One Nation Under Gold

by James Ledbetter

  To this day, no historians have assigned an unimpeachable figure for how much gold was actually in the hands of Americans in the early 1930s. Most Americans, of course, could not afford to own gold as an investment during the Depression. Many who owned gold coins had probably acquired them recently; gold withdrawals rose sharply after the Bank of England had been forced to abandon the gold standard in September 1931. In January 1932 the Hoover administration had estimated that between $1.3 and $1.4 billion in “hidden money” was being hoarded in private hands; that represented about 30 percent of the amount that the US government held in reserve.13 If American hoarders had been a central bank, their reserves would have been more than twice the amount of reserves in the Bank of England, larger than those of any central bank in the world besides France and the United States.14 Hoover created a special task force to recover hoarded gold, headed by Colonel Frank Knox, who had been the publisher of the Chicago Daily News. It warned economically depressed Americans that “a dollar hoarded not only ceases to perform its function as currency but destroys $5 to $10 in potential credit.”15 At least in the minds of the federal government, the problem of gold flowing to private owners was severe and had nearly forced the country off the gold standard involuntarily. In a speech at the height of the 1932 presidential election, Hoover criticized nineteenth-century greenbacks as a Democratic “panacea,” while also disclosing that his own treasury secretary had told him the country came within two weeks of abandoning the gold standard, which would have created “chaos.” A Hoover aide later said that “it was almost a matter of hours.”16

  Hoover’s anti-hoarding measures were mildly effective for a few months, but the problem was too sprawling for a domestic task force alone to solve, especially because hoarding was probably not the chief cause of domestic gold shortages. Most of the world had gone off the gold standard; by mid-1933, among the world’s largest economies, only France, Switzerland, Belgium, and Holland remained on the gold standard. For a variety of reasons these countries had begun exercising the right to cash in financial obligations in gold rather than US currency. In the spring of 1932, for example, France alone had taken some $700 million of gold out of the United States—a significant sum, considering that all of the US Federal Reserve banks held only a little more than $2.5 billion in gold at the time, and the law required 40 percent of the nation’s currency value to be backed up by gold. In an apt metaphor Hoover declared that “a mass of gold dashing hither and yon from one nation to another has acted like a cannon loose on the deck of the world in a storm.”17

  Now, however, the government had some means to tie the cannon down, and many Americans did appear to comply with the new law. Larger gold “hoarders” were no doubt fearful of public exposure and fines; those with smaller stashes of gold were probably caught up in the great national desire to support Roo-sevelt’s recovery program, whether or not they agreed with it or understood it. When the president’s first orders went out, streams of people showed up at banks with sacks of gold to be redeemed; some $200 million in gold was said to be recovered in the first week. On March 11, Treasury issued a chipper statement: “Already from every quarter of the Nation is reported a large and steady current of gold flowing back to the banks.” A seven-year-old girl in Chicago, channeling the can-do spirit of that era’s heroine Shirley Temple, sent a single gold dime to the White House, saying she did “not want to be a hoarder.”18

  Those with larger supplies were watched closely by Treasury and the Justice Department. Officials unearthed some clear efforts to mislead the government; evidently some five hundred people had withdrawn gold under fictitious names. Nonetheless, actual prosecutions were uncommon. In the fall of 1933, a New York lawyer named F. B. Campbell was indicted after he tried to recover some $200,000 in gold bars that he had been keeping at Chase National Bank in violation of the law. Campbell argued in court that the Emergency Banking Act was unconstitutional, but the judge did not agree. Campbell’s case was an exception, however. All told, the attorney general’s office by the end of 1933 knew of fewer than two dozen complaints or indictments.19

  It is nearly impossible to declare whether the confiscation of gold beginning in 1933 was a success. In part this is because the Roosevelt administration gave contradictory accounts of the gold confiscation program, both internally and externally. The lack of significant prosecutions could be interpreted as a sign of widespread compliance, but the administration at times made it clear that it was impractical to legally chase after anything but the largest gold stashes. When a former US senator from Colorado taunted the government to come after him for $120 worth of gold he held, $20 over the legal threshold, Attorney General Homer Cummings assured him that such small sums were not worth the effort to collect. Yet in May, Treasury estimated that approximately $700 million in gold and gold certificates remained in circulation, and it was never clear if such amounts could be recovered by going after the biggest hoards.20 In early June, Justice said it was investigating 10,000 possible hoarders, a number that quickly rose to 15,000. Cummings took a tough stance: “All of these will be run down and not one person who can be located will escape investigation. I am so thoroughly committed to the necessity that all gold be returned to the Treasury that I have not patience with those who hold it out in defiance of their government, and I brand them as slackers.” Then in August, the attorney general said that there were only forty known hoarders of gold who refused to turn in their metal without explanation, and that their holdings were worth only $400,000.21 In response to the criticism that he made threats that he could not follow up, Cummings reportedly said, “Hell, I was looking for gold, not for victims.”22

