 129 NE 64 19 14 FIFTIETH ANNIVERSARY 1964 Mr. Roosa on World Liquidity . . . full text of the speech, “ The Potentialities o f O ur International Payments System ” . Crime of ’73: Case Closed . . . silver’s new-found success leads to the latest episode in its check ered legislative ca re e r. Comstock Revisited . , . rising silver prices cause District producers to expand developm ent and exploration activities. Mr. Roosa on World Liquidity Eleventh A nnual International M onetary Conference of the Am erican Bankers Association m et on M ay 21 o f this year at the Palais Schwartzenburg in Vienna. M r R obert V. Roosa (Undersec retary o f the Treasury for M onetary A ffairs) highlighted the session with an analysis o f recent and possible future developm ents in the field o f international liquidity. H is speech, “The Potentialities of Our International Paym ents System ,” has aroused a great deal of interest in the business and financial com m unity, and for that reason it is reprinted here in its entirety. T he In the rising crescendo of calls for reform of the international m onetary system, the continuing them es of present experience seem sometimes to be barely audible. B ut I scarce ly need rem ind this audience that they are still im portant, and indeed are likely for a long time to come to provide the structure on which all of us in the w orld of finance will continue to depend. It has been one of the rem arkable and reas suring aspects of the close and intensive stud ies which have been under way for some m onths now within the so-called G roup of T en*, that the participants have never lost sight of the essence of w hat we already have. W hile it would be inappropriate for me, o r for any of us, as yet, to venture in public any views on specific possibilities for the future evolution of the international m onetary sys tem, I believe I may be perm itted to reflect fo r a few minutes, in purely personal term s, on some of the features of the arrangem ents th at are already in being. Even here, there is room for wide differences of view, but each of us m ust attem pt some sorting out of this kind as a prerequisite to taking any p a rt in the process of testing out and appraising the full range of thoughts, aspirations o r propo sals th at have been suggested for the future. *Ed. note—In October 1963, representatives of the ten leading industrial countries agreed “ to undertake a thorough examination of the outlook for the functioning of the international mone tary system and of its probable future needs for liquidity.” These countries are: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. There are a num ber of avenues of ap proach th at one might take tow ard a broad view of our international payments system and its ability to m eet the w orld’s need for liquidity. O ne is that of constructing various theoretical models of an ideal system and then, somewhat disappointedly as a rule, m easuring the perform ance of our present arrangem ents against this standard. A second line of approach traces historically the steps along which the world has evolved tow ard the present liquidity system, concluding all too often that we are already living in the best of all possible worlds, or if not, th at the only answer lies in turning back to an earlier stage of m onetary evolution. Still a third kind of approach has com e to appeal to me. Some w hat m ore eclectic in its point of view, it draws from o u r past experience while recog nizing that the chief lesson of history is that paym ents systems and liquidity arrangem ents — like most things in a dynamic world— are constantly evolving in response to current experience. Such an approach asks the historical ques tion “W here have we been and how did we get where we are?” , but it asks this question fo r the purpose ultimately of answering an other: “W here do we w ant to go and how do we get there?” It recognizes that our ability to foresee the future and its needs is gravely lim ited; that perhaps o u r surest course is to develop a cooperative and flexible approach, FEDERAL 1 12 RESERVE BANK both tow ard finding the direction in which we may wish to move, from one period to another, and in selecting the processes that will take us forw ard in an orderly m anner. The work of the G roup of Ten will have been fully successful, I believe, if it helps to assure and confirm the com m itm ent of all the participating countries tow ard such an ap proach. F o r as we look to the future with an eye to the past, we cannot escape the evi dence th at the evolution of our paym ents sys tem has too often been scarred by disruptive convulsions set off at an unexpected m om ent by the force of change itself. T he system, too often, was not readily flexible in meeting and adapting to underlying changes th at were already in m otion. In looking tow ard the changes th at an uncertain future always brings, the G roup of Ten is building with a new spirit of international financial cooper ation that has been developed in recent years and strengthened during the current discus sions. T o me, this spirit and its perpetuation represents a stride forw ard that is at least as im portant as any more concrete recom m en dations that may in the end emerge from our studies. A glance backw ard, in the history of our international liquidity system, suggests a num ber of intriguing parallels, as well as contrasts, with the liquidity systems th at have been developed within individual nations. The financial history of national economies, in the m ain, reflects a progressive develop m ent in the effective use of the liquiditycreating process to m eet national economic purposes and goals. This developm ent has generally taken place through the m arket place of private credit— where, in a neverending attem pt to economize on money, an almost infinite variety of near-m oney substi tutes has been developed. B ut it has been ac com panied by the emergence of central b an k ing, and paralleled by a growing reliance upon debt m anagem ent and fiscal policy. This con OF SAN FRANCISCO tinuous perfecting of the liquidity-creating process w ithin nations has rested on the es tablishm ent and perpetuation of secure polit ical institutions for the areas served. A nd it has been buttressed by an integrated system of financial m arkets and institutions— in vari ous stages of developm ent in different coun tries— as well as by the existence of only m inim al barriers within national boundaries to the free flow of men and goods, and money and capital. In the international area, the m oney-cre ating elem ent of the liquidity process cannot rest upon the political sovereignty th a t has been its essential foundation in the individual nation. N or can it rest on a unity of essential economic and financial policies among na tions. N ational m onetary, fiscal, trade, em ploym ent, and growth policies can and do differ in both philosophy and practice. N or can the creation of international m oney rest on a unified system of financial o r com m er cial institutions or on a single m oney and capital m arket. T o be sure, great strides have been made in recent years in bringing the countries of the W estern world closer toge ther in all these areas, but we w ould only be deluding ourselves if we were to think th at we have reproduced internationally— or are likely to do so in the near future— the things th at we can safely take fo r granted within national boundaries. We m ust be mindful, therefore, when we draw on analogies with national systems, as we try to visualize the potentialities for the creation of m onetary assets, as well as all other forms of interna tional liquidity, that a cautious and selective approach will be required. In the international area we are still in the com paratively early stages of learning how to economize on the prim ary elem ent of inter national liquidity, the m onetary reserves themselves. This effort to economize is not new, but its adaptation from the internal us age of nation-states to the external needs of June 1964 MONTHLY REVIEW the international com m unity has necessarily been slow. As recently as the Twenties, the dom inant theme among those concerned over the adequacy of the international liquidity system was th at of economizing on gold, al though an historian today might describe the aim m ore broadly as that of enlarging the capabilities for trade and finance of a system that rested ultim ately upon a slowly growing base of m onetary gold. It was generally rec ognized then, too, that frequent changes in the price of gold offered no useful alternative. F o r m onetary stability was hinged upon the certainty of a generally acceptable fixed-value base, and in tu rn was itself seen, then as now, to be essential for sustained economic prog ress. A t th at stage, of course, the econom izing on gold was accomplished, alm ost uncon sciously, by increases th at had been occurring for some years in the supply of a reserve currency— particularly the pound sterling— which form ed the m ost im portant p art of the increase taking place in the basic reserves of m ost other countries. L ater, as a concom itant of the vast resources and productive capacity of the U nited States, emphasis shift ed to the dollar. G row th in the dollar com ponent of reserve assets over the past two decades has provided the m ajor source of additions to international liquidity as a whole, while an impressive redistribution of the w orld’s m onetary gold reserves from the U nited States to other countries has also been taking place. I do not have to rem ind this audience, however, that the creation of international m oney through the deficits of a reserve cur rency country can also involve problem s. The overriding necessity th at has for some time been apparent to restore equilibrium in the U nited States balance of paym ents, and our recent progress tow ard that end, m ake it quite unlikely that the dollar would be able to add to international liquidity over the next decade as it has over the two preceding decades. This may to some imply, of course, a possible need to find additional substitutes for gold, perhaps through finding ways for other currencies to serve as convertible m onetary reserves. But the need might also point in a different di rection— tow ard economizing on the