Readable, thorough and fun book on the history of silver. If you're interested in metals and other commodities to protect yourself from inflation, this book will be an important element of your knowledge foundation.
No one is shocked by dumb government decisions nowadays, but usually we think of government stupidity en grande, as in disastrous wars or bungled high-profile programs like Obamacare. But this book teaches us about two major government dumbasseries that hardly anyone even noticed, yet both had awful economic ramifications: a subtle bill passed in 1873 (later nicknamed "The Crime of 1873") which demonetized silver, and then policies in the early 1960s under Kennedy which re-demonetized silver.
Finally, it's worth remembering that many commodity markets are surprisingly small and illiquid, to the point where a few whales could collaborate and easily move prices. I can't help but think of the Hunt brothers massively moving the silver price in the 1980s as a possible analogy for Bitcoin, the digital commodity. Buckle up!
Notes:
Cast of characters:
Alexander Hamilton (encourages a bi-metal currency standard of both silver and gold)
John Sherman ("The Crime of 1873")
William Jennings Bryan (Cross of Gold)
Key Pittman (influential Nevada senator)
Franklin Delano Roosevelt
Henry Morgenthau (indirectly helps Japan against China via his silver policies in the 1930s)
John F. Kennedy
Lyndon Johnson
Henry Jarecki (psychiatrist who becomes a huge silver trader)
Nelson Bunker Hunt (drives a huge squeeze in silver in the late 70s/early 80s)
Warren Buffett (large silver buyer in the late 90s)
Introduction:
1ff: On Lamar Hunt and his brothers Nelson "Bunker" and Herbert, sons of oil tycoon H.L Hunt. The brothers acquired a cache of $2 billion worth of silver over the course of six years, and in September of 1979, when silver hit $50 an ounce, that $2 billion stash became nearly $10 billion. A year later, however, Bunker Hunt had to pledge his oil company to avoid bankruptcy; he had borrowed heavily to buy up the silver, and the collateral value collapsed when silver fell back to $10 an ounce; later he and his brothers were found liable for conspiring with Saudi Arabian sheikhs to corner the silver market. When Bunker's older sister asked him what happened, Bunker told her "I was just trying to make some money."
3ff: Other examples: Warren Buffett spikes the price of silver in 1997 when he bought 100 million ounces; in 1933 FDR raised the silver price of the US Treasury to mollify western senators from key mining states; see also William Jennings Bryan's Cross of Gold speech in 1896, arguing to bring silver back into coinage, since with gold as the monetary there had been deflation during the last quarter of the 19th century. [Note that modern bitcoiners and Austrian economists would consider this a good thing, whereas Keynesian and postmodern "inflationista" economists would see it as a bad thing.] Bryan wanted silver to be monetized because it would produce inflation, and this would reduce the burden of mortgages owed by farmers. [Terrible logic in retrospect! But note that with inflation there are always winners and losers: the winners are people selling the things with rising prices and those who have borrowed in the inflating currency, the losers are those who are stuck buying those inflating things and whose savings are being inflated into oblivion.] But the author notes that a century later the Hunts saw silver as a hard asset to protect from that era's inflation.
5: Note England's currency is called the "pound sterling," paradoxically referring to sterling silver as the standard, "sterling" refers to 92.5% pure silver with 7.5% of some base metal, usually copper, added for strength.
Chapter 1: Hamilton's Design
10ff: On Hamilton championing a bimetallic standard, copying the English model and also using the British "trial of the Pyx" to ensure purity of the coinage [this is where a random sample of coins from the prior mint are locked in a chest from one period to the next and assayed by independent experts to compare later mintings, if the purity changed the master of the men would be jailed]. Under Hamilton's proposal the punishment was death!
13ff: Explaining the risks of a bimetallic standard; on what happens when the price of gold relative to silver changes: it drives out the more valuable currency as a result due to Gresham's Law. Note also the 1859 discovery of the giant Comstock lode, which marked the peak of the value of silver relative to gold.
Chapter 2: Solving the Crime of 1873
17: Ohio Republican John Sherman, chairman of the Senate Finance Committee, famous for sponsoring the Sherman Antitrust Act in 1890, however he is much less known for the (alleged) Crime of 1873. He was also younger brother of general Sherman. The Crime of 1873 refers to legislation that made gold legal tender for US monetary obligations while restricted the legal tender status of silver coins to $5 or less. "...few people realized the full consequences of the shift to gold when the law was passed."
