The speech was never needed, although when it was leaked to the New York Times, the paper’s Washington bureau chief wrote: “It would have marked the most sensational and historic episode in the constitutional history of the United States since Andrew Jackson said of a Supreme Court ruling: ‘John Marshall has made this decision; now let him enforce it.’ ”
The rulings handed down on February 18 did not create economic havoc, but were not a vindication of the administration’s policy or arguments, either. The Perry decision was a harsh reprimand for Congress’s action and the administration’s legal argument. If the government could borrow money and later reject the method of payment in the bond, the Court reasoned, it could equally reject the amount it owed. “The contention necessarily imports that the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge,” Hughes’s decision said.23 The Court ruled clearly that Congress’s abrogation of gold clauses “went beyond the congressional power.” And yet, the Court also found that the plaintiff was entitled to no damages, because he hadn’t lost anything via the bond that he would not have lost if he held the equivalent amount of gold (which, relevantly, he could no longer legally hold anyway). Even legal scholars who were content with the outcome could not endorse the opinion’s logic. Thomas Reed Powell said the decision “well nigh passes comprehension.” The well-respected Harvard Law professor Henry Hart pronounced it “baffling.” Many commentators, beginning with newspaper columnist Walter Lippmann, concluded that Hughes knew full well that if the Court tried to restore or enforce gold clauses, Congress and the administration would be compelled to find some other, possibly more damaging way to achieve the necessary end. Lippmann, a hardened realist who was close to FDR’s circle but often enraged them, reasoned that the Court realized its own legitimacy was on the line. “Any other decision by the Supreme Court would have created an almost impossible situation,” Lippmann wrote. “Congress would have been compelled to take measures to circumvent the court’s decision. This would seriously have impaired the court’s authority.”24
Unsurprisingly, the dissent was harsher still. Chief Justice Hughes slammed the “confiscation of property rights and repudiation of national obligations.” Dissenters declared Congress’s goal with the abrogation of gold clauses to be illegitimate, that its “real purpose was not ‘to assure uniform value to the coins and currencies of the United States,’ but to destroy certain valuable contract rights.” McReynolds departed from his text and delivered an extemporaneous speech “bristling with scorn and indignation.” The crowd gasped as he mocked the logic of the decision. “The Treasury of a great nation says, ‘Take this depreciated dollar. Congress made it unlawful for you to accept what is due to you.’ And since it is unlawful there is no damage.” He invoked Nero and concluded, “It seems impossible to overestimate the result of what has been done here today. The Constitution as many of us have understood it has gone.”25
In the White House, however, they were jubilant. The telephone relay system set up to shut down the stock market if necessary did not need to be used. As a kind of mock celebration, Roosevelt read his drafted radio address to a few close advisers; after lunch he announced that he was going to sleep for four days. Roosevelt wrote to Joe Kennedy: “How fortunate it is that [the] Exchanges will never know how close they came to being closed up by the stroke of the pen of one ‘J.P.K.’ Likewise, the Nation will never know what a great treat it missed in not hearing the marvelous radio address that the ‘Pres’ had prepared for delivery to the Nation Monday night if the cases had gone the other way.”26
Within a matter of months, the gold-clause cases would be subsumed by Court rejections of New Deal policies. On monetary policy, Roosevelt and a congressional majority had achieved nearly all of what they had hoped for. Some scholars have pointed to unfortunate consequences of inflating the dollar; it had a protectionist effect of automatically raising trade tariffs, for example.27 Yet Roosevelt, however clumsily or peremptorily, had squared a circle that had utterly eluded his predecessor and Congress. The administration’s monetary policies were among the few viable options available to any government that wanted to restore confidence in the American economy without giving in to more radical demands for inflation and silver coinage that came from western members of Congress, the radical farmers’ lobby, and populist agitators like Father Coughlin.
Politically, however, a wall had now been erected, separating not only those who advocated gold-based money from those who opposed it, but also separating those who believed in a role for gold in the private economic lives of Americans from the government and monetary institutions that would come to dominate life in the twentieth century. “Goldbugs” may or may not have represented a majority of Americans, but over time their inability to exercise the benign-seeming right of buying a gold coin or ingot pushed them into the legal and political margins while tapping Populist-era frustration at governing systems—and the Supreme Court pronouncements in the gold-clause cases legitimated their grief.
Beginning in the late 1930s a tremendous metallic gulf also opened up in America and across the world. Although American citizens could not own gold, the American government was amassing the largest stockpile of gold in human history. The devaluation of the dollar boosted the value of the federal government’s gold holdings; at the same time, the rise of the Nazi Party in Germany and jitters about imminent European war created an unprecedented flow of gold into the United States. Under other circumstances, European nations might have seen it as desirable to hang on to gold in case of war. The prospect of defeat, however, made it seem safer to store the gold in the United States, in return for gold certificates that could always be redeemed once the war fears subsided. Even France, which alone among the world’s major economies maintained a currency pegged to gold, gave up substantial amounts of gold in the mid- to late 1930s; many of its wealthier citizens worried about the future monetary policies of left-wing governments. In 1934 and 1935 alone, the value of gold held by the US government increased by more than $6 billion, a little less than half of which was attributable to raising the price of gold to $35 an ounce. By 1936, the US gold stock was worth more than $11 billion, more than half the world’s total supply.
