The occasion of the Pittman Act was explained in Volume I, Chapter I, as the sudden and pressing need for a great quantity of specie to pay the adverse trade balance with India during the war, and the desire to conserve the gold supply for reserve purposes. There were other incidental purposes, such as the stabilization of the price of silver and the encouragement of its production.
The act authorized the Secretary of the Treasury to reduce and sell as bullion silver dollars up to $350 million, then held in the Treasury, and to retire the silver certificates outstanding against the silver dollars so destroyed. To prevent contraction of the currency as the certificates were retired, the Federal Reserve Board was authorized to permit or require the federal reserve banks to issue federal reserve bank notes, in any denomination authorized by the board, to an amount equal to the silver melted and sold. In order to secure these bank notes the federal reserve banks were to deposit with the Treasurer of the United States certificates of indebtedness and 1-year gold notes. The Treasurer was permitted to extend the time of the certificates so deposited or to pay them before maturity, at his option, and the tax on the federal reserve bank notes so issued was to be so adjusted that the net return on the certificates of indebtedness and the gold notes would equal the net return on the United States 2 per cent bonds used to secure federal reserve bank notes. The Treasurer issued 2 per cent 1-year certificates for this specific purpose. In all other respects the federal reserve bank notes are like those provided for under the Federal Reserve Act.
Under this law, up to May 6, 1919, the date of the final transaction, the total amount of silver so reduced was $260 million, and up to December 31, 1919, there had been issued $259.4 million of federal reserve bank notes, mostly of $1 and $2 denominations.
The Pittman Act further provides that the Director of the Mint, at the instance of the Secretary of the Treasury, is to buy, at a maximum price of $1 per fine ounce, enough silver from the product of American mines to replace that melted and sold. Accordingly, the Director of the Mint is now (1921) buying silver at 99.5 cents, which is nearly twice the market price of foreign silver. When silver dollars have been coined from the silver thus purchased, the Federal Reserve Board may require the federal reserve banks to retire an equal amount of federal reserve bank notes, and the Secretary of the Treasury will pay off an equal amount of the certificates of indebtedness.