The Gold Spot: Fdr’s Boiled Egg

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from THE FORGOTTEN MAN: A NEW HISTORY OF THE GREAT DEPRESSION by Amity Shlaes, Jonathan Cape, London, 2007

October 1933

They met in his bedroom at breakfast. Roosevelt sat up in his mahogany bed. He was usually finishing his soft-boiled egg. There was a plate of fruit at the bedside. There were cigarettes. Henry Morganthau from the Farm Board entered the room. Professor George Warren of Cornell came; he had lately been advising Roosevelt. So did Jesse Jones of the Reconstruction Finance Corporation. Together the men would talk about wheat prices, about what was going on in London, about, perhaps, what the farmers were doing.

Then, still from his bed, FDR would set the target price for gold for the United States – or even for the world. It didn’t matter what Montagu Norman at the Bank of England might say. FDR and Morganthau had nicknamed him “Old Pink Whiskers”. It did not matter what the Federal Reserve said. Over the course of the autumn, at the breakfast meetings, Roosevelt and his new advisers experimented alone. One day he would move the price up several cents; another, a few more.

One morning, FDR told his group he was thinking of raising the gold price by twenty-one cents. Why that figure? his entourage asked. “It’s a lucky number,” Roosevelt said, “because it’s three times seven.” As Morganthau later wrote, “If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

By the time of his inauguration back on March 4, everyone knew that Roosevelt would experiment with the economy. But no one knew to what extent. Now, in his first year in office, Roosevelt was showing them.

Comment: In the Spring of 1922 a conference was convened at Genoa, Italy to find out ways of returning to the gold standard; this was the first attempt to do so since the Great War of 1914-1918. This conference gave birth to the “gold exchange standard”, which in truth was not really a gold standard because as James Rickards explains: “Participating countries agreed that central bank reserves could be held not only in gold but in the currencies of other nations; the word ‘exchange’ in ‘gold exchange standard’ simply meant that certain foreign exchange balances would be treated like gold for reserve purposes.” The consequence of this was that the burden of gold standard would be put upon the shoulders of those nations with the largest gold reserves, which in practice, of course, meant overwhelmingly the United States. The gold price was to be maintained at US$20.67 per ounce, and other nations held dollars as proxies for gold.

One problem with this attempt to establish the gold standard was the desire to return it to pre-War prices, which of course had been entirely set by the markets and, without government intervention or multilateral international committees, or central bank involvement, had been remarkably stable in the period of the classical standard 1870-1914.

Gold (and silver) coins and bullion had ceased to circulate with their accustomed frequency since the beginning of the war, and exchanges of paper for gold were subject to hefty minimum quantities, with the consequence that only the central banks and the commercial banks, with a few of the ultra-wealthy would be using gold bullion. Other notes would be used by everybody else, redeemable through government promises to maintain parity with gold. While this in theory meant that paper was de facto a promissory note with redeemable properties, effectively the gold itself vanished into the vaults of central banks.

And of course, central banks were now involved in gold in ways that they neither had been, nor had there been any necessary that they should have been, under the classical gold standard.

The stage was set. When FDR conceived of the idea that the dollar should be devalued against gold  almost as soon as he assumed the Presidency, “hoarding” of gold was banned. The Executive Order was issued on April 5, 1933; fifteen days later the export of gold from the U.S. was forbidden; nine days thereafter American gold mines were compelled to sell their gold only to the Treasury and at prices determined by the “customer”, the Treasury, which means that American mines were nationalized in all but name.

As of October 1933, FDR began to buy gold in the open market. He had already confiscated over 500 metric tons of the stuff from private hands, at the official price, giving America the largest “hoard” of gold in the world, and FDR’s market activities were, of course, designed to push the price up as a consequence of this monopoly.

So there we have it: a strange path indeed from the attempt to re-establish the, or at least, a gold standard, to the U.S. being given the responsibility of maintaining the price, through the Depression and the decision to devalue the dollar, the theft of private citizens’ gold giving the President an edge in the market place, thus ending up with Roosevelt sitting in bed with a boiled egg, determining the price of gold on a whimsy: monetary policy had become a bull session!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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THE GOLD SPOT: FDR’S BOILED EGG was first posted on May 21, 2013 at 1:02 pm.
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