The Story of Silver

CHAPTER 12 LBJ NAILS THE COFFIN SHUT

AT 2:38 P.M., FRIDAY, NOVEMBER 22, 1963, A SOMBER Lyndon Baines Johnson raised his right hand like a reluctant volunteer and was sworn in as president of the United States aboard Air Force One, the plane taking him and JFK’s body from Dallas to Washington, D.C.¹ Jacqueline Kennedy, wife of the slain president, stood by Johnson’s side watching Judge Sarah Hughes administer the oath of office and the orderly transfer of power in midst of an unfolding trauma.² It also meant that LBJ inherited the unfinished work of John Fitzgerald Kennedy, a bequest that resembled a vial of nitroglycerine.

Five days later, Wednesday, November 27, 1963, Lyndon Johnson gave his first formal address as president of the United States to a Joint Session of Congress. His full six-foot-four-inch frame standing erect behind the lectern on the dais of the House Chamber, he began with the now-famous words, “All I have I would have given gladly not to be standing here today.”³ It may have been an exaggeration, but he followed with a promise to continue JFK’s legislative agenda, including an item that would test the sincerity of his commitment: “No memorial oration or eulogy could more eloquently honor President Kennedy’s memory than the earliest possible passage of the civil rights bill for which he fought so long.”⁴

Fervent opposition by Southern Democrats in the Senate had throttled JFK’s civil rights initiative, suppressing the legislation with the genteel protocol of the upper chamber of Congress. LBJ, who had served as Senate majority leader and wrote the book on political persuasion, succeeded where JFK failed, using his Texas drawl to convince wavering former colleagues from border states to vote for the Civil Rights Act of 1964. The legislation was Johnson’s crowning achievement as president. LBJ also inherited Kennedy’s Vietnam brush fire but stoked that misadventure into an unpopular war. Vietnam was a failure that would tarnish his legacy. Historians have scrutinized Kennedy’s and Johnson’s records on civil rights and Vietnam but have ignored another joint venture of these two men who remain tethered by fate: the war against silver. LBJ finished what Kennedy started by burying the remaining link between money and precious metals in the United States, a disconnect that fueled the Great Inflation of the 1970s and almost ruined the American economy.

Treasury Secretary Douglas Dillon had testified in the Senate on April 29, 1963, that passing JFK’s legislation authorizing the Federal Reserve to print one-dollar bills would assure the “adequate supply of silver to meet our coinage needs for the next ten to twenty years.”⁵ Less than a year later, on Monday, March 23, 1964, a crowd of more than a thousand people ignored Dillon’s prediction and surrounded the historic U.S. Treasury building in Washington, D.C., like it was Macy’s on Black Friday, waiting to buy silver dollars.⁶ Few Americans used the bulky coins in daily life, but they had been last minted in 1935, and the growing population of numismatists found them irresistible. According to Franklyn R. Bruns, sales manager for coin and stamp collecting at the Woodward and Lothrop department store in Chevy Chase, Maryland, “People are just hoping they will come across some of the silver dollars with rare dates or rare mint marks. … For instance, … one of the 756,000 silver dollars minted in 1879 in Carson City, Nevada, would bring a good price. One dealer said … he would pay from $40 to $70 for an ‘1879CC’ which was uncirculated.”⁷ America’s obsession with coin collecting rivaled the craze for a new music group, the Beatles, who had arrived in America a month earlier.

Failure by the House of Representatives to allocate funds for new coinage of silver dollars had triggered the rush to get the remaining stock in Treasury vaults, but that was not the last word. Support for the production of more silver dollars came from high places beyond the Continental Divide, according to the Boston Globe: “A posse of lawmakers, headed by Democratic leader Mike Mansfield (Montana), cantered onto the Senate floor Saturday to defend the cartwheel—the ‘hard money’ silver dollar which is the favored coin of the realm in the Great West.”⁸ Mansfield, the majority leader of the Senate, sounded as though he regretted supporting JFK’s demonetization program, saying that cartwheels “should not follow the buffalo, the whooping crane, the eagle, and the gold piece into oblivion.” He said that even thieves preferred “hard money,” explaining that bank robbers recently took $20,000 in silver dollars from the bank in White Sulphur Springs, Montana.

