Roosevelt and his advisers recognized almost immediately that the policy of buying only domestic gold was ineffective, and they began seeking ways to buy foreign gold as well. This policy met resistance from the Federal Reserve; George Harrison from the New York bank cautioned the president that having the US government buy gold in the open marketplace could create trouble abroad. He also told the president that the policy would not achieve the aims he sought. Roosevelt persisted, and on October 30, Harrison phoned the whiskered Bank of England governor Montagu Norman, who “hit the ceiling” over the idea. “It would be an outrageous thing,” Norman contended, “for a Government to go into another country’s market to buy gold which it did not want, and at the risk of chaos in the exchange markets, deliberately to depreciate its currency.”32 The differences were soon smoothed over, and the administration publicly announced that it would buy foreign gold (which ended up being a much larger portion of RFC purchases than domestic gold). Still, much or all of the conflict with the Federal Reserve and other central banks could have been avoided if the White House had consulted genuine experts beforehand. Even Roosevelt supporters found the efforts amateurish. Walter S. Salant, a Keynesian economist who was loyal enough to Roosevelt to stay in the administration through World War II, remarked in an oral history: “I think the most interesting aspect of gold policy was the casting about for people who knew something, and the complete inability of the President or anybody very close to him to distinguish somebody who knew something from somebody who knew nothing.”33
During the three-month life of the gold purchase program, the RFC bought 695,000 ounces of gold in the US at a total cost of $23 million, and 3.3 million ounces of foreign gold at a cost of $108 million. Because the specific goals of the RFC gold-buying program were so vague, it is difficult to assess if it achieved its objectives. In a recent appraisal, Federal Reserve official Kenneth Garbade calls the program “ineptly executed,” noting several weaknesses.34 First, reflating prices presumably required an actual increase in the money supply, but the RFC was not a central bank; it had to fund its gold purchases by issuing short-term debt. Second, the administration kept raising the price it would pay for gold almost every business day. Few actual markets move only in one direction, and this anomaly caused anxiety in the markets—first abroad, where the fear was that American inflation would grow out of control, and then in November in the domestic bond market. Arthur Schlesinger, in his generally sympathetic account of the early days of the New Deal, wrote: “To what extent did the President really think that he could raise the price of commodities by raising the price of gold? The answer is, not very much.”35
But for Roosevelt and his most loyal advisers, any shortcomings in the currency management program were preferable to the cost of inaction. That fall, tens of thousands of agricultural and cotton workers had gone on strike in California; in Wisconsin, creameries and cheese factories where workers picketed were bombed and one dairy farmer was shot to death. On a somber Sunday afternoon on October 29, Roosevelt told a White House group: “Gentlemen, if we continued a week or two longer without my having made this move on gold, we would have had an agrarian revolution in this country.”36
Nonetheless, the idea of setting a new price every day was not sustainable, and the administration began to look for a more realistic solution. They hit upon the idea of reducing the gold content of the dollar and then restoring it to a “gold bullion standard”—meaning that the dollar would be convertible to gold at a fixed rate, but that gold would not be available in a hoardable form to anyone but the extremely wealthy. When the new year arrived, this notion had taken the form of legislation. In late January, Congress passed the Gold Reserve Act, which formalized the arrangements that had been put in place the previous year. Under its terms, all gold had to be turned in to the federal government, to be reimbursed at $35 an ounce, a 59 percent premium over the price that had been established in 1900. Most Republicans and bankers fought it all the way, but they had already been rendered impotent by the prior year’s emergency actions. Throughout the period, Roosevelt retained a strong, if somewhat dark sense of American economic history. Just as he had thundered in his inaugural address against the “practices of the unscrupulous money changers [who] stand indicted in the court of public opinion, rejected by the hearts and minds of men,” he saw his gold dictatorship as an assault on the banking class, in great Democratic tradition. “A financial element in the larger centers has owned the government ever since the days of Andrew Jackson,” he wrote to the diplomat Colonel House. “The country is going through a repetition of Jackson’s fight with the Bank of the United States—only on a far bigger and broader basis.”37
