“If we had not done so, we would have risked chronic coin shortages in the very near future.” President Lyndon Johnson commented before Congress just prior to his signing the Coinage Act of 1965, the law which fundamentally changed the composition of America’s coinage. The new Act set the stage for the complete abandonment of the use of silver for U.S. legal tender coins - the custom which Americans had been used to since the original Coinage Act of 1792, signed by President Washington. Thereafter, with the temporary exception of the Kennedy half-dollars, all U.S. legal tender coins would be composed of a mixture of copper and nickel, also known as cupronickel, thus ending a one-hundred and seventy-three year tradition of silver coinage.
Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins. 
The comments made by President Johnson before Congress assembled on that historic day implied that the reasoning for making the change was the increasing scarcity of silver as a result of increasing industrial usage of silver and stagnant mining output. This was an incomplete picture. President Johnson did not discuss this matter in terms of the effects of inflation on silver prices. In order to properly understand the decision without political bias, some key historical information should be considered. As a result of the Silver Purchase Act of 1934, President Roosevelt issued Executive Order 6814, nationalizing the nation’s hoard of privately owned non-monetary silver, and prohibiting private ownership of quantities exceeding 500 troy ounces.  Any amounts greater than this limit were to be surrendered to the U.S. government in exchange for U.S. silver certificates, minus a seigniorage and manufacturing deduction of 61.32% .
With the value of silver certificates fixed to the redemption price of $1.2929 per troy ounce of silver, Americans only received fifty cents per troy ounce for the non-monetary silver they surrendered!  At the time of the passing of the Silver Purchase Act of 1934, the actual market price for silver was approximately $.54 per troy ounce , so this arrangement worked to the slight advantage of the government. Inevitably, the amount of silver surrendered in this manner would have diminished, as compliance with the law was met over the long term. (The actual amount of silver surrendered to the government, and the purity therein, are beyond the scope of this examination, and shall require more research.)
The Silver Purchase Act of 1946 was then passed, establishing the U.S. government as the largest purchaser of silver in the world. The government bought silver directly from all domestic producers at a price floor set at $.905 per troy ounce, above the equilibrium silver price of $.87 at the time.  (Under this act, the U.S. government also sold silver at $.91, with a $.005 spread.) Silver producers benefited from receiving above-market price from the government for their product, while the U.S. taxpayer was forced to buy silver above the market price. For a while, the government accumulated a huge silver stockpile as a result of this legislation.  (Again, the quantity shall require more research.)
By the early 1960’s, the actual market price of silver breached this artificial price threshold. The U.S. government ceased to be a net purchaser of the metal. It immediately became profitable to purchase silver from the government. Since the Act of 1946 forced the government to sell at a fixed price, any spot price above $.91 would present the opportunity to acquire silver from the U.S. government at a discount. The government became a net seller of silver, and the hoard accumulated as a result of the Silver Purchase Act of 1946 began to shrink. By the mid-1960’s, the U.S. government had a problem. With the nation’s silver reserves decreasing due to the growing discount on silver afforded by the $.91 per troy ounce price obligation, the government could no longer afford to affix the dollar to silver prices. Additionally, once the market price of silver reached $1.29 per troy ounce, the price floor for the redemption of silver certificates established by the Silver Purchase Act of 1934 would be breached. At prices above this level, consumers could begin to purchase the certificates at face value, redeem them for silver, and sell the silver at a profit.
With its seigniorage erased, and facing both the net monetary losses from the legal obligation to sell silver at below-market prices as well as the continued honoring of silver certificates, the prospects that the nation’s silver supply would be exhausted became a threat to national security. The Treasury repealed the function of the original Silver Purchase Act of 1934 through a series of legislation between 1961 and 1963, and began pulling U.S. silver certificates from circulation.  By 1968, no more silver certificates could be redeemed. In 1966, the market price of silver reached the magic number of $1.38 per troy ounce. With a 90% silver quarter containing .1808 troy ounces, the U.S. government would be losing money, not only in the continued manufacturing but also through a shrinkage of the money supply due to speculators melting down the coins for profit. As illegal as this would have been for Americans to do, it would have been very difficult for the government to locate offenders, particularly if they were foreigners on vacation who intended to sell or melt the coins outside of the jurisdiction of the United States!
The effects of inflation, coupled with the strong incentives for private collection of the silver coinage which had now been demonetized, caused silver coins to quickly disappear from circulation. By 1970, strictly cupronickel coinage was manufactured and circulated by the U.S. government. The underlying circumstance which made the Coinage Act of 1965 necessary was the inflation caused by increases in the money supply. True enough, the strain on the nation’s supply of silver at the time was great, due in part to the government’s interference in prices. But the overarching monetary effects of inflation inevitably made it necessary to decouple the money supply from commodity value. According to the Bureau of Labor Statistics Inflation Calculator , in 1965, the year of the passage of the Act, the purchasing power of the U.S. dollar was worth only 31% of what the dollar had been worth in 1913, the year the Federal Reserve System was created and CPI data began to be collected. The gradual effects of inflation in the economy, and the inevitable effects over time on silver prices cannot be ignored as a factor which contributed finally to the decision to end an American tradition with the demonetization of silver.
An Interesting Corollary: the 5¢ Jefferson Nickel
Even though the cupronickel alloy ratio for Washington quarters and Roosevelt dimes was reset to 8.33% nickel to 91.67% copper to provide for sufficient seigniorage to beat inflation, the CPI Inflation Calculator. 5¢ Jefferson Nickel continues to be manufactured at a ratio of 25% nickel to 75% copper.  With February 19th, 2010 market prices for nickel at $9.3546 per pound, and copper at $3.3496 per pound, the total value of a 5¢ Jefferson Nickel is 5.34¢ per coin, not including manufacturing and distribution costs! If production figures for the Jefferson Nickel continue at the 2009 rate of 86.64 million coins , the U.S. government will be losing $294,576 (.34¢ per coin) per annum, excluding the other associated costs, and assuming fixed metal prices. As inflation accelerates, a decision will have to be made as to whether or not the U.S. economy can afford to continue minting the Jefferson coins with the current alloy ratio. Another means of supplying the subsidiary denomination will have to be established.
1. “Lyndon B. Johnson: 380 - Remarks at the Signing of the Coinage Act.” . The American Presidency Project.
Citations by John T. Woolley and Gerhard Peters. http://www.presidency.ucsb.edu/ws/?pid=27108
2. 3. 4. “The Donnelly Collection of Presidential Executive Orders: A Project of the Conservative Caucus” http://www.conservativeusa.org/eo/1934/eo6814.htm
5. 6. http://www.goldmastersusa.com./silver_historical_prices.asp
7. “Silver” by Henry E. Hilliard. United States Geological Survey. http://minerals.usgs.gov/minerals/pubs/commodity/silver/880798.pdf
8. “Price History: 1960 to 1965” The Silver Institute. http://www.silverinstitute.org/19601965.php
9. CPI Inflation Calculator. http://www.bls.gov/data/inflation_calculator.htm
10. The United States Mint: Coin Specifications. http://www.usmint.gov/about_the_mint/?action=coin_specifications
11. The United States Mint: Coin Production. Circulating Coin Production, January through December 2009. http://www.usmint.gov/about_the_mint/coin_production/index.cfm?action=production_figures&allCoinsYear=2009#starthere