Regardless of what caused the Depression, the overwhelming experience of the early 1930s was that nothing seemed to work to reverse the process: not the gold standard, not Fed market operations, not the Resolution Finance Corporation. For all its unprecedented power, the Federal Reserve seemed incapable in 1931 and 1932 of making anything happen; it was far better at debating and making administrative changes than at anything resembling effective action.24 An exasperated Treasury Secretary Mills told the board, “For a great central banking system to stand by with a 70% gold reserve without taking active steps in such a situation was almost inconceivable and almost unforgivable.” The independence of the Federal Reserve—so important to its integrity—became a quality to regret or even mock. In a hearing with Fed chair Eugene Meyer, a congressman threatened him: “Your careful policy may be the very means of Congress passing out some other kind of a command to the Treasury to do something to take the place of the inactivity of the Federal Reserve Board.”25 Of course, the Federal Reserve was not the only institution prone to inaction. Congress itself was an obstacle, particularly Senator Carter Glass, one of the principal architects of the Federal Reserve system, who was loath to make new changes. More than fifty bills to increase money and prices were introduced in the 72nd Congress, but none became law.
If there was a single event most likely to force change upon a shell-shocked system it was in September 1931, when Great Britain went off the gold standard. A run on the dollar ensued, and that fall, gold began to leave the United States at a pace similar to that in the 1890s. In the last two weeks of September, the US gold stock fell by $275 million. In October it decreased by an additional $400 million. The gold cupboard, once so impressive, was nearly bare. At the height of the 1932 presidential election, Hoover told an audience of Iowa farmers that the shortage of gold earlier that year had pushed the country to within two weeks of abandoning the gold standard, because it would not have been able to pay gold to those who demanded it. A Hoover aide later asserted that “it was almost a matter of hours.”26
The country’s gloom perhaps guaranteed that the White House would change hands in the 1932 election. And yet, in their party platform that summer, the Democrats gave little hint of a dramatic change: “We advocate a sound currency to be preserved at all hazards and an international monetary conference called on the invitation of our government to consider the rehabilitation of silver and related questions.” Even the perfunctory hat tip to the silver states was identical to what the Republicans proposed. In his campaign speeches, Franklin Roosevelt tended to depict the drain on the US gold supply as a disastrous result of the administration’s high-tariff policy, rather than a systemic monetary obstacle. And yet, even before Roosevelt took office, it had become clear that he and a handful of close advisers were deadly serious about removing the gold standard.
CHAPTER 4
FDR Bids Good-bye to Gold
These posters were hung in post offices to help enforce Franklin Roosevelt’s Executive Order 6102, which required US citizens to turn in their gold and gold certificates, to be reimbursed at $35 per ounce. Most Americans complied. Courtesy of the U.S. Government Printing Office
PRIOR TO THE PASSAGE OF the Twentieth Amendment, presidential inaugurations took place in March, turning the nearly half-year period following a November election into a purgatory of agony and boredom for the outgoing administration. In the case of 1932–1933, it was also economically the worst winter in the history of the United States. Banks, like dominoes, began closing and falling throughout the country, while one in four in the American workforce was unemployed. In the final hopeless days of the Hoover administration, the exhausted president was laboring furiously and having almost no impact whatsoever. He was sleeping perhaps three hours a night, and working “at an almost killing pace.”1
FDR offered the shiny opposite: decisive action, which he could make look easy. And in some ways, taking the United States off the gold standard was a remarkably simple action—so simple that it seems obvious that Roosevelt had planned it before his inauguration on Saturday, March 4, 1933, in which he had promised the American people “an adequate but sound currency.” The following evening, top FDR confidant Henry Morgenthau had dinner with George Warren, an agricultural economist who had flown from Cornell University in upstate New York to Washington to advise the new administration. Few were hit as hard by the Great Depression as those who lived in America’s farmland; on average, farm incomes dropped by nearly two-thirds in the beginning of the 1930s. Farmers and their communities were at least as desperate and as politically enraged as they had been during the days of William Jennings Bryan; when banks foreclosed on farms, angry mobs of farmers often showed up to auctions to prevent bidding on the assets—to the point where Iowa, Minnesota, and other farming states created moratoriums on foreclosures. Dairy farmers dumped countless gallons of milk into the street rather than accept a penny a quart. Warren ardently believed that the most effective way to raise the depressed crop prices was to take the country off the gold standard and inflate the value of the dollar artificially. For months Roosevelt and his circle had been meeting with experts, advocates, and businessmen who made similar arguments, although of course the Hoover administration and nearly all of the country’s financial establishment wanted to keep the gold standard that the Republicans had upheld since the turn of the century.
