The Sherman Silver Purchase Act was enacted in 1890, requiring the federal government to purchase 4.5 million ounces of silver monthly. President Benjamin Harris signed it into law on July 14th, 1890, during a period of political tension in the late 19th Century. It was rescinded only three years later during an emergency session of Congress, which may have saved the nation from further economic turmoil.
Setting the Stage
Passed during a time of intense debate over the nation’s monetary standard, the Sherman Silver Purchase Act aimed to increase the use of silver in the economy and support struggling miners and farmers.
The late 19th Century was a period of economic transformation and upheaval in the United States. Following the Civil War, the nation experienced rapid industrialization and westward expansion but faced significant economic challenges, including deflation and financial instability. In this era, a crucial point of contention was the monetary standard: should the U.S. adhere strictly to the gold standard, or should it adopt a bimetallic system incorporating gold and silver? This question led to major political movements, such as the Free Silver Movement, and culminated in the presidential elections of 1896 and 1900.
Silver in the 19th Century
The value of silver decreased significantly in the 1870s. New mines were discovered in Nevada and Colorado, leading to a significant increase in supply, while Europe abandoned the silver standard, lowering demand for the precious metal. At the same time, the United States passed the Coinage Act of 1873, which demonetized silver and discontinued the minting of silver dollars. This effectively put the U.S. on a strict gold standard. While this Act stopped silver from being majorly overvalued, silver proponents were outraged and coined the Act as the “Crime of ’73.” This created the Free Silver Movement, mainly consisting of farmers and miners from the West and Midwest who supported unlimited silver coinage.
Between 1873 and 1878, the economy stagnated, and farmers’ debts became unbearable due to the decreasing price of their goods. They supported the inflationary measure of increasing silver coinage to increase the prices of their products and help them pay off their debts. Additionally, silver miners wanted the United States to buy their silver surplus. These pressures led to the Bland-Allison Act of 1878. The Bland-Allison Act forced the U.S. Treasury to buy at least $2-4 million of silver every month from Western silver miners and coin it into silver dollars at the gold-silver ratio of 16:1. The market ratio of the time is closer to 18:1, which overvalues silver compared to the market price of silver and sets the stage for turmoil.
While this Act temporarily appeased farmers and miners, it did not wholly satisfy advocates for expanded silver usage. During the 1880s, prices still decreased by around 10%, and farmers argued that deflationary pressures were reducing the value of their crops and continuing to increase the debt burden. Silver miners still desired a larger market for their surplus production, and these groups coalesced into a powerful political force. They demanded policies that would increase the use of silver and expand the money supply. It was within this climate of economic tension and political pressure that the Sherman Silver Purchase Act was born.
Enacting the Sherman Silver Purchase Act
In 1888, Republican candidate Benjamin Harrison won the presidential election, and the Republican Party won a majority in the House of Representatives and Senate. At the time, Democrats were pro-gold, while the Republicans were mildly pro-silver. Farmers and silver miners were particularly vocal in advocating for policies that would increase the use of silver, thereby expanding the money supply and addressing the deflationary pressures squeezing their livelihoods. The Republican Congress passed the Sherman Silver Purchase Act to appease their base.
The Act was passed by a coalition of lawmakers from silver-producing states, representatives of agrarian regions, and members of Congress who sought to balance competing economic interests. It received support from President Benjamin Harrison, who signed the legislation into law on July 14th, 1890.
Key Provisions of the Sherman Silver Purchase Act
The Silver Purchase Act intended to compromise between supporters of bimetallism and those favoring the gold standard. It sought to placate both sides by increasing silver purchases and the supply of silver coins in the economy without abandoning the gold-backed monetary system. The key provisions include:
- Increased Silver Purchases: The Act required the U.S. Treasury to purchase 4.5 million ounces of silver each month—significantly more than was mandated under the Bland-Allison Act.
- Increase Supply of Silver Coins: The Treasury would mint silver coins from the silver at a ratio of 16-1, increasing the money supply and causing inflation.
- Issuance of Treasury Notes: The Treasury would issue notes redeemable in either gold or silver, effectively increasing the money supply and promoting liquidity in the economy.
- Support for Silver Mining: The Act aimed to bolster the struggling mining industry and ensure that silver played a more significant role in the nation’s monetary system by creating a stable demand for silver.
