Farm prices continued to fall. As the harvest approached, political pressure from the farm states and memos from Warren pushed Roosevelt to be less concerned about profits to foreigners. By mid-August, he decided to buy gold in the open market above the open market price. The attorney general ruled that he did not have that power, but as usual Roosevelt was determined. He decided to set up a corporation within the Reconstruction Finance Corporation to buy gold, silver, cotton, and other commodities. The attorney general, the Treasury, and RFC lawyers discussed the legality for several weeks before reaching a conclusion (Blum 1959, 65–67). Acheson opposed the decision and soon after resigned.71
The plan called for the RFC to sell short-term notes and use the proceeds to buy domestic and foreign gold above the going market price. Roosevelt personally drafted the fireside chat he gave on October 22, highlighting the importance of restoring the price level nearer to the level at which debts had been incurred and reversing the relative decline in farm prices. Higher prices would restore employment, Roosevelt said, but the increase was to be a one-time change, achieved over two or three years, not the start of permanent inflation. Once the price level rose, his policy was to maintain the dollar’s “purchasing and debt-paying power during the succeeding generation” (Krooss 1969, 4:2780). The option was not a temporary expedient, Roosevelt said. His policy moved toward a managed currency that “would not be influenced by the accidents of international trade, by the internal policies of other nations and by political disturbances in other continents” (4:2780).72
Roosevelt’s speech notwithstanding, the immediate objective was more circumscribed. On October 29 he told Harrison that it was “imperative to get agricultural prices up before Congress meets and that if we did not, he was fearful of what Senator Thomas [Oklahoma] and the other inflationists might do” (Harrison Papers, file 2010.2, October 30, 1933, 3). He anticipated spending $100 million to get the dollar gold price to $33 or $34 before Congress met, and he again warned about the dangers of serious social disorder in the West.73
70. The Treasury had established a committee on monetary policy under James Warburg. The committee included among its members Black and Harrison from the Federal Reserve and Walter Stewart. They opposed the devaluation policy but did not propose an alternative.
71. Pearson, Myers, and Gans (1957, 5633–34) report from Warren’s diary that Roosevelt continued to talk about greenbacks and silver as well as gold. Warren warned against other methods as ineffective. The reason for Roosevelt’s strong interest is the fall in commodity prices. Wheat at 75 cents a bushel was 50 cents below the summer peak, corn was back to the April price, and cotton, at 9 cents a pound, was 25 percent below its summer peak. The pressure from farm organizations and Congress for inflation rose as farm prices fell. Woodin objected, and the monetary committee including Sprague, Rogers, and Harrison tried to stop the planned devaluation.
72. Roosevelt bypassed the legal issue by citing “the clearly defined authority of existing law.” Roosevelt seems to have accepted some part of Fisher’s debt-deflation theory.
Markets and the public received Roosevelt’s speech enthusiastically. Between the beginning and the end of the broadcast, wheat future prices rose 38 percent to more than 93 cents a bushel (Pearson, Myers, and Gans 1957, 5641). Telegrams gave overwhelming support. With a few exceptions, leading economists of that period opposed the plan, usually because they favored the gold standard at the traditional gold price and opposed devaluation.
Purchases began on October 25. Roosevelt personally decided on the daily price.74 The initial objective was to have cotton at 10 cents a pound, corn at 50 cents a bushel, and wheat at 90 to 95 cents a bushel by January 1, 1934. (These prices were 10 to 20 percent above June 1933.) Originally the RFC made all gold purchases in the United States. Since gold exports had to be licensed, the United States gold price soon rose above the world price, so the policy changed by November 1 to include purchases abroad. Still, the purchases were limited to about $5 million a week, divided equally between London and Paris. A two-tier market developed, with the higher price set by United States purchases. After its initial successes in raising the domestic and international gold price to $34 an ounce, the program faltered. World gold prices fell, and commodity prices (in dollars) followed.