foreign exchange com ponent of international reserve assets— just as in the past the reserve cur rencies themselves were the means of econo mizing on the use of the limited supplies of gold. There are, to be sure, a num ber of differ ent ways of looking at the m ost recent phase of developm ent in international liquidity. Some observers, particularly in the academic fraternity, would stress the evidence they see of a shortage of international reserves. O thers would consider th at any evidence points in stead to a short-fall in long-term capital flows, and would regard liquidity as superabundant. A nd there are, of course, m any other variants. F o r myself, I have begun to w onder w hether the international economy m ay not presently be completing a phase of concentration on the build-up of prim ary reserve assets and w hether perhaps it is now entering a phase in which this supply of prim ary reserves can, w ithout further substantial increases, at least for a tim e, serve as a reasonably adequate basis for the gradual erection of a somewhat larger credit structure. Perhaps, if some of the developed countries are coming to consider their present reserves of gold and dollars as reasonably sufficient, they might wish instead, with proper safe guards, to use some p art of any additional surpluses for extending credit to others. On the p art of the less developed countries, while some m ay have additional scope for holding reserves, there are not many which can afford further sizeable accum ulations to be held idle in reserves for very much of the time. They need only the minimum that will serve for working capital purposes and as a base i ]3 FEDERAL 114 RESERVE BANK to support borrowing. In other words, the problem lying directly ahead of us may not necessarily involve a need for m ore dollars, n o r for the im m ediate creation of another international m oney to supplem ent them, but it may instead call for greater use of credit facilities and the international m oney substi tutes that are created as such credit facilities are utilized. This interpretation does not imply any fun dam ental change in the role of gold and the reserve currencies in our international m one tary system, either as a means of international settlem ent o r as international stores of value. It does not imply changes in the custom ary uses of currencies in private transactions. N or does it imply th at there are necessarily any natural limits upon the use of these fam iliar arrangem ents. There would be ample room in official reserves for — hopefully — an in creased volume of newly available gold at the continuing fixed price of $35 an ounce and for additional holdings of acceptable cur rencies, depending on the free choice of each of the individual countries concerned. If this should be the phase of development th at our international m onetary system has reached, countries would increasingly come to regard their prim ary reserve assets as a base upon which credit— in m any different possi ble form s— might be granted o r received. In effect, for exam ple, a country’s reserves might decline som ewhat less at times of strain than in the past because m ore of the custom ary drains upon reserves would be m et by credits — credits m ade credit-w orthy, in part, by the reserve assets still being held by the affected country. A nd conversely, surplus countries, instead of piling up m ore and m ore reserves, might accept in some form the credits needed by the deficit countries. In m any respects, under conditions of this kind, we would have reached a stage in the international area that was reached in several of the national financial systems seventy-five OF S A N FRANCISCO to one hundred o r m ore years ago, when the transition began from exclusive reliance on hand-to-hand currencies to a system which involved the use of a credit expansion proc ess and the creation of m oney substitutes by financial interm ediaries. As now developed, greater reliance on facilities for creating m oney substitutes and supplem ents w ithin in dividual nations has m ade possible a m uch m ore intensive use of the m oney supply itself. T o an im portant degree, credit arrangem ents that increase, in effect, the velocity of m oney do reduce the scale of needed increases in the m oney supply. It is essential in such an appraisal, too, to distinguish carefully betw een the needs of the private sector and the underlying needs for official reserves. M uch, if not most, of the discussion of international liquidity is carried on in term s of the public sector. B ut it is proper to rem ind ourselves that the ultim ate aim of all that we do is to ensure that the liquidity needs of the private sector can be met. This, of course, involves m ost of the sam e questions which the m onetary authori ties in each country m ust face in determ ining dom estic financial policy— questions as to the relationships between domestic liquidity, growth, em ploym ent, price stability, and the balance of paym ents. In part the problem is one of assuring adequate facilities for the w orking balances needed to carry on trade and paym ents abroad. In part, too, the p ro b lem is one of access to international credit and, particularly for countries where m oney m arkets are not well developed, it includes a need for holding secondary reserve assets abroad. B ut above all, there is the need for assuring ready convertibility at a stable price am ong the various currencies used to finance the flow of current paym ents fo r trade and services, to cover new investm ents abroad, and to service old ones. The actual operating needs of the private sector are serviced by an efficient complex of June 1964 MONTHLY REVIEW private banking and credit institutions, many of them national in origin but international in the scope of their operations. As repre sentatives of such institutions, you are con fident, I am sure, as you should be, that exist ing facilities for private credit, at least at short term , are adequate to m eet the chal lenge of a growing w orld economy. A nd w herever they may tend to lag behind, com petition will, within the open environm ent of free convertibility, set in m otion forces to widen appropriately the scope of such fa cilities. But underneath all of the structure and processes of private credit lies the capacity of the m onetary authorities of the individual countries to meet, at their posted exchange rates, the composite of drains arising from all of the private transactions that affect them. If inflows do not balance outflows, national policy changes may be needed to bring ad justm ent, but meanwhile any adverse flow must be financed. A djustm ent and financing are sometimes contrasted in ways which m ake them seem antithetical. B ut I am sure th at the m onetary authorities — and particularly those of the leading financial countries that have m ade such pioneering efforts in the area of cooperative action in past years— are alert to the need to respond to the disciplinary warnings that are sounded when an individual country’s payments position leads to inroads on official liquidity. We are, however, still in the process—-and it will certainly be a continuing one— of de veloping arrangem ents to ensure th at when the clustering of payments shifts heavily for or against an individual country, the neces sary means of paym ent can be m ade available in ways th at will set in m otion forces that will assist in the return to balance while avoiding abrupt interruption of domestic sta bility and growth. We m ust stress the im por tance of arrangem ents which encourage and facilitate the adjustm ent process. There would be serious risks for an individual coun try, or for an international liquidity system, that concentrated solely on ways and m eans of piling up prim ary reserves, in order to m eet all possible contingencies. In those cir cum stances, the world m ight well be subject ed again to the dangers of a competitive race for reserves as neighbor beggared neighbor in order to acquire and hold a m ercantilist hoard of prim ary reserves. A nd as m ore and m ore reserves were created, there would be less and less assurance that the self-restraint and discipline inherent in any system that relies on credit would be brought into play. This would be true irrespective of the form of prim ary reserve involved. It would be true even under a full gold standard system— for an individual country and for the system as a whole— if the additions to holdings were large relative to internal m onetary needs. We need not, therefore, view the possible emergence of greater reliance upon a credit FEDERAL 116 RESERVE BANK elem ent in international liquidity as a weak ness in our system. Instead, it may be a posi tive advantage— a flexible means of creating liquidity at the times and at the points where it is needed, but a means also of preventing m aladjustm ents from going too far and of encouraging the timely adoption of necessary policies to restore equilibrium . T he challenge to which we m ust respond in the international liquidity area is thus similar in m any respects to the challenge faced by central banks and m onetary authorities throughout the world in their respective m on etary and credit spheres. It is the challenge of assuring an ample expansion of liquidity for the real economic growth that is the object of all our actions while m aintaining the con trol necessary to keep expansion from result ing in inflation. T o be sure, the m ore success ful individual countries are in m aintaining relative price stability along w ith achieving their desired growth and em ploym ent levels, the fewer the problem s there are likely to be for international liquidity. F o r liquidity needs cannot be separated from the am plitude and m agnitude of paym ent imbalances and these in turn depend on the internal circumstances of individual countries. This only means, however, th at any consideration of liquidity m ust proceed hand-in-hand with considera tion of ways and means of im proving the balance of paym ents adjustm ent process and m aking it m ore efficient. If it should be true that the present phase of international financial developm ent in volves a shift of emphasis away from prim ary reserves and tow ard m ore use of credit facil ities, as well as tow ard greater reliance