It is impossible to overstate the significance of the Franklin Roosevelt administration’s confiscation of gold and its nullification of gold clauses in contracts. It is one of the most sordid episodes in American history. To get an accurate sense of Roosevelt’s actions, it would not be inappropriate to compare what he did with the domestic economic policies of a later 20th-century ruler, Cuba’s socialist president, Fidel Castro.
On April 5, 1933, newly inaugurated President Roosevelt issued Executive Order 6102, which prohibited the “hoarding” of gold by U.S. citizens. Americans were required to turn their gold holdings over to the federal government at the prevailing price of $20.67 per ounce.
Pursuant to Roosevelt’s executive order, anyone caught violating the law was subject to a federal felony conviction, 10 years’ confinement in a federal penitentiary, and a $10,000 fine. Soon after the confiscation, U.S. officials announced that the government would sell its gold in international markets for $35 an ounce, thereby devaluing the dollar by almost 70 percent and immediately “earning” a potential profit of almost $15 an ounce on the gold it had confiscated.
Two months later, Congress enacted legislation nullifying gold clauses in both government and private contracts, thereby requiring creditors in such contracts to accept devalued paper money in payment of such contractual obligations, even though the contract itself stipulated payment tied to gold.
Reflect for a moment on the significance of what Roosevelt did. Gold coins and gold bullion were private property, just like a person’s automobile, clothing, home, and food. On the mere command of the president of the United States, federal authorities simply confiscated gold holdings that were the private property of the American people and made it a grave federal offense to own such property in the future.
The gold seizure was no different in principle from Fidel Castro’s seizure of homes and businesses more than 25 years later in Cuba, an episode that U.S. officials still rail against while praising what Roosevelt did. Sure, Roosevelt paid Americans more money for the gold he seized than Castro paid Cubans and American companies for the property he seized, but the principle was the same: the rulers in both Cuba and the United States could appropriate people’s property at their whim.
What was Roosevelt’s justification for the gold seizure? He said that it was necessary to battle the Great Depression. Now, think about that for a moment. How in the world could the seizure of people’s gold relieve the consequences of the Great Depression?
Let’s say that I have $10,000 in gold coin in my house. The Depression hits. Prices plummet. Unemployment soars. How is my delivering my gold to the federal government in return for depreciated paper money going to relieve anyone else’s distress?
No, the real reason for Roosevelt’s gold seizure was twofold: First, he seized people’s gold for the same reason that Castro later seized people’s homes and businesses — to enrich the coffers of the federal government. Second, but more important, he did it to prevent the American people from protecting themselves from the onslaught of ever-depreciating paper money that he planned to use to finance his ever-extravagant welfare-state programs.
Keep in mind that the Framers had implemented a gold standard so that the American people would be forever protected from the destructiveness of inflation. It was the gold standard — that is, the requirement that the federal government redeem all its paper notes and bills in gold — that had operated as a restraint on government’s ability to print ever-increasing amounts of paper money. The gold standard’s positive effect on capital markets was also one of the primary reasons that the United States rather quickly became one of the most prosperous nations in history.
With his seizure of gold, Franklin Roosevelt revolutionized the monetary system of the United States — and without even the semblance of a constitutional amendment. It is instructive to understand how he pulled this off in a legal sense.
Roosevelt’s rule by decree
In issuing his executive order, Roosevelt relied on the Trading with the Enemy Act, which had been passed in 1917 as part America’s war against Germany in World War I. Yes, World War I, the infamous war that was supposed to make the world safe for democracy! This “temporary emergency” law, which should have expired with the end of the war, had instead been left on the books through the 1930s. This is the law that Roosevelt relied on in issuing his executive order confiscating people’s gold.
There’s another significant aspect to the executive order — the issuance of the order itself. That is, Congress did not enact a law expressly authorizing the gold seizure. Instead it was accomplished simply through a decree issued by the president.
What the Congress had done is delegate its power to make certain laws to the president, essentially vesting Roosevelt with dictatorial powers. In March 1933, Congress amended the Trading with the Enemy Act to vest the president with the power to declare “national emergencies” and then issue necessary decrees to deal with such emergencies, including even setting criminal punishments.
It was a type of executive power — rule by decree — that had characterized dictatorships throughout history. Thus, it shouldn’t surprise anyone that one of Roosevelt’s biggest admirers was Adolf Hitler, who was dealing with the Depression in Germany in much the same way that Roosevelt was dealing with it in the United States. As John Toland pointed out in his biography Adolf Hitler,
Hitler had genuine admiration for the decisive manner in which the President had taken over the reins of government. “I have sympathy for Mr. Roosevelt,” he told a correspondent for the New York Times two months later, “because he marches straight toward his objectives over Congress, lobbies and bureaucracy.” Hitler went on to note that he was the sole leader in Europe who expressed “understanding of the methods and motives of President Roosevelt.”
Nullifying the gold clauses
Roosevelt and his Congress did not stop at seizing the gold of the American people and making it illegal for them to protect themselves from the ravages of inflation. They also nullified every clause in every contract, both government and private, that tied the financial obligation to gold.
How did these gold clauses operate? Let’s say a corporation issued a 100-year bond for $20, promising to pay 3 percent interest. Any lender would ask himself the obvious question, “Why wouldn’t this bond be worthless in a hundred years because of inflation?” To ensure that that wouldn’t happen, the note would contain a “gold clause” which stipulated that the company had to repay the bond, both principal and interest, in the same standard of gold that existed at the issuance of the note.
