Roosevelt’s money policy, 1933-1934

On this day in 1933, it was the first Friday of Franklin Roosevelt’s administration, and the new president met reporters to talk to them about ending the bank holiday with which he had begun his term. The Federal Reserve Banks would open on Saturday so that member banks of the Federal Reserve System could open on Monday. A reporter asked if the banks would be open “[a]ll along the line, Mr. President; that is, all functions?” Roosevelt replied, “Yes, all functions. Except, of course, as to gold. That is a different thing. I am keeping my finger on gold.”

The president’s week had started with his inauguration on March 4, the previous Saturday, when he had told the American people they had only fear itself to fear, and promised them an “adequate but sound currency.” The next day Roosevelt worked all through the day with members of his team and holdovers from Herbert Hoover’s to draft orders to close the banks and halt all payouts of gold. They worked so hard that Sunday that it was late by the time the order was ready for presidential signature – so late that Federal Reserve counsel Walter Wyatt urged the president to wait a little longer to sign, so that it would be Monday, and not so sacrilegious. Roosevelt did wait, and then, on signing the order said – gleefully, according to one account – “We are now off the gold standard.” That was in the wee hours of March 6; later that morning, Americans began a week of doing business without access to banks.

At Roosevelt’s first press conference, on Wednesday March 8, he told reporters that “what you are coming to now is really a managed currency.… It may expand one week and it may contract another week.” The end of the dollar’s convertibility to gold was not temporary but “part of the permanent system so we don’t run into this thing again” – which was what he repeated when he said, on Friday, that he was keeping his finger on gold.

Roosevelt was strikingly consistent in his monetary policy declarations.1 The US went off the gold standard with the bank holiday, he never meant to go back on, and he didn’t. He wanted to establish an international system of managed currencies, with an agreement that would allow them to remain stable for long periods, but adjustable in case of need – that was what he told the World Economic Conference at the end of summer 1933, and that was why it broke up – because other countries weren’t yet ready to join the US. At the end of 1933, Roosevelt talked up the dollar in value, stabilizing it in January 1934, while saying “I reserve the right … to alter this proclamation as the interest of the United States may seem to require.”

Despite some often-quoted barbs at Roosevelt’s method of getting there (complaining that the president’s talking up of the dollar by unpredictable amounts looked “more like a gold standard on the booze than the ideal managed currency of my dreams” or a “game of blind man’s bluff with exchange speculators”) John Maynard Keynes approved of the destination, writing in January 1934 that the president’s policy “means real progress.” Roosevelt had “adopted a middle course between old-fashioned orthodoxy and the extreme inflationists.” He had done nothing “which need be disturbing to business confidence,” and the monetary policy was “likely to succeed in putting the United States on the road to recovery.” Roosevelt’s adoption of a value for the dollar to be kept generally stable, if altered at need, also opened the possibility for an international conference on money, to “aim for the future not at rigid gold parities, but at provisional parities from which the parties to the conference would agree not to depart except for substantial reasons arising out of their balance of trade or the exigencies of domestic price policy.”

In other words, before Roosevelt had been in office a full year, he had articulated, with Keynes’s approval, all the elements of what would become the Bretton Woods monetary policy in 1944: currencies would be kept at stable exchange rates, but would be adjustable in keeping with the needs of economic prosperity in each country.

1Historians have a real problem recognizing this, owing I think to the influence of a couple of misleading memoirs by disaffected Roosevelt advisors who didn’t like his monetary policy, and who departed the administration early and therefore got their licks in early. Maybe I’ll write a post about this particular thing.