Although there were obvious benefits to increasing the amount of gold inside America’s borders, the inflow also created its own set of economic problems. In 1940 two economists published an influential book called Golden Avalanche, arguing that the gold glut was hurting the American economy; expending so much energy and capital to acquire a metal that created no economic benefit took away from more productive activity. More specifically, too much gold created at least three significant headaches. One was that because gold was once again synonymous with money (if somewhat indirectly), the sudden increase in money supply could potentially create inflation. To stave this off, the Federal Reserve enacted a policy whereby the incoming gold and new domestic gold production was “sterilized,” or kept outside the money supply, starting at the end of 1936. Sterilization, however, created its own economic problems, and many economists believe that it contributed to the economic downturn—the second phase of the Depression—beginning in the spring of 1937.28
The second problem was logistical. Especially given the prospect of war, Morgenthau and others recognized that this massive haul of gold needed to be stored somewhere securely; coastal cities such as New York and San Francisco were vulnerable to attack. And thus, in yet another tie between gold and the US military, Treasury took control of a military facility in Kentucky that had once housed the cavalry—Fort Knox—and began rush construction of an impregnable gold vault there, some thirty-one miles west of Louisville, nestled safely between the Rockies and the Appalachians. The government began shipping billions of dollars’ worth of gold bullion, particularly from San Francisco, to Kentucky in 1935, and the Fort became operational in 1937.
The third problem
was global and much harder to solve. The gushing inflow of gold to the United States was perforce an outflow of gold from other places, mostly Western Europe. Even though most countries were no longer on a gold standard, draining their coffers of gold meant that they had less and less capital—at a time when war against Germany and Italy looked more and more likely. The Roosevelt administration struggled to support Britain, France, and other allies within the confines of the various Neutrality Acts that Congress passed beginning in 1935. Congressional isolationists resisted support for Britain, and to try to appease them Roosevelt made a show of seizing British assets and liquidating British securities held in the United States. This put a strain on Anglo-American relations at a critical time. Throughout 1940, British officials told Morgenthau’s Treasury Department that they had barely enough gold to meet the statutory requirement to back up their currency. The conflict came to a head in December, the month that Roo-sevelt warned Americans that Britain’s war was their war, too. “We must produce arms and ships with every energy and resource we can command,” Roosevelt proclaimed in one of his most famous fireside chats. “We must be the great arsenal of democracy.”
But building the arsenal of democracy required money that Britain no longer had. Roosevelt was willing to give the British whatever they needed but they had to pay for it. When they couldn’t, improvisations were needed, such as a swap of rusty American destroyer ships in return for access to British bases. And sometimes the United States simply had to take what it was owed. A week before the “arsenal of democracy” speech, Roosevelt ordered the USS Tuscaloosa cruiser to sail to South Africa to pick up $50 million worth of Britain’s gold; Morgenthau even wanted the British to pick up the insurance tab. This was too humiliating for Britain. Prime Minister Winston Churchill wanted to tell Roosevelt that he was behaving like “ a sheriff collecting the last assets of a helpless debtor,” although he thought better of sending that note. In a more measured letter written on New Year’s Eve, with the ship already en route, Churchill implored Roosevelt to reconsider. To stock a US warship with British gold in a dock in Cape Town, Churchill pleaded, “will disturb public opinion here and throughout the Dominions and encourage the enemy, who will proclaim that you are sending for our last reserves.”29 The tension eased somewhat when Congress passed the Lend-Lease Act in March 1941, the law that allowed the United States to support allied countries with materiel and supplies on the condition that it be repaid in kind. Churchill dubbed the law “the most unsordid act in the history of any nation,” and it carried the Allies through until the United States formally entered the war after Pearl Harbor was bombed.
These wartime realities—the gaping imbalance between the United States’ gold supply and the rest of the world’s, and the war debts that the Allies would find difficult to repay—would profoundly affect the role that gold would play in the world’s money when the war ended. Toward the end of World War II the United States became something like the world’s gold monopolist and policeman; the United States found itself reprimanding other nations for buying gold from the “wrong” sources. The Axis powers would typically seize gold and other valuable assets from countries that they had conquered, and that gold became an important form of international currency as the war drew to a close. In 1944 Morgenthau declared that the United States would not recognize the title transfer of looted gold, and he urged other nations to take similar actions.