20ff: Sherman was criticized because he did know of the ramifications of this demonetization of silver but never discussed it in any debate about the law, thus the bill was seen as a sort of subterfuge. [It's interesting to compare this to today, when you can reliably figure out what the precise objectives of a bill are by thinking of the exact opposite of what the bill is named: see for example the "Inflation Protection Act." But then again, note the subterfuge of the Obamacare bill, where Nancy Pelosi famously said "We have to pass the bill before you can see what's in it"... this was similar to the silver demonetization bill, where the actual objective of the bill was buried under a long list of "mind-numbing instructions to the mint."]
24ff: What the bill effectively did is reduce citizens' optionality to pay obligations in silver if the price of silver declined relative to gold. Further, this essentially reduced the money supply and led to some twenty years of price deflation beginning in 1876 where wages, farm commodities, and housing prices all declined in prices, while debts remained fixed of course.
26: See also L. Frank Baum's story The Wonderful Wizard of Oz which was a subtle allegory for the crime of 1873; see for example Dorothy, led through seven passages and up three flights of stairs in the Emerald Palace, a reference to 1873.
Chapter 3: Free Silver
27ff: On William Jennings Bryan, his lifelong prejudice against "the evils of the East Coast banking elite"; "We simply say to the East to take your hands out of our pockets and keep them out." Bryan moved into politics after failing to prosper as an Illinois lawyer.
31ff: Elaborating on the idea of wanting a bimetal standard (or "free silver" per the slogan of that era); this would essentially increase the money supply significantly, create inflation, and then benefit anyone who had liabilities and/or sold commodities. [Again, it's critical to remember here that inflation (or deflation) always hurts some people and benefits others.]
32ff: Bryan runs for president in 1896, losing to McKinley; he had other radical views in addition to wanting silver as monetary metal: he also favored an income tax, women's suffrage, direct election of senators, and of course he gave the famous "Cross of Gold" speech; note that this came after the depression that began in 1893: unemployment was still 14% in 1896 (although down from the 18% peak two years earlier). McKinley's campaign mocked Bryan's silver idea by talking about "53 cent dollars." Essentially the silver idea was a terrible idea because of all the inflation it would create.
36: Later Bryan served as Woodrow Wilson's Secretary of State from 1913-1915 and then was famously known for his role in the Scopes trial, where he won a prosecution victory against John Scopes, who was accused of teaching evolution. Bryan "died less than a week after the trial ended and did not live to see the verdict overturned by the State Supreme Court."
Chapter 4: Seeds of Roosevelt's Manipulation
39: Disturbing list here of all of FDR's horrendous business ideas and investment ideas that he attempted during the 1920s, good lord. He tried to corner the live lobster market!
39ff: On Key Pittman, who became senator in Nevada during Woodrow Wilson's first term, Pittman helped drive the FDR administration's support for silver prices.
42ff: Interesting discussion here of how Pittman introduced legislation in the Senate to let Britain borrow hundreds of millions of ounces of silver from the US Treasury to provide to India so that it could redeem its currency backed by silver; suspending rupee convertibility to silver would have led to unrest or even rebellion in India, and this would have impaired England's war effort. This act also required the US Treasury to replenish its inventory of coins by purchasing domestically produced silver at a dollar per ounce irrespective of the free market price; this was tremendously beneficial to western mining states.
Chapter 5: FDR Promotes Silver
45ff: Short chapter here consolidating a lot of FDR's steps once he got into office: the March 1933 bank holiday which shut the banking industry for ten days; specifically ordering banks to not permit withdrawals or transfers of any gold or silver coin, bullion or currency; efforts to produce inflation by any means necessary; in April of 1933 the president took the US off of the gold standard [note here that there's absolutely no mention of Roosevelt's infamous Executive Order 6102, which forbade Americans to hold gold, this order was put in right before the US devalued the gold/dollar exchange rate just weeks later; it turns out this is mentioned later in the book more or less out of order, it should have been discussed right here.]
Chapter 6: Silver Subsidy
56ff: More on the devaluation of the dollar, changing the dollar/gold exchange rate from around $20 to $35 an ounce; also on giving US silver miners a 50% subsidy above the prevailing world silver market price. Note that China was a silver-based currency at this time, this US decision caused deflation and economic havoc there.