But the public demanded more than just silver dollars. The U.S. Mint had inadvertently stoked the coin collecting frenzy by unveiling the Kennedy half-dollar on Tuesday, March 24, 1964, a day after the crowd stormed the Treasury building for the dwindling supply of cartwheels. The new fifty-cent piece with the profile likeness of the late president on the front gave the still-grieving public a sentimental reason to hoard the new coin, forcing banks to ration the supply among their depositors. The Charter Oak Bank and Trust Company in Hartford, Connecticut, limited one to a customer and distributed a thousand coins in one day. A man standing in line at the door said, “They’re going like wildfire.”⁹ The Treasury, which had suspended distribution of silver dollars on March 24 to allow customers to get the Kennedy halves, put a limit of forty per person even though $26 million coins had already been produced and more were on the way.¹⁰ Scarcity in the nation’s capital led to rumors of bank tellers selling Kennedy halves above their face value, forcing Richard Norris, president of the Riggs National Bank to say, “It is possible,” but none of their employees “would be allowed to engage in this sort of activity.”¹¹ Few would have asked his permission, of course.

More than 160 million Kennedy half-dollars minted in 1964 would prevent the coin from becoming a valuable collector’s item like the 1879 Carson City cartwheel, but people could not get enough of them, perhaps because word had spread that silver was a bargain at the Treasury’s price of $1.293 per ounce.¹² According to the Chicago Tribune, “Many experts believe the silver hoarder is the biggest single cause of the coin shortage plaguing the country.”¹³ The price of silver would have to go above $1.38 ¼ per ounce to make circulating dimes, quarters, and halves worth melting for their bullion value, but that was only 7% away and until then budding numismatists could enjoy their new hobby.¹⁴ Coin collectors also searched for nickels minted between 1942 and 1945, when silver replaced the coin’s nickel content, which was used in armor plating for combat vehicles.¹⁵ Those wartime nickels had a little more than .05 ounces of silver, making them worth more than 7¢ at the current price of $1.293 per ounce.¹⁶ Coin collectors had become closet silver speculators and the current profits were just an appetizer before the anticipated feast if silver exceeded $1.38. It was as though Americans had heard the opening bell at Comex signaling a new beginning for the white metal as a hard asset.

Vanishing nickels, dimes, and quarters tested the ingenuity of American business. The renewed coin shortage hit supermarkets the hardest during the first half of 1964, according to Clarence Adamy, executive vice president of the National Association of Food Chains: “Our stores have been spending countless hours working deals and running around to locate the coins they need but the situation is now desperate.”¹⁷ The Jewel Tea Company, with 350 supermarkets in the Midwest and New England, proposed issuing its own scrip, private paper currency in various denominations. The notes were about the size of a personal check and were color-coded to avoid confusion: blue for nickels, green for dimes, and orange for quarters. Stores did not require customers to accept scrip, but the company promised to redeem the colored notes for real money (in dollar increments) or in exchange for other purchases. The treasurer of the Kroger Company of Cincinnati, a 1,400-store Midwest chain, confirmed a similar plan for their customers. This clever response to the coin crisis displeased the U.S. Treasury.

Treasury rules prohibit private groups or individuals from issuing any “note, check, memorandum, token or other obligation for a sum less than $1 intended to circulate as money.”¹⁸ A week before the Jewel Tea proposal the Treasury had impounded wooden “nickels” about the size of a poker chip issued by the First National Bank of Monroe, Wisconsin, which were circulating among local merchants. The bank president, Edward R. Adams, said, “The Mint was unhappy,” but he ignored the reprimand because he was about to retire for the same reason he authorized the ersatz nickels—the coin shortage.¹⁹ The Treasury confiscated most of the 20,000 wooden coins that had been issued except for those hoarded by collectors who were paying $11 per chip now that the supply had been cut off.²⁰ The U.S. Treasury then rejected the Jewel Tea Company proposal even though their notes were not designed to circulate.²¹ Uncle Sam does not like competition.