  A bigger problem—one that the American government would continue to encounter through subsequent decades—was that gold is exceedingly difficult to count reliably. Many historians have been taken in by a bit of sly official bookkeeping. Looking at the official statistics today, the amount of gold coin in circulation did drop dramatically, from $284 million in February 1933 to $24 million by the end of the year—a 91.5 percent reduction. But those figures are wildly misleading. Originally, the government count in January 1934 showed $287 million of gold coins still in circulation. But Treasury and the Federal Reserve decided that because gold ownership by 1934 was illegal, it no longer made sense to include that figure at all. So they dropped the $287 million in January 1934 to zero, and subtracted $287 million from all earlier calculations going back to 1913. Using the original figures, gold coins went from $571 million in February 1933 to $311 million in December—or a percentage drop of 45.5 percent.23

  Why the change? “This was done primarily because private holdings had become illegal,” a Federal Reserve publication later explained, “but there was also reason to believe that much of the computed amount of gold coin in private hands had in fact been lost or taken out of the country by travelers.”24 Explaining the apparent overstatement of gold coins in circulation in previous years, the Federal Reserve’s annual report said: “Results of official efforts during [World War I] to concentrate gold and more recently, since March 6, 1933, to secure its return from private hoards, have indicated that the overstatement was large.” So Hoover and Roosevelt may have been chasing after tens or hundreds of millions of dollars’ worth of hoarded gold that simply wasn’t there, or perhaps the efforts to chase it down drove the gold out of the country or caused it to be “lost.” For their part, Milton Friedman and Anna Schwartz’s monumental monetary history concluded that the bulk of the missing $287 million in gold coin “was retained illegally in private hands.”25

  One crucial question is whether FDR and his circle intended the value of the American dollar to be managed by the government indefinitely, and—as a corollary—for the private possession of gold to be prohibited to the vast majority of Americans forever. By invoking the Trading With the Enemy Act to ban the flow of gold, FDR effectively declared a national economic emergency that was equivalent to war. Typically, however, emergencies pass; most of the
nation’s banks, for example, were reopened a few days or weeks after the “holiday” ended.

  But the confiscation of Americans’ gold was a prerequisite to the program that the administration began moving toward: the nationalization of all American gold and the day-to-day management of the US dollar. A series of steps taken over the spring and summer set the stage for near-absolute control over gold by the executive branch. Gold exports were explicitly prohibited without a license, and the government announced that no new licenses would be issued. Non-hoarding use of gold, such as for industrial and artistic use, would now require approval from Treasury. By a joint resolution of Congress, clauses in contracts that required repayment in gold were declared void, a move with potentially shattering ramifications. All domestic production of gold—which in 1932 had been about 2.1 million fine ounces—now had to be sold to the secretary of treasury at a price that Treasury would determine. And most crucially, the Thomas Amendment to the Agricultural Amendment Act gave the president the power to fix the value of the dollar to gold and silver as he saw fit, up to 50 percent inflation. Nothing like this total monetary control had ever existed in the United States. With the passage of the Thomas Amendment on May 12, a top pro-gold Roosevelt aide declared the “end of civilization.”26

  Somewhat perversely, these supplementary measures drew greater attention and deliberation from Congress than the far more sweeping March 9 legislation they were designed to implement. Even so, relatively little of the debate focused on the removal of gold from the American monetary system. One exception was Louis McFadden, a Pennsylvania Republican, who introduced articles of impeachment against many members of the Roosevelt administration as well as the Federal Reserve Board for, among many other sins, “having deprived the people of the United States of their lawful circulating medium of exchange.”27 (McFadden was a perennial gadfly, who had also unsuccessfully attempted to impeach Hoover and who charged that a cabal of Jewish Wall Street bankers had aided the Soviet revolution.) If anything, especially among inflation advocates in the West, the spirit of William Jennings Bryan was still alive; among these partisans, the measures to remove gold from American financial life were seen as great steps of human progress. During the debate on gold clauses in contracts, Congressman Martin Smith, a Washington Democrat, said, “The enactment of this law is another emancipation proclamation, declaring liberty for 120 million Americans from the thralldom and cruel yoke of gold which has enslaved the human race.”

  Collectively, these measures represented a unique and high-risk experiment in the history of monetary policy in the United States. One economic historian calls the period between Roosevelt’s inauguration and January 1934 “in many ways one of the most complex and baffling in twentieth-century United States monetary history.”28 And throughout the period, Roosevelt had little support from traditional quarters. The Federal Reserve Board, especially under chairman Eugene Meyer, opposed nearly all aspects of Roosevelt’s first-year monetary actions, although it did little to undermine them. Roosevelt’s own economic team, which included several holdovers from the Hoover administration, grew increasingly distant from the president, particularly after Roosevelt made it clear to a world monetary conference in July that he was rejecting “old fetishes of so-called international bankers” and that the dollar’s relationship to commodities was more important to him than its relationship to currencies abroad.