The gold buying program rewarded sellers able to sell to the RFC with little effect on its target, the prices of wheat, cotton, and corn. If the United States had been willing to buy in unlimited quantities, it would have eliminated the difference between domestic and international gold prices. Under the program, the difference persisted and widened. By mid-December, the United States gold price was 7 percent above the world price, but commodity prices were set in international markets. They fell from mid-November to mid-December. The Board’s wholesale price index was 11 percent above the previous year but back to the level of early September.
73. Governor Black, who was at the meeting, told the president that small purchases would not be effective and large purchases would have serious repercussions abroad. He offered to cooperate, however, if the president decided to proceed. Harrison seconded his statements. Neither man said what he would do (Harrison Papers, file 2010.2, October 30, 1933, 4–5).
74. Each morning Morgenthau, Warren, and Jesse Jones, head of the RFC, met in Roosevelt’s bedroom. Morgenthau reported the previous day’s prices of gold and commodities. Roosevelt chose a new gold price for the day. The aim was to keep the gold price rising. On Roosevelt’s announcement the price in London rose from $29.01 to $31.02. Roosevelt set the first buying price at $31.36. The daily price changes were always positive, but the increments varied to fool the speculators (Blum 1959, 69). In fact, it made little sense to fool the speculators. One day he raised the price by 21 cents because that was a lucky number, three times seven (ibid., 70). Pearson, Myers, and Gans (1957, 5643) quote a slip Roosevelt gave to Warren with the words “Oct. 30. I think 31.96 is right for today. FDR.”
Falling commodity prices weakened the program’s support and strengthened opponents. Opposition intensified. Acheson, budget director Douglas, and Sprague resigned, the last after complaining that the “present policy threatens a complete breakdown of the credit of the government” (quoted in Pearson, Myers, and Gans 1957, 5649). Other prominent economists stressed the risk of inflation and damage to the government’s credit.75 These claims seemed to be validated by a small temporary, seasonal increase in short-term interest rates in December.76 The American Federation of Labor (AFL), the Chamber of Commerce, the American Legion, and the Economists’ National Committee on Monetary Policy opposed the policy. Farm groups and the Committee for the Nation approved.
Foreign central bankers vigorously opposed the policy also. Harrison described Norman as having “hit the ceiling” when first informed about RFC purchases. United States gold purchases might “undermine confidence in all currencies. . . [a]nd bring about currency and exchange chaos in Europe” (Harrison Papers, file 3115.4, November 2, 1933, 1). Harrison assured Norman repeatedly that Roosevelt acted for domestic reasons only.77 With the dollar depreciated in mid-November, he offered to discuss stabilization of the pound at $5.25 to $5.35, even if it meant selling up to $25 million in gold. Nothing came of the discussion. The usual reason given was that French political problems made it difficult to discuss stabilization of the franc,78 but Morgenthau told Harrison his main concern was that, even if the agreement lasted only a week, prices might fall.79
75. Six young Harvard instructors, led by Lauchlin Currie, sent a letter to Roosevelt supporting devaluation of the dollar as essential for Roosevelt’s expansionist policies, but they dismissed Warren’s argument closely linking the price of gold to commodity prices (Pearson, Myers, and Gans 1957, 5653; Sandilands 1990, 56–57).
76. On November 16, Roosevelt accepted Acheson’s undated letter of resignation and appointed Morgenthau as his successor. Since Woodin was ill, Morgenthau became acting secretary and, after Woodin’s resignation, secretary on Janua
ry 1, 1934.
77. Norman recognized, as Harrison apparently did not, that, if successful, the “domestic operation” would raise the gold price and lead to increased United States exports, fewer imports, and a flow of gold to the United States. This would initially force appreciation and deflation on all gold standard countries.
78. Roosevelt blamed the French problems on their failure to balance their budget for three years. He told Harrison that he did not expect them to remain on the gold standard. Harrison urged him to stop gold purchases temporarily to help the French, and Roosevelt agreed (Harrison Papers, file 2012.4, November 22 and 23, 1933).