Chapter 7: China and America Collide
61ff: China "was forced off the silver standard" when FDR subsidized the silver price in the USA; details here on US Treasury purchasing of silver at above-market prices; the developing the "dual price" where there was an industrial price based on the actual market price for silver and then the subsidy price that the US was paying: $0.64 per ounce. China was harmed in two ways: first, higher world silver prices would draw silver out of Chinese banks to be sold, reducing Chinese silver reserves; second, it also would harm Chinese exports, because the value of Chinese currency would rise (most export-based countries would devalue their currency in order to make their exports more competitive). [One tremendously important takeaway here is to recognize that if you use a precious metal to back your currency, but yet the supply/demand dynamic of that metal can be impacted by geopolitical events or by other active interference from other countries, you are putting your country at risk, making it dependent on the kindness of strangers; see Spain, subjected to significant inflation when all of the gold and silver was extracted from South America and brought home, for example. It's also not unreasonable that some country somewhere might have a major discovery of silver (or in the case of the USA might decide to actively manipulate the price), thus China must be prepared for price movements in either direction, and the consequences.]
Chapter 8: Bombshell in Shanghai
71ff: 1934: Henry Morganthau's "Silver Problem Report" on what to do about China; note that FDR and the US government was fairly oblivious about Japan and its influence on China at the time; Morganthau is embarrassed when he realizes how much he's indirectly helping Japan with all his silver purchases: Japan had invaded Manchuria in 1931; note also that Senator Key Pittman had quietly purchased mining properties during this time and was also benefiting from the silver subsidy. FDR is delusionally oblivious to the effects of the silver subsidy: he thinks it's going to help China and hurt Japan; per the author, FDR "would recognize his error too late."
78ff: Roosevelt announces an even higher subsidized price: 71c versus the prior 64.5c, later hiking it to 77c and pushing the free market price to 81c by April 1935. Note also Mexico was having a shortage of currency, as people were melting down Mexican silver coins for the melt value. Mexico then had a "bank holiday," seized all silver pesos and banned exports of silver; this was under President Lazaro Cardenas. [Interesting here that the high silver price was "very good news for Mexico" per the author (and it was positive for their mining industry, which specialized in silver), but you would think that Mexico would experience the same deflationary effect as China here, in other words it wouldn't actually be positive news.]
81-82: Note here the language the Japanese government uses as they advance beyond The Great Wall into a demilitarized zone outside of Manchuria. "The sole object of the present drive is to clear away the bandits... The Japanese army has not the slightest intention of starting another military operation." As always you can often use the heuristic "believe the opposite of what a government says"--in the case of Japan here this was exactly true.
82ff: 1935: China de-links from silver, becomes a full fiat currency; also the Chinese government seizes all silver coins to be exchanged for paper banknotes; they also sell a large amount of silver to the United States in exchange for dollars which would be reserves for their new paper currency. Note here Henry Morganthau's quote, "This is our chance...to hook them to the dollar instead of the pound sterling." Note also Morganthau and FDR underestimated Japanese fury at this step, and shortly thereafter Japan escalated its military invasion into North China. A great quote from the author: "The Japanese military should have been shopping for a Christmas gift to send to FDR." Also the Japanese government smuggled silver out of China and were able to sell that on the world market at elevated prices.
88: A month later the US removed support for the silver market internationally, although it continued to support and subsidize the price inside the US.
89: The author concludes that the US treasury's manipulation of the silver market under FDR weakened China in the 1930s and helped Japan conquer it.
Chapter 9: Silver Lining
90: Sort of depressing discussion here of how the US Treasury moved 114 tons of silver from the New York office in Manhattan to the US military academy at West Point. [If you think about it, this is silver unearthed in the western states and then basically "reburied" in a vault with armed guards. Absolute lunacy and such a waste of taxpayer resources to dig this stuff up and then just bury it again somewhere else.]
91: On "secondary" silver: secondary metal sources such as scrap or silver reclaimed from the jewelry industry or from melted coins; this eventually would overwhelm extreme bull market in a commodity.
92: Note also the issuance of silver certificates and silver coinage during this era that were equally accepted everywhere, adding to the money supply, see also the picture here of the $10 "silver certificate" paper bill.