by creditor countries upon the supplem entary reserve assets which the use of these credit facilities implies, we are left w ith another crucial question: W hat form shall these a r rangem ents take in order to achieve our twin goals of ( 1 ) the ample financing of tem porary balance of paym ents swings and (2 ) the OF SAN FRANCISCO exertion of pressure for an orderly correction of any underlying imbalances th at m ay occur? It cannot be em phasized often enough that the function of international liquidity is not to perm it countries to avoid the need to m ake what m ay sometimes be painful adjustm ents in domestic policies and practices. It is rather to perm it those adjustm ents to be m ade in an orderly fashion and in ways that minimize the possibility of cum ulative pressure on other countries and on the international system as a whole. We need liquidity so th at economic ills can be cured w ithout the use of shock treatm ent. We do not need, and cannot suc cessfully use, liquidity to avoid the necessity of a cure. I suspect th at the only thing that can safely be said now about the credit facilities that will be needed to m eet these ends is that they will be composed of m any elements. O ur own A m erican experience of the past few years has witnessed the establishm ent of new facil ities — including m ost notably the Federal Reserve swap netw ork and Treasury foreign currency bonds— along with the adaptation of older arrangem ents to m eet new needs in unexpected ways. W ho, for exam ple, could have foreseen even five years ago th at the long-term loans th at we extended to E urope during the period of its reconstruction would be convertible into liquidity instrum ents for our own use through advance debt prepay ments by a num ber of o ur E uropean p a rt ners? These have been among the fruits of international financial cooperation in the past few years, and I am sure th at we will see many more. As we look to future liquidity arrange ments, and in the process take a searching look at the past and the present, I believe that we are also m aking healthy rediscoveries of w hat we already have and w hat we can do with our present arrangem ents. P art of this process of rediscovery has been to realize the potential of the International June 1964 MONTHLY REVIEW M onetary F und as the m ajor international agency where credit financing and financial discipline naturally come together. O ur A m erican view of the International M onetary F und had, in the past, been colored by the assum ption, shared with us by many others, that the prim e function of the Fund would be to serve as a distributor to other countries of the dollars paid in by the U nited States under its quota. To be sure this was expected to be a revolving fund rotating am ong countries with the greatest present need, but the poten tial usefulness of the F und to the U nited States was not always fully appreciated. M any of us, at least, thought of the various quotas as drawing rights, to be used as “b or rowing facilities” in case of need— something to be considered, so to speak, as a sort of asset “below the line.” We did not also think of our quotas as creating an equal oppor tunity for acquiring an asset “ above the line” — as our own currency was draw n from the Fund by others— an asset that would be read ily available, in turn, for us to draw upon at will if we needed to use reserves. It did not occur to m any of us in the U nited States that, as dollars were paid out by the International M onetary F und over the early postw ar years, we were gaining a valu able asset in the parallel increase in our “ super-gold tranche” position, or, more p ro p erly, our “net creditor position” in the Fund. Then m ore recently, as dollar shortage gave way to dollar plenty, in some countries, debtor countries to the F und were able to pay back the dollars they had draw n earlier. The Fund itself was thereby absorbing a sig nificant fraction of the dollars that our pay m ents deficit was pum ping into the w orld— am ounting, in fact, to about $1.3 billion in the period from 1958 to 1963. O r, to pu t it another way, w ithout receiving very much attention, the U nited States was m aking use of its creditor claims on the Fund, acquired in years of balance of paym ents strength, to m eet a significant p art of its reserve drain as our deficit accum ulated— consisting largely of some $304 million in 1959, $442 million in 1960 and $626 million in 1962. A t the present tim e, as you know, the U nited States is a small net user of the F u n d ’s resources. In effect, dollars draw n by others in earlier years have been wholly repaid out of the dollars created by our m ore recent def icits. A nd now, in order to facilitate addi tional dollar payments to the International M onetary F u n d out of the accum ulated re serves of F und debtors, the U nited States has itself draw n m odest am ounts of foreign cur rencies under the standby arrangem ent made in July, 1963. Beginning in 1960, but increasingly in 1961 and thereafter, the Fund has filled the draw ing requests of m em ber countries by using the national currencies of those coun tries on the C ontinent th at have run sizeable balance of paym ents surpluses. A nd as these currencies have been paid out, a form of re serve assets has been created for the countries supplying them — assets th at can be used as needed in other times and other circum stances. The value of these assets is becoming more and m ore fully recognized. Some of the G roup of Ten countries already include their “super-gold tranche” claims, as well as their norm al gold tranches in the Fund, among FEDERAL RESERVE BANK their prim ary reserve assets, while others con sider them as a useful second line supplem ent. M ost recently, Italy, following the pattern of the U nited States, has been able to use during a period of deficit the added reserves acquired a few years earlier when other countries were actively draw ing lire from the Fund. I expect th at the m onths and years ahead will see m ore of a reappraisal and rediscovery of the dim ensions and potentials of the In ter national M onetary F und for our payments system and as a center of international liquid ity. T he F u n d ’s own study of liquidity will itself, I am sure, be a stim ulant to our think ing and to our planning. I personally cannot visualize arrangem ents for the future th at will not include a leading role for the Fund. F o r in the F und we have an established institution that provides, through its norm al operations, an accepted way of using national currencies to bolster international liquidity in a lim ited and systematic way. I spoke to you in Rom e two years ago of the problem of m ultilateralizing a p a rt of the role perform ed by the key currencies. It seems to me that the International M onetary F und has developed m ore and m ore as a m echanism where the non-reserve currency countries can share in a m ultilateral way the responsibilities for the financing of payments swings and thereby m ake a contribution to longer-run liquidity needs. In addition, room has been found outside the F und for other bilateral and m ultilateral facilities as well— supplem enting and rein forcing, but in no way supplanting, the cen tral role of the F u n d itself. We have come a long way in these past ten years, and building on our past experience we can look to the future with confidence. O ver the period, as seen from the U . S. point of view, one of the m ajor achievements has been the develop 118 OF SAN FRANCISCO m ent of the Federal Reserve swap netw ork. While originally designed m ainly as a defense for the dollar, the reciprocal nature of the arrangem ents has becom e progressively ap parent. They have proved their usefulness in economizing on prim ary reserves by com batting speculation and avoiding disruptive swings in reserve positions-—and have al ready served m ore im portantly for other cur rencies at periods of great stress than fo r the dollar itself. Together with other m utual cen tral bank arrangem ents, these swap facilities will clearly play an integral role in any liquid ity system in the future. T reasury foreign currency bonds have similarly dem onstrated their usefulness, not only in absorbing the tem porarily large dollar accruals of some in dividual countries, but also in providing sup plem entary reserve assets fo r the original creditor, which he m ay later use in case of need— as Italy has already done. B ut these are only exam ples of the credit forms that m ake up an essential part of our present-day liquidity system. I am sure that new forms will emerge as needs appear. The em phasis I would like to place is not upon the specific instrum ents themselves, b u t on the process that has created them — the p ro c ess of evolutionary change shaped by com m on appraisal and cooperative action. All countries, and particularly the leading indus trial countries, have not only a m utual in terest bu t also a shared responsibility in the m aintenance of an adequate and stable in ternational m onetary system. The fortunate fact is th at they recognize and understand this imperative. They are, I believe, deter m ined to find those approaches which will, while adapting to the shifting needs of the world economy, m ost nearly fulfill the poten tialities of our international paym ents system. June 1964 MONTHLY REVIEW *.