Money Mischief_ Episodes in Monetary History - Milton Friedman [61]
The first test in the Senate, on an amendment to adopt the free and unlimited coinage of silver at 16 to 1, was "rejected 44 to 33, but showed a gain of 15 votes since the time when the question had been voted on in January" by the lame-duck Congress (Leavens 1939, p. 245). Obviously the silver bloc was a potent political force, which the president could hardly ignore. And, as Roosevelt had made clear during the campaign, he had no intention of doing so.
The president's response was to support an amendment to a farm relief bill that was then being proposed by Senator Elmer Thomas, who was not from a silver state but nonetheless was "a sturdy inflationist" (Leavens 1939, [>]). As finally passed, on May 12, 1933, the Thomas amendment provided for an increase in Federal Reserve notes and deposits and U.S. notes, at the discretion of the president, in an amount ($3 billion) that would have nearly doubled the amount of high-powered money. In addition, the amendment authorized the president to reduce the gold content of the dollar and gave him sweeping powers with respect to silver—powers that would, for example, have enabled him to give immediate effect to Bryan's battle cry of free and unlimited coinage of silver at 16 to 1. These powers were "hardly used until December 21, 1933, when ... President Roosevelt used the authority granted by the Thomas amendment to direct U.S. mints to receive all newly produced domestic silver offered to them up to December 31, 1937, at cents an ounce (i.e., $0.6464 ... an ounce)" (Friedman and Schwartz 1963, p. 483), at a time when the market price was 44 cents an ounce.* Roosevelt justified the bizarre purchase price by adopting the fiction that the Treasury was simply coining silver at the legally specified weight for the silver dollar—that is, at a monetary value of $1.2929 per ounce—but was charging 50 percent for seignorage. This device had the advantage that the subsidy to silver producers not only entailed no budgetary costs but actually yielded a budgetary income equal to the fictional seignorage. "Smoke and mirrors" in budgetary bookkeeping is not a recent invention.
In the meantime, the ill-fated World Economic Conference, called at the request of President Roosevelt to fulfill his campaign promise and, a couple of months later, summarily torpedoed by him, had come and gone.† About its only achievement was more smoke and mirrors: an agreement among silver-producing and silver-using countries to take measures to shore up the price of silver. This imposed no significant actions on any country other than the United States and simply provided the United States with the cover of an international agreement to do what it was going to do anyway—buy a limited amount of silver (for a full discussion, see Leavens 1939, [>]).
The climax came with the Silver Purchase Act, enacted by Congress in response to a message by President Roosevelt of May 22,1934, and signed by him less than a month later, on June 19, 1934. The Silver Purchase Act "directed the Secretary of the Treasury to purchase silver at home and abroad until the market price reached $1.29+ an ounce, or until the monetary value of the silver stock held by the Treasury reached one-third of the monetary value of the gold stock. The Secretary was given wide discretion in carrying out that mandate" (Friedman and Schwartz 1963, p. 485).*
Purchases and, much later, sales under the 1934 and successor acts continued until late 1961, and the legal authority for purchases was not repealed until 1963. Yet, despite the massive acquisition of silver under the act, neither