Morgenthau let Warren know over dinner that the president, whom Warren had met as the governor of New York State, agreed with his views. When their meal was finished, Warren joined the newly appointed secretary of state Cordell Hull, FDR’s adviser Raymond Moley, and the president himself. Roosevelt told the group that Hull’s first two acts would be to call a special session of Congress later that week, and to issue a presidential mandate to close the banks and outlaw the hoarding of gold and silver. At 1 a.m. Monday morning—the president deliberately waited until after midnight, lest religious Americans complain that he had signed crucial legislation on a Sunday—Roosevelt issued a proclamation to close every one of the nation’s 18,000 banks. That, however, was not the part of the bill that intrigued Roosevelt and his circle; the bank closure and refinancing details were handled almost entirely by Hoover aides who stayed on. FDR had his eye on the gold. Warren wrote in his diary that FDR told the group, “We are now off the gold standard,” adding that the president exuded “a great deal of glee.”2
But of course, it was not that simple—either procedurally or politically. Abolishing a long-held monetary standard was enormously complex, and there were few if any legal or political guideposts. FDR recognized this, teasing reporters in his first presidential press conference: “As long as nobody asks me whether we are off the gold standard or gold basis, that is all right, because nobody knows what the gold basis or gold standard really is.” As it happened, taking the United States off the gold standard required more than a dozen steps of legislation and executive orders, few of which had been apparent to FDR’s “brain trust” on Inauguration Day. At a neck-snapping pace, the Roosevelt administration moved from forbidding banks to pay out or export gold, to abrogating gold clauses in private and public contracts, to outright nationalizing and confiscating gold. In conjunction with other actions, these moves helped the United States emerge from the global Depression. Today’s mainstream economists tend to agree with the assertion from Ben Bernanke—the bearded Stanford and Princeton economist who became the chairman of the Federal Reserve—that “to an overwhelming degree, the evidence shows that countries that left the gold standard recovered from the Depression more quickly than countries that remained on gold.”3
For all the high drama and seemingly decisive action, however, many of the administration’s steps were improvised or clumsily handled—and the political cost was high. Roosevelt would end up bitterly dividing his administration in the crucial first year of the New Deal, and he very nearly brought the country to a constitutional crisis over court cases pertaining to the use of gold in commercial contracts. He
created a permanent political coalition deeply opposed to his view of the federal government, using gold as its central symbol and occasionally veering into the politics of conspiracy and hate. Moreover, while Roosevelt famously and successfully campaigned to repeal the prohibition of alcohol, his unprecedented monetary action enacted a prohibition against gold ownership that would last forty years.
The financial legislation that Congress passed during Roo-sevelt’s first week in office was breathtaking. It had two massive goals, both unprecedented even during wartime: first, it outlawed operating a bank without the permission of the treasury secretary, and created a system whereby the nation’s 18,000 banks—closed since Monday morning, March 6—could be examined for health and allowed to reopen or recapitalize. And second, it authorized the treasury secretary to confiscate “any or all gold coin, gold bullion, and gold certificates owned by . . . individuals, partnerships, associations and corporations.” The president asserted the authority for both these sweeping actions by invoking the Trading With the Enemy Act, a wartime provision passed during World War I that gave the president the power, among other things, to regulate the trade and hoarding of gold and silver.
