A Tale of Two Silver Markets-and Two Disasters

• Author: Allen Pusey
• Pages: 72-72

PHOTOS BY BETTMANN/CONTRIBUTOR/GETTY IMAGES; WIKIMEDIA COMMONS; SHUTTERSTOCK

In the late 1970s, two forces drove an xiety over the nation’s economy: oil and infl ation. A 1973 oil embargo

prompted by war in the Middle East, followed by a 1979 spike in oil price s, plunged the nation into a dizzy ing

round of infl ation peaki ng at 14 percent, and the U.S. dollar was having trouble remaini ng stable.

Until 1971, when Richard Ni xon freed the

U.S. from the gold standard, public fa ith in

currency depended on the price of gold. To

average Americans , the tethering of cur-

rency to a precious metal, whet her gold or

silver, seemed a sensible thing. But at least

two events in histor y, both involving silver,

revealed the disrupt ive vulnerabilities of both.

On Feb. 20, 1893, the Philadelphia and

Reading Rai lroad declared bankruptcy,

sparking the Panic of 1893. Though commod-

ity speculation and outsi ze railroad debts

metastasi zed the panic, many blamed the

rivalry b etween gold and silver for the nation’s

economic woes.

Historically, a gold-based cur rency was considered con-

servative and stable. But in the dec ades after the Civil

War, farmers in the nation’s rapidly expanding agricu ltur-

al base grew to re sent the increasing strength of the gold-

based dollar, which required t hem, in e ect, to pay debts

in dollars mor e valuable than the money they borrowed.

Their need became a movement that championed a

silver-based curr ency and drove passage of the 1890

Sherman Silver Purcha se Act. The act required the gov-

ernment to buy 4.5 mill ion ounces of silver each month

and issue certifi cates redeemable for either silver or gold.

Though a boon to farmers and mi ners, it was a spectacu-

lar boondoggle. Speculat ors redeemed silver certifi cates

for gold, then traded it on the open market, depressi ng the

prices of both metals . Speculation was so rampant that by

August 1893, President Grover Cleveland ca lled a special

session of Congress to repea l the Silver Purchase Act.

Silver remained par t of the nation’s c oinage and a major

tenet of the populism charac terized by presidential can-

didate Willia m Jennings Bryan at t he turn of

the century. But in 1979, silver speculat ion

returned wit h a vengeance in the form of bil-

lionaires Nelson Bunker, Willia m Herbert

and Lamar Hunt, sons of legendar y oilman

H.L. Hunt.

Starting in 1 973, the Hunts used their inher-

ited billions to accu mulate substantial amounts

of silver and soybean fut ures contracts. But un-

like other traders who simply traded c ontracts

for a profi t or loss, the Hunts began tak ing

delivery of the actua l soybeans and silver, and

regulators suspe cted a goal of market manip-

ulation. By April 1977, the Hunts controlled

an estimated t hird of the U.S. soybean crop.

The Commodity Future s Tr ading Commission

stepped in, fi n ing the family $500,000 and

asking a federal cour t to order them to disgorge

a three-month profi t of up to $100 million.

But barely two years later, the Hunts began t he same

behavior in the silver market. A gain, they not only bought

futures contrac ts but took delivery of the actual silver,

accumulating va st stocks of the metal in Swiss v aults.

Between January and D ecember 1979, as the price of sil-

ver rose from $6 to $32 per ounce, the Hunts borrowed

against the increa sed value of their hoard and used the

money to buy more si lver—whether in future s contracts,

bullion or stock in mining operat ions. As prices rose, sil-

ver poured in from every where: jewelry boxes and pawn

shops, tea sets and coin collec tions, bank vaults and bur-

glaries. By the time t he price reached $49.45 per ounce on

Jan. 18, 1980, the Hunts controlled, in one way or another,

more than 69 percent of the world’s silver supply.

On Jan. 21, 1980, at the urging of regu lators, the

Commodity Excha nge, the main marketplace for silver,

enacted rule s on silver purchases that in e ect requ ired

the Hunts to sell. As they sold, silver pr ices declined; the

Hunts had to pay their margi n calls, and decline begat

decline.

The results were disas trous. On March 27,

1980, a day known as “Silver Thur sday,” the

price of silver plummeted to $10.80 per ounce,

and the Hunts, once legendary bill ionaires, were

well on their way to bankr uptcy. Q

72 || ABA JOURNAL JANUARY-FEBRUARY 2019

Billionaire Hunt brothers

William Herbert (left)

and Nelson Bunker

are sworn in before

a House subcommittee

investigating the 1980

collapse of the silver ma rket.

A Tale of Two Silver Markets—and Two Disasters

Precedents || By Allen Pusey

The Panic of 1893 at th e

New York Stock Exchange