When it comes to the question of money, mankind made its preference abundantly clear long ago. For millennia it has looked to the precious metals — above all, gold — as the ideal medium of exchange. So central has this standard been to any thinking about value that concepts like the Golden Age, the Golden Mean, and the Golden Rule were woven into the cultural fabric of civilized peoples. In modern history, gold was esteemed by the productive classes of society, the artisans and independent merchants and business- people, who trusted it as a shield against the inflationist machinations of state-connected financiers. As the economist Benjamin M. Anderson wrote in Economics and the Public Interest:
Gold needs no endorsement. It can be tested with scales and with acids. No act of faith is called for when gold is used in payments, and no compulsion is required. Gold is an unimaginative taskmaster. It demands that men and governments and central banks be honest. It demands that they keep their promises on demand or at maturity. Gold was old-fashioned and it was honest.
America’s — and the Western world’s — vast economic growth and rising prosperity in the late 19th and early 20th centuries were undergirded by the international gold standard. By it, each of the national currencies, the dollar, the pound, the franc, and so on, was defined as a specific quantity of gold.
To be sure, there had been occasional lapses. In 1862, in order to finance its war against Southern independence through inflation, the Lincoln administration went off the gold standard. The period of the “greenbacks,” of unbacked paper money, lasted until 1879, with the value of the dollar in constant turmoil.
But despite the clamor of inflationist lobbies, clear-sighted leaders saw to it that the greenbacks experience was not repeated. In 1895, when U.S. gold stocks reached a dangerously low point, Grover Cleveland, the last decent American president, nonetheless defended the dollar. The Treasury continued to pay out gold on demand, and the crisis was weathered. Even during World War I, the United States did not go off the gold standard, when all the other major belligerents abandoned it, again, in order to finance the war through inflation.
Gold an obstacle in FDR’s path
However, even before Roosevelt’s inauguration, rumors that he intended to forsake the traditional standard intensified the run on the banks and the hoarding of gold. Knowledgeable men rushed to gold’s defense. In January 1933, a letter was sent to the president-elect, urging him not only to lower tariff barriers to revive international trade, but to maintain the gold standard “unflinchingly.” The letter was signed by a number of prominent “traditional” economists, headed by the American “Austrian,” Frank A. Fetter, of Princeton.
But the new president understood that the old standard was a major stumbling block to his plans. On April 5, 1933, Roosevelt issued a proclamation declaring the possession of gold coins, bullion, or certificates unlawful and subject to criminal penalties. It was the first step in dismantling the monetary system that had served the nation so well. A few “reactionaries” protested. Sen. Carter Glass (D-Va.) declared, simply: “It’s a dishonor, sir.” He was right. The 1932 Democratic Party platform had pledged to defend the gold standard, as had Roosevelt himself in the campaign. Federal Reserve notes and U.S. government bonds stated on their face that they were redeemable in gold. None of these solemn promises meant anything to Franklin.
In May, the Thomas Amendment to the Agricultural Adjustment Act (AAA) was passed, giving the president the authority to increase the money supply by $3 billion in unbacked bills and to reduce the value of the gold dollar by up to half. In June, a supine Congress delivered to FDR the joint resolution he had requested, forbidding private debtors to fulfill their obligations in gold and relieving the government of its own sworn obligations. One of the last holdouts was another “reactionary,” Thomas P. Gore, Democrat of Oklahoma, who, though blind, was one of the most learned men in the U.S. Senate. When FDR asked him what he thought of the new policy, Gore replied: “Well, that’s just plain stealing, isn’t it, Mr. President.”
Roosevelt never forgave Gore, who committed the added sin, from the president’s standpoint, of being a confirmed “isolationist” in foreign affairs. In 1936, FDR made sure that Gore was defeated in the Democratic primary. But many of the old gentleman’s ideas were carried on, late into the 20th century, by his grandson, Gore Vidal, caustic critic of the “banksters” and American global imperialism.
Finally, in January 1934, came the Gold Reserve Act. All the gold held by the Federal Reserve banks was seized by the U.S. Treasury. In return, the banks received something called “gold certificates.” These could not be exchanged for actual gold, but functioned merely as receipts for the gold stolen. By executive decree, Roosevelt reduced the value of the gold dollar — for purposes of foreign exchange transactions — from $20 an ounce to $35, a devaluation of 40 percent.
The upshot of FDR’s gold confiscation was described by Murray Rothbard, in For a New Liberty:
[Before] 1933, there was an important shackle upon the Fed’s ability to inflate and expand the money supply: Federal Reserve Notes themselves were payable in the equivalent weight of gold. …The government cannot create new gold at will. But Federal Reserve Notes can be issued at will, at virtually zero cost in resources. In 1933, the United States government removed the gold restraint on its inflationary potential by shifting to fiat money: to making the paper dollar itself the standard of money, with government the monopoly supplier of dollars.
