Mises Daily Articles
The Great Gold Robbery of 1933
It's been 75 years since the federal government, on the spurious grounds of fighting the Great Depression, ordered the confiscation of all monetary gold from Americans, permitting trivial amounts for ornamental or industrial use. This happens to be one of the episodes Kevin Gutzman and I describe in detail in our new book, Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush. From the point of view of the typical American classroom, on the other hand, the incident may as well not have occurred.
A key piece of legislation in this story is the Emergency Banking Act of 1933, which Congress passed on March 9 without having read it and after only the most trivial debate. House Minority Leader Bertrand H. Snell (R-NY) generously conceded that it was "entirely out of the ordinary" to pass legislation that "is not even in print at the time it is offered." He urged his colleagues to pass it all the same: "The house is burning down, and the President of the United States says this is the way to put out the fire. [Applause.] And to me at this time there is only one answer to this question, and that is to give the President what he demands and says is necessary to meet the situation."
Among other things, the act retroactively approved the president's closing of private banks throughout the country for several days the previous week, an act for which he had not bothered to provide a legal justification. It gave the secretary of the Treasury the power to require all individuals and corporations to hand over all their gold coin, gold bullion, or gold certificates if in his judgment "such action is necessary to protect the currency system of the United States."
The Emergency Banking Act reached back in time to amend the Trading with the Enemy Act of 1917, which had originally been intended to criminalize economic intercourse between American citizens and declared enemies of the United States. One provision of the act granted the president the power to regulate and even prohibit "under such rules and regulations as he may prescribe … any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency … by any person within the United States." In 1918, the act was amended to extend its provisions two years beyond the conclusion of hostilities, and to allow the president to "investigate, regulate, or prohibit" even the "hoarding" of gold by an American.
After those two years elapsed, people generally assumed that the Trading with the Enemy Act had passed into desuetude. But the Supreme Court later explained that the act's provisions were not limited merely to World War I and the two years that followed — it "stood ready to meet additional wars and additional enemies" and could be called into service once again under those circumstances. (Little did anyone suspect in 1917 that these "additional enemies" would turn out to be the American people themselves.) As amended by the Emergency Banking Act of 1933, the Trading with the Enemy Act no longer said that simply "during time of war" could the president prohibit the export of gold or take action against "hoarding" (i.e., holding on to one's money). Now these actions could be taken during time of war or "during any other period of national emergency declared by the President."
A month later, claiming authority from the Emergency Banking Act and its amendment to the Trading with the Enemy Act, the president ordered all individuals and corporations in America to hand over their gold holdings to the federal government in exchange for an equivalent amount of paper currency. The paper currency they were receiving in exchange for the gold had always been redeemable in gold in the past, so few saw anything amiss in this coerced transaction, and most trusted the government's assurances that this was somehow necessary in order to combat the Depression. Only later would they discover that they weren't getting that gold back, and that the paper dollars they were being given in exchange would be devalued. Soon only foreign governments and central banks would be able to convert dollars into gold — and even that link to gold would be severed in 1971.
On June 5, 1933, at the behest of the president, Congress took the next step, passing a joint resolution making it illegal to "require payment in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby." Any provision in a private or public contract promising payment in gold was thereby nullified. Payment could be made in whatever the government declared to be legal tender, and gold could not be used even as a yardstick for determining how much paper money would be owed.
For the next six months President Roosevelt pursued an erratic monetary course. Every day a new gold price was declared, on a basis no one could figure out. Private lending in effect came to a halt, with the value of the dollar in constant flux amid the prospect of ongoing devaluation. As Senator Carter Glass (D-VA) put it, "No man outside of a lunatic asylum will loan his money today on a farm mortgage." And thus the government could triumphantly announce that since the private sector was cruelly depriving Americans of credit, it would have to step in and provide relief.
Meanwhile, Senator William Borah was assuring his countrymen that when it came to the nation's monetary system, "there is no limitation upon the power of Congress. It is not circumscribed in any respect whatever. It is given full and plenary power to deal with that subject; and therefore it is the same as if there were no Constitution whatever." Borah also tried to argue that "when an individual takes an obligation payable in gold" he does so "with the full understanding that the Government may change its monetary policy at any time and that he must accept whatever the Congress says at a particular time shall constitute money."
The general rule (to which there are occasional exceptions) that no senator should ever be listened to on anything holds here: the power of Congress over money is in fact very limited. It has the power to "coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."
Coining money simply refers to the process of taking a precious metal, converting it into coins, and stamping those coins with an indication of their metal content. The power to regulate the value of money does not involve a power to dilute the value of money by inflation, an absurd and self-serving rendering. Regulation of the value of money is a power of declaration and comparison, whereby some monetary standard is compared to other coins in circulation and an exchange rate for these various kinds of currency established according to the amounts of precious metals (with due allowance for the distinct values of different precious metals) in each. In other words, if Congress were to declare by statute what the prevailing market exchange rate between gold and silver was, and thus to "regulate" gold and silver coins vis-à-vis one another — or, more precisely, vis-à-vis the Spanish silver dollar that constituted the American monetary standard — then it would be properly exercising its constitutional power, which consists of nothing more than this.