Nearly four dozen nations participated in the conference in Bretton Woods, New Hampshire, in July 1944, to forge a new international monetary order out of the wartime chaos. There were many visions of such a world, including that offered by the Federal Reserve at the end of the previous war for an international gold exchange. John Maynard Keynes, probably the twentieth century’s most influential economist, had envisioned a world in which currencies could be valued based on the strength of the economies that issued them and a centralized global bank would control credit and issue a global currency called the “bancor.” American negotiators at Bretton Woods, led by Harry White, envisioned a system in which gold would still play a central role, as would the dollar.30 While in many respects Keynes’s plan was probably superior, there were two large obstacles to implementing it. One was that it would require the world’s central banks to give up much or all of their gold to a central authority, which they were understandably reluctant to do (the Soviet Union—a major if secretive gold producer—was especially unlikely to agree to such a provision). And second, there were few advocates for Keynes’s system who had the international leverage to bring it about; the allied countries were broke and, to a greater or lesser degree, in debt to the United States. If depression had created a need for flexibility and inflation, protracted and expensive war created a need for stability and growth. The world had little choice but to turn to the United States monetarily just as it had done militarily.
The Bretton Woods system was not technically a gold standard; it is usually referred to as a gold-exchange standard or gold convertibility standard. At its core, the dollar was fully convertible to gold at the same rate as in 1934: $35 an ounce. Each other major currency was assigned a par value from which it could deviate up to 1 percent; larger revaluations required permission from the International Monetary Fund, one of the two major institutions (along with the World Bank) established by the Bretton Woods agreement. The United States was not expected to intervene in foreign exchange markets, and the Fund would lend or sell gold and currencies to member countries that were in deficit. This system had its flaws, as will be discussed in the next chapter. But for a decade or so it worked remarkably well as an engine of stable expansion. Western European countries and Japan experienced year upon year of hefty growth, without breakneck inflation or punishing boom-and-bust cycles. In 1985, forty years after the Bretton Woods agreement (and after its most fundamental building blocks had been removed), one economist wrote: “The real commodity output of the world has increased fourfold since World War II; the real commodity trade of the world, sixfold. Even though the population of the world has more than doubled—from approximately 2.2 billion in 1950 to 4.5 billion today—living standards have risen substantially on the average.”31
Within the United States, however, the politics of gold and the international monetary system were not always widely appreciated or even understood, any more than they had been in the late nineteenth century. Most Americans prospered in the postwar period, but a disgruntled minority—largely but not exclusively within the Republican Party, which was outside the White House from 1933 until 1953—believed that the growth was illusory, created by “war expenditures, waste and extravagance, planned emergencies, and war crises.”32 Fighting World War II had vastly expanded the size and expense of the federal government; this continued in the form of the Marshall Plan, the GI Bill, and soon enough the expense of the Korean War. Deficits and debts ballooned to numbers that seemed staggering by pre-Depression standards. The fiscal conservatism of balanced budgets and sound money preached by Hoover was by the mid-1940s so long in the past that many feared it was gone forever. It seemed to this group a supreme folly for a country that could not handle its own money to turn over control of the world’s money to nations that were poorer still.
But while the issues of debt, deficits, and the size of government were paramount for Republicans and conservatives in the 1940s, the definition of money had ceased to be the red-hot cause it had been at the turn of the century. Father Coughlin continued his advocacy for monetary silver through the late 1930s, but his influence waned when his radio show stopped airing once America entered World War II. In Washington, federal laws requiring the purchase of prescribed amounts of silver had largely placated western members of Congress. As for gold, it was difficult to gain much political traction advocating a return to a gold standard because Roosevelt had put the country back on a kind of gold standard, albeit with a devalued dollar—which became the bigger object of conservative ire. The 1944 Republican Party platform made vague promises to �
��maintain the value of the American dollar” and to “repeal existing legislation which gives the President unnecessary powers over our currency,” but omitted any mention of gold. The metal itself, for all its symbolic power, became less and less familiar to Americans. The United States shut down all of its gold mines—more than eight thousand mines—between October 1942 and July 1945. During that period, some mines caved in or filled with water, and mining equipment deteriorated, and so even when production resumed it was at a fraction of its prewar level. A mining official lamented near the end of the war, “If the citizen is deprived of the personal protection of gold as money, if he only knows of it as being in national treasuries or central banks, how can he help losing his present viewpoint of its high psychological value?”33
Yet by the late 1940s, the philosophy espoused by Justice McReynolds began to harden into a new form of populism. Like the populism of the 1890s, its appeal was largely in the Midwest and West, in farming areas. But unlike the populism of the 1890s, it did not preach inflation as a solution; instead, inflation was now deemed the enemy. Roosevelt, by inflating the dollar, had made it “worthless.” On this issue, the men running Wall Street and many big businesses as well as the men speaking for midwestern farmers could unite against a common enemy: the abstract global economic order. And accordingly, gold was not the source of evil as it had been for Bryan; gold was the solution.
One Nation Under Gold Page 14
