Economics and The Public Welfare

Chapter 45

Roosevelt’s Abandonment of the Gold Standard

We can only commend the Administration’s reopening of the banks. But the banking holiday was made the excuse for a radical change in monetary policy. In the hastily adopted Act of Congress of March 9, blanket authority was given the President to do pretty much as he saw fit regarding money and banking, including authority for the seizing of the gold and gold certificates in the hands of the people.

The Seizure of the People’s Gold. Very speedily (April 5) this authority was invoked and it became unlawful to own or hold gold coins, gold bullion, or gold certificates. Control of gold exports and foreign exchange transactions were also provided for in the bill, and it ceased to be lawful to export gold in making payments abroad except under license from the Treasury. Provision was made in the proclamation dealing with this matter to allow jewelers, dentists, and others having industrial use for gold, to obtain gold to meet their reasonable needs. The crisis was made the excuse for the abandonment of the gold standard.

For a time the pretense was maintained that these measures were temporary, and the hope persisted that we would resume the gold standard in its full integrity. The dollar dipped in the foreign exchanges as against the gold standard countries, but rallied, and the dollar stood practically at mint parity with the French gold franc until the middle of April.

The Thomas Amendment. Then came developments of a startling sort which revealed the real purposes of the Administration. A show of “inflationist” sentiment in the United States Senate in connection with a bimetallic proposal led the President to take the position that he wanted control of “inflation,” and, with the support of the Administration, Senator Thomas of Oklahoma on April 20 sponsored a monetary amendment to the pending agricultural bill which gave the President vast powers regarding money:

1. He could direct the Secretary of the Treasury to enter into agreements with the Federal Reserve banks and the Federal Reserve Board, whereby the Federal Reserve banks would buy obligations of the United States in the open market to the extent of $3,000,000,000, regardless of reserve deficiencies which might be created thereby.

2. He could direct the Secretary of the Treasury to issue $3,000,000,000 of greenbacks, United States Notes. These Notes were to be issued in paying maturing Federal obligations and for purchasing United States bonds. These notes were to be retired, but only at the rate of 4% per annum.

3. He could establish bimetallism at any ratio he found necessary.

4. He could reduce the weight of the gold dollar by any amount up to 50%.

5. He could accept silver at a price of 50¢ per ounce up to $200,000,000 from foreign governments in payment of debts to the United States.

These powers were discretionary rather than mandatory. The President did not have to do any of these things, and the hope persisted that he might have asked for the powers so that he would have weapons in his hands to force an agreement regarding money from foreign governments at the coming London Conference. The thought was that he might have wanted the powers so that he could check the threat of competitive currency debasement in the world, by being in a position to engage in that competition in a big way if foreign governments, particularly England, were not willing to stabilize on gold. But the dollar broke in the foreign exchanges as this amendment became part of the pending agricultural bill. The amendment was adopted by the committee on April 20, though the bill itself did not become law until May 12.

The measure struck in virtually every known way at the integrity of the currency, providing both for quantitative increase and for qualitative deterioration.

Senator Glass and President Roosevelt—“It Is Dishonor!” Senator Glass said, as he talked in his office on the day that this amendment was first announced: “It’s dishonor, Sir. This great Government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold Government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It’s dishonor, Sir.” To the grand old Senator, morality was something written in the Heavens, eternal and unchangeable. But the pragmatic philosopher, to whom morality is human-social discipline, growing out of the needs and experiences of human social life, was no less shocked than the Senator. There is no need in human life so great as that men should trust one another and should trust their government, should believe in promises, and should keep promises in order that future promises may be believed in and in order that confident coöperation may be possible. Good faith—personal, national, and international—is the first prerequisite of decent living, of the steady going on of industry, of governmental financial strength, and of international peace.