< jT ' . L New Luster for the White Metal I. Crime of ' 73 : Case Closed orators, finding no rational ex planation for the grinding deflation that racked the nation’s economy before the turn of the century, argued th at hard times were the result of a m onstrous conspiracy organized by London bankers and their W all Street minions. W hen asked for evidence, these o ra tors (as in this passage from C oin’s Financial School) autom atically pointed to the “Crime of 1873” : “A crime, because it has brought tears to strong m en’s eyes and hunger and pinch ing want to widows and orphans. A crime because it is destroying the honest yeo manry of the land, the bulw ark of the na tion. A crime because it has brought this once great republic to the verge of ruin, where it is now in im m inent danger of tot tering to its fall.” The “crim e”— the legislative dem onetiza tion of silver— was denounced in such violent o p u list P term s because the Populists felt that this m easure contracted the money supply and thereby contributed to a deliberate policy of deflation. In their eyes, the “crim e” was com pounded in 1900 with the form al adoption of the gold standard, and it was only partly as suaged in the 1930’s with the discarding of gold as a domestic means of paym ent and the adoption of a silver-purchase program . Yet, last year, when legislation was passed which perm itted the Treasury to w ithdraw silver certificates from circulation, strong men no longer wept and the R epublic failed even to note its peril. A side from a few nostalgic edi torials, the news of the event was confined to the financial pages. Perils of success There was no national crisis, prim arily be cause the turn-of-the-century m onetary b at tles had eventually persuaded the nation to 119 FEDERAL RESERVE 120 BANK enact the Federal Reserve A ct, and thereby to institute flexible m ethods of m onetary con trol. But the m atter was more com plex than that, since silver’s rebirth as an industrial and artistic m aterial has contributed significantly to its problem s as a m onetary metal. A 40percent jum p in the New Y ork price quota tion in the year or so preceding the new leg islation was a response not only to the short fall in the m ajor sources of supply— W estern mines and T reasury stockpiles— but also to the significant strengthening of silver dem and throughout the economy. Because of its varied characteristics— silver is forem ost in electri cal and therm al conductivity, highest in opti cal reflectivity, and second only to gold in ductility — the white metal has gained new luster am ong dentists as well as debutantes, and am ong spacem en as well as slot-machine enthusiasts. The latest episode in silver’s checkered leg islative career, in brief, was a reflection of the m etal’s dazzling price perform ance during the early 1960’s. The m ajor episodes in sil ver’s earlier m onetary history, by way of con trast, were products of prolonged price de clines for silver, and for everything else, in the G reat Depression of the 1890’s and the even greater catastrophe of the 1930’s. So, just as the “Crime of ’73” epitom ized the ear lier time of m onetary troubles, the virtual repetition of that act may well typify silver’s newfound period of prosperity. N ow th at a m ajor chapter in silver’s long, em otion-drenched m onetary history has come to a close, some perspective m ay be gained from a review of the legislative highlights. The record dates back to 1792, when the new n a tion set up two units of value: a gold dollar containing 24.75 grains of pure gold and a silver dollar containing 371.25 grains of pure silver. Silver’s m onetary value of $1.2929 per ounce, although not defined in such terms in the law, could be derived by dividing the number ° f grains in an ounce (4 8 0 ) by the num OF S A N FRANCISCO ber of grains of pure silver in the silver dollar (3 7 1 .2 5 ). Silver’s m onetary value is still m easured in the same way, but th at a p p ar ently is the only sign of stability in the m etal’s volatile behavior between 1792 and today. The Founding F athers— specifically, A lex ander H am ilton— thus opted for a bimetallic standard, with the unit of account and all types of m oney kept at a constant value in terms of gold and also in term s of silver. P rac tically, however, an alternating standard de veloped because of the im placable workings of G resham ’s Law, since the m etal th at was overvalued fo r m onetary purposes consistent ly drove out of m onetary use the m etal that was undervalued for such purposes. The orig inal 15-1 m int ratio was below the m arket ratio, and the consequent gold outflow tended to make silver the nation’s standard money until the 1830’s; gold was then revalued, how ever, and the resultant 16-1 mint ratio caused a reversal of the situation and led to a disap pearance of silver. Greenbacks and Gresham Then came the Civil W ar, followed by a losing thirty-year battle waged by debtor groups to m aintain prices at the high w artim e levels at which their debts had been contract ed. The postw ar price decline had developed partly because of the cessation of the w ar-induced dem and for commodities and partly be cause of the sudden buildup in farm surpluses resulting from the rapid expansion of the trans-M ississippi W est— but also because of a shift in m onetary policy tow ard contraction of the paper currency and resum ption of spe cie paym ent. The contractionary policy was im posed despite the growing econom y’s need for a long-term expansion of the m onetary stock— and despite the G overnm ent’s need to supply Federal currency again in the area of the old C onfederate States. The struggle of the Populist farm ers and other debtors to restore w artim e price levels June 1964 MONTHLY REVIEW through currency inflation was led initially by the G reenbackers. T hat group, which de m anded the redem ption of war bonds in paper and not in gold, suffered a crucial defeat when the A dm inistration resum ed specie pay ments in 1879. The inflationists thus were driven to another expedient. Since the value of the currency could not be forced down to the level of inconvertible paper, they reasoned that the same end probably could be achieved by injecting silver into the m onetary system at an inflated ratio. In accordance with G resham ’s Law, silver at the 16-1 m int ratio had been undervalued and had long since disappeared from circu lation. In fact, such a long time had elapsed since any silver had been presented to the mints for coinage that Congress in 1873 stopped the further m inting of the standard silver dollar, and thereby effectively dem one tized silver. W hether deliberately or through oversight, Congress simply failed to include in a long, very detailed and technical revision of the coinage laws any provision for the con tinuing coinage of the standard (371.25-finegrain) silver dollar. T hus was the “ Crime of ’7 3” perpetrated. N o cries of outrage greeted the event at the time it occurred, since every ounce of silver was then worth $1.30. But within three years the situation altered drastically: the price of silver dropped to $1.16 and below, on the heels of a glut occasioned by the opening of new mines in N evada and the closing of silver m arkets in the new gold-standard countries of W estern and Southern Europe. Crime and the Cross of Gold T he Populists cried conspiracy, since if enough silver could have been coined at the old 16-1 ratio the workings of G resham ’s Law would have driven out the gold and reduced the value of currency to that of silver. In order to repair the ravages of the crime, therefore, these inflationists dem anded that Congress re store the free and unlimited coinage of silver at the old 16-1 ratio. The best they could ob tain, however, was the passage of the BlandAllison A ct of 1878, which required the Treasury to buy not less than $2 million of silver every m onth for coinage o r for backing of silver certificates. B ut the net increase in currency— $253 million in the period 187990— merely m et the norm al growth in the country’s requirem ents; the silver certificates in particular simply took the place of nation al bank notes which were being retired with the concurrent reduction of the national debt. The price of silver dropped to $0.94 with in the following decade, so the inflationists de m anded that more be done. This time the best they could accomplish was the passage of the Sherm an Silver Purchase Act of 1890, in a trade whereby W esterners voted for a tariff bill which they disliked while Easterners voted for a silver bill which they feared. The Sher m an Act directed the Secretary of the T reas ury to buy 4.5 million ounces of silver bullion m onthly (alm ost the entire domestic produc tio n ). The bullion was to be paid for through the issue of new legal-tender Treasury notes, which were to be redeemable in either gold or silver— a provision which perm itted the “endless chain” of gold withdrawals in the panic of 1893. Despite these efforts, the Sherman Act did not succeed in its purpose. It failed to raise the price of silver, and it failed just as dismal ly to increase the am ount of m oney in circu lation and to affect the steady decline in farm prices. (Senator Sherm an’s influence obvious ly was far m ore lasting in the antitrust field.) President Cleveland and the other “goldbugs” favored abandoning silver to its fate and adhering form ally to the gold standard. The silverites, on the other hand, continued to favor the unlim ited coinage of silver and the pegging of the silver price at the tradition al 16-1 ratio. F o r a while, Cleveland had his way; faced with the panic of 1893 and with FEDERAL RESERVE BANK OF S A N FRANCISCO D ollars Per Fine Troy Ounce a substantial gold outflow which reduced the gold reserve below the tacitly recognized floor of $100 million, he forced through Congress the repeal of the Silver Purchase Act. Yet this led to his repudiation by his own party and to the mighty Populist upsurge which in 1896 carried William Jennings Bryan just to the verge of the Presidency. G old-bugs triumphant 122 N onetheless, within four years the money question was no longer at the center of public controversy— in fact, was hardly in the p ub lic eye at all. Early in 1900 the victorious “gold-bugs” secured the passage of an act providing that the gold dollar of 25.8 grains nine-tenths fine should be the unit of value and that all other form s of currency should be m aintained at parity with this dollar, with parity to be accom plished through a $ 150million gold reserve which the Treasury would hold available for the redem ption of paper money. Then, later in 1900, B ryan’s second defeat sealed the doom of silver as a dom i nant political issue. June 1964 MONTHLY REVIEW The issue died out simply because of the long-awaited reversal of the dow nw ard trend in the price level. Between the low point of 1896 and 1914 the general price level in creased 40 percent. B ut inflation and farm prosperity were achieved not through the Populists’ chosen instrum ent, silver, bu t ra th er through the influence of two unexpected factors— developments in the m etal they de tested (gold) and in the center of the gold “ conspiracy” which they despised (the city). New gold