As cataclysmic and unprecedented as the financial overhaul of 1933 and 1934 was, and despite the insistence in financial circles that Americans preferred “sound money,” most Americans settled in to the new gold order without excess fuss. Will Rogers, the everyman humorist of the era, published several columns in 1933 and 1934 that supported going off the gold standard while managing to poke fun at it. “We been on a gold basis since the boys started digging it out of the creeks, and the girls started digging it out of the boys, yet I doubt if we got a boy or a girl in this country under twenty that ever saw one of our gold coins,” Rogers wrote. “Our paper money said, ‘Payable in gold,’ but it should have had under it in small letters, ‘Can’t you take a joke?’ ”38 And law enforcement soon realized that gold prohibition provided them with an effective new tool. When Charles Lindbergh’s infant son was kidnapped in 1932, it gripped the nation in what was called the “crime of the century.” A $50,000 ransom was paid in gold certificates that would become illegal to possess a few months after the money changed hands in a graveyard. In September 1934, police were tipped off after kidnapper Bruno Hauptmann pumped his Dodge sedan with gas at a filling station at Lexington Avenue and 127th Street in Manhattan—and paid with a now-contraband $10 gold certificate.
One effect of the gold-buying program, unanticipated by the administration but probably welcome, is that the higher dollar value of gold gave a boost to the American gold-mining industry. In 1934 domestic gold production jumped 21 percent to nearly 2.8 million ounces, and by 1937 was more than 4.1 million ounces. Throughout the West, gold and silver mines that had been left to gather dust became active again, sometimes by organized companies and sometimes by individuals striking out on their own.39 Beginning in the early 1930s, many amateur miners with no better employment prospects would drive to old placer mines to try their luck, leading some to label the era “the automobile gold rush.”40 Encouraged by often sensational newspaper headlines of freak gold discoveries, plenty of hard-strapped Americans wanted to believe that gold could be their salvation, as they imagined it had been for their grandparents. In California, Arizona, and Georgia, among other places, at least 100,000 Americans in 1933 alone rushed to once-productive placer mines, hoping that the ground could provide them with the wealth that the American economy could not. Alas, like the nineteenth-century gold rushes, the supply could not keep up with the demand. A government report estimated that there were twenty would-be “automobile gold rush” miners for every one who actually found gold, and that the payouts even for the successful were modest.41 “Disillusionment was rapid,” concluded the report.
Disillusionment overtook parts of the administration as well; the fallout from Roosevelt’s gold actions was bitter and long-lasting. A large number of top officials and advisers parted ways with the White House, and a kind of permanent opposition to Roosevelt formed, with gold as its organizing principle.
The opposition had three chief (and in some ways overlapping) components, each of which created a political thrust that outlasted the Roosevelt presidency. The first was essentially partisan in nature, using the opposition to Roosevelt’s gold policy as the centerpiece of a broader attack on the New Deal and an attempt to reelect Hoover or another Republican as president. Beginning in the fall of 1933, Hoover and onetime Roosevelt ally
James Warburg set up in Chicago to assemble a group of businessmen—including representatives of Quaker Oats, Montgomery Ward, International Harvester, and Frank Knox, the publisher of the Chicago Daily News, who also had headed up the gold antihoarding task force for Hoover—to propagate anti-inflation, anti-Roosevelt ideas to influence Congress and public opinion.42
The second group represented the economic orthodoxy, which included most of the American banking industry as well as economists who believed as a matter of principle that the economy would run best on a gold standard. They were the inheritors of the “hard money” legacy from the nineteenth century, but Roo-sevelt’s decisive split from gold gave their arguments new focus and urgency. In some instances, this stance was also associated with the development of theories about the business cycle and inflation, and there were several economics associations that sprung up at this time—such as the American Institute for Economic Research in Massachusetts, founded in 1933—that advocated a return to a gold standard as part of a broader conservative economic policy.
