FDR | June 5, 1933 — FDR & Woodin Nullify Gold Contracts

Instant Relic, Gold-Backed Currency.

June 5, 2017 — On this day in 1933, the United States took the third of several steps in going off the gold standard.

Under the gold standard, contracts guaranteed payment in a certain quality of gold.  Certain greenbacks were designated as "gold certificates" that could be exchanged for gold (others were call "silver certificates," allowing an expansion of the reserves backing currency to include silver).

Going off the gold standard allowed for the expansion of the money supply, which had been previously restricted by the requirement that currency be backed by gold reserves.  Christina Romer at the NBER concluded in 1991 that the main reason that the United States eventually recovered from the Depression is that the money supply was expanded by gold inflows in the 1930s and this stimulated investment.

Origin of the Problems.  In some ways policies of both the Federal Reserve and the Treasury were at the heart of the cause of the Great Depression. For one thing, the Treasury Secretary was also the ex officio Chairman of the Federal Reserve Board in Washington. The person who best understood how the Fed's actions were affecting the financial markets was Benjamin Strong, President of the Federal Reserve Bank of New York. The Fed began raising its the target short-term interest rate, the Federal Funds rate, in the spring of 1928 because it felt the stock market had become frothy and inflation was taking its toll. It kept increasing interest rates, even though the economy turned down in August 1929. The Fed’s action helped generate the stock market crash in October 1929.

After the Crash of 1929, speculators began trading their dollars for gold, creating a serious drain on reserves in late 1931. Dollar-holders lost confidence in the dollar, which had two consequences

• Banks ran out of gold to exchange for gold certificates and their cash reserves dwindled. Then they ran out of cash completely as depositors lined up to withdraw all their deposits.
• The Treasury worried about their loss of gold reserves as overseas claims for gold to settle accounts.

To preserve the value of the dollar and stop the outflow of gold, the Fed raised interest rates again. But that further restricted the availability of money for businesses. More bank closures followed and the Fed still did not try to calm the markets by increasing liquidity.

Investors withdrew their deposits from banks and banks failed, creating panic. (The scene is well recreated at the small town level in It's a Wonderful Life (Frank Capra, 1946). The Fed did not respond to the panic by lending money to the banks. More people withdrew their deposits and took their cash home. The money supply fell 30 percent. When FDR was inaugurated many states had declared a bank holiday and their banks were closed until further notice.

1.  No Bank Payouts of Gold. Part of the problem was that the United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I. When FDR was inaugurated on March 4, 1933, he and his Treasury Secretary, Will Woodin declared a national bank holiday. Woodin personally supervised round-the-clock printing of $2 billion in greenbacks by the Bureau of Engraving and Printing, filming of the presses at work late at night and the dispatch of vans filled with currency for banks, and distribution of the film clips to cinemas around the country to be screened along with the latest movie offerings. Advisers had previously suggested issuing "government scrip" and Woodin scratched his head, noting the ban on banks' redeeming gold certificates in gold coin, and advised FDR: "What are greenbacks if not government scrip?"

From the first day of his presidency, FDR embargoed payment in gold.

At the same time as the bank panic spread within the United States, reaching its apex just as FDR was sworn in, foreign creditors were cashing in their claims on the U.S. Treasury and demanding gold, as was their right under the gold standard regime. Gold was flowing out of the United States at an alarming rate. So along with the bank holiday, FDR and Woodin prohibited banks from paying out gold or exporting it. This was a suspension of gold payments similar to what occurred in the Great War (World War I).

2.  Ban on Private Holding of Gold. On April 5, 1933, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. Everyone had to turn in all gold coin, gold bullion and gold certificates they owned to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates.

Will Woodin, a world-class coin collector, co-author of the definitive book on American pattern coins (i.e., unique American coins that were samples of a new design), obtained a valuable specific exemption from the new law for coin collectors. They were allowed to keep their collectible coins.

3. Nullification of Contracts Defined in Gold. Different from WWI, on June 5, 1933, Congress made the exit from the gold standard permanent, and in the absence of a war. It enacted a joint Senate-House resolution nullifying the right of creditors to demand payment in gold. This applied to both public and private contracts.

The impact of this was possibly clear to Wall Street experts right away, and would become clear the following year, when the government price of gold was increased to $35 per ounce. This effectively increasing the gold on the Federal Reserve’s balance sheets by 69 percent, and reduced the value of all contracts defined in gold. This increase in assets allowed the Federal Reserve to further expand the money supply, but it reduced the wealth of contract-holders by 69 percent.