From a monetary perspective, the prohibition against gold ownership was logical. The frightening run on banks that had taken place over the previous months demonstrated that the Federal Reserve had no genuine control over the nation’s banking system. Either the government had to control the supply of money, or no one would. To close the banks but to continue to allow commercial transactions to occur in gold carried multiple risks, including moving much of the nation’s gold supply out of bank vaults and into private hands, or indeed out of the country, from which it might never return. The latter concern was very real; during this period, war-scarred France was obsessed with stockpiling gold, raising its share of gold worldwide from 7 percent in 1927 to 27 percent in 1932.
And of course, the nation was desperate. Bankruptcies were rampant and many communities functioned only through hastily created “scrip” money or even personal bankbooks that traded at a discount to their face value. Voters had elected Roosevelt and a heavily Democratic Congress—the electoral vote was a lopsided 472 to 59—out of a sense that almost any change had to be for the better. Yet as a matter of public policy, the Emergency Banking Act ought to have been widely resisted or at least contested. Using the Trading With the Enemy Act to justify a peacetime bank holiday seems on its face suspect; the language of the 1917 act refers repeatedly to “war” and “enemies,” neither of which were apparent in 1933. In his inaugural address, FDR declared that if Congress would not cooperate with his plans, “I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe”—but introducing new government powers on the basis of martial metaphors seems at least worthy of scrutiny.
After all, there was already a track record of caution and resistance around using the Trading With the Enemy Act to control the nation’s finances. Hoover’s Treasury Department as far back as 1932 had considered invoking the act for both a bank holiday and to fight gold hoarding; an aide had even drawn up presidential proclamations similar to those that FDR would later issue. (Indeed, Milton Elliott, the first general counsel of the Federal Reserve, and Paul Warburg, a Federal Reserve Board member, deliberately added wording to the Trading With the Enemy Act that authorized the president to investigate, regulate, or prohibit certain gold and silver transactions even during peacetime—precisely because “at some future time the government might desire to place an embargo upon the export of gold.”) Hoover, however, consulted with the Federal Reserve Board and found its majority unwilling to support the measure.4
Neither did Roosevelt or his advisers have a clear, shared idea of what their gold policy was. During Roosevelt’s first week, he strongly hinted to reporters—off the record—that the country was now off the gold standard. Yet Treasury Secretary William Woodin that same week publicly insisted on the opposite: “It is ridiculous and misleading to say that we have gone off the gold standard, anymore than we have gone off the currency standard. We are definitely on the gold standard. Gold merely cannot be obtained for several days.” Then, once it was established that the country was indeed off the gold standard, the public had no way to know whether it should understand the situation as permanent or temporary. In an April press conference, Roosevelt was asked, “Is it still the desire of the United States to go back on the international gold standard?” He replied, “Absolutely; one of the things we hope to do is to get the world as a whole back on some form of gold standard,” a remark which was misleading at best.5
Similarly, in those early days, Roosevelt and his circle seemed unsure whether they wanted to confiscate Americans’ gold—or if they even needed to. The initial version of the Emergency Banking Act originally submitted to Capitol Hill, for example, did not require individuals to relinquish their gold to the government, nor did it give the power of rounding up gold and monitoring its future use to the executive branch. Rather, the first draft allowed that if the Federal Reserve Board deemed it necessary, member banks of the Federal Reserve could be required to turn in their gold and accept payment from the Fed’s board. Even this relatively modest board power could only be exercised, the draft bill said, “upon the affirmative vote of five of its members.”6 Putting the Federal Reserve in charge of the gold was consistent with a request that the Fed board made on March 8, asking all Federal Reserve banks to compile a list of anyone who had withdrawn gold since February 1 but not returned it by March 13.