The third group reached into the darker recesses of American politics. During the Populist period, arguments against eastern banking elites had sometimes elided into explicit hatred for Europeans and Jews. And while Roosevelt’s inflationist policy to a considerable degree was meant to accommodate the western populists, the forces of paranoia and hate were not placated and made Roosevelt their target, often using the same pro-gold, anti–New Deal arguments as the Republicans and orthodox economists. In some cases these were just angry individuals who managed to build sizable followings by offering extreme anti-Roosevelt rhetoric. For example, James True was a onetime Chicago Tribune advertising employee and freelance writer who began selling a weekly newsletter in July 1933 called Industrial Control Report. In addition, he published a seventy-six-page book in 1938 called Gold Manipulations and Depressions.43 He was also a vicious anti-Semite; he spoke of the “Jew Communism which the New Deal is trying to force on America” and claimed to have applied for a patent on a heavy-duty policeman-style club he called a “Kike Killer.”
In a sense, this tendency represented a continuity of the most despicable and least viable parts of the Populist legacy—and significantly without the mass support that William Jennings Bryan enjoyed. Nonetheless, political identification with gold became synonymous with opposition to Roosevelt, including the extremist (and, especially later, isolationist) opposition. And the Supreme Court was about to hand that opposition one of the most powerful rhetorical weapons available.
CHAPTER 5
The Arsenal of Gold
To house the gold that the federal government began confiscating in 1933, the Treasury Department constructed a massive bullion depository inside Fort Knox in Kentucky. The billions of dollars of gold bullion and the legendary security around them have excited the American imagination for decades. Courtesy Library of Congress
THERE WERE FEW DAYS in FDR’s first term that his attorney general would have considered relaxing. Yet on the evening of January 10, 1935, Homer Cummings, who had originally only taken the attorney general job on a temporary basis when Roosevelt’s initial nominee died, was feeling especially troubled. Cummings and his colleagues had spent three punishing days arguing multiple cases before a feisty Supreme Court, and he was nervous about the outcome. In the context of the New Deal, with its sweeping overhaul of so many institutions of everyday life, these cases—known informally as the “gold clause” cases—were not particularly well known or understood. Compared, say, to the National Recovery Act, which the Court would unanimously strike down as unconstitutional a few months later, the gold-clause cases were a major concern for only a small number of people, almost all of whom were quite wealthy.
And yet Cummings knew that if the Court decided against his position, the economic consequences could be devastating, quite likely catapulting the United States into another period of severe economic contraction like that which began in 1929 and from which the country was still slowly recovering. For this reason, Cummings decided for the first time since he’d taken the office to make the oral arguments to the Supreme Court himself. Worse still, to lose the gold-clause cases would almost certainly drain the US Treasury of unprecedented billions of dollars, leaving the government without the stimulus resources that had been the only source of hope after the Depression had hit. By Cummings’s own calculation, if the Court upheld the validity of gold clauses in contracts, it would add nearly $70 billion to the country’s already formidable public and private debts. (Later, some economists estimated the damage higher still.) This was an almost unimaginable figure; the entire gross domestic product of the United States at the time was roughly $100 billion. Never before had such a towering sum been directly at risk over the votes of nine justices.
Despite the high stakes, the administration had been conspicuously unprepared to handle the issue of gold clauses; they largely ignored it when they first moved to take the dollar off gold, even though it had been much debated by experts. And now, Cummings and his allies were paying the price for being unprepared. The questions from the Court’s justices had been not merely skeptical but, as one newspaper put it, “savage.”
And thus, when Cummings returned to the White House that evening, he relayed the news to Roosevelt and Treasury Secretary Henry Morgenthau, who were discussing tax policy along with Robert Jackson, a fast-rising Treasury attorney who, within a few years, would join the very Court that was now vexing his colleagues. Roosevelt expressed deep concern about the consequences of losing the cases, “and was quite determined that he just could not accept an adverse decision,” Jackson later recalled.1 The president spoke openly about whether it was possible to defy the Court’s ruling; within a few weeks, Roosevelt would go so far as to draw up a radio address explaining to the nation why his administration had to ignore the ruling of the highest court in the land.
