Last Updated on August 8, 2024
The Sherman Silver Purchase Act of 1890 compelled the US Treasury to purchase 4.5 million ounces of silver per month.
This was designed to support the falling price of silver and was one episode in a long battle in US monetary politics between proponents of bimetallism and proponents of a mono-metallic gold standard.
The Sherman Silver Purchase Act also required the Treasury to issue paper notes, redeemable in gold or silver bullion, in order to buy the 4.5 million ounces of silver required by the legislation.
This law was extremely controversial and only lasted three years. It was repealed by the Cleveland administration in 1893 in response to the financial panic of that year, the Panic of 1893.
Why Was The Sherman Silver Purchase Act Passed?
In order to understand the Sherman Silver Purchase Act fully and why it was passed you first need to understand some context around the political issue of bimetallism and the role of silver as money.
The United States had been on a bimetallic standard since the 1792 Coinage Act. This established the silver/gold ratio at 15:1.
This ratio was adjusted with the 1834 Coinage Act to just over 16:1 with another slight tweak in the 1837 Coinage Act.
All of these adjustments were a result of the market ratio of gold and silver being in a state of constant fluctuation due to demand and supply.
The government was trying to keep up in order that their fixed ratio did not result in either of the metals being over or undervalued.
This issue is one of the big flaws of bimetallism.
The balance was upset once again after large gold discoveries in California and Australia after 1848.
The influx of gold onto the market lowered the price of gold relative to silver, which meant the face value of silver coins was lower than their bullion value. As per Gresham’s law, this silver was then withdrawn from circulation as people would rather hold the coins than spend them.
Another Coinage Act in 1853 attempted to fix this problem by lowering the silver content in the half-dollar, quarter dollar, dime and half-dime. However, the silver content in the silver dollar was retained.
The 1853 Act also ended the free coinage of silver in those small denominations.
The free coinage of silver is the right to take silver bullion to the US mint and have it minted into silver coins in unlimited amounts.
Twenty years later, in 1873, another coinage act ended the right to free coinage of silver in the silver dollar. This had the effect of demonetising silver and putting the nation onto a de facto gold standard.
This act outraged those who favoured bimetallism and it became known as the Crime of 1873, kicking off several decades of political battles between the advocates of bimetallism and the advocates of a mono-metallic gold standard.
The demonetisation of silver was politically unpopular among silver mining regions and farmers. Farmers tended to have large debts and since the gold standard was deflationary, servicing debt became more difficult over time.
To make matters worse, new discoveries of silver and an international move towards the gold standard put further downward pressure on silver prices in the 1870s.
To combat this, silver advocates managed to get the Bland-Allison Act passed in 1878 over the veto of President Rutherford Hayes.
This was a compromise. It did not restore the free coinage of silver but it required the Treasury to purchase silver every month in the range of 2-4 million dollars and coin it.
Supporters of the gold standard were opposed. Supporters of the free silver movement thought it did not go far enough. They wanted to restore the free coinage of silver.
Given that the Bland-Allison Act provided a range within which the government had to purchase, it was unsurprising that the government met its obligations at the low end of the range.
This provided some support to the silver price, but it could not change the prevailing trend. The world was moving towards a deflationary mono-metallic gold standard, silver was being demonetised and was therefore falling in value relative to gold.
However, the miners and farmers would not accept that and continued to push for the free coinage of silver.
It was in this political environment that the Sherman Silver Purchase Act was passed.
Senator John Sherman, a staunch opponent of silver, sponsored what became the Sherman Silver Purchase Act, which ordered the Treasury to buy more silver than they had under the Bland-Allison Act.
4.5 million ounces per month.
The reason this was passed, despite objections by Sherman and others towards silver, was to try and find a compromise with the free silver movement. They were prepared to allow the Treasury to buy a larger amount to try and boost demand as long as it did not mean a return to the free coinage of silver.
Sherman explains:
“A large majority of the Senate favored free silver … [and] some action had to be taken to prevent a return to free [and unlimited] silver coinage, and the measure [that] evolved was the best attainable. I voted for it, but the day it became law I was ready to repeal it, if repeal could be had without substituting in its place absolute free coinage.”
How Did The Sherman Silver Purchase Act Backfire?
While the move from the government to support the silver price was popular among many in the United States, it caused concern among foreigners about the soundness of the gold standard and whether America was on a path back to bimetallism.
This resulted in outflow of gold from the country. Murray Rothbard explains:
“Uneasiness about the shift from gold to silver and the continuing free-silver agitation caused foreigners to lose further confidence in the U.S. gold standard, and to cause a drop in capital imports and severe gold outflows from the country. This loss of confidence exerted contractionist pressure on the American economy and reduced potential economic growth during the early 1890s.”
Additionally, the Sherman Silver Purchase Act required the government to issue paper notes in order to purchase the silver. These notes were convertible in gold, however without an increase in the gold stock, people naturally wondered how good the promise to redeem in gold might be.
A run on the Treasury’s gold began, instigating the Panic of 1893.
Rothbard gives his take:
“Banks began to insert clauses in loans and mortgages requiring payment in gold coin; clearly the dollar was no longer trusted. Gold exports intensified in 1892, the Treasury’s gold reserve declined, and a run ensued on the U.S. Treasury….The Treasury was paying the price for specie resumption without bothering to contract the paper notes in circulation. The gold standard was therefore inherently shaky, resting only on public confidence, and that was giving way under the silver agitation and under desperate acts by the Treasury.”