The theory behind this action was not yet developed, as it would be three years before John Maynard Keynes would publish his General Theory. But FDR either learned from the Bank of England, which has already gone off the gold standard in 1931 in response to the Crash of 1929, or he understood instinctively that greenbacks had more credibility if the issuer had a lot of gold reserves, and this allowed the Treasury to print more greenbacks and the Federal Reserve to put them into circulation, expanding the most basic definition of the money supply.

Treasury Secretary Will Woodin, being a life-long Presbyterian and Republican, disagreed with FDR on this move. He felt bound to honor contractual commitments to pay back in gold. He had campaigned on the hard-money platform in 1998 when he ran for Congress in his home district around Berwick, Pennsylvania. However, his loyalty to FDR made him swallow his doubts and support FDR in his action.

But it was FDR-Keynes theory, already implemented by the Bank of England, that expanding the money supply and making credit easier would spur investment and economic growth. The Great Depression created an unemployment rate of 25 percent, and Britain's going off the gold standard two years before justified an equivalent action in the United States, an action that Herbert Hoover could not take because of his own commitment to hard money.

Aftermath. The American economy turned around as soon as FDR came into power. The Depression formally ended in the quarter he was inaugurated, although it would be years before the economy recovered to the pace it was running at in the steaming 1920s.

The U.S. Treasury held the $35 per ounce price until August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. Since there was no longer any need to back the dollar currency with gold, President Gerald Ford in 1974 signed legislation that permitted Americans again to own gold bullion as an investment independent of jewelry, dental or industrial uses.

Related Posts: Are Fed Models Out of Sync? . Mnuchin Testimony, May 18, 2017 . Glass-Steagall . FDR's First Fireside Chat

TRUMP | The Anti-FDR

Different messages: FDR and Trump.

Mar 12, 2017—Today is the anniversary of Franklin Delano Roosevelt's first radio Fireside Chat, on Mar 12, 1933. 

FDR's radio broadcasts were as revolutionary then as President Trump's Tweets are today. But their messages are very different.

FDR in his first Fireside Chat took on the banking system and promised to calm the markets and make them work for ordinary Americans. Obama in 2009 promised the same kind of policies, as incorporated in The Credit Cardholders Bill of Rights passed in early 2009 and the following year the Dodd-Frank Act, which addressed the worst abuses that had led to the meltdown of 2008.

President Trump is now seeking to roll back Dodd-Frank and is calling for more of the deregulation of financial markets that got the country in trouble in 1929-33 and in 2008-2009. In so doing Trump is pushing the opposite way from FDR. 

In his Rendezvous-with-Destiny speech before the 1936 Democratic National Convention, Philadelphia, Pennsylvania, June 27, 1936, FDR described the job of government in reining in privileged financiers:

In 1776 we sought freedom from the tyranny of a political autocracy — from the eighteenth-century royalists who held special privileges from the crown. It was to perpetuate their privilege that they governed without the consent of the governed; that they denied the right of free assembly and free speech; that they restricted the worship of God; that they put the average man's property and the average man's life in pawn to the mercenaries of dynastic power; that they regimented the people.

And so it was to win freedom from the tyranny of political autocracy that the American Revolution was fought. That victory gave the business of governing into the hands of the average man, who won the right with his neighbors to make and order his own destiny through his own government. Political tyranny was wiped out at Philadelphia on July 4, 1776.

Since that struggle, however, man's inventive genius released new forces in our land which reordered the lives of our people. The age of machinery, of railroads; of steam and electricity; the telegraph and the radio; mass production, mass distribution — all of these combined to bring forward a new civilization and with it a new problem for those who sought to remain free.

For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital — all undreamed of by the Fathers — the whole structure of modern life was impressed into this royal service.

There was no place among this royalty for our many thousands of small-businessmen and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things.

It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.

The hours men and women worked, the wages they received, the conditions of their labor - these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small-businessmen, the investments set aside for old age - other people's money — these were tools which the new economic royalty used to dig itself in.

Those who tilled the soil no longer reaped the rewards which were their right. The small measure of their gains was decreed by men in distant cities.

Throughout the nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

An old English judge once said: "Necessitous men are not free men." Liberty requires opportunity to make a living — a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor - other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it. Under that mandate it is being ended.

The royalists of the economic order have conceded that political freedom was the business of the government, but they have maintained that economic slavery was nobody's business. They granted that the government could protect the citizen in his right to vote, but they denied that the government could do anything to protect the citizen in his right to work and his right to live.

Today we stand committed to the proposition that freedom is no half-and-half affair. If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the market place.

These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike.