discoveries in South A frica and N orth A m erica, along with the developm ent of new processes for extracting the precious m etal from the ore, flooded the world with gold during these critical years. The average annual coinage of gold increased about 50 percent in the two decades around the turn of the century, and this developm ent perm itted a corresponding expansion of per capita cur rency circulation. A fter 1896, therefore, the gold inflation brought the inflationary m ove m ent which the farm ers for so long had tried to win with silver. The evidence was appar- FEDERAL RESERVE B A N K OF ent on every hand— w heat rising from 72 cents a bushel in 1896 to 98 cents a bushel in 1909, corn rising from 21 cents to 57 cents, and so on throughout the list. But the A m erican city itself, and not sim ply the gold inflation, saved the A m erican farm er. T hroughout th at golden age the farm er in m ost lines of production was rapidly losing a large part of his foreign m arket. W hat sustained his prosperity was the very thing th a t was cited as evidence of his political sub mergence— the great increase of the urban population. In 1890, 4.6 million A m erican farm s supplied a dom estic urban population of 22 million; in 1910, 6.4 million farm s sup plied 42 million city-dwellers. Relatively few er but larger, m ore efficient, and m ore m ech anized farm s produced an increasing p art of their total produce for the hom e m arket (and less for the foreign m a rk e t), under far stabler and m ore advantageous conditions of tran s portation and finance than had prevailed in the past. A nd yet this favorable trend— la beled “F rom Pathos to P arity” by one histo rian— was achieved despite the inability of the Populists to utilize their favorite weapon, silver inflation. G old-bugs forlorn 124 T he second m ajor developm ent in silver’s dram atic history occurred in another m ajor period of deflation— the 1930’s. Once again a m ovem ent arose to halt a prolonged defla tionary spiral by restoring currency values to the level at which w artim e and postw ar debts had been contracted. A nd once again a rem edy was proposed, in the Thom as am endm ent to the A gricultural A djustm ent A ct of 1933, th at envisioned both the printing of m ore paper money and unlim ited coinage of silver. T he A m endm ent, in addition, authorized in creased open m arket purchases of G overn m ent securities and reduction in the gold con tent of the dollar. SAN FRANCISCO T he last-nam ed of these alternatives re ceived the m ost em phasis in early N ew D eal days. U nder th e authority of the G old R e serve A ct of 1934, th e value of the dollar was officially fixed at 59.06 percent of its form erly established (1 9 0 0 ) value in term s of gold. B ut m uch to the surprise of the theorists who influenced the A dm inistration’s decision— theorists who posited a close relationship b e tween the price level of com m odities and the gold content of the m onetary m edium — the price level did not autom atically respond. T rue enough, the wholesale price index in creased som ew hat in line with the general expansion of dem and following th e D epres sion low, but the increase was only about half of w hat the inflationists expected in view of the 4 1 -percent reduction in the gold content of the dollar. Silver inflation, therefore, was brought forw ard as a supplem ent to the in com plete gold inflation— and as an answ er to the perennial legislative dem and to “ do som e thing for silver.” Since 1873, the dow nw ard tren d in the price of silver had been interrupted only twice, during the silver-purchase period around 1890 and again during W orld W ar I. In fact, since the tu rn of the century (except during the inflationary w ar p e rio d ), the m arket price generally had been less th an half the nom inal m int value. Silver had rem ained in a m onetary lim bo with respect to new acquisitions; some was used for subsidiary coins, some circulated in the W est in the form of standard silver dollars, and a roughly fixed stock of silver certificates rem ained as a relic of the 1890’s. Thus, by the 1930’s, only about 650 million ounces were in use as coin o r as currency backing at the Treasury. Silver, silver everywhere A t the end of 1933, with the m arket price of silver standing at about $0.44 an ounce (75 percent above D epression lo w ), u n lim ited purchases of newly m ined silver were June 1964 MONTHLY REVIEW initiated at $0.6464 cents an ounce under the authority granted by the Thom as am endm ent. B ut inflationist pressure then brought about even further action, in the form of the Silver Purchase A ct of 1934. U nder its term s, the Secretary of the T reasury was directed to purchase silver at hom e and abroad until the m arket price reached the traditional m int price of $1.2929 an ounce, o r until the m one tary value of the T reasury’s silver stock reached one-third of the m onetary value of its gold stock. T he support price at which purchases were m ade was changed on several different occasions during the ensuing dec ade; originally $0.6464, it was eventually set at $0.9050 in 1946. U nder the authority of the silver-purchase legislation of the 193 0 ’s and subsequent Presi dential proclam ations, the T reasury acquired some 3,200 million ounces of silver— about half of it in the four-year period 1934-37, and about half in the subsequent quarter-century. Some 110 million ounces consisted of silver that was “nationalized” in m id-1934, w hen the A dm inistration required nonm onetary silver to be turned in at $0.5001 p er fine ounce, so as to capture the profits expected to be realized from the increased governm ent purchase price. Some 2,210 million ounces consisted of m etal purchased abroad at pre vailing m arket prices, and the rem aining 880 million ounces consisted of newly m ined do mestic silver. U ntil 1955, the T reasury support price for newly m ined dom estic silver was higher than the m arket price, so alm ost all dom estic sil ver went to the T reasury while the dem and of A m erican silver users was m et by foreign sources. B ut from 1955 to late 1961, the m arket price approxim ated the support price, and silver users not only absorbed current output but also purchased from T reasury stocks of the metal. In little over a quarter-century, the T reas ury purchased $2 billion in silver and sex tupled the physical quantity used as currency o r held in stockpiles. N evertheless, th e silver program during th at period failed to achieve either of the objectives specified in the 1934 Silver Purchase A ct: a m arket price equal to the m onetary value of $1.2929, o r a l-to -3 ratio of the m onetary stocks of silver and gold. P rio r to the recent expansion of w orld de m and, upw ard pressures on prices above the $0.9050 floor were relatively weak. M ean while, the ratio of m onetary silver to m one tary gold stocks (both at their nom inal m one tary values) generally ranged around a 1-to5 figure in the prew ar period, then rose to l-to -7 as a consequence of the early postw ar gold inflow, and finally dropped to l-to -4 during the following decade as gold began to flow out instead of in. M ore im portant, the underlying goal of general price inflation eventually was achieved, just as in the p re ceding generation— but, when achieved, it turned out to be both unw anted and also som ew hat irrelevant to silver’s new found m onetary problem s. Triumph of the market Eventually, the m arket accom plished what legislation could not do for the cause of sil ver price support. In the late 1950’s, world m onetary and nonm onetary consum ption of silver increased about 4 percent annually, while w orld production rose only about 1.5 percent annually. Sales from T reasury stock piles filled the gap— and held the price line— fo r several years, bu t the depletion of stocks finally brought the process to a halt. T he situation cam e to a head in late 1961. By th a t time, the worldwide industrial-artistic-coinage dem and for silver approxim ated 300 million ounces annually (o f which about half was A m erican d em an d ), whereas w orld wide production approxim ated 235 million ounces annually (o f which only about 15 per cent was from A m erican m ines). T he gap had to be filled by T reasury sales from its 125 FEDERAL RESERVE BANK stocks of free silver, th at is, from the portion of the T reasury’s holdings th at was not re quired to back silver certificates or converted to subsidiary coin. The T reasury’s supply of free silver had reached its peak in early 1959 at 222 million ounces. B ut by the end of 1960, the supply was m ore than halved, and by late 1961, all but 22 million ounces was gone. There re m ained, however, nearly 1,700 million ounces in a bullion reserve held against the issuance of p art of the nation’s paper currency. A bout one-fourth was held against $5 and $10 silver certificates, and the rem ainder was used to support $1 and $2 silver certificates. The larger denom inations could have been issued in the form of Federal Reserve notes, but thenexisting legislation authorized only silver cer tificates for the sm aller denom inations. The final act? 126 The stage thus was set for the final leg islative dram a. On N ovem ber 2 8 ,1 9 6 1 , Presi dent Kennedy w rote Treasury Secretary D il lon, “I have reached the decision that silver m etal should gradually be w ithdraw n from our m onetary reserves”— and with that, he instructed the Secretary to suspend further sales of the T reasury’s free silver, to suspend the use of free silver for coinage, and to ob tain the silver required for coinage needs through the retirem ent from circulation of $5 and $10 silver certificates. (Interpreting the President’s statem ent as a T reasury w ith draw al from the supply side of the m arket, the m arket responded with a 10-percent jum p in price the very next day, and with a further 30-percent rise during the following year.) W ith the passage of Public Law 88-36 (June 4, 1 9 6 3 ), the legislative record was complete. T he A ct repealed the Silver P u r chase Act of 1934 and subsequent legislation, and repealed the tax on transfers of interest in silver bullion. B ut in particular, the A ct authorized the issuance of Federal Reserve OF S A N FRANCISCO C o in a g e / in d u stry n e e d s s o a r while output