79. Harrison made several proposals, on his own initiative, to stabilize exchange rates (Harrison Papers, file 3115.4, November 15, 18, December 1). At one point (December 1) Norman was willing to approach the British Treasury with a proposal to stabilize the exchange rate at the former rate, $4.86. Norman and Harrison also discussed the possibility of exchange controls. Harrison’s concern was with inflationists in Congress when Congress returned in January.
Between September and December, the dollar depreciated against the pound and French franc by 9.6 and 5.3 percent, respectively, in nominal terms and by 8.6 and 7.8 percent in real terms. Harrison described Roosevelt in mid-November as “pleased with the gold experiment up to date” and “working up to around $34 at the end of the week when he will survey the situation and decide on the next move” (Harrison Papers, file 2012.4, November 13, 1933, 5). Harrison also described the president as uncertain what to do next. He was opposed to legal devaluation but might consider temporary de facto stabilization if the British would agree. But the president was also concerned that Congress would want wheat and cotton prices to reach $1.25 a bushel and 15 cents a pound (5).80
Depreciation awakened British interest in concerted action to stabilize currencies temporarily. As commodity prices fell, Roosevelt’s interest in a joint agreement increased, and his interest in buying gold waned.81 By December, RFC gold purchases slowed. Morgenthau asked Harrison to reopen discussions with Norman about a possible agreement to devalue jointly against gold, then stabilize. Agreement had to be reached before Congress reconvened.
The British would not consider joint devaluation against gold (Harrison Papers, file 2012.4, December 4, 1933, 4). Roosevelt blamed them for the dollar’s failure to depreciate against gold in foreign markets (Blum 1959, 121).82 Many bankers shared this view and claimed that the British used their Exchange Equalization Fund, set up after the 1931 devaluation, to prevent dollar devaluation. The bankers wanted a United States stabilization fund to counter the British fund (12).
80. The memo also reports that Roosevelt and Morgenthau were concerned about capital flight as rumors of an impending devaluation spread.
81. Morgenthau’s evaluation was that success had been partial, but the changes “did not restore the balance between agricultural and industrial prices that Warren had hoped to redress” (Blum 1959, 75). Morgenthau’s views are consistent with Harrison’s reports suggesting that Roosevelt had achieved most of his objective. Warren cites criticism of the program at home and abroad by the AFL, the Chamber of Commerce, bankers, numerous economists including J. M. Keynes, and many members of Congress (Pearson, Myers, and Gans 1957, 5649–55).
82. Jacob Viner, on Morgenthau’s staff, explained the differences between domestic and foreign gold prices in the same way Warren did (Blum 1959, 120). The United States gold purchases abroad were not large enough. Roosevelt and Morgenthau did not seem to understand that devaluation and a fixed gold price would bring the domestic and world gold prices together at the fixed price, and raise the dollar prices of commodities commensurately, if the United States maintained the higher gold price by buying all gold offered at the price. The United States gold price would become the world gold price, so dollar prices of commodities would rise.
Devaluation
Discussion of a formal devaluation started in late September.83 The Federal Reserve’s main concern, at first, was whether the profit on the gold stock belonged to the Federal Reserve or could be taken by the Treasury under existing legislation. The attorney general’s staff considered the Thomas amendment possibly invalid because it delegated to the president congressional power “to coin money and regulate the value thereof.” Further, even if the courts upheld the Thomas amendment, that amendment did not give the president the right to take the Federal Reserve’s profit from the devaluation. When Congress discussed the Thomas amendment, it considered profits from devaluation, but it did not reach a conclusion (Memo on Taking Gold Profit, Board of Governors File, box 164, October 5, 1933).
The Board’s staff repeated the arguments about legality and added others. The takings clause of the Fifth Amendment provided some protection. The staff argued also that the Federal Reserve could not maintain gold reserve requirements against Federal Reserve notes, and member bank reserve balances could not be maintained, if the Treasury took the gold in Federal Reserve banks.