But when Congress was called into special session on March 9, the legislation was changed; the gold-hoarding protections were apparently the section that was most heavily edited in the office of Senator Carter Glass of Virginia. There were few on Capitol Hill with more financial savvy and legislative experience than the self-educated and territorial former journalist Glass. He had been instrumental in passing the Federal Reserve bill a generation earlier; in the twenty-first century he is still occasionally invoked as one-half the name of the long-standing Glass-Steagall Act. Glass, who had turned down FDR’s request to become his treasury secretary and would go on to oppose much of the New Deal, was being advised by several members of the Federal Reserve staff. In Glass’s office the bill was rewritten to apply to individuals, partnerships, and corporations; moreover, the new draft made future oversight of all gold transactions a responsibility of the treasury secretary rather than the Federal Reserve.7 According to Walter Wyatt, who was advising the Federal Reserve Board, “That morning, when we were in Senator Glass’s office, somebody asked us to change that provision and invest the power in the Secretary of the Treasury to require gold to be paid in to the Treasury Department.”8 No one seems to have kept any record of who the “somebody” was or why the change was made.
The lack of communication between the major institutional players about the most effective ways to handle gold hoarding or the devaluation of the dollar was downright dysfunctional. When the Treasury Department asked the New York Federal Reserve for its opinion about the gold-hoarding legislation, its president George Harrison said that while it was now too late, he would have preferred that gold bullion be exempted, “partly because there is an insignificant amount of gold bullion now hoarded, and partly because we have felt that the fewer the restrictions that may be made now the easier it will be later to determine the country’s gold policy.” A month later, Harrison could make neither head nor tail of the administration’s dollar devaluation, and wrote confidentially to Treasury Secretary Woodin demanding that he explain it.9 (Woodin was probably not the best equipped man in the administration to ask.)
This was typical of the harried, slapdash approach to one of the most important pieces of financial legislation in American history. FDR’s adviser Moley noted in a memoir that “the decisions made and actions in Washington were crowded into so
few days, the individuals directly concerned were so few and so hidden from public notice at the time, and the Congressional action was so swift and so lacking in debate that the record tends to be speculative and sketchy.”10 If anyone in the US Congress felt that the government was overextending its power, or that a different approach would have been better, it left little trace on the official record. Congress acted more like a body in a parliamentary system than a check on executive power. The House of Representatives was denied the ability to amend the bill. There were no committee hearings and next to no debate, and indeed the bill passed without even a roll call taken. Then again, it would have been difficult for members of Congress to discuss a bill they hadn’t read. Reportedly, Alabama representative Henry Steagall was the only member of Congress given a copy of the bill, and that version contained penciled markups; for the rest it was read aloud into the record. The House minority leader, Bertrand Snell of New York, complained that “it is entirely out of the ordinary to pass legislation in this House that, as far as I know, is not even in print at the time it is offered,” although he ended up supporting the bill.11 According to Moley, the bill “was represented by a folded newspaper in the House because there had not been time to print copies of it.”12 Within a matter of hours, both houses of Congress had approved the bill on March 9 and the president had signed it. The front page of the next day’s New York Times referred to the government’s newfound “dictatorship over gold.”
As dictatorships go, however, FDR’s over gold does not appear to have been the most forceful. Once the banking law and its various amendments and extensions were in place, and as banks began reopening in the spring, the federal government and the banks began the enormous, almost comical task of rounding up all the gold in private American hands in a matter of weeks. The modern record of governments attempting to prohibit and confiscate material that the population deems useful or enjoyable is far from stellar. Just a few years earlier, as part of a broader attack on jazz music’s supposedly decadent and subversive powers, the Soviet government had tried to ban all use, manufacture, and imports of saxophones. This effort did not succeed. It is difficult to assess whether the United States’ effort to combat gold hoarding—both in Hoover’s later months and in the first several months of the Roo-sevelt administration—was any more effective.
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