The age of unending inflation, sometimes slow, sometimes faster, had arrived. Still, gold continued to be used to settle international accounts, and the United States guaranteed that dollars could be exchanged for gold by foreign governments and central banks. This last remaining pledge was finally broken in 1971. In response to the deteriorating position of the U.S. dollar because of galloping domestic inflation, Richard Nixon — another arch-deceiver, though not, of course, in Roosevelt’s class — “closed the gold window,” making the dollar irredeemable in gold under any and all circumstances.
The “first New Deal”
Meanwhile, the plans and programs that constituted the “first New Deal” proliferated. Wide- ranging acts were passed and agencies set up in FDR’s first “Hundred Days,” as they were called, after Napoleon Bonaparte’s reconquest of France following his escape from Elba.
In May, the Agricultural Adjustment Act became law. Among other provisions, it established acreage and production controls, paying farmers not to grow or raise wheat, corn, cotton, hogs, etc., and to plow under crops and destroy livestock. The aim was explicitly to raise the prices of all farm commodities. The preposterous economic “theory” behind this was that if prices and wages were jacked up, that would increase “purchasing power,” which was the way to lift the country out of the Depression. In the two years of the AAA’s existence, before the U.S. Supreme Court declared it to be unconstitutional, it distributed some $700 million to farmers to restrict production and destroy their crops, in an attempt to make food (and textiles) dearer for consumers. And that at a time when millions were going hungry.
In June, the most ambitious program of the “Hundred Days” came into being. It was the National Industrial Recovery Act (NIRA), setting up the National Recovery Administration (NRA). Its aim was nothing less than total control of American industry, again in order to raise prices and wages and hence “purchasing power.”
For years, many big businessmen had been looking for ways to restrict competition and cartelize their industries with the help of government. High tariffs had been a major part of their program. Their crowning achievement in this area was the Smoot- Hawley Tariff Act of 1930, passed by a coalition of big business with farmers’ groups and the labor unions, and signed into law by President Hoover. The Act promulgated the highest tariff rates in American history. Its impact on international trade, already reeling from the Depression, was devastating.
The figure of Benito Mussolini, Italian dictator and founder of fascism, also exercised a strange attraction. It is nearly impossible now, more than half a century after his death, to realize the effect Mussolini had on many of his contemporaries in the 1920s and early 1930s. Today he is seen as part buffoon and part the sinister junior partner of Adolf Hitler. But before he involved himself with the conquest of Ethiopia and, more seriously, with Nazi Germany, Mussolini was widely admired by many businessmen, intellectuals, and politicians (Churchill was particularly fervent in his praises). By 1933, he had instituted the “Third Way” between free enterprise and communism, a system he called “the Corporate State.” He had replaced cutthroat and destructive competition, he claimed, by cooperation and “organization.” The whole Italian economy was divided into “corporations,” for steel, textiles, chemicals, etc., each corporation governed by a board representing capital, labor, and the government, which was ultimately in charge. The boards planned, regulated, and monitored every aspect of the industry’s operation. For his Corporate State idea, Mussolini was hailed as a visionary leader by many who, for their various reasons, feared competitive capitalism.
Fascism comes to America
Under the NRA, the president had the power to establish “codes of fair competition” for every industry in the country. The codes soon came to cover 95 percent of the industrial workers in the country. A retired Army general, Hugh Johnson, was put in charge. The Blue Eagle, which became the symbol of the NRA, displayed by every “cooperating” firm and organization, was the brainstorm of Bernard Baruch, the head of the War Industries Board during the First World War and a former business associate of Johnson’s. General Johnson’s philosophy of administration is illustrated by his heartfelt cry: “May Almighty God have mercy on anyone who attempts to trifle with that bird!”
The NRA won the hearty support of big business. The U.S. Chamber of Commerce stated:
A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today. We have left the period of extreme individualism.
But, after all, why wouldn’t established businesses enthuse over a plan that permitted them to curtail production, fix prices, and suppress competition from “chiseling” rivals, while wrapping themselves in the mantle of superpatriotism? Union leaders quickly saw the potential benefits for their own monopolistic aims. The promotion of collective bargaining, minimum wages, and a 30-hour week were added to the program. Not coincidentally, there was a great upsurge in unemployment in the South, especially among blacks. One economist estimated that an additional 500,000 black workers were unemployed because of the minimum wage.
But hundreds of industry “codes,” thousands of new bureaucrats, and a blizzard of confusing and conflicting regulations could not prevent people from engaging in free exchanges whenever they could evade the talons of “that bird.” Within a year, a commission appointed by Roosevelt to look into the matter blasted the NRA as an oppressive fraud. In 1935, the U.S. Supreme Court declared the NIRA unconstitutional, as a surrender of Congressional law-making powers to the president, and the NRA ceased to exist. It was the most colossal of Roosevelt’s failed attempts to cure the Depression. And still the New Deal rolled on.