In addition to legal concerns, the Board had policy concerns. A devaluation by 40 percent of the gold content would increase the value of monetary gold by almost $2.9 billion. If the profit accrued to the Treasury, the Treasury could retire all the debt held by Federal Reserve banks, depriving them of earnings and removing their ability to sell securities to contract credit. Further, the profit to the Treasury could be used to finance government spending (Memo Smead to Black, Board of Governors File, box 164, November 23, 1933).84 The System’s relations with the Treasury, and Morgenthau’s attitude toward “bankers,” did not permit the System to dismiss this possibility.
Early in December, Roosevelt appointed a committee consisting of the acting secretary of the treasury, the attorney general, and the governor of the Federal Reserve Board to consider how to resolve differences. The committee did not meet. Instead, the attorney general proposed that the Treasury take the System’s gold, using the powers of the Board authorized in section 11 of the Federal Reserve Act, without public announcement or prior notice to the officers of the reserve banks. The reserve banks would receive a letter stating that they were entitled to gold certificates. Black objected that the proposal was probably illegal, unwarranted, unworkable, and unnecessary. The Thomas amendment was probably unconstitutional. It should be left to Congress to legislate the disposition of the Federal Reserve’s gold holdings (Board of Governors File, box 164, December 22, 1933).
83. There was not much precedent. Congress had reduced the weight of the gold dollar by 6 percent and fixed its value in 1834. The dollar had floated during and after the Civil War, but the gold parity did not change.
84. The reserve banks, as legal owners of the gold, hired Newton Baker, a longtime outside counsel, to negotiate a compromise with the administration. The banks accepted that the profit belonged to the Treasury. They proposed that, at the time of devaluation, the Treasury should exchange gold for gold certificates. The profit would go to the Treasury, but the gold would be returned in exchange for the gold certificates once the devaluation was completed. Congress would pass legislation approving the devaluation and the exchange. Otherwise several banks would not surrender their gold and others would do so under protest unless the banks’ directors approved the transfer. The banks’ directors were concerned about their fiduciary responsibility as representatives of the shareholding banks.
The directors of some of the reserve banks reinforced Black’s position. Chicago’s directors unanimously approved a resolution opposing the transfer. Citing the opinions of Newton Baker and their own counsel as the basis for doubts about their legal authority to surrender the gold, they declined to voluntarily comply with a request to turn over the gold (Letter Stevens to Black, Board of Governors File, box 164, December 27, 1933).
After much additional discussion by the reserve banks, by the Board, and within the administration, on December 28 the secretary ordered all gold delivered to the Treasury at $20.67 per ounce. The next day the Board agreed that the profit on revaluatio
n belonged to the government, not the reserve banks. It urged the president to get congressional approval of the decision to take the gold and allocate the profit (Board Minutes, December 29, 1933; Letter Black to Roosevelt, same date).
Roosevelt yielded. On December 29 he offered Black a compromise. If the reserve banks would transfer their gold, he would propose legislation ratifying the transfer. If Congress did not approve the transfer in the next session, the Treasury would return the gold, excluding the profit on revaluation. He reserved the right to take over the gold at a later date (Letter Roosevelt to Black, Board of Governors File, box 164, December 29, 1933).
Two weeks later the president asked Congress for authority to acquire the gold held by the Federal Reserve banks, substitute gold certificates, permit devaluation up to 60 percent of the gold content, and use $2 billion of the profit of any revaluation to establish a fund for foreign exchange operations, later called the Exchange Stabilization Fund (Krooss 1969, 4:2789–92). The proposed fund was about the size of the Federal Reserve’s open market portfolio. It operated secretly, under the control of the treasury secretary with the president’s approval (Schwartz 1997). Moreover, the proposal gave the secretary “authority to assume complete control of general credit conditions and to negate any credit policies that the Federal Reserve System might adopt” (Memo, Smead to Black, Board of Governors File, box 164, January 17, 1934). The Exchange Stabilization Fund gave the Treasury the means to conduct monetary operations without getting approval for spending from Congress.
A History of the Federal Reserve, Volume 1 Page 66