lags far behind M i l l i o n s of O u n c t s 1949 1951 1953 1955 1957 1959 1961 1963 Source: U. S. Bureau of Mines. notes in the sm aller denom inations, thereby providing for the eventual elim ination of sil ver as backing for $ 1 and $2 bills. The purpose of the A dm inistration’s pol icy was clear; in President K ennedy’s words, “O ur new policy will in effect provide for the eventual dem onetization of silver except for its use in subsidiary coinage.” N onetheless, Secretary D illon found it necessary to clarify several points in the hearings which preceded the adoption of the new law. The bill, he em phasized, did not envision the debasem ent or devaluation of the currency, nor did it mean the disappearance of the silver dollar and oth er traditional silver coins. The Secretary, faced with the charge that the replacem ent of silver certificates with F ed eral Reserve notes constituted debasem ent of the currency, pointed out that the value of silver certificates has never depended on their silver backing, but rath er upon the fiscal and financial integrity of the G overnm ent. This has consistently been so; the m arket value of the silver behind silver certificates generally has been far below the m onetary value of $1.2929 p er ounce. The Secretary also em phasized that the bill did not encom pass devaluation of the dol- June 1964 MONTHLY REVIEW lar; aside from the fact that the A dm inistra tion has consistently rejected devaluation, there was simply no relationship between the proposed legislation and the question of de valuation. As always, the international ex change value of the dollar is m aintained through the nation’s policy of standing ready to settle its international accounts through the purchase and sale of gold— the only interna tionally accepted m onetary m etal for this purpose— at its m onetary value of $35 per ounce. In this connection, however, the A dm in istration noted th at the substitution of F ed eral Reserve notes for silver certificates would have some effect, albeit a m inor effect, on the gold backing of the dollar. Since Federal R e serve notes are subject to a 25-percent goldreserve requirem ent, the substitution repre sents a reduction in the T reasury’s stock of free gold, that is, in the portion of the gold stock not required as backing for F ederal R e serve note and deposit liabilities. W ith ap proxim ately $2 billion of silver certificates outstanding, the shift, if m ade immediately, would involve roughly a $500-m illion reduc tion in free gold— but the retirem ent of silver certificates is expected to be spread out over a period of years. Silver rush o f ’64 There rem ained the problem of silver dol lars. The new legislation authorized the Sec retary of the Treasury at his option to redeem silver certificates by paym ent of silver bullion instead of silver dollars, but this authoriza tion was m ade solely in order to avoid the wasteful expense of redeem ing certificates in silver dollars when redem ption was desired only for industrial purposes. As Secretary Dillon pointed out in legislative hearings in m id-1963, an ample supply of silver dollars was available, and m ore could be m inted if needed. But the m arket felt otherwise, and soon thereafter staged the dram atic epilogue to the Act of 1963— the great ’64 silver rush. U nderlying this sudden developm ent was the inability of the Philadelphia and D enver mints to keep up with the public’s burgeon ing dem and for coin. Circulating coin, at $3.0 billion today, has m ore than doubled within the postw ar period— and alm ost half of the increase has occurred within the past five years, because of the heavy toll levied by vending m achines, sales taxes, school lunches, parking meters, and coin telephones, and also because of the insatiable dem ands of the growing band of coin collectors. The m ints, intent on supplying the public dem and for m inor coin, have not m inted standard silver dollars during the entire post w ar period; in fact, the last of these “cart wheels” came out in 1937. Yet, for some time, there appeared to be no problem . O f the pres ent supply of 485 million silver dollars, only 170 million were in circulation in 1950, and by 1960 the num ber in circulation had in creased only to 305 million. B ut then the ou t flow accelerated, and accelerated even more in the m onths following the enactm ent of the new silver legislation. Only 28 million “cartw heels” were left in T reasury hands at the beginning of this year. M any of them went into circulation by early M arch, and then, when the H ouse A ppropria tions Com m ittee rejected a Treasury request for an appropriation to begin m inting these pieces again, the rush was on. In two weeks’ time the Treasury shipped out m ore than 11 million pieces to the tradition-loving W estern states— and meanwhile distributed more than 3 million pieces to a jostling, haggling crowd which besieged the T reasury building in search of choice “M organ” dollars of turnof-the-century vintage. Driven from the temple A t that point— as a leading financial jo u r nal described the scene— “Secretary D illon drove the m oney changers out of his tem ple.” Exercising the option open to him under the \2 7 FEDERAL RESERVE B A N K term s of the 1963 legislation, the Secretary decreed that silver certificates henceforth would be redeem able only in silver bullion at the m onetary value of $1.2929 per ounce. Holders of silver certificates could continue to exercise their legal right to dem and an am ount of silver precisely equal to the silver content of a standard silver dollar, but they would be assured of getting only several sliv ers of metal in an envelope instead of a coin of considerable num ism atic value. The great silver rush thus came to an end, but while it lasted it dem onstrated both the canniness of coin collectors and the continued devotion of W esterners to the noble white metal. In fact, in subsequent weeks several W estern senators not only supported the T reasury’s request for an appropriation for m inting silver dollars but, in addition, intro duced legislation to reduce the silver content of the nation’s coinage— legislation which the T reasury vigorously opposed. T he Treasury adm itted th at eventual ex haustion of its silver stock was possible in the absence of a radical change in the supplydem and equation. But its holdings, which now am ount to about 1,500 million ounces, are considered ample for the continuation of the present coinage and for supplying indus trial dem ands for some years ahead; for ex ample, at the recent rate of redem ption of out standing silver certificates, the present supply of silver should last until about 1972. The Treasury therefore opposed any consideration of m ajor changes in the coinage until the com pletion of a continuing study of the prob lems created by the excess of silver dem and over current production. C hanging the alloy 128 U nder the term s of legislation introduced this M arch by M ontana’s Senator M etcalf, the problem would be met by changing the content of silver coins from the present alloy of 90 percent silver and 10 percent copper to OF SAN FRANCISCO an alloy of 80 percent silver and 20 percent copper. But, according to Treasury U nder secretary R oosa’s appraisal, “its enactm ent would in fact raise the m onetary value of sil ver to $1.45; this would, in turn, soon cause the disappearance from circulation of all pres ently outstanding silver dollars, w ould in all probability in the near future lead to the m elt ing down of our present subsidiary silver coinage, and would consequently lead to an impossible situation for the mints in supply ing the coinage needs of our country.” In his testimony on the bill, M r. R oosa ar gued that silver would tend to disappear from circulation simply on the basis of the sugges tion th at the price of the m etal be raised through the reduction in the silver content of the dollar. H e contended, therefore, th at the best solution is for the Treasury to m aintain the ready availability of silver at the $1.2929 price. W hile th at availability continues, with current stock at about 1,500 million ounces and total annual consum ption at 186 million ounces, the m arket price, in his view, is not likely to rise appreciably above m onetary value of $1.2929. There the m atter stands. R ecent develop ments, however, constitute not only an im portant afterm ath to the legislation of 1963 but also an ironic epilogue to the “Crime of 1873.” Indeed, the Treasury m ay yet be able to do what it could not do 90 years ago— that is, resum e m inting of silver dollars as soon as m int facilities and appropriations are made available by Congressional action. But silver’s history has been full of such ironic touches. D espite all the efforts of the Populists to raise silver prices and to restore prosperity through the silver legislation of the late nineteenth century, success cam e only through the inflation generated by the de spised m etal gold and through the growing m arket created by the distrusted city m ulti tudes. Despite all the sim ilar efforts of their successors exerted through the silver legisla- June 1964 MONTHLY REVIEW tion of the 1930’s, prosperity returned only as increased dem ands were generated by a war which everyone sought fervently to prevent. A nd now that the price of the metal has soared to near-record levels because of the dem ands generated by this age of space and affluence, silver’s very success has created its current difficulties as a m ajor m onetary metal. II. Comstock Revisited is the W estern m etal par excel lence. Its output today may be rela tively insignificant, but in the century since the opening of the Com stock Lode the white metal frequently has dom inated both the na tional and the regional stage. The voice of silver has been heard in the halls of Congress, and the economy, the society, and the poli tics of the W est have harkened to its voice. Prosperity has been only a fitful visitor in silver mining camps, however. Prices have fluctuated violently over the years, while the long-term trend of output and employment has been downward. But, as of today, the versatile m etal can boast a resurgence of de m and, together with the highest level of prices of the past half-century. How will the indus try respond to this