A Reviewer’s Notebook – 1966/6

Decline and Fall of Silver Coins

The first thing to be said about William F. Rickenbacker is that the “decline and fall of silver coins” which is the subject of his Wooden Nickels (Arlington House, $3.95) hardly keeps him awake o’ nights. Not in itself, that is. Our silver dollars, half dollars, quarters, and dimes form such a small part of our total money supply that their disappear­ance into the hoarders’ socks isn’t going to make much difference. The real subject of Mr. Ricken­backer’s worry is something differ­ent. What he is profoundly con­cerned about is the inability of the modern breed of politician to realize that Gresham’s Law, which says that bad money always drives out good money, is just as true and just as inexorable in its workings in our neo-Keynesian days as it was in the time of Good Queen Bess.

The reason why Mr. Rickenbacker undertook a study of what has happened over a period of two decades to our silver currency is that it offers a classic example of Gresham’s Law in operation. This is a witty book about the bungling of so-called statesmen and self-styled Treasury experts who tried to go on coining silver for mone­tary use at unrealistic ratios while the hoarders were snapping it up. It is the story of how three Ad­ministrations, those of Dwight Eisenhower, John F. Kennedy, and Lyndon Johnson, presided over the collapse of our subsidiary coinage without betraying even the most elementary acquaintance with the law of supply and demand. Silver coins started to vanish in the nine­teen fifties. Yet even as late as 1965 an Assistant Secretary of the Treasury was still protesting that “our chicken-feed problems,” mean­ing our troubles in keeping silver in circulation, would soon be over.

The whole fantastic record is summarized by Mr. Rickenbacker in a pithy paragraph that says the Treasury “had to lose three-quarters of its free reserves (of silver) before it awoke to the ex­istence of an abnormality. Its im­mediate action was based on a faulty interpretation of the cir­cumstances (first the numisma­tists were guilty; then the vend­ing machines; then economic growth). Its subsequent actions were inadequate and delayed. It failed to anticipate the price rise in silver after it withdrew from supplying half of domestic indus­trial demand…. Every official forecast was wrong. Douglas Dil­lon’s famous prophecy that we have enough silver to last into the 1980′s, and almost any statement by poor Mr. (Robert) Wallace, will serve as samples of the unin­formed, haphazard, or deliberately deceptive pronouncements that have characterized the Treasury in recent years.”

Ample Warning, No Response

The real joke on the U.S. Trea­sury is that this reviewer, who is the veriest neophyte in coinage matters, is hailed as a prophet of the collapse of our silver coinage by Mr. Rickenbacker. Away back in 1955 I undertook to do an arti­cle on silver for Barron’s Finan­cial Weekly. I discovered, by talk­ing with some real experts in the smelting business, that the indus­trial uses of silver were increas­ing every year. Steadily increas­ing supplies of silver were needed for photographic work, for elec­trical uses, for brazing and solder­ing, for batteries, and for vessels that were corrosion-resistant. Fur­thermore, I learned what every mining authority has known for years, that the production of silver is mainly a by-product of the min­ing of other metals. The circum­stances of its new industrial uses and its limited supply could mean only one thing: that in a short time there wouldn’t be enough to go around for coinage purposes at the existing relationships between silver, gold, and the paper dollar.

So I set it down in Barron’s more than ten years ago that silver was on the way toward being demonetized. Mr. Ricken­backer is good enough to quote me at several points in his book. But I was only a second-hand prophet; I was merely reporting, as an eco­nomic journalist, what at least ten knowledgeable metal experts within a stone’s throw of Wall Street were saying about silver. Incredibly, the U.S. Treasury peo­ple were to let a full decade go by without listening to the metal experts for themselves. Mean­while, I had completely forgotten that I ever wrote the article for Barron’s. It was with quite a start that I rediscovered my own words in Mr. Rickenbacker’s book.

The Vital Message

Well, the incompetence of gov­ernment need never surprise any­body. Luckily, as Mr. Ricken­backer points out, precious metals are not needed in a subsidiary coinage. We do need, however, a Treasury Department that knows something about Gresham’s Law. The behavior of the Treasury in the prolonged farce of the vanish­ing silver dollars and half dollars is rather terrifying proof that no­body in Washington has any savvy about the proclivity of people for hoarding valuable items when adulterated money is flooding the market.

Says Mr. Rickenbacker: “We cannot bid farewell to silver with­out profound foreboding.” For, in its “minor fashion,” the disap­pearance of silver coins has meas­ured “the speed of our monetary debauch.” Now that the silver quarter has been replaced by the cupro-nickel quarter, which looks like “a salami sandwich made with moldy bread,” the United States is on what amounts to “a com­pletely fiat basis.” For the “first time since 1792,” so Mr. Ricken­backer says, “we are on a money backed by nothing better than the politician’s pledge. The stage is set for the final inflationary blow-off if that is what our money man­agers desire… Our leaders have not learned from history.” (Mr. Rickenbacker chooses to ignore what he describes as “the trivial connection between gold and that 20 per cent of our money supply that is composed of Federal Re­serve notes.”)

Rampant Inflation

Mr. Rickenbacker is fun to read because of the wit and elegance of his sentences, which are always exquisitely tailored. But the fun becomes macabre when one real­izes that Mr. Rickenbacker is in­tensely serious in his warning to his readers. He is striving, by playing up the symbolism of the silver story, to tell us that infla­tion itself is nothing more nor less than a dramatic unfolding of Gresham’s Law as it is applied to values in general. What happens, in an inflationary blow-off, is that bad money tends to drive every­thing of value into hiding along with any remaining supply of good money. As fast as bad money comes into the hands of people, they trade it for anything at all that will serve as a “store of value” while the inflationary blitz continues.

The inexorable working of Gre­sham’s Law applied to values-as-a­ whole causes people to hoard land, food, clothing, hardware, common stocks, or anything else they can get their hands on. Gresham’s Law, in short, applies to every­thing of value in the world. For, in a time of inflation, anything of value is potential money. (See the use of cigarettes as money in de­feated and occupied nations as an example.)

Wooden Nickels is Mr. Ricken­backer’s first book. He has a great talent for economic clarification and for the orderly marshalling of pertinent evidence. Now that he has paid his respects to the story of silver, one wishes he would go on to tell us what is happening to gold, which is a more important matter.