Under the Silver Purchase Act of 1934 the federal government purchased large quantities of silver and issued silver certificates, significantly adding to the United States’ monetary base. The act marked a renewed emphasis on silver as monetary metal, reversing a trend to demonetize silver, which had been evident since the late nineteenth century.
The deflation of the 1930s created fertile conditions for another silver movement, an echo of the nineteenth-century free silver movement. The monetization of silver appeared as a means of increasing the money stock and reinflating prices while remaining committed to precious metal money rather than fiat paper money. After the depression-driven tumble in prices of all commodities, precious metal monetary standards of any stripe held little charm for governments. The silver-producing interests, however, still had sufficient political clout to advance silver as a partial answer to the woes of economic depression.
The Agricultural Adjustment Act of 1932 (AAA) had an amendment attached, the Thomas amendment, authorizing the president to return the country to a bimetallic standard that would define the dollar in both a gold equivalent and a silver equivalent, and provide for the unlimited coinage of gold and silver. The United States had been on a bimetallic standard from 1792 until 1873, and then populist political leaders had taken up the banner of the free silver movement, advancing the idea of reenfranchising silver as a monetary metal. By the turn of the century gold seemed to have won a clear victory over silver as a competing monetary standard, but the Great Depression of the 1930s intervened to dethrone the much-vaulted gold standard.
After the adoption of the Thomas amendment, the United States abandoned the gold standard, and President Roosevelt showed no indication that he planned to exercise his authority under the Thomas amendment. Silverites in Congress, those favoring a return to a bimetallic standard based on gold and silver, pressed ahead with new legislative proposals and Roosevelt finally compromised, sending a message to Congress that led to enactment of the Silver Purchase Act of 1934.
The act authorized the government to purchase silver until either the monetary value of the United States’ silver stock equaled one-third of the value of its monetary gold, or the market price of silver climbed to the monetary value of $1.29 per ounce. Under the act the government purchased silver at market prices and made payment in silver coins and silver certificates, a form of paper money similar to Federal Reserve Notes. Soon after the passage of the act, the government nationalized domestic silver stocks at $0.50 per ounce. By 1938 the government had acquired 40,000 tons of silver, an amount that raised the issue of storage. The grounds of the West Point military academy became the home of a depository that held the silver until industry found a need for it in the 1960s.
The Silver Repurchase Agreement raised the world price of silver, and silver production increased in the United States. Rising silver prices put a hardship on the handful of countries still on a silver standard because it made the exports of these countries more expensive to the rest of the world, forcing these countries to undergo domestic deflation to remain competitive worldwide. China abandoned the silver standard in November 1935 and Mexico began exchanging its silver coins for paper. In 1936 and 1937 the United States government let the price of silver fall, but the trend toward demonetization of silver in silver standard countries had already established momentum. Because of its depression-inducing effects on silver-standard countries, the Act of 1934 actually reduced the monetary demand for silver abroad, canceling long-term benefits to the American silver industry. In the United States the monetization of silver had no inflationary effects because the government retired Federal Reserve Notes to compensate for the infusion of silver certificates.
In the 1960s the industrial demand for silver accelerated, lifting silver prices above the official price of $1.29 per ounce. The government began selling off its silver stocks. In 1963 Congress repealed the Silver Purchase Act of 1934 and authorized the issuance of Federal Reserve Notes in denominations of $1 and $2, enabling the government to retire silver certificates. The Coinage Act of 1965 allowed the government to substantially cut the silver content of its silver coinage, and thus further curtail its silver purchases. The final chapter on the demonetization of silver in the United States closed on 24 June 1968 when the right to redeem silver certificates expired.
Friedman, Milton. 1992. Monetary Mischief.
Jastram, Roy W. 1981. Silver: The Restless Metal.
Rickenbacker, William F. 1966. Wooden Nickels: Or the Decline and Fall of Silver Coins.