The View From 1776

All governments lust for taxpayers’ money.  The ability to direct the expenditure of large sums of money confers great power upon political leaders.  But the spending requirements that President Franklin Roosevelt had in mind upon taking office in 1933 were of extraordinary dimensions.  Inflating the currency, in socialist theory, was a way to create more money for that end.

In the 1920s, after the disillusionment of World War I, socialism enjoyed great vogue in the United States.  Social Gospel ministers extolled it, intellectuals lauded it, and popular magazines ran many favorable articles about it.  In that period, the general public had no awareness of the horrors then being effected in the name of socialism in the USSR, and Hitler’s National Socialism was still in the future.

It was against that background that Franklin Roosevelt campaigned for the presidency in 1932 with the promise to give state-planning a try.  Described in that way, it seemed to be no more than a proposal to coordinate government spending more effectively.

FDR’s ideas, however, went much further than that, as demonstrated by the barrage of government take-over programs enacted immediately after his inauguration.  His “brain trusters,” socialistic Ivy League professors, were proposing to nationalize the private banks and agriculture, and to regulate industrial production, prices, and wages on the model of Mussolini’s Fascist state-corporatism.

The tenor of the times was flippantly described in The New Dealers, an admiring book written in 1934, the second year of the New Deal.  The author wrote:

To-day, as the New Deal moves slowly towards the nationalization of the banking system through the social control of credit policies, there is lamentation in the tents of ... the Wall Street group… For the monetary controversies of the first year of the Roosevelt Administration can be understood only an the assumption that there is a profound struggle between the Government and the bankers for the control of the American credit system.....

The President knew that financing the imposition of socialism and collectivization of power in Washington would require a huge expansion of Federal spending power.  Along with that, his “brain trusters” proposed to inflate prices with the theoretical intention of giving farmers and workers more spending power.  Inflation, they assumed, would enable easier debt repayment, force higher wages, and reduce unemployment.  In practice the results were quite disappointing.

Throughout the history of the world, the one universal measure of value has been gold.  In times of war and economic weakness, people owning gold have always been able to buy what they needed in exchange for gold.  Paper currencies, like the present-day U.S. dollar, have no intrinsic value.  Their worth changes daily with inflation and foreign exchange dealers’ transactions.

OPEC, for example, came into existence in large measure because oil-producing countries were being paid fixed prices in dollars, but the exchange value of the dollar was declining rapidly.  OPEC pushed oil prices from around $5 to more than $90 per barrel, adjusted for today’s inflation, in the 1970s.

To the consternation of everyone outside the New Deal government cohort, President Roosevelt almost immediately abandoned the gold standard in order deliberately to produce overnight inflation.

In April, 1933, the President issued an executive order that abrogated gold payment clauses in government and private contracts and made it illegal for private citizens to keep their gold coins or to own gold for any purpose other than industrial applications.  He completed the destruction of the dollar by arbitrarily reducing the dollar’s gold content.

Before FDR’s executive orders, Federal Reserve currency could be exchanged at the Federal Reserve banks for gold at a price of $20.67 per ounce.  President Roosevelt ordered that the dollar be devalued almost 41% by raising the price per ounce of gold to $35.00.  At the $20.67 gold ratio, one dollar would buy 0.048 ounces of gold.  At the $35 ratio, one dollar would buy only 0.0286 ounces of gold. 

The inflation set in motion by FDR’s actions has continued without cease.  The London gold price was $664.95 on February 16, 2007, a de facto 96.9% devaluation of the dollar vs the price before President Roosevelt began the devaluation process.  The Consumer Price Index is now approximately 905% higher than in 1932.

Before FDR’s inauguration, gold coins minted by the Treasury were in common use, Federal Reserve paper currency was exchangeable for gold, and U. S. Treasury debt gave holders the option to take payment in currency or gold, at a fixed rate.  Moreover, most corporate debt similarly provided for payment in currency or gold.  This gave the dollar a fixed value and made it one of the world’s strongest currencies, “as good as gold.”

In effect, President Roosevelt confiscated 40% of assets in the hands of individuals, corporations, and banks, without offering any compensation to them.

Needless to say, the President’s action was profoundly unsettling to private individuals, corporations, and to the international banking community, particularly to central banks which held dollars as part of their currency reserves.

Senator Carter Glass was one of the most financially knowledgeable and most highly respected figures in Washington (and a Democrat).  He had sponsored the legislation that created the Federal Reserve in 1913 and later served as Secretary of the Treasury.  Outraged at the President’s actions in 1933, he said, 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 is breaking its promise to redeem its paper money in gold coin of the present standard of value.  It’s dishonor, sir.

Oklahoma’s Senator Thomas P. Gore put it more bluntly: Why, that’s just plain stealing, isn’t it, Mr. President? At the next election, FDR financed a rival candidate in the Democratic primary and defeated Senator Gore.

To make FDR’s perfidy even clearer, he had pledged to support the Democratic Party’s 1932 presidential campaign platform, which explicitly promised to uphold the existing gold standard for maintenance of a sound currency.

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