America’s Money Machine

With the country in practical paralysis, and in a condition of near panic, Congress was prepared to grant dictatorial powers to the incoming administration and the wonder is at the modesty of the carte blanche which it requested. While Roosevelt was an experimenter and innovator, his philosophical—or perhaps more correctly, his sentimental—attachments were to the old order—the capitalistic system, the tradition of wealth and aristocracy of the Dutch patroons, of whom he was descended. Franklin Roosevelt was at this stage certainly far less radical, that is, less inclined toward state intervention than the earlier Theodore. Still he was inclined to gather power into his hands on the same theory as many predecessors in history—in order that he might return it to the people: he restricted their liberty in order to enlarge their freedom. In this respect he stood, of course, in the tradition of the Caesars and Augusti of Rome.

The National Recovery Administration, with its attempt to organize labor and business in quasi-autonomous groups operating under “codes of fair competition” that were to be self-enforcing and self-administered, was a recall of the medieval guild system; and the mass of new regulatory laws and agencies were a reversion to the state interventionism of Elizabethan England.

From our viewpoint, the most interesting throw-back was the New Deal solution to the money crisis, which had its origin in the reforms of Solon in Athens of the sixth century B.C.

Solon, a war hero, and universally popular, had won election as archon in the midst of mankind’s first monetary crisis. Coinage was relatively new at the time, having been introduced into Greece from Lydia probably not more than a century earlier. The existence of a uniform standard of payments—the Greek drachma was noted for its purity and beauty—facilitated trade and promoted the spread of banking and credit. The peasant landowners, particularly, went into debt with the evidence, in the form of engraved stone pillars, standing on the mortgaged land. At the same time, the growth of shipping had brought the cheap wheat of the fertile Egyptian Delta into competition with the hard-won tillage of the stony Greek hills. Falling prices, and mortgage payments to meet, induced an agricultural crisis similar, we may imagine, to the farm strikes of the Hoover era and the later peasant protests in France.

Solon’s first action as archon was a decree—the Seisachthia or Overthrowing of Pillars—that effectively abrogated the farm mortgage debt in favor of the Greek landowners. To meet the resultant complications—the loss to the city merchants and banker creditors—he authorized the payment of commercial debts in drachmas of reduced weight. The devaluation was approximately 26 per cent.

The devaluation of the drachma—the first debasement of money which history records, but not the last—seems to have been successful, but it is noteworthy that thereafter the municipal officials of Athens in assuming office were required to take an oath not to tamper with the currency and this restraint characterized subsequent Greek monetary experience.

The passage of the Emergency Banking Act, followed by the President’s radio “fireside chat” on the following Sunday evening (the twelfth), assuring the American people that their deposits were now safe, was electric in its effects. By March 15, about half the banks, holding some 90 per cent of the deposits of the country, were reopened, and within three weeks some $1,185 million of currency had been redeposited in the banks. By the end of June, all but 3,871 of the 18,394 banks in being at the beginning of the year had been reopened, but many small communities continued without banking facilities for months longer, and many banks never reopened.

The significance of the Thomas amendment is that it formally took the U. S. off the gold standard. It gave the President authority to reduce the statutory gold and silver content of the dollar by as much as 50 per cent, to accept at 50 cents an ounce up to 400 million ounces of silver in discharge of foreign government debts owing the U. S., and to issue silver certificates to the extent of such silver received. Since the silver was monetized at $1.29 per ounce (unless the silver dollar should also be devaluated as permitted by the Act) this meant multiplying by more than two and a half times the purchasing power of silver acquired. It also gave to the Executive authority practically to direct the Federal Reserve banks to purchase up to $3 billion of government securities, under penalty of direct issue of $3 billion Treasury circulating notes (“greenbacks”) under the Civil War Act of 1862. The Thomas amendment met unexpected opposition from conservatives, among them Carter Glass, who had been offered the post of Secretary of the Treasury; but the Roosevelt influence, combined with the crisis mood, was decisive.