93ff: The US enter World War II after Japan bombs Pearl Harbor; this led to a rationing of all sorts of metals for war production and it resulted in the use of silver in many copper applications; the US government also lent silver to industrial plants for defense production, to be returned at the termination of the war. See also the use of silver for magnetic coils used in separating and enriching uranium. This chapter really is more about copper and its important rather than silver.
Chapter 10: Costly Victory
99ff: Senator Key Pittman dies November 1940, succeeded by Pat McCarran who continued the battle for silver "with no less fanaticism." This chapter covers the US Senate battle between McCarran and Rhode Island senator Theodore Green, who wanted to lower silver prices; essentially a battle between western miners (who produced and sold silver) and eastern silversmiths (who bought silver). A compromise was reached with a bill allowing the Treasury to buy domestically produced silver at 90.5c/ounce and also sell it to industry at the same price. "Few realized at the time that this provision would destroy silver's monetary crown. McCarran died in 1954 and did not live to see President Kennedy lead the coup."
Chapter 11: JFK's Double Cross
104: Strange (and hopefully facetious) paragraph opening the chapter here listing all of the kooky theories for why JFK was assassinated, then suggesting that the Kennedy assassination came because of his elimination of a silver subsidy; the author claims this theory was "at least as plausible as the rest."
105ff: By 1961 the Treasury had only 22 million ounces of silver remaining, after continued sales under the 1946 compromise silver bill. Industrial silver use was 285 million ounces per year while mine production was 198 million ounces. The silver price went from 91c (the treasury sales price) to over a dollar per ounce. However, Kennedy also directed that silver should be withdrawn from monetary reserves and be demonetized eventually.
106ff: On Treasury secretary Douglas Dillon, under Kennedy. Kennedy and Dillon began to remove silver from the monetary system by gradually withdrawing $5 and $10 silver certificates, replacing them with Federal Reserve notes; which freed up 45 million ounces of bullion that was later used to manufacture coins. [Note that a big part of how this was done was by the Treasury's replacement of damaged or degraded "silver certificate" bills with new (non-silver certificate) bills; note the fascinating thing about paper currency is that it can be replaced with new paper currency with different promises printed on it!]
110ff: An acute shortage of small change in supermarkets and department stores throughout the country during 1962's Christmas shopping season. Treasury secretary Dillon blamed "vending machines" (a recent innovation), but mint director Eva Adams blamed hoarding from coin collectors, who assumed coins would be worth much more in the future. Also on a shortened debate on the bill to re-demonetize silver: the author argues that the discussion was corrupted the sense that over the four days dedicated to debate the bill, only two hours were allocated to opposition witnesses.
114ff: Warnings from congressman and senators that the demonetization of silver was a step toward the complete demonetization of silver and gold: this turned out to be totally true.
116: Note here that this bill also effectively made it possible for American citizens to buy silver bullion to protect themselves from inflation. It also enabled silver futures trading on the Comex.
Chapter 12: LBJ Nails the Coffin Shut
120ff: Johnson actually continued Kennedy's efforts in delinking money and precious metals in the United States which helped fuel the awful inflation of the 1970s.
121ff: on people collecting/hoarding silver dollars like the new Kennedy 50c piece and other coins because of their silver content and potential melt value.
125: Mines in the west reopening because of the structural deficit in silver: annual silver use exceeded annual mining production. Note an interesting nuance here however: silver is a byproduct of mining of base metals like lead and zinc, so price increases in silver aren't as readily expressed in extraction, you need price hikes and demand drivers in the directly-affected base metals too.
126ff: LBJ speaking to Congress in 1965: "Silver is becoming too scarce for continued large-scale use in coins... We expect to use more than 300 million troy ounces--over 10,000 tons of silver for our coinage this year. That is far more than total new production of silver expected in the entire free world this year." [Note that you can always debase the coinage and therefore increase the money supply, but typically coins that have melt (or numismatic) value higher than their actual face value will get pulled out of circulation; also there can be a shortage of coins because you simply didn't mint enough, which drives inefficiencies in your economy...] The US minted identical-looking coins but with copper and nickel alloys rather than any silver. The Kennedy half dollar had its silver content reduced from 90% to 40%. Note also that Gresham's Law came into play here: all of the silver-based dimes, nickels and quarters were quickly pulled from circulation as people kept them rather than spending them.