Grover Cleveland assumed the Presidency on 4 March 1893 right in the middle of the crisis.
Rothbard continues:
“Poor Grover Cleveland, a hard-money Democrat, assumed the presidency in the middle of this monetary crisis. Two months later, the stock market collapsed, and a month afterward, in June 1893, distrust of the fractional reserve banks led to massive bank runs and bank failures throughout the country. Once again, however, many banks, national and state, especially in the West and South, were allowed to suspend specie payments. The panic of 1893 was on.”
Why Was The Sherman Silver Purchase Act Repealed?
Cleveland understood that the requirement of the government to buy silver was causing the financial panic.
He acted to repeal the Sherman Silver Purchase Act in order to halt the run on gold and preserve the gold standard.
In his message on the repeal of the act, Cleveland said the following:
“Our unfortunate financial plight is not the result of untoward events nor of conditions related to our natural resources, nor is it traceable to any of the afflictions which frequently check national growth and prosperity…I believe these things are principally chargeable to Congressional legislation touching the purchase and coinage of silver by the General Government. This legislation is embodied in a statute passed on the 14th day of July, 1890, which was the culmination of much agitation on the subject involved, and which may be considered a truce, after a long struggle, between the advocates of free silver coinage and those intending to be more conservative…The people of the United States are entitled to a sound and stable currency and to money recognized as such on every exchange and in every market of the world. Their Government has no right to injure them by financial experiments opposed to the policy and practice of other civilized states, nor is it justified in permitting an exaggerated and unreasonable reliance on our national strength and ability to jeopardize the soundness of the people’s money.”
What Was The Impact Of The Repeal Of The Sherman Silver Purchase Act?
The repeal of the Sherman Silver Purchase Act put an end to the speculation that the US was returning to a bimetallic standard.
The gold standard was affirmed which helped stabilise the currency, provided confidence in the monetary system and reassured investors.
Gradually the economy recovered from the Panic of 1893.
However, politically the battle lines were drawn for a further challenge by the free silver movement who now focused their attention on the 1896 presidential election.
The Democrats nominated pro-silver candidate William Jennings Bryan who ran against Republican William McKinley who was a proponent of the gold standard.
The election became, in effect, a referendum between bimetallism and the gold standard. McKinley prevailed and the free silver movement was defeated.
What Was The Significance Of The Sherman Silver Purchase Act?
The Sherman Silver Purchase Act was a significant piece of legislation in US history because it became the focal point for the heated and divisive debate about monetary policy that existed in the late 19th century.
The Act itself was a compromise measure that satisfied no one and was quickly repealed.
But it demonstrated the power and influence of the free silver movement.
It also demonstrated the power of hard money and the fact that even passionate political resistance is no match for the market’s demand for a harder monetary medium.
Lessons For Today From The Sherman Silver Purchase Act
1. Moving To A New Monetary Standard Involves A Fight
It is a natural monetary progression to move towards a harder and harder money. Humans have done this throughout history.
This is why gold emerged as the monetary medium of choice and why Bitcoin is so compelling.
Moving from bimetallism to the gold standard was a good thing.
The lesson is that the interest groups that supported the old standard will fight tooth and nail to keep it that way.
I don’t blame them. It makes sense that debtors and silver mining interests would resist a deflationary gold standard even if it was better for the nation and the economy as a whole.
It is not surprising that there was a protracted political battle over two decades regarding the roles of gold and silver in the monetary system.
If we are to move towards a harder monetary standard in the future, for example Bitcoin, then we should expect the same level of political resistance to change.
2. Governments Will Compromise If They Have Too
Sherman didn’t want the free coinage of silver.
He didn’t want to buy 4.5 million ounces per month. He opposed silver entirely.
Yet he made the compromise of the Sherman Silver Purchase Act in order to give something to the free silver movement.
These types of compromises are often disastrous, as this example shows. But politicians will make these deals and create these distortions anyway.
Get used to it.
3. The Market Always Wins
The resistance towards the gold standard was understandable even though it was futile.
The compromise of the Sherman Silver Purchase Act was understandable even though it was futile.
No matter how many people wanted bimetallism or how many interventions were made to support it, the market was always going to win.
It always does.
The United States reduced the soundness of its money and the market reacted. Gold flowed out and people made a run on the bank.
This forced the hand of the government to restore soundness to the dollar.
The gold standard prevailed and bimetallism failed because that was what the market demanded.
Government distortions and attempts to manipulate money will only ever be short-lived.
Conclusion
Senator John Sherman, sponsor of the Sherman Silver Purchase Act 1890, was a staunch opponent of silver.
Yet he sponsored a bill that required the Treasury to purchase 4.5 million ounces of silver per month.
Why?
It was a compromise with the free silver movement, who wanted to restore the right to the unlimited coinage of silver at a fixed government price.
The legislation was a disaster as it undermined the confidence in the United States gold standard and led to an outflow of gold from the country.
After causing a financial panic in 1893, the Sherman Silver Purchase Act was repealed.
Sources
Rothbard, Murray N. A History of Money and Banking in the United States : The Colonial Era to World War II. Auburn, Ala.: Ludwig Von Mises Institute, 2005.
Silber, William L.. The Story of Silver : How the White Metal Shaped America and the Modern World. Princeton, New Jersey: Princeton University Press, 2021.
Image Credits
John Sherman Portrait is in the public domain
John Sherman at his Desk is in the public domain
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