So let’s say, for simplicity’s sake, the $20 bond was issued in 1885, with $20 equal to a one-ounce gold coin. Let also say that because of inflation, when the bond became due 100 years later, it would take $100 in paper notes and bills to buy one ounce of gold. With the gold clause in the $20 bond, the debtor would have to pay the creditor either a one-ounce gold coin or $100 in paper notes (plus interest). With the gold clause nullified, all the debtor would have to pay would be $20 in paper money (plus interest), even though it would purchase only one-fifth of an ounce of gold at the time of repayment.
It’s not difficult to imagine the adverse effect that Roosevelt’s actions had on long-term capital markets.
The Supreme Court
The constitutionality of Roosevelt’s gold-confiscation decree was never addressed by the U.S. Supreme Court. There were few federal prosecutions, possibly because Roosevelt didn’t want to take the chance that the Supreme Court would declare his confiscation unconstitutional. Better to simply let the lambs who were meekly complying with the law continue filling the government’s coffers with gold and leave the ones who weren’t obeying the law alone.
The gold-clause cases did reach the Supreme Court. Unfortunately, a majority of the Court declared the nullification of the gold clauses in private contracts to be a constitutional exercise of the president’s power. While it declared the nullification of gold clauses in government notes to be unconstitutional, the Court also held, in a twisted form of logic, that the holders of government debt had suffered no damage because gold was then illegal to own anyway.
The Supreme Court’s opinions in the gold-clause cases are worth reading. (See Norman v. Baltimore & O.R. Co.). The most persuasive arguments, not surprisingly, were published by the dissenters — McReynolds, Sutherland, Van Devanter, and Butler, who often voted to declare much of Roosevelt’s New Deal unconstitutional:
Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both. No definite delegation of such a power exists; and we cannot believe the farseeing framers, who labored with hope of establishing justice and securing the blessings of liberty, intended that the expected government should have authority to annihilate its own obligations and destroy the very rights which they were endeavoring to protect. Not only is there no permission for such actions; they are inhibited. And no plenitude of words can conform them to our charter….
Under the challenged statutes it is said the United States have realized profits amounting to $2,800,000,000. But this assumes that gain may be generated by legislative fiat. To such counterfeit profits there would be no limit; with each new debasement of the dollar they would expand. Two billions might be ballooned indefinitely — to twenty, thirty, or what you will.
Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appalling.
What was the reaction of the American people to Roosevelt’s gold seizure? By the 1930s, most of the United States had been under systems of public (i.e., government) schooling for at least three decades. After years of such indoctrination, even though Americans had not yet become dependent on the federal government’s welfare dole that Roosevelt was initiating, most of them nevertheless now deferred to the wisdom of federal officials to deal with such complicated subjects as economics, depressions, and monetary policy.
Thus, when Roosevelt issued his decree, it was not met with massive protests and demonstrations but rather with the same degree of meekness and submission that many (but certainly not all) of the Cuban people would display when their homes and businesses were confiscated by Castro several decades later.
The additional value of the public-school indoctrination was that it effectively immunized federal officials from having to bear responsibility for the consequences of their own wrongful conduct. For when U.S. officials announced that the 1929 stock-market crash and the resulting Great Depression were all the fault of “free enterprise” and that such things as the gold seizure and the New Deal were necessary “to save free enterprise,” entire generations of public-schooled Americans had no idea that they were being misled. If Americans had known the truth — that the stock-market crash and Great Depression, along with all the financial devastation and unemployment — had actually been the fault of the Federal Reserve, there would have been considerable anger, perhaps even violent revolts, against the federal government.
In 1974 Congress made it legal to own gold once again, providing Americans the means to protect their wealth from the inflationary propensities of the federal government.
Is there a possibility, however, that federal officials could confiscate gold again and make it illegal to own it? You bet your bottom gold dollar there is. For one thing, the Trading with the Enemy Act is still on the books and is still being used as the basis for presidential decrees. For another, ever since the Roosevelt administration, federal officials, assisted by the Federal Reserve, have never desisted from issuing ever-growing quantities of paper money, an inflationary process that has ravaged people’s savings. Finally, federal officials hate gold because its rising price in the face of inflation provides a public and an easily readable market message to the citizenry that government officials are destroying the currency.
And make no mistake about it. If another U.S. president issues a gold-confiscation decree, it will be enforced violently and brutally by federal officials. In the climate of the perpetual “crisis” known as the “war on terrorism,” combined with an “economic emergency,” it is not difficult to imagine that federal officials would conduct warrantless raids on banks to search bank records and safety deposit boxes and prosecute dangerous “enemy combatants” and “terrorist sympathizers” who show they “hate their country” by violating the law against the ownership of gold.
The ultimate solution to this financial chaos, destruction, and morass lies in sound money. The ideal is a free market in money, as the Nobel Prize-winning economist Friedrich A. Hayek observed. The second-best solution is the type of gold standard established by the Framers, where gold and silver coin are the official money and where the federal government is required to redeem all bills and notes in such money.
Both solutions would necessarily entail the abolition of one of the most powerful engines of financial destruction in American history — the Federal Reserve System — as well as the repeal of all legal-tender laws.
This article originally appeared in the October 2006 edition of Freedom Daily.