Jackson, a cunning, politically seasoned lawyer who had never graduated from law school, then spoke up. He noted that he had recently read an article by economic historian Sidney Ratner, which made a persuasive argument that President Grant had appointed two additional justices to fill vacancies in order to reverse the Court’s decision in the Legal Tender cases. The two men discussed the possibility of expanding the Court, and the topic surfaced again at the next day’s cabinet meeting. Harold Ickes, Roosevelt’s hard-driving liberal interior secretary, wrote approvingly in his diary: “The Attorney General went so far as to say that if the Court went against the Government, the number of justices should be increased at once so as to give a favorable majority.”2 At least as far back as his 1932 campaign, Roosevelt had railed against the Republican leanings of the Court, and there had been loose talk about appointing additional justices, but this was the first time that a true plan was being laid out. To get his way, Roosevelt would seek congressional approval, appeal directly to the people, and even shut down the stock market if he had to. If the Court wanted a constitutional crisis over gold clauses that would likely throw the country into bankruptcy, Roosevelt and his administration were prepared to deliver one.
There is no flattering explanation for why the Roosevelt administration was late to realize the massive problem that gold clauses represented. The clauses themselves had been in use at least as far back as the Civil War. Indeed, the introduction of greenbacks raised the question of whether contracts demanding payment in gold or silver were enforceable; the Supreme Court had ruled in 1868 that they were.3 The concept was simple: a debtor agreed to pay a creditor the amount owed in gold if asked. This was a hedge against any devaluation of currency. The rise of agrarian populism, inflationists, and silver advocacy in the final third of the nineteenth century caused many individuals and businesses to seek a way to protect themselves from possible disruptions in the value of currency in the event that, say, a William Jennings Bryan should be elected president and fulfill the promise to change the value of money.
By the 1930s, gold clauses had become more or less standard in
home mortgages and big businesses. Railroads in particular almost universally wrote gold clauses into bonds; the $11 billion worth of debt owed by railroad companies in the early 1930s was nearly all secured by gold-clause contracts. Gold clauses were also used in many corporate bonds; bonds that contained gold clauses were considered less risky and thus tended to sell at a lower cost than those that did not. After the Panic of 1893, gold clauses became an important component of the “sound money” system championed by Grover Cleveland and the Republican Party; it has been argued that in the depressed 1890s there would have been no buyers of American bonds without the gold clause.
The federal government itself used gold clauses. In 1910, the government began requiring that all future government bonds issued “shall be payable in principal and interest in United States gold coin.” The Liberty Bonds that funded World War I were payable in gold, cementing a connection between gold and patriotism. As with the gold standard itself, gold clauses in contracts tapped a place in American psychology where the monetary realm met moral and psychological realms. One historian has written that gold-backed money and the support represented by gold clauses in contracts “had become deeply embedded in American thought, business practices and popular psychology. It was thought of as sacred, absolutely essential to the proper functioning of business and commerce.”4
When the Depression hit, many gold bondholders and legislators began to worry what would happen to gold clauses if the United States followed the lead of other countries and went off the gold standard; recall that Herbert Hoover told an audience in October 1932 that earlier in the year the Treasury came within two weeks of depleting its gold supply. It was clear to some observers that if the value of the dollar was going to be depreciated, the status of gold clauses in contracts would quickly fall into legal limbo. Either creditors would lose out because they would be forced to accept payment in a depreciated currency, or debtors would lose out because they would have to pay a gold premium on top of the nominal amount owed—but no one would know which until a definitive ruling was made. At the corporate level, as one economist put it, “it would be impossible to know absolutely whether it would be better to own stocks or bonds.”5 Such fundamental uncertainty would be sure to slow business activity, especially if the cases took years to resolve legally.
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