FDR and the End of Gold: 2,500 Percent and Counting

by
C.J. Maloney
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The world is full of scraps of paper today.
- Benjamin Anderson, economist, Chase Manhattan Bank (1920 - 1939)

April 1933 found America mired in a crushing economic depression, and newly elected president Franklin DeLano Roosevelt -- who had declared the previous month he had a legal power derived from the Trading with the Enemy Act to assume control of our monetary system -- responded by taking America off the gold standard. That the Act, an unexploded legislative relic left over from the First World War, was completely irrelevant to the situation at hand (there was no “enemy” to speak of as the nation was at peace) proved an easily passed over quibble.

During FDR’s famous first hundred days, a blizzard of unread legislation sailed through Congress and what they missed was put into action by the president with a mere wave of his hand. FDR’s decree forbidding Americans to touch gold (the bureaucrats christened her Executive Order #6102) was but a sign of the times. It was the 1930s, the Strong Man was much in vogue, and despite growing up a wealthy momma’s boy, FDR was ours. Such are the odd things that a democracy can produce.

FDR needed to confiscate everyone’s gold because, according to his economic recovery plan, he needed to raise prices, though he assured the pubic it would be a “controlled inflation.” History would prove his promise to be less than worthless. The cumulative inflation since 1933 has totaled 2,448 percent (and counting), a debasement previously unknown in our nation’s history. Yet, that’s looking at this story solely from the viewpoint of cold statistics, and that strips out the most important part of the story – or at least it’s most entertaining and interesting part. Sometimes, history can read like the wildest of fiction, as if Kafka took a whack at it.

During the last few months of 1933, the year when his 12 years in office began, FDR would hold informal morning meetings in his bedroom, the president still laying under the covers. To be invited into FDR’s inner sanctum was a sign of his favor, and for a time an economics professor named George Warren basked in Roosevelt’s glow. As the general level of prices was now to be “managed” by the guiding hand of experts, of which George Warren was certainly one, the two of them, FDR in command but Mr. Warren providing the theoretical stars to guide them, worked to raise prices. That required intervening in the gold market, and that required someone to set each day’s target price. A not very serious-minded student (nor executive), FDR would “jokingly consider the meaning of numbers, or flip coins” to fathom what the proper price should be, and in one instance he decided the target would a 21-cent increase, and “smiling broadly” explained to his assembled experts that he chose it because seven times three was a lucky number. I find no record of what Professor Warren thought of all this.

That FDR (or his famous Brains Trust of experts, for that matter) knew nothing about gold and monetary matters did not for a moment make him hesitate; he went at it with a courage born from an insatiable need to do something (“to maintain a government of action” was, in his words, his rule of thumb) and this frenzy of political activity grasped our monetary system. The punch line of it all is that FDR, at the time he first assumed power, was a man who never seemed to take things all too seriously. Even as a young man fresh out of law school he kicked off his legal career with a carefree air by publicly announcing his services included “briefs on the liquor question furnished free to ladies. Race suicides cheerfully prosecuted. Small dogs chloroformed without charge.” A close associate of FDR recalled that when he assumed control of the monetary system, “not even the realization that he was playing nine-pins with the skulls and thighbones of economic orthodoxy seemed to worry him.” He meant it as compliment; he shouldn’t have.

People wondered at his bottomless serenity and humor when Making Big Decisions during the burning intensity of the early New Deal, never guessing that it could have been the result of being safely cocooned and conditioned by a lifetime of inherited wealth, by never having to pick his own clothes up off the floor, so to speak, and so having, according to someone who knew him well, “a perfect faith that somehow, someone would always be round to take care of details satisfactorily.” (He meant it with admirable wonder; he shouldn’t have.) FDR demanded responsibility for our nation’s monetary system then handled it with a pitiless nonchalance. In reading biographies of the man, he does not bring to mind any of history’s great statesmen, but instead Tom and Daisy Buchanan from The Great Gatsby, careless people who “smashed up things and creatures and then retreated back into their money.”

FDR’s time in power set into motion a sea change in our monetary system and he is without peer in his personal influence on it, but coupled with the fact he was a very unserious man in a very serious position of power answers why much of what has happened since his time happened at all. Unlike Alexander Hamilton, a thoroughly serious man who created our old monetary system (including our first government bank), FDR kicked off our modern one as casually and carelessly as if he were deciding what socks to wear each morning. Almost 2,500 percent in endless inflation later, we’re still paying for it.