129ff: Note also around this time, 1965, the House and Senate Banking Committee urged passage of a bill to remove the 25% gold backing required for Federal reserve deposits. [By 1971 Nixon would do it anyway.] "President Johnson had loosened the restraints on monetary expansion [by reducing the silver content in coinage in the US] and speculators would roil the silver market in response, but few politicians listened to the subsequent warning whistle."
Chapter 13: Psychiatrist's Meltdown
131ff: On Henry Jarecki, psychiatrist, who during his residency would arbitrage British gold sovereigns in Switzerland, would even arb Nescafe coffee canisters, then when he did his residency in the US he would import used Mercedes and resell them at significant profits.
135ff: Henry's brother Richard played roulette, looking for inefficiencies in roulette heels; he brings to Henry a shoebox filled with silver certificate dollars. Henry knew that silver had been stuck at $1.29 per ounce since mid-1965 because the US was selling silver at that price to discourage hoarding; Henry suspected the price would rise, and thus trades the box of paper certificates in for a 70-pound bar of 99.9% pure silver, and uses it as a doorstop. (!) LBJ then changes policy, creating two silver prices: $1.29 for companies/industrial users, and a separate, free-floating free market price which rose to $1.49 an ounce, an all-time high, beating the 1919 prior high in the aftermath of the original Pittman Act.
137ff: Henry's plan was to sell silver futures at $1.54 (the then-market price) but pay $1.29 for the bullion using silver certificates and then deliver the silver to fulfill the futures contracts he sold. All he had to do was go out and find silver certificates, so he runs an ad in the New York Times offering to pay face value. Whenever he acquired $12,930 worth of silver certificates he would sell one future. Even a Pan American pilot would bring in silver certificates from Liberia. This arb worked until 1968 when the Federal Reserve began paying for silver certificates in regular notes rather than bullion. [Looking back, all this really seems kind of dumb: all this energy diverted to arbitrage to make money on price differentials guaranteed by a government when you can get rid of all of it just by having a fully fiat currency].
Pretty hot guy
141ff: The US Treasury starts mini-defaulting on the silver obligation, fulfilling it with silver of a different grade which wouldn't make good delivery for futures; there also was a refining strike in the US so Jarecki starts transacting on the London exchange, selling his underlying bullion in the London forward market with financing from a London-based firm called Mocatta & Goldsmid. [Note also here that this arbitrage got tighter and tighter so he was facing smaller and smaller returns, thus he then used significant leverage to try to maintain his returns.]
144ff: See also how things tend to crescendo: by 1968 the US stops being able to support the $35 gold price too; this actually pushed silver prices even higher because American citizens were not legally able to buy gold so they had to use silver for inflation protection.
Chapter 14: Battle Lines
147ff: Interesting blurb here on how in 1969 the Treasury lifted the ban on melting pre-1965 coins. Henry Jarecki, from our last chapter, decides to restart his arbitrage on coins now after the lifting of this ban; in fact he gives up his medical practice in order to do this stuff full-time. [Note here the difference however on a coin's numismatic value and its melt value, many coins were worth much more in their original form to collectors than they were for their silver content and as such would never come into the melt marketplace.]
Chapter 15: Nelson Bunker Hunt
150ff: Bunker Hunt was 49% owner of the Sarir oilfield in Libya, he negotiated the concession with King Idris in 1957, making him the richest man in the world at age 40 (he was worth between $6 and $8 billion when there were perhaps 13 billionaires in the entire world); Bunker as his father's least favorite son; Bunker Hunt saying "People who know how much they are worth, generally aren't worth much." Born in 1926, his father, H.L. Hunt, had an uncanny ability to find oil. Bunker's oldest brother Hassie was mentally unstable despite having a similar "instinct" for oil; other details about the family; note here also that Bunker's father had eight children by two women other than his wife, in addition to the six children he had with his wife. (!)
155ff: On the 1969 overthrow of King Idris by 27-year-old Gaddafi; he allowed the oil companies favored by the king to remain initially, but then began nationalizing foreign-owned oil operations. "Bunker began to worry as soon as they said not to worry." Gaddafi decides to nationalize Bunker Hunt's half of the Libyan oil field in 1973, which "demoted" Bunker "from the wealthiest man in the world to an ordinary multimillionaire."