The President’s course in connection with the gold standard and in connection with the Thomas Amendment, represented an act of absolute bad faith. He had not dared to make any suggestion of anything but adherence to the gold standard in the campaign. Both political parties had stood for the gold standard in the campaign. The President had given “100%” endorsement to Senator Glass’s magnificent speech in the campaign replying to President Hoover’s gold standard statement—and Glass, in that speech, had pledged the Democratic Party to protect the gold standard. The Government, after the defeat of the Free Silver movement in 1896, had twice pledged the faith of the Government to the maintenance of the gold standard, once in legislation in 1900 adopted by a Republican majority, and once in 1913 in the Federal Reserve Act adopted by a Democratic majority. The Government had not only written the word “gold” on the Federal Reserve Notes, but also on all its bonds and on every interest coupon attached to them. The Government was bound by its solemn promises, and the President was personally bound by his campaign utterances and by the platform of his party. It was dishonor.1

Dishonor Creates “Hot Money.” We knew nothing of “hot money” on a large scale in the decades that preceded the first World War, when great governments protected the gold standing of their currency as a matter of course because it was the honorable and expected thing to do. But since the bad faith of the two greatest governments in the world, Great Britain in 1931 and the United States in 1933, we have had a world full of “hot money,” jumping about nervously from place to place, seeing no safety anywhere, but going from places that seemed unsafe to places that seemed less unsafe. We have had a world in which men have been afraid to make long-run plans. We have had a world in which conscientious and scrupulous trustees have been turning from “gilt-edged bonds” toward common stocks, not because the common stocks were safe, but because they were less unsafe than Government obligations, and we have had them doing this with the approval of scrupulous and upright judges who have taken cognizance of the bad faith of the Government.

President Roosevelt and Senator Gore. President Roosevelt did not escape sharp rebuke from distinguished men in his own party who opposed this bad faith. As part and parcel of his policy of debasing the gold dollar, he had introduced into Congress a joint resolution (signed by the President on June 5, 1933) abrogating the gold clause in existing governmental and private obligations. The resolution not only forbade private debtors to keep their gold obligations, but also freed the Government itself from its solemn promise. Before the introduction of this resolution, the President conferred with a group of Senators regarding it. Among them was Senator Thomas P. Gore, the great blind Senator from Oklahoma. When the President asked Senator Gore for his opinion regarding the matter, the Senator replied, “Why, that’s just plain stealing, isn’t it, Mr. President?” Senator Gore, moreover, in debate on the Senate floor, said, in substance, this: “Henry VIII approached total depravity, as nearly as the imperfections of human nature would allow. But the vilest thing that Henry ever did was to debase the coin of the realm! ” 2

Senator Gore, who, though blind since the age of twelve, made himself a great scholar, and who mastered the literature of money as few professional economists have, exhibited throughout his career courage and independence and tenacious adherence to principle almost unmatched in our history. He defied two Presidents of his own party when he believed that they were wrong. He lost his seat in the Senate as a result of defying Woodrow Wilson, but he came back. After his defiance of President Roosevelt in the conference above referred to, he was a marked man. Roosevelt succeeded in beating him for renomination to the Senate in 1936. He could have made his peace and would have been reëlected, had he yielded on any one of several issues 3 in the period between 1933 and 1936, but he would not yield. The country’s greatest need today is more men like Senator Gore in high places.

There was bad faith on the part of the British Government and bad faith on the part of the United States Government in abandoning the gold standard. The British at least had the excuse of being under heavy pressure and of being short of gold. It has been shown that the excuse was not a valid one. But we had no pretext of an excuse. We went off the gold standard with $3,000,000,000 of gold in the Federal Reserve banks, and we passed the Thomas Amendment at a time when gold was still pouring into the Federal Reserve banks from the people.

There was divergent opinion in Washington at the time as to whether the Thomas Amendment represented President Roosevelt’s deliberate choice or whether his hand was more or less forced. One view was that if the President had stood against it, it would have been easy enough to defeat the inflationist sentiment in Congress. Another view was that this sentiment was altogether too strong. An intermediate view was that while the President could have resisted successfully and would have been sustained by at least one House of Congress, it would have meant an open break between the President and Congress. In retrospect, it is pretty clear that the Congress was so subservient to the President at that time that the President could have taken any course that he chose, and that it would have been entirely possible for him to have carried out the Democratic platform with respect to money, tariffs, and everything else.

“The Netherlands Bank will hardly trust sterling again. It lost its capital from trusting sterling.

“And they will hardly trust the American dollar for a long time. You have destroyed the great competitor of gold, credit; and you have raised the value of gold for decades in the world as a whole as a result.” Hearings before the Committee on Agriculture and Forestry, United States Senate, on “The Causes of the Loss of Export Trade and The Means of Recovery.” Government Printing Office, 1935, p. 284.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.