American history began. But this time the American public wouldn’t be fooled.
As Barron’s put it in its March 27, 1933, issue: “It has been aptly observed that the stages of deflation since 1929 have been the flight from property (chiefly securities) into bank deposits, next a flight from bank deposits into currency, and finally, a flight from currency into gold.”
Incredibly, the currency supply of the United States was falling so fast that if it continued at that pace for a year only 22 percent of it would remain. The U.S. economic outlook was dire, and it seemed as if the dollar would fall into oblivion.
Executive Order
On March 4, 1933, Roosevelt was inaugurated, and within days he signed executive proclamations closing all banks for a “bank holiday,” freezing foreign exchange, and preventing banks from paying out gold coin when they reopened. A month later he signed an executive order requiring U.S. citizens to turn over their private property (gold) to the Federal Reserve, in exchange for Federal Reserve notes.
On April 20, he signed another executive order, ending the right of U.S. citizens to buy, or trade in, foreign currencies, and/or transfer currency to accounts outside the United States. On the same day, the Thomas Amendment was sent to Congress, authorizing the president, at his discretion, to reduce the gold content of the dollar to as low as 50 percent of its former weight in gold. It was enacted into law on May 12, and then amended to give Federal Reserve notes the full “lawful money” status.
But there was still one major hurdle to overcome before Roosevelt could devalue the dollar: the infamous gold clause.
During the Civil War, President Abraham Lincoln had to come up with a way to pay the troops and introduced a second purely fiat currency to the country the greenback dollar. When it first appeared, the greenback was worth the same amount as gold notes. But by the end of the Civil War they had fallen to just one third of the value of the gold-backed dollar. Many people who had made contracts or taken out loans before the war in gold notes paid them back in depreciated greenback dollars. Of course this was cheating the creditors and many lawsuits were filed.
After the end of the Civil War most contracts contained a “gold clause” to protect lenders and others from currency devaluation. The gold clause required payment in either gold or an amount of currency equal to the “weight of gold” value when the contract was entered into. The big problem for Roosevelt was that most government contracts and obligations also had this clause written into them. So devaluing the dollar would also increase the cost of government obligations by the same amount.
So at the behest of President Roosevelt, Congress passed a joint resolution on June 5 defaulting on the gold clause in all contracts, public and private, past, present, and future. In essence, the government simply said to American citizens and businesses, “We don’t have to pay you.” Outraged by what he viewed as the government’s blatant disregard for Americans’ rights, Senator Carter Glass, chairman of the Senate Finance Committee, lamented, “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’s dishonor, sir.” But Senator Thomas Gore of Oklahoma put it even more succinctly when he said, “Why, that’s just plain stealing, isn’t it, Mr. President?”
But these protests fell on deaf ears. On August 28, 1933, Roosevelt signed Executive Order 6260, outlawing the constitutional right of U.S. citizens to own gold. To keep from having to default on its commitments (declare bankruptcy), and to keep concealed the fraud of fractional reserve banking, the banking system’s only choice was to get the government to make gold (the legal money of our constitution, an inert, inanimate element) illegal for U.S. citizens to own. Roosevelt gladly obliged.
First under threat of publishing the “gold hoarders”—names in the newspaper, and then under threat of fines and imprisonment, the United States of America, land of the free and home of the brave, ordered its citizens to turn over their own private property (the money in their pockets) to any Federal Reserve Bank. As far as I can tell, no one seems to know exactly who penned these proclamations and executive orders. But one thing was now clear. The government was no longer a government of the people, by the people, and for the people. Instead it was a government of the bankers, by the bankers, and for the bankers.
But there was still one more dastardly deed to be done.
Weight Watchers
On January 31, 1934, Roosevelt signed an executive proclamation effectively devaluing the dollar. Before this proclamation it took $20.67 to buy one troy ounce of gold. But now, since the dollar instantly had 40.09 percent less purchasing power, it took $35 to buy the same amount of gold. This also meant that, with regards to international trade, the government had just stolen 40.09 percent of the purchasing power of the entire currency supply of the people of the United States—all with the stroke of a pen. That is the power of fiat currency.
The worst part of this whole situation is that people who followed the rules and turned in their gold as decreed were the ones who suffered the most because those who illegally hung on to their gold realized a 69.33 percent profit due to the pressures Roosevelt’s policies applied on the dollar. Less than 22 percent of the gold in circulation was turned in, however, and it seems not a single person was arrested or prosecuted for hoarding.
But despite the efforts of the U.S. government, gold won in the end. Gold and the will of the public forced the government’s hand. By forbidding the U.S. population from laying claim to any of its own gold, and by devaluing the U.S. dollars, the United States was able to avert international runs on the dollar and was able to continue international trade under the gold standard. By declaring the claim checks on gold held by U.S. citizens null and void, and by requiring more claim checks from foreign central banks to purchase each unit of gold, there was now a far lower multiple of claim checks to gold, and the fractional reserve system was once again manageable.
Chart 2 shows the accounting that gold did of the U.S. dollar as a result. The gray line is U.S. base currency (dollars in circulation plus the paper dollars held at the Fed and in the banking system that are used as the base for fractional reserve credit dollars). The black line is the total value of the U.S. gold stock (the number of ounces the Treasury held times the price per ounce). By devaluing the dollar from one twentieth of an ounce of gold to one thirty-fifth of an ounce, the value of the gold held by the U.S. Treasury now exactly matched the value of the monetary base. This meant the dollar was once again fully backed by gold. It also meant that there was no reason for gold to continue being illegal since there was now enough gold to pay out against every paper dollar in existence, and the dollar could have been fully convertible into gold once again.
Chart 2. U.S. Monetary Base and Gold Reserves, 1918-1935
Source: St. Louis Federal Reserve Bank
Gold had once again revalued itself, not with the knockout blow and the death of the currency as in previous chapters, but this time by a technical knockout. To halt the implosion of the U.S. banking system and to regain the trust of our international trading partners, gold had forced the government to devalue the currency by stealing from its citizens, and it had once again accounted for all the excess currency the banking system had created. Gold was still the undefeated heavyweight champion of the world.
But all the pain and suffering could have been avoided. Gold and silver require discipline and constraint from banks and governments, and both banks and governments resent gold for it. Numerous factors contributed to the Great Depression, but there was only one root cause. Governments around the world, along with the Federal Reserve, foreign central banks, and commercial banks, all tried to cheat gold.