157ff: In 1970, Bunker Hunt begins accumulating silver, modestly at first, and then much more aggressively by 1973; he also begins acquiring land in Australia and Mississippi, buys a large horse stable in France, also joins a group of investors with George Steinbrenner to buy the Yankees in 1973.
161ff: The story backs up to 1959, when Lamar Hunt and Bud Adams join together to form the American Football League, then later arranged the merger between the NFL and the AFL, also inventing the name "Super Bowl."
162-3: Helpful discussion here on "primary sources" of a metal, mining, followed by "secondary sources" like jewelry on the market, coins hoarded by investors or coin melting arbitrageurs, etc., this incremental supply tends to get shaken loose as prices go up. See also Bunker Hunt believing that gold was too easily manipulated by central banks around the world, and therefore silver was a preferable inflation hedge. See also a blurb here on the fact that the US government confiscated silver bullion from American citizens in 1934 at the arbitrary price of 50 cents an ounce, and so it was seen as "safer" to store silver offshore, like in a Swiss bank for example.
164: "Herbert Hunt designed a modified blueprint for accumulating silver on the commodity exchange, a buying program that nearly destroyed Henry Jarecki."
Chapter 16: Heavyweight Fight
165ff: The Hunt Brothers bought 2,000 December futures contracts in 1973, then took delivery of the 20 million ounces of silver for $60 million dollars. Thanks to this buy (as well as continued Hunt Brothers buying afterward) the silver price more than doubled to $6.70 an ounce by February 1974.
168ff: The story returns here to Henry Jarecki and Mocatta, his silver trading company, which now was doing bullion dealerage between major producers and major industrial users, clipping the spread between buyers and sellers. When the silver price started going up radically in 1973, industrial buyers like Kodak would buy futures faster than producers in Mexico and Peru were selling. In 1974 Jarecki's firm was short 5 million ounces of silver needed for delivery, it was also way too much for him to buy on the spot market, so he calls in a favor from his friend Luis Chico at the bank of Mexico who agreed to sell him 5 million ounces directly.
171ff: 1974: here silver hits a near-tem peak price leading up to the re-legalization of gold ownership for American citizens.
172ff: Bunker Hunt rents a fleet of Boeing 707s to ship his silver from the Comex warehouse to Switzerland. (!!)
174: "[Bunker Hunt's] courtship of the Arabs made him super rich and world famous but, like his Libyan oil venture, ended in disaster, with an assist from Henry Jarecki." [The author does a good job rendering his story more readable with forshadowing verbal flourishes like these]
Chapter 17: Saudi Connection
177ff: Hunt now tries to acquire Sunshine Mining, an Idaho-based silver mining company but, unusually, not a base metal miner [see page 125, above]. Hunt also starts buying soybeans; also Hunt uses family members to set up additional commodities trading accounts to bypass position limits at the CBOT; Bunker sells the Saudis on the idea of silver.
Chapter 18: Silver Soars
182: February 1979: Iran's revolution sends silver above $7 an ounce for the first time, then the price blasts off to $50 an ounce over the next twelve months.
184ff: Decent explanation here on different ways to engineer a squeeze: with low "above ground" stocks of the commodity and less than one billion ounces of silver in the world, just 150 million ounces' worth of buys would drive a squeeze. You can buy it outright long (costly, you have to put up all the capital yourself), or else use spreads in the futures market (requires a lot less capital but you have to maintain minimum margin requirements), or go long and big a near month and sell an out month to fund it (this is the least costly, but then the market price usually collapses if you ever want to sell to take advantage of the price increase, so it's hard to liquidate a big futures position). See Henry Jarecki's article in Commodities Magazine on how to engineer a squeeze, which was "essentially an ad" saying to the Hunts "You want to do this? Come and talk to us." Jarecki said later, "The Hunts followed my roadmap to the letter with one exception: they didn't ask us to help them."
186ff: The Hunts enter into a quiet partnership with two Saudis to accumulate more silver.
190ff: Turns out Jarecki's firm had lent out or borrowed against the $50m in silver the Hunts placed with him as collateral for their (the Hunts') own loans. Blurbs here on variation margin payments required in futures markets; on EFP "exchange of futures for physical" transactions to close out a short position; Jarecki's firm was short futures to hedge his inventory of coins and other silver exposure.
