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(Excerpt from THE GREAT DEFORMATION: The Corruption of Capitalism in America by David A. Stockman. Published by PublicAffairs.)

When FDR Got the Gold

The long-lasting imprint from FDR’s famous “Hundred Days” did not stem from the bank holiday, national industrial recovery act, the farm adjustment act, the Tennessee Valley Authority, or the public works administration.

Instead, it is lodged in the footnotes of standard histories; namely, FDR’s April 1933 order confiscating every ounce of gold held by private citizens and businesses throughout the United States. Shortly thereafter he also embraced the Thomas Amendment, giving him open-ended authority to drastically reduce the gold content of the dollar; that is, to trash the nation’s currency.

These actions did not constitute merely a belated burial of the “barbarous relic.” In the larger scheme of monetary history, they marked a crucial tipping point. They initiated a process of monetary deformation that led straight to Nixon’s abomination at Camp David, Greenspan’s panic at the time of the 1998 Long-Term Capital Management crisis, and the final destruction of monetary integrity and financial discipline during the BlackBerry Panic of 2008.

The radical nature of this break with the past is underscored by a singular fact virtually unknown in the present era of inflationary central bank money; namely, that the dollar’s gold content had been set at $20.67 per ounce in 1832 and had never been altered. There had been zero net domestic inflation for a century and the dollar’s gold value in international commerce had never varied except during war.

The Thomas Amendment nullified this rock-solid monetary foundation and instead permitted the president on his own whim to cut the dollar’s gold content by up to 50 percent. So doing, it signaled that money would no longer exist fixed, immutable, and outside the machinations of the state, but would now be an artifact of its whims and expedients.

It was a shocking deviation from FDR’s own repeated campaign pledges to preserve “sound money at all hazards” and contradicted the pro–gold standard views of even his own party’s mainstream. Likewise, the removal of gold from circulation entirely had never before been seriously proposed, not even by William Jennings Bryan, the populist Democrat presidential candidate best known for his “Cross of Gold” speech.

Self-evidently, bank notes and checkbook money had long been a more convenient means of payment than gold coins, but the function of gold was financial discipline, not hand-to-hand circulation. Redeemability of bank notes and deposits gave the people an ultimate check on the monetary depredations of the state and its central banking branch. Indeed, the public’s freedom to dump its everyday money in favor of gold coins and bullion was what kept official currency and bank money honest.

At the time, however, the shell-shocked nation—even the conservative opposition—scarcely understood that the Rubicon had been crossed. The most notable clarion call, in fact, came from Lewis Douglas, FDR’s own budget director and key economic advisor. Hearing on April 18, 1933, of the president’s intention to endorse the Thomas Amendment, Douglas famously declared, “This is the end of western civilization.”

Douglas was at least eighty years premature with respect to timing but his sense of the implication was profoundly correct. In one fell swoop, FDR’s capricious actions launched the Democrats down the road to a government-manufactured currency and a purely national form of money.

It thereby repudiated the internationalist hard-money stand of the 1932 Democratic platform, the pro–gold standard candidacies of Al Smith in 1928, John Davis in 1924, and the James Cox—Franklin Roosevelt ticket of 1920. It also nullified the pro-gold principles of Carter Glass and the Democratic majority that had instituted the Federal Reserve Act in 1913 and the Cleveland, Jackson, and Jefferson Democrats who had gone before.

In short, amid the atmosphere of public fear and alarm from his self-inflicted banking crisis, and owing to his willful insouciance in single-handedly scrapping the nation’s deep and bipartisan gold standard tradition, FDR essentially parted the waters of monetary history. Until June 1933, virtually everyone believed that gold-redeemable money was the foundation of capitalism, yet within months such convictions had gone stone-cold dormant.

It would, of course, take time for the resulting monetary vacuum to be filled by an aggrandizing central bank and a credit-money-based financial system cut loose from the discipline of gold. In the interim, the Great Depression quashed inflationary expectations and speculative instincts for decades to come, and produced a generation of conservative commercial and central bankers who earnestly attempted to replicate its discipline.

Nevertheless, it was only a matter of circumstances before the policy vacuum was filled by less wholesome propensities. Eventually, Nixonian cynicism and Professor Milton Friedman’s alluring but dangerously naïve doctrines of floating exchange rates and the quantity theory of money picked up where FDR left off. Notwithstanding Friedman’s aura of intellectual respectability, Nixon’s crass political maneuvers amounted to a primitive economic nationalism that harkened back to the worst of the disaster that FDR had first sown in the 1930s.

FDR’S London Conference Bombshell: The End of the Liberal International Order

After Roosevelt effectively suspended convertibility in the bastion of the world gold standard, money was essentially nationalized. Most of the world’s major economies, including the United States’s, retreated into separate silos of autarky and stagnation, which in turn bred ultra-nationalism, rearmament, and finally world war. But this outcome was not inevitable.

To be sure, the survival of a liberal international economic order had been in doubt throughout the 1920s, as the world struggled to repair the inflationary mayhem of the Great War and resume convertibility of national currencies. Between 1925 and 1928, huge strides toward normalization of exchange rates, capital markets, and trade were accomplished as England, Belgium, Sweden, and even Japan (1930) restored gold standard money.

But all of this tenuous progress had been seriously jeopardized by England’s abandonment in September 1931 of the very gold exchange standard it had spent a decade promoting under the auspices of the League of Nations. So prospects for resumption of the fabulously stable and prosperous pre-1914 liberal international order were hanging by a thread. In this context, historians are agreed that it was FDR who personally delivered the coup de grâce with his famous “bombshell” message to the London Economic Conference in July 1933.