That is why this power appears in the same clause with the power to "fix the Standard of Weights and Measures," which involves the measurement of fixed standards in order to assure uniformity throughout the nation. That power does not give Congress the power to declare that one-tenth of a pound shall now be declared a pound, but to take an already-existing standard and codify it. Every single monetary statute enacted from the ratification of the Constitution until the 1930s understood the congressional power to regulate the "value" of money not in the sense of declaring money to possess some arbitrary value that suits the whims of politicians or central bankers, but in the sense of establishing the relative values of gold and silver coins in terms of the ever-shifting relative values of those metals on the free market. (Needless to say, the market is perfectly capable of doing this on its own.)
Moreover, the "dollar" was not an arbitrary term at the time the Constitution was drafted. In the late 18th century, everyone knew what the "dollar" referred to: the silver Spanish milled dollar, which was in widespread use in the United States. The Constitution twice refers to the dollar — in Article I, Section 9, Clause 1 (a clause that everyone understood to involve a tax on the import of slaves), and in the Seventh Amendment (which protected the right to a jury trial in civil cases involving at least twenty dollars). If the dollar had been something that Congress could manipulate at will, or if "dollar" had been merely a generic term to refer to whatever Congress should arbitrarily choose to recognize as currency, the South would never have accepted that clause — or the Constitution itself. Congress might have manipulated the dollar so as to make the tax on slave imports prohibitively expensive. It could also have effectively abolished trial by jury in civil cases by making twenty "dollars" an astronomically high amount of money.
The Court never pronounced upon the constitutionality of the gold seizure (for reasons we speculate on in our book), the legality of which it simply took for granted. The cases it chose to hear involved the cancellation of gold clauses in public and private contracts. Known as the Gold Clause Cases, Norman v. Baltimore & Ohio Railroad Co., Nortz v. United States, and Perry v. United States were argued in January 1935 and decided the following month. In each case Chief Justice Charles Evans Hughes wrote the opinion for the Court; Justice McReynolds composed a single dissent that he applied to all three.
The Court declared in the first two cases that the federal government had been entitled to cancel all private contracts in gold. The perpetuation of gold clauses would have amounted to the "attempted frustration" of "the constitutional power of the Congress over the monetary system of the country…. [T]hese clauses interfere with the exertion of the power granted to the Congress." Not a stitch of evidence existed for any aspect of this argument.
Perry, the third case, involved a man who had purchased in gold a US bond that was payable in gold, and was seeking payment either in gold or in the equivalent in paper currency. Since the government intended to pay in depreciated dollars, he believed he was receiving far less than he was entitled to under the terms of the bond. The bond's face value was $10,000 in gold. In the inflated dollars of post-gold-standard America, it would have taken nearly $17,000 in paper currency in order to satisfy what the government had contracted to pay him.
The Court declared that the plaintiff was indeed entitled to his gold, since the government had an obligation to live up to its promises. But in not paying him his gold, the government wasn't really wronging him, since gold was now illegal to hold. In other words, if the government paid him in gold, it would then have to confiscate that gold from him anyway since holding gold was against the law.
Speaking for the minority, Justice McReynolds declared:
Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both. No definite delegation of such a power exists; and we cannot believe that the farseeing framers, who labored with hope of establishing justice and securing the blessings of liberty, intended that the expected government should have authority to annihilate its own obligations and destroy the very rights which they were endeavoring to protect. Not only is there no permission for such actions; they are inhibited. And no plenitude of words can conform them to our charter.
To the argument that the bondholder had suffered no damage in being denied payment in gold since it was now illegal for people to own gold, the dissent replied: "Obligations cannot be legally avoided by prohibiting the creditor from receiving the thing promised…. There would be no serious difficulty in estimating the value of 25.8 grains of gold in the currency now in circulation." The contract to pay in gold having been broken, the holder was at least morally entitled to receive in currency not just the nominal amount of the bond but an amount in paper dollars equivalent to what he would have earned if the payment could have been made in gold. "For the government to say, we have violated our contract but have escaped the consequences through our own statute, would be monstrous. In matters of contractual obligation the government cannot legislate so as to excuse itself." Suppose a private individual tried to do the same thing, "secreting or manipulating his assets with the intent to place them beyond the reach of creditors." Any such attempt "would be denounced as fraudulent, wholly ineffective."
"Loss of reputation for honorable dealing," the dissent concluded, "will bring us unending humiliation; the impending legal and moral chaos is appalling."
By the 1970s the federal government had once again permitted Americans to hold gold coins. But when it came time to actually mint them again, it made sure that gold coins could never circulate and displace the constantly depreciating paper currency printed by the US government: the law required that such coins could circulate with a face value only a tiny fraction of their market value.
The full story of the gold confiscation is actually much worse than this, and we tell it in Who Killed the Constitution? What this episode teaches us is not so much that we need to "return to the Constitution," though that would be an improvement over what we have now, but rather that pieces of paper that governments themselves interpret cannot be expected to prevent governments from doing what they think they can get away with.
Lysander Spooner once said that he believed "that by false interpretations, and naked usurpations, the government has been made in practice a very widely, and almost wholly, different thing from what the Constitution itself purports to authorize." At the same time, he could not exonerate the Constitution, for it "has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." It is hard to argue with that.