The brave and clear platform adopted by this convention, to which I heartily subscribe, sets forth that government in a modern civilization has certain inescapable obligations to its citizens, among which are protection of the family and the home, the establishment of a democracy of opportunity, and aid to those overtaken by disaster.

But the resolute enemy within our gates is ever ready to beat down our words unless in greater courage we will fight for them.

For more than three years we have fought for them. This convention, in every word and deed, has pledged that the fight will go on.

The defeats and victories of these years have given to us as a people a new understanding of our government and of ourselves. Never since the early days of the New England town meeting have the affairs of government been so widely discussed and so clearly appreciated. It has been brought home to us that the only effective guide for the safety of this most worldly of worlds, the greatest guide of all, is moral principle.

We do not see faith, hope, and charity as unattainable ideals, but we use them as stout supports of a nation fighting the fight for freedom in a modern civilization.

Faith — in the soundness of democracy in the midst of dictatorships.

Hope — renewed because we know so well the progress we have made.

Charity — in the true spirit of that grand old word. For charity literally translated from the original means love, the love that understands, that does not merely share the wealth of the giver, but in true sympathy and wisdom helps men to help themselves.

We seek not merely to make government a mechanical implement, but to give it the vibrant personal character that is the very embodiment of human charity.

We are poor indeed if this nation cannot afford to lift from every recess of American life the dread fear of the unemployed that they are not needed in the world. We cannot afford to accumulate a deficit in the books of human fortitude.

In the place of the palace of privilege we seek to build a temple out of faith and hope and charity.

It is a sobering thing, my friends, to be a servant of this great cause. We try in our daily work to remember that the cause belongs not to us, but to the people. The standard is not in the hands of you and me alone. It is carried by America. We seek daily to profit from experience, to learn to do better as our task proceeds.

Governments can err, presidents do make mistakes, but the immortal Dante tells us that Divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted on different scales.

Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.

There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny.

In this world of ours in other lands, there are some people, who, in times past, have lived and fought for freedom, and seem to have grown too weary to carry on the fight. They have sold their heritage of freedom for the illusion of a living. They have yielded their democracy.

I believe in my heart that only our success can stir their ancient hope. They begin to know that here in America we are waging a great and successful war. It is not alone a war against want and destitution and economic demoralization. It is more than that; it is a war for the survival of democracy. We are fighting to save a great and precious form of government for ourselves and for the world.

FDR | March 4–Inauguration

The Brains Trust with President-elect FDR.
L to R: Cary Grayson, Norman Davies, Raymond
Moley, Redford Tugwell, Will Woodin, FDR.

On this day, March 4, 1933, at a climax of the Great Depression, Franklin Delano Roosevelt was inaugurated as the 32nd U.S. president.

For his rained-on Inaugural Address outside the east wing of the U.S. Capitol, FDR had to ascend the steps to the podium to take the oath of office.

To do this, an elaborate series of wheelchair-accessible ramps was constructed and hidden. FDR walked the last few yards leaning heavily on the arm of his son James.

FDR then outlined his New Deal–an expansion of the federal government to create jobs and improve the quality of life for Americans. He told Americans that “the only thing we have to fear is fear itself.” His Inaugural March, composed for the occasion by FDR's Treasury Secretary, William H. Woodin, was played in the rain. Despite the downpour, FDR delivered a speech that conveyed an upbeat, can-do spirit.

The President then had to face serious the bank panics and gold outflows. He turned that job over entirely to Treasury Secretary Woodin so that he could focus on the message that he wanted to deliver to his country.

Woodin immediately focused on printing more bills, getting them to the banks to solve the liquidity problem, publicizing the generation of liquidity, opening solvent ("sound") banks, and closing down banks that were insolvent. Meanwhile, Woodin worked on the passage of the Banking Act of 1933—the Glass-Steagall Act—and the Securities Exchange Act of 1933. The turnaround in the financial markets was almost immediate and endured.

FDR was born in 1982 to an old Dutch family in Hyde Park, NY, the fifth cousin of Theodore (Teddy) Roosevelt, who served two terms as the 26th U.S. president in 1901-1909. In 1905, FDR, then a student at Columbia University Law School, married Anna Eleanor Roosevelt, Teddy Roosevelt's niece. After three years practicing law, FDR followed his cousin Teddy's lead and campaigned for, and won, election to the NY State Senate in 1910 as a Democrat. He soon earned a reputation as a reform-oriented charismatic politician.

After supporting progressive N.J. Governor Woodrow Wilson in his successful 1912 bid for the Democratic presidential nomination, FDR was appointed assistant secretary of the U.S. Navy, a post that Teddy Roosevelt once held. In 1920, FDR won the Democratic nomination for vice president on a ticket with James Cox. The Democrats to Republicans Warren Harding and Calvin Coolidge, and FDR returned to his law practice and some  business ventures.