FDR capriciously defied all of his advisors, to the very last man, including the then-chief of his brain trust, Raymond Moley. Flying by the seat of his own pants, he airily dismissed the warnings of his budget director, the brilliant industrialist and financial scholar Lewis Douglas. He also disregarded the firm pro-gold viewpoint of James Warburg, his most senior financial advisor with Wall Street and international finance experience. Moreover, FDR had failed to even solicit the opinion of Senator Carter Glass. Under the circumstances, that was not merely a telling omission; it was damning.

For the better part of three decades, the legendary Virginia senator, also former secretary of the treasury under Woodrow Wilson and principal author of the Federal Reserve Act, had been the Democratic Party’s paragon of authority on matters of money and banking. Glass had been an unwavering proponent of the gold standard and had personally written the 1932 Democratic platform in such a manner as to leave no doubt that the Democrats would not resort to easy money and inflationist expedients.

For several weeks before his March 4 inauguration, Roosevelt pleaded with Glass to become his secretary of the treasury. Yet hardly sixty days after Glass finally refused the job, FDR did not even bother to consult him when launching what were epochal monetary policy actions. In essence, FDR’s April 1933 gold machinations repudiated the life’s work of the very financial statesman he first picked for the single most important job in his government.

Roosevelt’s flip-flopping on Glass and gold was a defining moment. It showed that on the raging economic crisis of the hour, Roosevelt’s insouciance knew no boundaries; he could believe almost any contradiction that came his way.

It thus happened that after the Hundred Days of emergency actions was completed in late June, FDR headed off to vacation on Vincent Astor’s yacht. He sent Moley as his personal emissary to the London conference, which by then had come to be viewed as literally the last hope for retaining an open international trading and monetary order.

The conference had the good fortune that its presiding officer was Secretary of State Cordell Hull. A former Democratic senator from Tennessee and a splendid statesman, Hull had been a staunch advocate of free trade, the gold standard, and an open international economy.

Most of the assembled financial officials, including Hull, recognized that restoration of some semblance of exchange-rate stability was the key to the rest of the conference agenda, especially to rolling back the protectionist trade barriers which were rapidly choking off world trade. The latter had sprung up everywhere after Smoot-Hawley and were being compounded by beggar-thy-neighbor currency manipulation after the sterling-based gold exchange system broke down.

After long and arduous negotiations, the framework for such a monetary stabilization agreement was reached soon after Moley arrived in London. The US delegation, Great Britain, and the French-led gold bloc nations had all managed to find common ground. While Moley had been a strident voice of nationalistic autarky in the Roosevelt inner circle, even he was persuaded by Hull and the British to endorse the tentative internationalist agreement.

The heart of the plan was repegging the dollar to pound exchange rate in a narrow band about 20 percent below the old parity (i.e., at about $4.00 versus $4.86 per pound sterling). From that pivot point, the French franc and other major currencies would be fixed to the dollar.

The significance of this breakthrough cannot be gainsaid. All sides recognized that floating currencies would poison the international trading system, encourage destructive currency speculation, and fuel violent movements of “hot money” among financial centers. The latter would continuously destabilize both national money markets and confidence in the international trading system as a whole.

In one of the great misfortunes of history, however, FDR was literally incommunicado during the hours when a global consensus to reboot the international financial system briefly flickered. Alone on Astor’s luxurious yacht, the Nourmahal, the president had the advice of only his wealthy dilettante chum Vincent Astor and Louis Howe, his butler and glorified White House “secretary.”

When Moley finally found a navy ship to track down the Nourmahal and deliver a radio message outlining the nascent London agreement, Roosevelt, Howe, Astor, and perhaps also the yacht’s captain, as it were, gathered around a kerosene lamp on the deck. There they scribbled out a handwritten response and turned it over to the navy for radio dispatch back to London.

Roosevelt’s message was undoubtedly among the most intemperate, incoherent, and bombastic communiqués ever publicly issued by a US president. It not only stunned the assembled world leaders gathered in London and killed the monetary stabilization agreement on the spot, but it also locked in a destructive worldwide régime of economic nationalism that eventually led to war.

High tariffs and trade subsidies, state-dominated recovery and rearmament programs, and manipulated fiat currencies became universal after the London conference failed. In the months which followed, Sweden, Holland, and France were driven off the gold standard, leaving international financial markets demoralized and chaotic.

[At the end of the day, it was only the outbreak of war in 1939–1940 which pulled the world out of the rut of economic nationalism and stagnation to which FDR’s quixotic action had condemned it. It also meant that the domestic economy had now been cut off from its vital export markets, condemning the nation to a halting recovery and to continuous and mostly ineffectual New Deal doctoring that succeeded primarily in planting the seeds of welfare state expansion and crony capitalism.

Roosevelt’s deplorable action from the deck of the Nourmahal tends to be dismissed by historians as a forgivable bad hair day early in the reign of the economic-savior president. In fact, it was the very opposite: FDR’s single-handed sabotage of the London conference was one bookend of a thirty-eight-year epoch. The other end was bounded by Richard Nixon’s equally impudent destruction of Bretton Woods in August 1971.

In each case the modus operandi was the same. Both Roosevelt and Nixon were aggressive politicians who lacked any enduring convictions about economic policy. Neither had any compunction at all, however, about using the taxing, spending, regulatory, and money-printing powers of the state to achieve their domestic political and electoral objectives. In the great scheme of modern financial history FDR and Tricky Dick were peas in a statist pod.