President Johnson had been preoccupied with the civil rights bill, but in May 1964 he responded to the accelerating coin shortage by allocating funds to permit the Denver and Philadelphia mints to work around-the-clock, seven days a week, as though they were fighting a war.²² He resorted to some budget trickery to pay the mint workers because Congress, deadlocked over civil rights, had failed to appropriate the necessary funds.²³ The president also favored Majority Leader Mike Mansfield and other western senators by signing legislation on Monday, August 3, 1964, to produce forty-five million silver dollars at the Denver mint.²⁴ LBJ often displayed his western roots, wearing a fawn-colored Stetson hat like the Texas rancher he was, and promoted the Denver mint because the nearby Nevada casinos feasted on the cartwheels fed into their slot machines. To force the silver dollars into circulation and keep them away from collectors, who valued uncirculated coins, the mint proposed to distribute a few thousand new cartwheels each month to banks in the Rocky Mountain states. LBJ also signed a bill authorizing the Treasury to freeze the 1964 date on all new coin production, minimizing future scarcities that enhance a coin’s value to numismatists.²⁵

It was a losing battle.

Silver speculators masquerading as coin collectors knew that the Treasury had been disposing of its vast supply of bullion, holding the price of the white metal at $1.293, but when that ended the excess demand would blow the roof off the government-imposed ceiling. The Treasury’s stock of silver declined by 366 million ounces during 1964, a drop of almost 25% compared with annual average declines one-third the size since 1960.²⁶ The bulk of the 1964 decline—203 million ounces—went into increased production and distribution of dimes, quarters, and half-dollars, almost triple the annual average increase in coinage since 1960.²⁷ The Wall Street Journal reported on December 28, 1964, that the Treasury would delay minting the silver dollars LBJ had authorized five months earlier “so that all the department’s equipment can be used to make quarters, dimes, and other lesser coins … for which there is no substitute.”²⁸ But that was like battling a forest fire with a water pistol.

The Treasury’s 1.2 billion ounces of silver bullion looked respectable in December 1964, but about 950 million ounces of that hoard backed the more than $1.2 billion silver certificates still outstanding.²⁹ The Treasury retired $645 million certificates during the year, exchanging most of them for Federal Reserve notes as planned, but speculators and industrial companies like Engelhard Minerals & Chemicals Corporation had used certificates to acquire more than 140 million ounces of the Treasury’s white metal.³⁰ Worldwide consumption of silver exceeded new mine production by 200 million ounces a year since 1960, compared with an annual average of less than 75 million ounces during the 1950s, and the excess demand rose despite the increase in prices.³¹ Prospects for further price appreciation encouraged long dormant producers like the old Smuggler Mine near the ski slopes of Aspen, Colorado, to reopen, described in the press as “It’s Silver Time in the Rockies as Mines Come Alive,” but that activity would not restore balance.³²

The New York Times showed a picture of jagged mountain peaks framing Ouray, Colorado, where five hundred men rode clattering rail cars around a snow-covered pine forest and into the Camp Bird Mine of the Federal Resources Company.³³ Benton Bailey, a long-time engineer at the Camp Bird Mine, recalled when caravans of two hundred pack horses carried ore from the mines and said that “the industry is in for good times again” because many mines “were shut down before the coming of modern technology.”³⁴ But mechanization could not overcome the cold calculations of hardened speculators, who knew that price increases in the white metal failed to expand production significantly because most silver was a by-product of mining base metals. When lead and zinc rose from 8¢ a pound to 15¢, silver production expanded alongside those metals, and miners simply scooped up the extra profits from high silver prices.³⁵ A Treasury staff study confirmed, “Variations in pure silver production … do not seem to bear any simple relationship with silver prices.”³⁶

The headline “Silver Shortage Nearing Crisis” greeted readers in the nation’s capital on January 1, 1965.³⁷ The Washington Post story described the problem: “The demand for silver by industry has put the U.S. Treasury on the spot. It mints silver coins by the billions and is using more and more of its own stockpile to try to get ahead of the coin shortage.” The article warned “consumers simply began tapping” the Treasury when the price reached $1.293 but “if the stockpile were depleted the lid would be off.” The Post then hinted at a New Year’s resolution: “Congress … is expected to act well before the Treasury’s stockpile vanishes,” but the president would have to deliver the marching orders.