  Roosevelt’s plan centered on a “managed currency,” in which the dollar’s gold value would change frequently to a price set by the administration. This concept was more than controversial; it became, as historian Eric Rauchway put it, “the principal article in the Roosevelt administration’s profession of faith.” James Warburg, a longtime ally of Roosevelt’s who never formally joined the administration, could not abide the idea of a dollar permanently untethered from gold. He sought allies with whom he hoped he could persuade the president. One was Dean Acheson, the brilliant, headstrong lawyer who was undersecretary of treasury (and would become, after World War II, secretary of state). In August, Acheson told Warburg that the president had given him a “penciled note” that asked him to try his hand at purchasing newly minted gold at $28.00 an ounce—meaning thereby a substantially weaker dollar. Acheson was appalled; he could not accept the principle behind the Thomas Amendment granting the president the power to dictate the dollar’s value. Acheson believed that Treasury could only buy gold at the price that had been established in the nineteenth century, $20.67 an ounce.

  Acheson thought he had the law on his side, as well as the opinion of the attorney general. He was not merely resistant to change; Treasury was about to complete a sale of Liberty Bonds to the public, and Acheson feared that devaluing the dollar would violate the government’s obligation to its bondholders. For the president, however, this was not useful; as an Acheson biographer put it, “what FDR wanted was to be told how he could do it, not that it was impossible to do.”29 And indeed the objections of Acheson, Warburg, and the Federal Reserve did little to impede Roosevelt. On August 29 he signed an executive order authorizing Treasury to buy gold mined in the United States, which could then be sold to authorized users or abroad. The price would be “equal to the best price obtainable in the free gold markets of the world.” To the press, “high Treasury officials” insisted that this soft nationalization of gold had nothing to do with cutting the gold value of the dollar, and indeed it would help gold producers by allowing them to obtain a higher price.30 The market agreed; in an otherwise unspectacular period of trading, gold-mining stocks shot up.

  On September 7, gold producers delivered an estimated 10,000 ounces of newly mined metal to government offices in New York and San Francisco, and the following day the purchase price was announced: $29.62 an ounce, or nearly $9 an ounce more than Treasury paid to coin gold. Of course, this did not constitute a return to the Civil War–era gold market; only gold producers were allowed to sell, and Treasury was the only buyer, reselling only to authorized industrial or artistic users or to foreign buyers. Nonetheless, for the first time in decades, the United States had a gold market, and its prices were unlikely ever to return to the $20.67-per-ounce level at which the dollar had officially been defined. As a New York Times editorial noted, this development was little understood “in the somewhat perplexed mind of the general public.” But if Roosevelt’s currency policy ever had a point of no return, this was it; domestic gold producers would not lightly accept a return to an export ban, and the downward trajectory of the dollar’s value seemed indelibly linked to a widely appreciated pickup in business.

  This, however, was merely the first phase of gold buying. By late September, Roosevelt, along with Morgenthau and his staff, had cooked up a clever, if convoluted, plan whereby the Reconstruction Finance Corporation—the agency Hoover had set up to aid troubled banks—would issue short-term debt in order to buy gold, and that debt in turn would be bought by Treasury. With the economy beginning to show more strength than it had in years, Roosevelt knew he could sell this novel, even radical idea to the public. In his fourth “fireside chat,” on October 22, Roosevelt told listeners that it “may be necessary from time to time to control the gold value of our own dollar at home.” He continued, “I am authorizing the Reconstruction Finance Corporation (RFC) to buy gold newly mined in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President.” The administration had hoped to begin gold purchases the following day but still couldn’t agree on details. The plan was also deliberately secretive and vague; there was no target value set for the dollar; nor any commitment to buy gold on any given day; nor an announced endpoint of the purchasing program.

  Although Roosevelt had told the country that he would set the gold purchase price with the secretary of treasury, in reality Woodin, who was in poor health, had nothing to do with it and was generally opposed to the program. The decisions were made with Morgenthau (who by mid-November would take over at Treasury), RFC
chairman Jesse Jones, and occasionally members of the Federal Reserve, with a pricing method that was less than scientific. “I believe it was on Friday that we raised the price 21 cents,” Morgenthau wrote in his diary, “and the President said, ‘It is a lucky number because it is three times seven.’ If anybody ever knew how we really set the gold price through a combination of lucky numbers, etc., I think that they really would be frightened.”31

  Initially, the policy had little impact, and the administration was clearly out of its element. On October 25, the government began buying domestic gold at the price of $31.36 an ounce, or about 27 cents above the world market price, and implying a gold price of the dollar of 66 cents. But the value of the dollar on the currency market actually went up—the opposite of what they’d planned. One misstep was the initial decision to buy only domestic gold. The prices of American farm products were set in international markets, where they were purchased with foreign currencies. Thus, buying only gold mined in the United States would not affect the market price because Treasury’s purchases wouldn’t affect the price of gold abroad.