The Sherman Silver Act of 1890 nearly doubled the government’s monthly purchase of silver and provided for the issuance of legal-tender treasury notes in payment of silver.
The Coinage Act of 1873 made no provision for the coinage of silver dollars, an omission that became an angry point of contention as deflation and depression spread in the late 19th century and silver interest saw silver prices steadily decline. A “free silver” movement sprang up, calling for unlimited coinage of silver. The Bland–Allison Act of 1878 provided for restricted purchase of silver and coinage of silver dollars, but silver prices continued to fall, and agitation for “free silver” mounted strength. The Sherman Silver Act of 1890 extended the monetization of silver about as far as possible without embracing “free silver,” and returning to a bimetallic gold-silver standard.
The act called for the treasury to purchase 4.5 million ounces of silver per month at market prices as long as the market prices did not exceed $1.29 per ounce, the historic mint price since 1837. The treasury was to pay for the bullion in treasury notes in denominations not less than $1 or more than $1,000. These treasury notes were legal tender for all debts, private and public. The act made these notes redeemable in either gold coin or silver coin, depending on the discretion of the treasury. The act only required the treasury to coin quantities of silver bullion as needed to redeem treasury notes.
The act authorized the issuance of treasury notes to save on coinage expenses. Since the market value of silver
fell short of its official price, silver was preferred over gold in the payment of government obligations. Silver dollars tended to return to the treasury as fast as they were issued, notwithstanding the treasury’s practice of shipping the silver coins to distant places at no cost. Complaints were heard about the storage costs and inconvenience of the silver dollars. Before the act of 1890, the government was issuing treasury notes that were not legal tender.
The Sherman Silver Act passed the Congress after a “free silver” bill had already passed the Senate. Apparently, one motivation for enacting this legislation was to avoid what gold standard defenders saw as a worst alternative, a free silver bill.
Since the United States and the countries of Europe were on either a de facto or an official gold standard in the 1890s, gold coin was preferred over silver coin. Banks tended to ask the treasury to redeem treasury notes in gold coin, and the treasury obliged. The treasury’s gold reserves dwindled, whereas silver reserves grew. Foreigners who had purchased U.S. securities with gold became fearful that these securities would be redeemed in silver, at a rate well below the market value of silver. Foreigners began to sell U.S. securities, taking payment in gold and causing a gold outflow to Europe. In 1893, after the government had to sell bonds to raise gold reserves, Congress repealed the Sherman Silver Act. The treasury stopped purchasing silver except for subsidiary coinage, and the flight of capital from the United States ceased. The Gold Standard Act of 1900 officially put the United States on the gold standard.
See also: Bimetallism, Bland–Allison Silver Repurchase Act of 1878, Crime of ‘73, Free Silver Movement, Gold Standard Act of 1900
Friedman, Milton. 1992. Monetary Mischief.
Hepburn, A. Barton. 1924/1967. A History of Currency in the United States.
Jastram, Roy W. 1981. Silver: The Restless Metal.
Myers, Margaret G. 1970. A Financial History of the United States.