194ff: 1979: The Comex puts a committee together to look into the silver marketplace; they decide to raise margin requirements and reduce position limits; silver just keeps going higher, in part due to geopolitical risks rising with the Iran hostage situation as well as Russia invading Afghanistan.
199: Hunt's average price was $8 an ounce with silver at $34.45 at the end of 1979.
200ff: Ismael Fonseco, a Peruvian civil servant at Minpeco, the Peruvian government-owned company managing Peru's mineral wealth, goes rogue basically and sells far too many short silver contracts, blowing up the company, Minpeco then sues the Hunts for manipulation.
Chapter 19: Collapse
202ff: Secondary silver sources like coins, silverware place settings and tea sets are melted for scrap, even theft increases, thieves seeking to cash in on the boom in silver, etc. There was enough secondary silver to cover twelve years (!) of production/consumption shortfall, some 2.5b ounces, far more than Jarecki's 600-800m ounce estimate of secondary silver. Note however that a shortage of refinery capacity blunted the impact. [You never know where a bottleneck may impact a system!]
205ff: Comex again reduces of position limits, these cuts effectively reduced the amount of silver contracts for which the Hunts could take delivery, essentially creating a "time bomb" that would "explode in Bunker's face"; Bunker makes an EFP deal (see p190 above) with Engelhard Minerals and Chemicals, this cuts the company's short position and lets Bunker get under the new, lower position limits. Note that there was an accelerated delivery clause in this deal.
206: Silver hits an all time high of $50 on January 18, 1980, hitting a 1:17 ratio to the gold's price [analogous today to the ETH/BTC ratio].
207ff: January 21, 1980, the Comex votes to limit trading to "liquidation only," effectively banning Hunt and anyone else from buying more silver. The CBOT follows and does the same thing the next day. Silver drops $10 to $34 that day (!) and 30% from the high.
210: Funny blurb here about whether it's fair or even legal for an exchange to change its rules without notice (by summarily switching to "liquidation only" trading), Henry Jarecki's lawyer said, "Ah, but one of the rules is that futures exchanges are permitted to change the rules."
211ff: Lenders start refusing requests to finance the Hunt buys to take delivery on futures contracts that were coming due. The silver market senses this and starts falling more.
214ff: Margin calls start coming in from Bunker's counterparties, then formal telegrams to liquidate from creditors; then Bunker Hunt announces he would join in a group to sell silver-backed bonds that paid interest, about $4 billion worth, which would be plenty to solve everyone's cash shortage. [At this point Hunt was so big in the silver market that if he blew up he would bring the entire market and everybody else, all his counterparties and lenders, down with him, following the maxim if you owe the bank a million dollars you have a problem, if you owe the bank a billion dollars the bank has a problem.] The price of silver dropped still more and this bond deal never got traction.
216ff: "Silver Thursday", March 27, 1980: Silver falls another third to $10.80 an ounce, also trading in Bache & Company (which was selling Hunt's futures positions to recoup margin loans) is halted; silver sits at $12 and the Hunts still owe $1.7b to.other creditors.
220ff: The Hunts still lacked enough cash to pay Engelhard the $434 million due on March 31st, 1980, but arranged ultimately to offer a 20% interest in a Canadian oil and gas property, relinquish claims to any of the silver in the EFP transaction with Engelhard, and also give up an additional 8.5 million ounces of silver as well. [This deal actually didn't work out well for Engelhard but it was far superior to directly forcing the Hunts into bankruptcy: a Hunt default would have tied everything up in court and Engelhard might have recovered next to nothing.]
221-2: See also Paul Volcker arranging a sort of a bailout to stabilize this various circlejerk of silver market creditors, implying basically that the Hunt Brothers were too big to fail.
223: List here of the various properties that the Hunt Brothers pledged to make good on their silver losses, including Mississippi cotton land, an old bowling alley in Dallas, their families' mink coats, and Bunker's 500 thoroughbred horses. "It was embarrassing but the worst was yet to come." [Again, the author does a good job of connecting chapters to keep the reader engaged.]
Chapter 20: The Trial
224ff : Bunker Hunt in a civil trial filed by the Peruvian government. [Note that this trail wasn't until 1988, some eight years later! The wheels of justice grind slow.]