price upsurge? The in dustry itself may not know, but a survey of its past perform ance may yield some clues. ilv e r S Across the High Sierra The birth of the nation’s silver industry oc curred in the W ashoe Hills of N evada in 1859, as thousands of miners rushed across the Sierra from the already failing placers of C alifornia’s M other Lode to stake a claim in the fabulously rich Com stock Lode. Twenty years later, the Com stock bonanza had helped finance the Civil W ar, built transcontinental railroads, and established San Francisco as a glittering and opulent metropolis. By the time the Lode played out at the end of the century, over $200 million worth of silver and almost as m uch gold had been recovered. B ut Comstock was only one of a series of rich silver finds. In the late 1860’s, there was Black H aw k Canyon (C o lo rad o ), Cotton wood Canyon (U ta h ), B utte (M o n ta n a ), and Owyhee County (Id a h o ). T he 1870’s and 1880’s saw the developm ent of the great sil ver deposits at Leadville, Colorado, as well as the mines in the Calico D istrict of Cali fornia’s High Sierra. From this series of beginnings, the W estern states becam e the focal point of silver mining in the country, and soon m ade the U nited States the w orld’s leading silver producer. (A fter 1900, however, M exico took first place.) C olorado and M ontana, topping the roster of producing states in 1900, accounted at that time fo r 60 percent of the domestic total of about 58 million fine ounces. U tah, Idaho, and A rizona were next— and then came N evada, despite the virtual exhaustion of the Comstock. Twelfth D istrict states have dom inated the industry during this century; in 1963 they supplied almost 80 percent of the 35 million ounces produced domestically. Id ah o ’s share 129 FEDERAL RESERVE BANK O th e r sources ta k e up slack as U. S. and Mexican output decline M illio ns of Ounces U.S. M eiico Peru Other Source: U. S. Bureau of Mines. began to rise dram atically in the late 1930’s, and today that State produces alm ost half of the nation’s silver. M ost of it em anates from the rich silver-base deposits of the C oeur d ’ Alene District in northern Idaho, the home of the nation’s three largest mines. A rizona’s share also has m oved steadily higher; th a t State today is the second largest producer, mining 18 percent of the country’s output. U tah, in third position, accounts for some 13 percent, a somewhat sm aller share than heretofore. N evada’s position reached a height in 1913, when developm ent of great deposits at T onopah gave her 7 percent of the dom estic total, while C alifornia’s share reached a peak of about 8 percent in 1924, at the height of operations at the California R and M ine in San B ernardino County. T o day, however, those two states each account for less than 1 percent of U.S. production. Declining production 130 In term s of the value of output and the num ber of employees, the silver industry throughout this century has been relatively unim portant in the Twelfth D istrict’s total economy. This has been especially true since the short-lived boom created by the Silver OF S A N FRANCISCO Purchase A ct of 1934. Thus, while the value of m ineral production in the D istrict m ore than tripled from 1937 to 1963, the value of silver production declined from about $38.5 to $35.3 million, or by alm ost one-tenth. Sil ver’s share of total m ineral production in the D istrict therefore receded from 5 to 1 p er cent. Currently, silver is significant only in the economy of Idaho, where, as the leading m ineral, it accounts for about 26 percent of the State’s m ineral output. The reduction in domestic production, ac com panied by the expansion of production in the rest of the world, has m eant a decline in the U. S. share of total world output. A d vances in the output of Peru and C anada, countries which are challenging the position of the U nited States as second ranking p ro ducer behind M exico, have helped reduce this country’s share of world output from about 25 percent a quarter-century ago to about 15 percent today. B ut the increase in production abroad has not m eant an increased inflow into this country. Indeed, im ports recently have been only about half of w hat they were a dec ade or m ore ago. Rising consumption The decline in domestic production of sil ver has contrasted m arkedly with the growth in consum ption, which has jum ped from 145 to 222 million ounces in the 1950-63 period alone. In the last half-decade, industrial con sum ption of silver expanded 28 percent, from 86 to 110 million ounces. The photographic industry, the largest consum er of silver, was a m ajor source of this dem and. In addition, because silver ranks first am ong the m etals in conductivity of electricity and heat, everincreasing quantities were em ployed in the m anufacture of electrical contacts, switching equipm ent, and batteries for the growing electronics industry, and also as solders and alloys in the m anufacture of jet aircraft and missiles. M eanwhile, consum ption of silver June 1964 MONTHLY REVIEW for coinage rose even m ore dram atically, in creasing 192 percent between 1958 and 1963, to 111 million ounces. As a result of these divergent trends, do mestic production of silver has consistently fallen short of consum ption throughout the postw ar period. B ut the gap began to widen appreciably only after 1958, and today it equals 185 million ounces, or about twice the size of the average gap of a decade ago. O ut side this country, a sm aller shortfall in sup ply has existed since 1960, with production averaging 170 million ounces and consum p tion 198 million ounces annually. decision to suspend sales from these stocks. W ith that, the price in the New Y ork m arket really began to soar. The quotation rose from $0.9162 an ounce prior to the suspension of T reasury sales to an average of $1.0453 in January 1962. It held more or less steady for about six months, and then began rising again. Finally, in Septem ber 1963, the price reached $1.2930—-the effective ceiling set by silver’s m onetary value. Today, as a consequence of m arket forces and the legislative changes of recent years, the T reasury acts as a residual supplier of the dem and in excess of com m ercial offerings. Between late 1961 and m id-1963, the metal consum ed by industry and the arts came m ost ly from current output and im ports— mainly from M exico, C anada, and Peru— bu t since that time, disposals of Treasury silver in ex change for silver certificates have been cru cially im portant. In fact, heavy m arket and coinage dem ands in 1963 caused total T reas ury stocks— free silver plus m onetary reserves — to decline by 182 million ounces, to about 1,500 million ounces. A bout 111 million ounces were consum ed in minting, 51 million ounces in silver dollars were sold, and 19 mil- Result: rising prices Reflecting these scarcities, the New Y ork m arket price for silver rose fairly steadily from 1950 to 1958, and then jum ped above the Treasury’s support price of $0.9050 early in 1959. As users turned to the G overnm ent as a source of supply, Treasury stocks of free silver— silver exceeding the am ount required as backing for silver certificates— were sub ject to a heavy drain. By late 1961, free silver stocks had declined from 202 to 29 million ounces, and this led President K ennedy to his Id ah o d o m in ate s silv e r m in in g indu stry . . . other District and other Western states show declining output since turn of century MiIIions of Ounces 80 r- 1900 1910 Source: U. S. Bureau of Mines. 1920 1930 t940 1950 I960 FEDERAL RESERVE BANK lion ounces were w ithdraw n through redem p tion of silver certificates. If silver consum ption continues to grow at its recent pace, the T reasury’s stocks could be exhausted within the next decade o r so. Thus the overhanging threat of a further run-up in the price, posed by this depletion, creates some anxiety in the silver m arts. T he recent rise has brought the metallic value of stand ard silver dollars to a level at which— disre garding costs of melting— the three-fourths ounce of silver contained in the coins is worth their value as money. Subsidiary coinage— half dollars, quarters, and dimes— would reach their “melting point” at a price of $1.3824. The “melting point” aspect of the price rise has led to the suggestion that existing coins be replaced with coins of lower silver content. Legislation to this effect has been in troduced in the Senate (as the preceding arti cle describes), but the Treasury firmly op poses the suggestion on the grounds that it would aggrevate the current coinage problem , since it would induce speculators to m elt down coins for their silver content. Some foreign countries, meanwhile, already have cut down on their use of silver in coins. In recent years, the U nited Kingdom has m inted substantial quantities of copper-nickel coins as substi tutes for silver-bearing half crowns, florins, shillings, sixpence, and three pence. Italy has recently issued alum inum and brass coins, France has issued stainless steel pieces since late 1962, and A ustralia aims to swing from silver to copper-nickel coins by 1966. W hat response to $1.2929? 