This story is brilliantly told in a new scholarly book by Sebastian Edwards, the Henry Ford II Professor of International Economics at the University of California at Los Angeles. Edward’s book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold, has just been released by the Princeton University Press.
FDR entered the White House on March 4, 1933, and in less than two months (April 19, 1933), he announced that he was taking the U.S. off the gold standard. FDR asserted that he was doing this to end the Great Depression and to raise farm prices. As FDR put it: “the whole problem before us is to raise commodity prices.”
FDR gave Congress license, and Congress used it to abrogate the Gold Clause via a joint resolution in June of 1933. Before that, a gold clause was included in most private and public bond covenants. These covenants insured that bond holders would receive interest and principle payments in dollars that contained as much gold as the dollar had contained when the bonds were issued.
The U.S. government manipulated the price of gold upward until President Roosevelt redefined the dollar in gold terms under the Gold Reserve Act of January 1934. Overnight, the dollar became 41% lighter. This left gold‐clause bond holders out to dry.
Because of the Congress’ abrogation of the gold clause, bondholders could only receive the nominal dollar amounts of interest and principle, as stated on their bonds. They could not receive enough additional dollars to make their payments equal in value to the amount of gold originally stipulated. In short, they were stuck with new “light” dollars, not the original “heavy” ones that had been specified in the original bond covenants.
Bondholders, of course, sued over this theft. But, the Supreme Court, in 1935, held that the abrogation of the gold clause for private bonds was constitutional. The Court’s decision rested on the fallacious argument that contracts, which contained the gold clauses, interfered with Congress’ authority to coin money and regulate its value (Article 1, Section 8 of the U.S. Constitution). Never mind.
For bonds issued by the U.S. government, the situation was different, as Congress does not have the authority to repudiate obligations of the U.S. government. But, because the legal briefs were defective in proving actual damages, the plaintiffs who had held U.S. government bonds “protected” by gold clauses could not collect damages from the U.S. government.
In anticipation of additional gold‐clause cases, Congress simply passed a law amending the jurisdiction of federal courts, so that they were barred from hearing any further gold‐clause cases. Every time I reflect on this Congressional maneuver, Paul McCartney’s classic “Back in the USSR” rings in my ears.
The point is clear: the Rule of Law, particularly during a so‐called national emergency or crisis is very, very elastic — even in the good old U.S.A. Indeed, with the abrogation of the Gold Clause, the U.S. defaulted on its debt, as Edwards recounts.
Gold wasn’t the only metal that FDR was intent on meddling with. He also engineered a plan to manipulate the price of silver. This, among other things, destabilized all the countries that were on the silver standard, notably China.
In the early 1930s, China was still on the silver standard and the United States was not. Accordingly, the Chinese yuan/U.S. dollar exchange rate was determined by the U.S. dollar price of silver.
During his first term, FDR delivered his silver “plan.” It was wrapped in the guise of doing something to help U.S. silver producers and, of course, the Chinese.
Using the authority granted by the Thomas Amendment of 1933 and the Silver Purchase Act of 1934, the Roosevelt Administration bought silver. This, in addition to bullish rumors about U.S. silver policies, helped push the price of silver up by 128% (calculated as an annual average) in the 1932–35 period.
Bizarre arguments contributed mightily to the agitation for high silver prices. One centered on the fact that China was on the silver standard. Silver interests asserted that higher silver prices — which would bring with them an appreciation of the yuan against the U.S. dollar — would benefit the Chinese by increasing their purchasing power.
As a special committee of the U.S. Senate reported in 1932: “silver is the measure of their wealth and purchasing power; it serves as a reserve, their bank account. This is wealth that enables such peoples to purchase our exports.” But, things didn’t work as Washington advertised. It worked as “planned.” As the dollar price of silver shot up, the yuan appreciated against the dollar. In consequence, China was thrown into the jaws of the Great Depression. In the 1932–34 period, China’s gross domestic product fell by 26% and wholesale prices in the capital city, Nanjing, fell by 20%.
In an attempt to secure relief from the economic hardships imposed by U.S. silver policies, China sought modifications in the U.S. Treasury’s silver‐purchase program. But, its pleas fell on deaf ears. After many evasive replies, the Roosevelt Administration finally indicated on October 12th, 1934 that it was merely carrying out a policy mandated by the U.S. Congress. Realizing that all hope was lost, China was forced to effectively abandon the silver standard on October 14th, 1934, though an official statement was postponed until November 3rd, 1935. This spelled the beginning of the end for Chiang Kai-shek’s Nationalist government. FDR’s “plan” worked like a charm — Chinese monetary chaos ensued. This gave the communists an opening that they exploited — one that contributed mightily to their overthrow of the Nationalists.
FDR should not be remembered as a monetary messiah, but rather as a monetary madman. Abandoning the gold standard resulted in, among other things, America’s only federal government debt default. And, the manipulation of the price of silver forced China, which was on the silver standard, into a depression, opening the door for the communists.