230: "As evidence becomes more complicated and the trial longer, the power of a simple memorable argument increases." Jeffrey Williams, commenting on the Hunt civil trial.
231ff: Bunker and Herbert Hunt file for personal bankruptcy, Wednesday September 21, 1988, but it appears to be a stalling maneuver to delay the Peruvian government's claims. Note also that the family company Placid Oil already had gone into Chapter 11 in August 1986. Lamar Hunt settles his share of the judgment with Peru without bankruptcy. The Chapter 11 reorganization involved a trustee selling Bunker's Australian land, his coin collection, his 2000 acre ranch, etc. Also the CFTC settled its judgment with the hunts with a $10 million fine for each along with a lifetime ban.
Chapter 21: Buffett's Manipulation?
236ff: In this chapter and the next the author makes an unrigorous claim that Buffett "manipulated" silver, frankly the case he makes isn't particularly compelling. As we will see, the silver price only moved from $4 to $7 during Buffett's ownership period for one thing, and the price only exploded upward after exited the position! The author says here that Buffett refused to be interviewed for this book, and answered only one question by email through his assistant. Buffett buys large amounts of silver for BRK in 1997-1998, reasoning that industrial use was larger than mine production.
239: On backwardation, when the near month trades higher than later delivery months [usually commodities are in contango, the reverse]. Backwardation may reflect a squeeze in a commodity.
240: Silver moves from $4 to $7 over the course of the year, compare this paltry move to the gigantic repeated moves during the Hunt era. Note also proof of "intent" is also required for manipulation. Also, Buffett sold way too early! Per the author, "Buffett missed the explosive advance that would soon challenge the Hunt-era record of $50 an ounce."
Chapter 22: Message from Omaha
243ff: Note also that Buffett lost money in the short run, made trivial money when he allegedly sold in 2005, and the real gains in silver's price didn't really happen until 2006 after he was out. Not compelling at all to claim manipulation here. "Charlie Munger deadpanned, 'I think we've demonstrated our expertise in commodities, if you look at our activities in silver.'"
245ff: On the 2008 crisis and declines in many commodity prices; copper and oil cut in half, while gold and silver were up some 20%; silver's increase was a surprise because it had more industrial demand, however silver tends to correlate more with gold than with copper. Silver peaks at $48 in 2011 during the Euro crisis.
247: Blurb here on the US American silver eagle, a $1 coin containing one troy ounce of silver.
Chapter 23: The Past Informs the Future
249ff: Bunker Hunt dies October 2014 at age 88; Herbert Hunt returned to the ranks of the billionaires in 2013 by selling an oil-rich property he had bought in North Dakota; review of things discussed earlier in the book: Hamilton embracing silver; Senator John Sherman and the crime of 1873 demonetizing silver and leading to the great deflation of the late 19th century; William Jennings Bryan's "Cross of Gold" rhetoric; Senator Key Pittman from Nevada and his arrangement with FDR in the 1930s to support the Silver Purchase Act which partially remonetized silver; this drove China off the silver standard in 1935 and helped speed its collapse in the face of Japanese aggression; of course this drives home the idea of how a domestic policy can have tremendous international implications; delinking of the dollar to gold in 1971 and the inflation that followed in the 1970s; brief musings here on whether precious metals will ever return to monetary status, on their value as stores of value in the future, etc.
To Read:
Stephen Fay: Beyond Greed
A.E. Feavearear: The Pound Sterling: A History of English Money
Milton Friedman: Money Mischief: Episodes in Monetary History
Laurence J. Laughlin: History of Bimetalism in the United States
Paul Volcker and Toyoo Gyohten: Changing Fortunes
Franz Pick: Silver: How and Where to Buy and Hold It
Jerome Tuccille: Kingdom: The Story of the Hunt Family of Texas
Harry Hurt III: Texas Rich: The Hunt Dynasty From the Early Oil Days Through the Silver Crash
***Jerome F. Smith: Silver Profits in the Seventies
***Henry Jarecki: "A Squeeze in Silver: How Likely?" Commodities Magazine, March 1979, pp. 56-58.
***Jeffrey Williams: Manipulation on Trial: Economic Analysis and the Hunt Silver Case
W.J. Streeter: The Silver Mania