In 1921, FDR was stricken with polio and became nearly totally paralyzed. His wife, Eleanor, kept the Roosevelt name alive in Democratic circles. In 1924, partly recovered (although he could never again walk unaided), FDR returned to politics, nominating NY Governor Alfred E. Smith for the presidency with a rousing speech at the Democratic National Convention.

In 1928, he again nominated Smith, and the outgoing New York governor urged Roosevelt to run for Governor. Roosevelt campaigned across the state by automobile and was elected even as the state voted in the presidential election against their favorite son and for Republican Herbert Hoover.

As governor, Roosevelt worked for tax relief for farmers and in 1930 won a resounding electoral victory just as the economic recession brought on by the October 1929 stock market crash brought on the Great Depression. Governor Roosevelt mobilized the state government to play an active role in providing relief and spurring economic recovery. His aggressive and effective approach to the economic crisis won him the Democratic presidential nomination in 1932.

The contrast between FDR's activist response in NY State to the Depression and President Hoover's laissez-faire inaction nationwide couldn't have been greater, and FDR had no trouble defeating Hoover in 1932. Many blamed Hoover for the Depression, and FDR carried all but six states. During the next four months before the inauguration, bank panics increased, the economy continued to decline. When Roosevelt took office on March 4, 1933, most banks were closed, farms were suffering, 13 million workers were unemployed, and industrial production stood at just over half its 1929 level.

FDR's Treasury Secretary, Will Woodin, was a Republican industrialist who had once run for Congress on a hard-money program. He was a fan of Teddy Roosevelt and helped FDR with his Warm Springs Foundation and with fundraising for his runs for Governor and President.

Woodin was a key player during the financial reforms of the first 100 days of FDR's presidency. Aided by a Democratic Congress, Roosevelt took prompt, decisive action, and most of his New Deal proposals were approved during these 100 days. Most important for the financial sector were the Banking Act or Glass-Steagall Act of 1933, a trade of tough bank regulation for a limited deposit insurance program sought by the banks, and the Securities Exchange Act of 1933. Woodin as Treasury Secretary was deeply involved in the passage of these laws.

Job-creating programs also passed in the first 100 days included the Agricultural Adjustment Act, National Industrial Recovery Act, and the Public Works Administration and Tennessee Valley Authority.

Although many in the business community stubbornly criticized FDR's regulatory and job-creating programs—both FDR and Secretary Woodin were called traitors to their class—the programs unquestionably improved America’s economic climate and FDR was reelected handily three more times. Woodin became sick from the long hours and stress of his job, and died in May 1934; FDR called him a "martyr to public service."

CHINA | Its Move Today vs. FDR's in 1933-34

FDR's moves to stabilize financial markets and devalue the
dollar paid off.

China's devaluing the renminbi (aka the yuan) appears to be based on the idea that by devaluing in stages, the rest of the world is less likely to care.

Actually, no.

It seems that the Chinese government had in mind loosening the effective peg of the renminbi to the dollar, allowing the currency to fluctuate within a wider band against the dollar.

But markets react fast. Once people in the marketplace think they understand what is happening, they worry about losing money every minute they delay in acting on the knowledge.

FDR and his first Treasury Secretary, Will Woodin, had the brains first to stabilize the financial markets in March-April 1933, and then to buy all private gold in May 1933. They were preparing quietly for a devaluation in order to:

• reduce the foreign (gold) equivalent of U.S. public and private debts
• encourage exports and
• discourage imports.

Gold played a role vis-a-vis the dollar then that the dollar today plays vis-a-vis the renminbi.

FDR in 1933 forced the sale to the government of private gold (other than gold coins in the hands of collectors). Then, at the beginning of 1934, FDR devalued the dollar against gold in one fell swoop, from $20.67 for an ounce of gold, where it had been for a century (except for the Civil War), to $35 an ounce.

His action was meant to be a one-time event, and so it turned out to be.

An example of what appears to be the Chinese program is conveyed by an old Irish joke. A Kerry man in the Dail urges his colleagues to change all the road signs so that vehicles drive on the right, as they do in Continental Europe. He figured that the cost could be spread out over several years. The first year they would move the trucks over to the right lane. Then they would move the buses, and the third year they would move over the private cars.

As Lady Macbeth says in Act 1, Scene 7: "If it were done when 'tis done, then 'twere well / It were done quickly." FDR understood that. The Chinese government, if we understand their moves aright,  does not.

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