On Thursday, June 3, 1965, Lyndon Johnson began his coinage message to Congress by reminding legislators of America’s great monetary history: “Our coins, in fact, are little changed from those first established by the Mint Act of 1792,” and “the long tradition of our silver coinage is one of the many marks of the extraordinary stability of our political and economic system.”³⁸ He then switched to the sad facts: “Silver is becoming too scarce for continued large-scale use in coins. … We expect to use more than 300 million troy ounces—over 10,000 tons—of silver for our coinage this year. That is far more than total new production of silver expected in the entire free world this year.” He said reform was needed “to maintain an adequate supply of coins or face chaos … from using pay telephones, to parking in a metered zone, to providing children with money for lunch at school.”

Legislation for parking spaces and lunch money had broad support in Congress and presidential politics made the Coinage Act of 1965 resemble a well-stocked smorgasbord. It recommended new dimes and quarters that looked like the old but were made of a copper and nickel alloy and no silver, pleasing the Northeast industrial users who wanted to eliminate government demand for the white metal. The new Kennedy half-dollar remained a combination of copper and silver in deference to public sentiment but reduced the white metal content from 90% to 40%. The president satisfied western preferences by keeping the cartwheel at 90% silver but left in place the Treasury’s indefinite delay in minting the silver dollars that Congress had authorized a year earlier.³⁹ And he asked for authority to buy domestically mined silver bullion at $1.25 an ounce, spreading a safety net beneath the prevailing $1.293 price to comfort Rocky Mountain producers and to prevent a revolt by the silver bloc senators. To implement the new coinage system LBJ asked for “standby authority to institute controls over the melting and export of coins” but left the embarrassing details about manipulating the silver market to his new Treasury secretary, Henry Fowler.⁴⁰

Two months earlier, when Douglas Dillon resigned after four years in the job, the president appointed the bespectacled, white-haired Fowler as his successor. Henry Fowler, a fifty-six-year-old courtly Virginian, called “Joe” ever since classmates at Yale Law School dubbed him Gentleman Joe for his snappy dress, had served as Treasury undersecretary to Dillon, and was described as a “middle-roader both politically and economically.”⁴¹ His soft southern manners smoothed his testimony in Congress.

Fowler appeared before Texas Congressman Wright Patman’s House Committee on Banking and Currency to promote LBJ’s Coinage Act and anticipated the contradiction of banning silver from dimes and quarters but keeping it in the half-dollar: “One reason for retaining some silver in our coinage is a desire to continue the 173-year-old tradition of American silver coinage … [but] we could, if unforeseen difficulties developed, do without the half dollar temporarily. It can be replaced in use by two quarters.”⁴² Fowler ignored why the same logic did not apply to the dime, which could be replaced by two nickels, and focused instead on the delicate task of keeping the old 90% silver coins in circulation alongside the new debased currency. Speculators may not have heard of Sir Thomas Gresham, but they knew the potential value of those precious dimes and quarters if the price of silver rose above $1.38¼ per ounce. The New York Times quoted Dr. Franz Pick, a foreign exchange market observer, saying that “dimes and quarters now in circulation will completely disappear, and maybe even half-dollars too.”⁴³

Joe Fowler revived the Democratic Party’s penchant for manipulating the price of silver but this time to keep it down rather than to perk it up: “The continued use of coins that are 90 percent silver also requires protection of this high silver content coinage from hoarding or destruction. … It will be necessary for the Treasury to protect the monetary value of our silver coinage by supplying silver to the market upon demand at the present monetary price.”⁴⁴ He added clarity for Committee Chairman Patman: “Treasury had been doing this since 1963 by exchanges of silver bullion against silver certificates,” but section 6 of the new law went further, providing for “sales by the Treasury of silver in excess of what is needed to back silver certificates” with the objective of keeping the price at or below $1.293.

