Roosevelt’s 1933 Gold Theft and Default

[April 5 is the 90th Anniversary of Franklin Roosevelt’s executive order banning private ownership of gold. In this selection from Part III of America’s Money Machine: The Story of the Federal Reserve, economist Elgin Groseclose shows how FDR’s executive order was part of a larger effort to deliberately debase the dollar, drive up prices, nationalize gold markets, and default on gold-based bonds. All the while, he claimed the dollar “a generation hence” would “have the same purchasing and debt-paying power.”]

Public sentiment for inflationary remedies and direct monetary management continued to outpace the Administration thinking and during the 73rd Congress numerous bills to this end were introduced. Among them was another bill, by Representative T. Alan Goldsborough, that would have established an independent monetary authority. Roosevelt managed to have this buried on the necessity for further study. Several Senate bills would also have abolished the Federal Reserve Board and created a new monetary authority.

Meantime Roosevelt was coming round to the views of George Warren that the quickest way to restore prices was by raising the price of gold, which would cause a similar movement in the prices of all other commodities. Warren calculated and promised that a 75 per cent increase in the price of gold from $20.67 to $36.17 an ounce would restore prices to the 1926 leve1. He was supported by the influential Committee for the Nation, which was urging a $41.34 price for gold, that is, a 50 cent dollar.

The chronology of the development of the gold policy is of interest. On March 10, the day following the signing of the Emergency Banking Act, Roosevelt had issued an Executive Order prohibiting the export of gold except under license. This had been followed by an Order on April 5, that forbade the private holding of gold and gave the Secretary of the Treasury authority to regulate by license all transactions in gold, both domestic and foreign. On April 20, a further Order terminated the export of gold and took the U. S. off the gold standard. Following the April 20 Order, the dollar began to depreciate abroad; that is, the price of gold began to rise, with the premium going to 23.2 per cent by June 10. At the same time the prices of basic commodities began to move upward, and this was taken as confirmation of the Warren gold-price theory.

On May 12 the Thomas amendment was enacted, which gave the President authority to devalue the dollar by as much as 50 per cent, with corresponding authority to revalue silver.

On June 5, by Public Resolution, all “gold clauses” contained in dollar obligations, excepting currency, were declared to be against public policy; and such obligations, whether or not they contained a “gold clause,” were declared to be discharged upon payment, dollar for dollar, in any coin or currency that was legal tender at the time of payment. The Resolution also declared all coins and currency of the United States to be legal tender.

The gold clause abrogation was pushed through the House in three days (from May 26 when the Resolution was introduced to May 29) and a little longer in the Senate. It represented a profound break in U. S. banking practices. Since the Civil War currency depreciation it had been customary in bond indentures to specify payment of principal and interest in gold coin of “the present weight and fineness.” It had become federal practice by the Act of February 4, 1910, which provided that “any bonds and certificates of indebtedness of the United States, hereafter issued, shall be payable, principal and interest, in United States gold coin of the present standard of value.”

As an estimated amount Of $100 billion of public and private obligations bearing the gold clause were outstanding, it was argued that the clause was meaningless since there was not enough gold in the world for the purpose. That the argument equally applied to all the monetary obligations outstanding in relation to the available money stock carried little weight. The constitutionality of the Resolution was subsequently challenged in the courts and in a series of famous “gold clause” cases the abrogation was sustained.

On July 22, Roosevelt sent his message to the London Economic Conference which practically foreshadowed a competitive debasement of currencies, in his declaration that “the United States seeks the kind of a dollar which a generation hence will have the same purchasing and debt-paying power as the dollar we hope to attain in the near future.”

On October 22, in a radio address to the country, Roosevelt formally launched his famous experiment in lifting the price level by purchasing gold in accordance with the Warren theory. In his address he reiterated that the definite policy of the Government “has been to restore commodity price levels.” He stated that when the price level had been restored, “we shall seek to establish and maintain a dollar which will not change its purchasing and debt-paying power during the succeeding generation.” Stating that “it becomes increasingly important to develop and apply the further measures which may be necessary from time to time to control the gold value of our own dollar at home,” and that “the United States must take firmly in its own hands the control of the gold value of our dollar,” the President announced the establishment of a Government market for gold in the United States. He stated that he was authorizing the Reconstruction Finance Corporation to buy gold newly mined in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President. “Whenever necessary to the end in view,” the President added, “we shall also buy or sell gold in the world market. ” He continued, “Government credit will be maintained and a sound currency will accompany a rise in the American commodity price level.”

The operations of the program were formalized by an Executive Order on October 25 and were carried out by a special committee consisting of Jesse H. Jones, chairman of the Reconstruction Finance Corporation; Dean Acheson, Under Secretary of the Treasury; and Henry Morgenthau, Jr., then governor of the Farm Credit Administration. Roosevelt, however, took personal charge of the program and he seems to have done so with the enthusiasm of a sports car fan with a new model.

The first offer was set at $31.36, the equivalent of a 66 cent dollar, and the idea was to raise the offer by degrees. The committee met daily at the White House to fix the prices for the day and the amount of the increase seems to have been a matter of caprice. Morgenthau, in his Diary, reports that Roosevelt one morning suggested a 21 cent increase: “It’s, a lucky number, because it’s three times seven.”

On January 17, 1934, the price of gold had been advanced to $34.45 plus handling charges, at which price it was held. Roosevelt now concluded that he needed a stronger legislative mandate for his proposed reform of the currency system and in a message to Congress on January 15 he outlined in comprehensive form the objectives of the new monetary policy. Repeating language he had used to the London Economic Conference, he declared his purpose to be that “of arriving eventually at a less variable purchasing power for the dollar.” Although extensive hearings had been scheduled by the House Committee on Coinage, Weights and Measures, the leadership pushed the bill through the House by 360 to 40, with only one day of debate.

Roosevelt’s gold buying program in many ways marked the divide between his earlier policy of fiscal conservatism and the outright acceptance of managed money, fiscal manipulation and government intervention. It caused the first major shift in his staff of advisers. Dean Acheson resigned as Under Secretary of the Treasury and was replaced by Henry Morgenthau, Jr. on November 17. William H. Woodin pleaded his illness to resign the Secretaryship of the Treasury and was replaced by Morgenthau on January 1. James P. Warburg and O. M. W. Sprague also retired from the scene.

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