132 There can be no doubt of the im portance of increased production, but will a significant increase be forthcom ing in response to the price rise? One special circum stance, unique to silver mining, can explain why the reaction has been and may continue to be slight. A bout two-thirds of silver production is recovered OF SAN FRANCISCO O utpu t an d e m p lo y m e n t decline ever since boom of the '30's Note: Data are five-year averages; employment shown for gold and silver mining combined. Sources: U. S. Bureau of Mines, Resources for the Future. as a by-product o r co-product in the mining of zinc, lead, copper, and gold, so its produc tion frequently depends m ore on prices re ceived for these metals th an on silver prices. Silver’s link with other metals undoubtedly has been involved in the failure of production to increase over the last dozen years despite rapidly rising consum ption and prices. The price of lead sank to a 15-year low of 9.5 cents a pound by the end of 1962, while the price of zinc, at 11.5 cents, also was below its 1950 level. B ut the recent strengthening of these prices— to current quotations of 13.0 and 13.5 cents a pound, respectively— along with a 1-cent-a-pound increase in the price of copper, should certainly encourage future increases in silver production. M ost of the silver produced from mines operated prim arily for their silver content em anates from the C oeur d ’A lene mining district in northern Idaho. In 1961, output in Idaho reached its highest level since 1938. A lthough output was affected adversely by strikes in the following two years, its level in 1963 was higher than in 1950, contrary to the trend elsewhere in the nation. R ecent price trends reportedly are exerting a strong im pact June 1964 MONTHLY REVIEW in the State. Since price largely determ ines the cutoff grade that divides ore from sub-m arginal resources, higher quotations are making mining of previously m arginal reserves fea sible. M oreover, since new and improved deep-level mining techniques now perm it in creased exploitation of m arginal reserves, higher quotations are encouraging producers to install new, efficient equipm ent of this type. T o obtain greater increases in production, however, will require the reopening of old mines and the discovery of new veins. B ut luckily, the rising price trend has spurred in terest in these activities in virtually all of the m ajor producing states. F o r exam ple, mines in the Hailey district of Idaho, a significant producing region at the tu rn of the century, are now being rehabilitated. A new $500,000 concentrating mill, designed eventually to handle 300 tons of ore daily, has begun opera tions at this site and currently is processing 150 tons a day. F o r another example, the U. S. Office of M inerals E xploration is now pro viding funds for various exploration projects, which are being carried out from the air by large team s using all the latest techniques of geologic analysis, seismic m ethods, and photogeology. O utside the U nited States, developm ent and exploration have been particularly active in C anada. T h at country’s silver production em anates principally from the old C obalt area of O ntario, from New Brunswick, and from silver-lead-zinc mines in W estern C anada. The recent discovery of a rich deposit of cop per, zinc, and silver at Timmins, O ntario, il lustrates the new look in prospecting there— intensive, scientific exploration of vast areas by big com panies, many of them based in the U nited States. The U. S. Bureau of M ines estimates this country’s reserves of recoverable silver at 763 million ounces, o r about 15 percent of esti m ated world reserves. W ith prices at current levels, the industry now has a strong incentive to increase its exploration activities and to ex pand and m odernize its exploitation of pres ent reserves. While carrying on these activi ties, W estern silver m iners with a philosophi cal bent will see a great deal of poetic justice in their new-found prosperity. A t long last— a century after the Com stock ushered in a pe riod of W estern elegance— a new age of space and affluence is creating a dem and for the products of their once-fabulous mines. M onthly R eview is published by the R esearch D epart m ent of the Federal Reserve B ank of San Francisco. Individual and group subscriptions to the M onthly R e view are available on request from the A dm inistrative Service D epartm ent, Federal Reserve B ank of San F ran cisco, 400 Sansome Street, San Francisco 20, California. 133 FEDERAL RESERVE B A N K OF S A N FRANCISCO Western Digest Banking Developments L oan portfolios increased $230 million and securities holdings declined by an equivalent am ount at Twelfth D istrict weekly reporting m em ber banks in M ay Business loan dem and was quite strong in early M ay; as a result, com m ercial and industrial loans increased $ 111 million during the m onth, in contrast to net repay m ents of $32 million in the year-ago m onth. On the other hand, the gains in mortgage financing and in consum er loans were only about half as great as in M ay 1963 D istrict banks recorded a $550-m illion decline in dem and deposits adjusted. This decrease was partly offset by a $ 164-million increase in time deposits; in fact, the savings-deposit inflow, which had lagged the 1963 pace during the early months of the year, finally exceeded th at year-ago pace during May. Employment and Unemployment M ajor D istrict states generally m atched the national pace of em ploym ent expan sion in M ay, but their increases were not sufficient to cut into unem ploym ent totals, especially in view of the continued growth in their w ork forces. W hereas the national jobless rate dropped to 5.1 percent (the lowest rate in m ore than four y e ars), the rate increased from 5.7 to 5.9 percent in California, and from 6.4 to 6.5 percent in W ashington. (All rates are seasonally adjusted.) . . . C alifornia’s total em ploym ent rose from 6.51 to 6.59 million between A pril and M ay, in the face of a decline in factory jobs. The decline centered in defense-related and food industries . . . . A t 510,000, C alifornia’s defense-related em ploym ent is now 4 percent below the yearago level. O ver the past year, however, state-local governm ent em ploym ent has risen 6 percent, while jobs in construction and in services have increased alm ost 5 percent . . . . W ashington em ploym ent rose from 1.04 to 1.07 million betw een A pril and M ay, mostly on the basis of seasonal gains in agriculture. A ircraft em ploym ent in th at State continued to decline; at 51,000, the total is now 20 percent below a year-ago. Production and Trade Despite early-spring gains, total construction contracts in the D istrict in the Jan u ary-A pril period rem ained below their 1963 level, while in the rest of the country aw ards substantially exceeded year-ago figures . . . . L um ber prices declined slightly in M ay, as a result of a continuing decline in new orders. Steel production began its norm al seasonal decline in M ay; unlike last year, however, the industry this sum m er will not be constrained to w ork off strike-anticipatory excess inventories. Petroleum refinery inventories were draw n down in recent m onths, despite heavier im ports of crude, because of the inability of District producers to keep up with the growing dem and for petroleum products . . . . Livestock prices continued at depressed levels in early June, while some fresh vegetables were selling at bargain prices— as m uch as 50 percent below year-ago levels . . . . D istrict departm ent store sales in M ay ran about 6 percent ahead of the year-ago figure. B ut in the nation as a whole, dep art m ent store sales were 12 percent higher than a year ago. 134 FEDERAL RESERVE BANK OF SAN FRANCISCO Condition Items of All Member Banks — Twelfth District and Other U. S. Bill! lia rs 30 300 B il l i o n s of D o l l a r s 500 400 300 200 2 1955 1957 1959 1961 [963 20 2 1955 (957 1959 1961 20 1963 Source: Federal Reserve Bank of San Francisco. (End-of-quarter d ata shown through 1962, and end-of-month data thereafter; data not adjusted for seasonal variation.) B A N K IN G A N D CREDIT STATISTICS A N D BUSINESS IN D E X E S -T W E L F T H DISTRICT (In d e x e s: 1957-1959 = 100. D ollar a m o u n ts in m illions of d ollars) C ondition item s of all m e m b e r b a n k s 2 Seasonally A d ju sted Y ear an d M onth 1951 1952 195B 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 L oans and d isco u n ts3 U.S. G ov’t sec u rities D em and d ep o sits a d ju s te d 4 T otal tim e d ep o sits 7,751 8,703 9,090 9,264 10,827 12,295 12,845 13,441 15,908 16,628 17,839 20,344 22,915 6,370 6,468 6,577 7,833 7,162 6,295 6,468 7,870 6,495 6,764 8,002 7,336 6,651 9,512 10,052 10,129 10,194 11,408 11,580 11,351 12,460 12,811 12,486 13,676 13,836 14,179 6,713 7,498 7,978 8,680 9,130 9,413 10,572 12,099 12,465 13,047 15,146 17,144 18,942 57 59 69 71 80 88 94 96 109 117 125 141 157 21,246 21,604 21,761 21,890 22,236 22,387 22,673 22,915 7,262 7,293 7,059 6,958 6,968 6,698 6,730 6,651 13,828 13,959 14,044 13,990 14,102 14,106 14,272 14,179 17,967 18,101 18,290 18,334 18,409 18,727 18,923 18,942 152 153 158 162 166 167 170 167 23,256 23,544 23,763 23,953 24,102 6,575 6,832 6,893 6.559 6,541 14,332 14,222 14,287 14,243 14,170 19,342 19,520 19,685 19,773 19,813 163 168 166 170 167 In d u strial production (physical volum e)8 3.66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.46 5.50 T o tal nonagric ultural em ploy m ent D ep’t. store sales (value)6 80 84 86 85 90 95 98 98 104 106 108 113 117 68 73 74 74 82 91 93 98 109 110 115 123 129 99 101 102 101 107 104 93 98 109 98 95 98 102 87 90 95 92 96 100 103 96 101 104 108 111 112 97 92 105 85 102 109 114 94 92 102 111 100 117 116 116 116 117 117 118 118 118 129 127 128 132 125 127 130 136 96 97 95 102 105 108 106 111 112 116 115 116 113 112 110 110 141 129 107r 105r 105r 104p 114p 112p 119 B ank ra te s on B ank sh o rt-term d e b its Index b u sin e ss 31 c itie s5, 6 lo a n s7, 8 135 137 133 134 115r 114r 111 115 113 111 116p 123p 136p 143p L um ber Refined3 P etroleum S te e l3 1963 M ay June July August September October November December 5.53 5.47 5.47 1964 January February M arch April M ay 119 5.47 119 119p 114 1 Adjusted for seasonal variation, except where indicated. Except for banking and credit and departm ent store statistics, all indexes are based upon data from outside sources, as follows: lumber, N ational Lumber M anufacturers’ Association, West Coast Lumberm an’s Association, and Western Pine Asso ciation; petroleum, U.S. Bureau of Mines; steel, U.S. D epartm ent of Commerce and American Iron and Steel Institute; nonagricuttural employment, U.S. Bureau of Labor Statistics and cooperating state agencies. 2 Figures as of last Wednesday in year or m onth. 3 Total loans, less valuation reserves, and adjusted to exclude interbank loans. 4 Total demand deposits less U.S. Government deposits and interbank deposits, and less cash items in process of collections. 5 Debits to demand deposits of individuals, partnerships, and corporations and states and political subdivisions. Debits to total deposits except interbank prior 1942. 6 Daily average. 7 Average rates on loans made in five major cities, weighted by loan size category. s N ot adjusted for seasonal variation. p—Preliminary. r —Revised. 135
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