Peter Dominick, the tall and athletic Republican senator from Nevada, warned that the Johnson administration’s efforts to suppress the price of silver were doomed: “The law of supply and demand wants to raise silver prices substantially” and the current situation resembles “an overheated pressure cooker with a blocked release valve.”⁴⁵ But Democratic Committee Chairman Patman, perhaps unfamiliar with the warning whistle of the stainless steel cooking pot, ignored the potential explosion. He had known LBJ ever since the president’s father, Sam Johnson, had shared a desk with Patman when they both served in the Texas legislature. The chairman considered LBJ “one of the most loyal friends I ever had.”⁴⁶ He accepted the administration’s plan and led Treasury Secretary Fowler on a duet defending the new law.⁴⁷

PATMAN: Mr. Secretary … we would not debase our coinage at all by this bill because the monetary value attributed to silver is merely that accorded by the people’s elected representatives.

FOWLER: That is correct sir.

PATMAN: So, these coins, regardless of the commodity value of the metal that is in them, will have the stamp of the United States recognizing that each coin is legal tender for the payment of all debts, public and private.

FOWLER: Yes, sir.

PATMAN: I know one fellow who owed a considerable amount as alimony, about $1,500, and he took it all in pennies and delivered it to his former wife.

Fowler ignored Patman’s Texas humor and simply assured the chairman that the Coinage Act of 1965 made subsidiary coins legal tender, ending an ambiguity that had plagued small change for almost a century.⁴⁸ He also understood the reason for Patman’s responsive reading of the virtues of fiat currency. Three months earlier Patman’s House Committee on Banking and Currency, and its Senate counterpart, had urged passage of an administration bill to remove the required 25% gold backing for Federal Reserve deposits, freeing the central bank’s credit creation ability from external restraint.⁴⁹ A vigilant Senator Dominick had warned back then:⁵⁰ “It is an obvious first step toward a completely managed monetary system … making the value of the dollar thereafter subject to the arbitrary decisions of the fiscal managers.” Dominick acknowledged “there may be valid objections to a complete return to a gold standard” but urged “a gold reserve high enough to give stability and firmness to an expanding currency and to provide a series of warning lights against inflation.” Dominick supplemented his argument with an analogy to congressional control of the national debt ceiling: “While the Congress has traditionally given in to the administration by repeatedly increasing the debt limit, it has in recent years become more and more obstinate about doing so. The very nature of this situation has forced upon the administration certain fiscal restraints and requirements for justification of its economic policies.”

Dominick, a Yale Law School graduate like Fowler, made considerable sense. The Johnson administration had convinced Congress to remove monetary speed bumps by passing the Coinage Act of 1965 and by eliminating gold backing against Federal Reserve deposits.⁵¹ The central bank could now pursue an easy monetary policy to accommodate fiscal deficits without braking to explain. In a retrospective on the Great Inflation of the 1970s, Harvard’s Robert Barro, an influential monetary economist, referred to “the removal of silver from most United States coins minted after 1964 … as one of President Johnson’s most significant policy moves.”⁵² Barro dignified this obvious exaggeration by adding that he said it “only partly in jest” and explained that the demonetization of silver was a “continuation of the well-established tendency of all unrestrained monarchs to secure revenue by debasing the currency.”

Debasing the monetary standard leads to inflation, but economic circumstance and a history of price stability can often delay the consequences. A mid-1965 Wall Street Journal article warned, “Inflation’s bag of tricks includes the fact that it doesn’t necessarily explode into a wage-price spiral the moment or the year the government lights the fuse.”⁵³ President Johnson had loosened the restraints on monetary expansion and speculators would roil the silver market in response, but few politicians listened to the subsequent warning whistle.