Despite the apprehensions of Roosevelt’s advisers—Lewis Douglas, the budget director, thought the Thomas amendment marked “the end of civilization”—Roosevelt was circumspect in his use of the Thomas amendment powers. What seems to have been decisive in bringing him to an about-face, and to the adoption of radical monetary measures, was the writings of a Cornell University economist, Professor George F. Warren, whose specialty was land management rather than money, and Herbert Bayard Swope, who was a journalist. Swope had written a memorandum on the advantages of domestic price lifting and Warren had written a book on gold and prices with Professor Frank A. Pearson, which seemed to demonstrate conclusively that prices moved in accordance with the price of gold. Roosevelt was a country squire by temperament, and he had always shown an especial interest in rural economics, and it was natural that the views of an agricultural economist should obtain his sympathetic attention. Warren held—and Roosevelt was persuaded—that by raising the price of gold, it would be possible to achieve all that legislation and monetary policy had been seeking to achieve, namely a rise in the general price level.

The natural Rooseveltian conservatism of these early days was particularly manifested in his attitude toward the World Monetary and Economic Conference at London, which he “torpedoed”—to adopt the opprobrium of his critics. The conference had been initiated during the Hoover Administration, and its objectives were restoration of international trade mainly through agreement to avoid competitive currency depreciation and return to the gold standard.

Roosevelt at the first had shown considerable enthusiasm for the conference and had sent his Secretary of State to head the American delegation, but it soon became evident that Roosevelt’s views did not accord with those of the European delegation or even of his principal negotiators. From the conservative viewpoint, Roosevelt’s view seems the sounder. A declaration had been drawn declaring that stability in the international exchanges was of prime importance and a first object of policy, and that there should be a return to the international gold standard—but the schedule should be optional with each country. However, the statement proposed that countries still on the gold standard should maintain the free working of the standard at current gold parities, while countries not on the gold standard should limit exchange speculation, and all central banks should cooperate to achieve these objectives.

Raymond Moley, the President’s closest adviser at the time who had been sent to London as Roosevelt’s personal liaison officer, cabled his urgent recommendations of approval of the statement. Roosevelt, however, had meantime come under the Warren influence and had become convinced that international stability began with domestic stability and that until economic recovery had been achieved at home, attempts to stabilize foreign exchanges would be fruitless.

In this view he was, of course, on sound ground. Unfortunately, he was persuaded that he could restore domestic prosperity by monetary manipulation to raise prices. He cabled Moley, after some delay, refusing to accept the declaration, and followed it with another that astounded the delegates by its practical repudiation of the American delegation: “The sound internal economic system of a nation is a greater factor in its well being than the price of its currency in changing terms of the currencies of other nations.”

He went on to say that “national budgets must be balanced,” and that “the U. S. objective would be that of giving currencies a continuing purchasing power which does not vary greatly in terms of the commodities and need of modern civilization.”

“Let me be frank,” he concluded, “in saying that the United States seeks the kind of dollar which a generation hence will have the same purchasing and debt-paying power as the dollar value we hope to attain in the near future. That objective means more to the good of other nations than a fixed ratio for a month or two in terms of the pound and franc.”

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2The BLS index of wholesale prices, all commodities, (1926= 100) dropped from 95.3 in 1929 to 64.8 in 1932, compared with a drop from 154.4 in 1920 to 97.6 in 1921. (Historical Statistics of the U. S.)

• 2Theodore Roosevelt returned from a year of big game hunting in Africa and a triumphal tour in Europe to find again an opprtunity and a demand for his political talents. Drawn by an appeal to public service, and perhaps to a considerable degree by ambition,* he began to angle for the leadership of the insurgent wing. In a speech at Osawatomie, Kansas, on August 31, 1910, on “The New Nationalism” he backed the Supreme Court’s attitude toward social legislation and announced the political doctrine “that every man holds his property subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”