09 June 2008

Roosevelt’s Fiat

Amity Shlaes wrote a good article in the Wall Street Journal on June 5, the 75th anniversary of Franklin Delano Roosevelt’s resolution annulling the so-called “gold clause” in all government and private contracts.  As I understand it, the gold clause was a device incorporated into private contracts that provided a hedge against inflation – that is, against government meddling with the valuation of the dollar.  In one sweep of his presidential signature, Roosevelt abrogated the contracts of innumerable individuals and companies.

There is one particularly chilling passage in Miss Shlaes’ article.  On a certain evening in April, 1933, after having single-handedly removed the country from the gold standard in order to personally manage the dollar, 

FDR surprised a bunch of advisers, saying, “Congratulate me.”… [He] took out a ten-dollar bill, examined it and said “Ha!... How do I know if it’s any good?  Only the fact that I think it is makes it so.”(1)

Whether or not Roosevelt followed this sinister little speech with the requisite diabolical laugh – MU-HA-HA-HA! – is not recorded in the history books as far as I know.  What is clear though is that he relished the power that he had just obtained for himself.

I remember reading about FDR’s shockingly cavalier attitude toward manipulating money in John T. Flynn’s eye-opening book, The Roosevelt Myth, an account of the New Deal era that is relentless in its depiction of the arbitrary wielding of federal power.  Roosevelt was convinced by some advisers in his inner circle that “the country could use a little dose of inflation.”  Almost like children describing a new game to a naive sandbox chum, they sold their ideas to Roosevelt, which were accepted all the more readily for being unorthodox.  They told him that

the government could regulate prices very simply by regulating the price paid for gold...  [FDR] declared: “If we cannot get prices up one way we will get them up another.”...  Later Congress passed an act to validate what he had done, which was clearly illegal when he did it.

Thereafter each day [Treasury Secretary] Morgenthau and Roosevelt met, with Jesse Jones, head of the RFC, present, to fix the price of gold.  They gathered around Roosevelt’s bed in the morning as he ate his eggs.  Then “Henny Penny” and Roosevelt decided the price of gold for that day.  One day they wished to raise the price.  Roosevelt settled the point.  Make it 21 cents, he ruled.  That is a lucky number - three times seven.  And so it was done.  That night Morgenthau wrote in his diary: “If people knew how we fixed the price of gold they would be frightened.”(2)

Perhaps in those days, people would have been frightened by such meddling.  I fear that now the average person is more frightened by the thought of not having the government in charge of the currency.


(1)  Wall Street Journal, http://online.wsj.com/article/SB121262149780346715.html.

(2)  Flynn, John T., The Roosevelt Myth, Fox and Wilkes, San Francisco, p. 51-2.

(3)  A concise history of “The Early Gold Wars” (as well as the nice picture of the gold coin above) may be found at The Privateer Gold Pages (http://www.the-privateer.com/gold2.html).

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