John Sherman and the Irony of the Act’s Name
The Sherman Silver Purchase Act was named after Senator John Sherman of Ohio, a prominent Republican lawmaker with a long and storied political career. He served in the House of Representatives from 1855-1861 and in the Senate from 1861-1897. He took a four-year hiatus from the Senate to serve as the Secretary of the Treasury from 1877-1881 for President Rutherford B. Hayes. He eventually became the Secretary of State for President William McKinley in 1897 before retiring one year later.
Sherman was a key figure in shaping U.S. monetary policy. He played a leading role in drafting and advocating for the Silver Purchase Act. His involvement in the legislation was ironic, considering he spent most of his political career supporting the gold standard. During his first tenure in the Senate, he introduced the Coinage Act of 1873, which ultimately led to the Free Silver Movement, and he openly opposed the Bland-Allison Act of 1878. However, other Republicans in the Senate supported an unlimited coinage of silver at the legal ratio of 16:1. Sherman was tasked with writing a “compromise bill,” and the Sherman Silver Purchase Act was born. While he didn’t support silver and preferred the gold standard, he endorsed the Act as a political compromise to address the demands of silver advocates and maintain party unity.
Immediate Effects of the Silver Purchase Act
The Sherman Silver Purchase Act immediately impacted gold and silver, potentially leading to the Panic of ’93. By purchasing 4.5 million ounces of silver every month, the United States government became the second largest purchaser of silver in the world, only behind India. However, silver became extremely overvalued, leading to gold becoming undervalued. According to Gresham’s law, the undervalued gold began to leave circulation, leading to complications.
How Was Silver Affected?
The Act dramatically increased the demand for silver, benefiting miners and silver-producing states. By mandating the purchase of 4.5 million ounces of silver each month, the legislation provided a stable and predictable market for silver producers. This bolstered the mining industry and temporarily raised the price of silver. However, the overproduction of silver and global economic trends led to a decline in its market value. For example, a silver dollar’s monetary value was around $1.29 per ounce of silver, but the intrinsic value of silver on the global market was only around seventy cents. The disparity between silver’s market price and its official monetary valuation created instability in the financial system.
The Impact on Gold
The Sherman Silver Purchase Act had a significant and destabilizing impact on gold. The issuance of Treasury Notes redeemable in either gold or silver created uncertainty about the U.S. monetary system. Many Americans and foreign investors feared that the increased reliance on silver would undermine the nation’s gold reserves. This led to a surge in the redemption of Treasury Notes for gold, draining the Treasury’s gold reserves and weakening confidence in the financial system. The depletion of gold reserves ultimately contributed to the Panic of 1893, as the U.S. government struggled to maintain its gold standard obligations.
| Year | U.S. Treasury’s Gold Reserves |
| 1888 | $320 million |
| 1890 | $311 million |
| 1891 | $267 million |
| 1892 | $259 million |
| 1893 | $189 million |
The Panic of 1893 and Repeal
In 1893, the stock market crashed, and gold continued to flood out of the U.S. Treasury’s reserves. Proponents of the gold standard blamed the Sherman Silver Purchase for the Panic of 1893, which became one of the worst financial crises in American history. The rapid depletion of gold reserves undermined confidence in the U.S. dollar and led to widespread bank failures, unemployment, and economic hardship.
Recognizing the need to stabilize the economy, President Grover Cleveland called for an emergency session of Congress to repeal the Sherman Silver Purchase Act. In 1893, Congress repealed the Act, signaling a shift from bimetallism toward a stronger reliance on the gold standard. The repeal helped restore confidence in the financial system and saved the United States from an economic crisis, but it was a political disaster for Grover Cleveland. It deepened divisions between supporters of gold and silver, adding fuel to the fire of the Free Silver Movement that became the central focus of the 1896 presidential election.
Long-Term Significance
The Sherman Silver Purchase Act marked a pivotal moment in the United States’ monetary history. Although short-lived, the Act highlighted the challenges of balancing competing economic interests and underscored the importance of maintaining confidence in the nation’s financial system. It also set the stage for the eventual adoption of the gold standard through the Gold Standard Act of 1900, ending the bimetallism debate.
Today, the Sherman Silver Purchase Act reminds us of economic policymaking’s complexities and monetary legislation’s far-reaching consequences. Economists and historians continue to study its legacy as a key episode in the evolution of American financial policy.
