Roosevelt’s money policy, 1933-1934

by Eric on March 10, 2015

Money Makers
Forthcoming in September, from Basic Books

On this day in 1933, it was the first Friday of Franklin Roosevelt’s administration, and the new president met reporters to talk to them about ending the bank holiday with which he had begun his term. The Federal Reserve Banks would open on Saturday so that member banks of the Federal Reserve System could open on Monday. A reporter asked if the banks would be open “[a]ll along the line, Mr. President; that is, all functions?” Roosevelt replied, “Yes, all functions. Except, of course, as to gold. That is a different thing. I am keeping my finger on gold.”

The president’s week had started with his inauguration on March 4, the previous Saturday, when he had told the American people they had only fear itself to fear, and promised them an “adequate but sound currency.” The next day Roosevelt worked all through the day with members of his team and holdovers from Herbert Hoover’s to draft orders to close the banks and halt all payouts of gold. They worked so hard that Sunday that it was late by the time the order was ready for presidential signature – so late that Federal Reserve counsel Walter Wyatt urged the president to wait a little longer to sign, so that it would be Monday, and not so sacrilegious. Roosevelt did wait, and then, on signing the order said – gleefully, according to one account – “We are now off the gold standard.” That was in the wee hours of March 6; later that morning, Americans began a week of doing business without access to banks.

At Roosevelt’s first press conference, on Wednesday March 8, he told reporters that “what you are coming to now is really a managed currency.… It may expand one week and it may contract another week.” The end of the dollar’s convertibility to gold was not temporary but “part of the permanent system so we don’t run into this thing again” – which was what he repeated when he said, on Friday, that he was keeping his finger on gold.


Roosevelt was strikingly consistent in his monetary policy declarations.1 The US went off the gold standard with the bank holiday, he never meant to go back on, and he didn’t. He wanted to establish an international system of managed currencies, with an agreement that would allow them to remain stable for long periods, but adjustable in case of need – that was what he told the World Economic Conference at the end of summer 1933, and that was why it broke up – because other countries weren’t yet ready to join the US. At the end of 1933, Roosevelt talked up the dollar in value, stabilizing it in January 1934, while saying “I reserve the right … to alter this proclamation as the interest of the United States may seem to require.”


Despite some often-quoted barbs at Roosevelt’s method of getting there (complaining that the president’s talking up of the dollar by unpredictable amounts looked “more like a gold standard on the booze than the ideal managed currency of my dreams” or a “game of blind man’s bluff with exchange speculators”) John Maynard Keynes approved of the destination, writing in January 1934 that the president’s policy “means real progress.” Roosevelt had “adopted a middle course between old-fashioned orthodoxy and the extreme inflationists.” He had done nothing “which need be disturbing to business confidence,” and the monetary policy was “likely to succeed in putting the United States on the road to recovery.” Roosevelt’s adoption of a value for the dollar to be kept generally stable, if altered at need, also opened the possibility for an international conference on money, to “aim for the future not at rigid gold parities, but at provisional parities from which the parties to the conference would agree not to depart except for substantial reasons arising out of their balance of trade or the exigencies of domestic price policy.”


In other words, before Roosevelt had been in office a full year, he had articulated, with Keynes’s approval, all the elements of what would become the Bretton Woods monetary policy in 1944: currencies would be kept at stable exchange rates, but would be adjustable in keeping with the needs of economic prosperity in each country.



1Historians have a real problem recognizing this, owing I think to the influence of a couple of misleading memoirs by disaffected Roosevelt advisors who didn’t like his monetary policy, and who departed the administration early and therefore got their licks in early. Maybe I’ll write a post about this particular thing.

{ 35 comments }

1

Bruce Wilder 03.11.15 at 2:34 am

I was reading the press conference transcript you linked to.

FDR: . . . of course, undoubtedly there are necessary in regard to certain phases of the financial situation some form of additional proclamations [coming]. That means, for example, the question of control of gold. That is obvious. As long as nobody asks me whether we are on the gold standard or gold basis, that is all right, because nobody knows what the gold basis or gold standard really is. He went on to read aloud a newspaper story from the previous evening discussing what it means in operational terms to be “on the gold standard”. The article lists four criteria, ending with international trade in gold, and FDR claims that only the U.S. had been allowing free trade in gold, and that was what had ended the previous Sunday.

That seems like classic Roosevelt: frankness thru obfuscation. He’s clearly aware that there are more pieces to be put into place, to extricate the country and the world from the gold standard, and he’s not willing to challenge them all at once.

2

Bruce Wilder 03.11.15 at 2:35 am

The Emergency Banking Act had passed the day before, March 9, I believe, authorizing the Federal Reserve System to issue additional currency on the surety of commercial bank assets or in exchange for government bonds. The ability to issue additional currency, not a guarantee of banks, was being used to backstop the banking system. It may be an interesting contrast to more recent practice.

FDR: [in relation to a question about his definition of “sound money”]:. . . in its essence — this is entirely off the record — in its essence we must not put the Government any further in debt . . . . Any talk of a general guarantee means a definite loss to the government and the whole objective in the plan that we are working on can be best stated this way: there are undoubtedly some banks that are not going to pay one hundred cents on the dollar. We all know it is better to have that loss taken than to jeopardize the credit ot the United states Government or to put the United States Government further in debt, and, therefore, the one objective is going to be to keep the loss in the individual banks down to a minimum endeavoring to get 100% on them, but not having the United States Government liable tor the mistakes and errors of individual banks and not putting a premium in the future on unsound banking.

I’m a little unclear on the exact mechanisms by which gold hoarding inhibited the Federal Reserve from responding properly to the demand for currency to prevent bank runs. Were Federal Reserve Notes partially backed by gold? When exactly did that requirement for gold backing end?

How did the Milton Friedman and Anna J. Schwartz critique of Fed policy finesse the gold standard problems of international trade and domestic hoarding? Was it gold or discretion that created bad policy?

3

Eric 03.11.15 at 2:49 am

Bruce – Federal Reserve notes were backed 40% by gold; the proximate cause for the federal bank holiday was the Federal Reserve Bank of New York hitting, or maybe dipping below, that gold reserve.

4

david 03.11.15 at 5:20 am

The backing of money with government guarantees rather than convertibility to gold coexists with government existence being, in a sense, more authentic than physical possession of the gold backing. Physical seizures of gold reserves to cripple states was still very much a feature of war as late as of WW1 and (somewhat) of WW2. The Belgian government in exile did not have Belgium but it did have Belgium’s gold, albeit in Britain. Likewise Norway, to America. Observe that at the end of the war, Belgium returned to Belgium and Norway to Norway, but both saw it fit to leave the gold behind.

You can’t really discuss why the USPS is a constitutionally-granted government service in the frame of a modernist privatization-vs-nationalization efficiency alone – instead it stems from certain military realities that faded in importance over time, or certain state capacities in raising revenue or obtaining credit that expanded over time. This sort of complication is why Roosevelt would be going, well, we’re off the gold standard now, but it’ll still be a jolly good thing if more people converted their gold into USD at the standard rate. I don’t think it’s obfuscation inasmuch as the old cognitive frame making itself felt – it seems obfuscative in a modern frame because permanent one-way convertibility is nowadays obviously a capital control trick to maintain a divergent rate, you couldn’t really pretend otherwise, but at the time there seems some legitimacy to desiring to accumulate gold for the sake of accumulating gold, to the point where nobody seems to object even in an OTR Q&A.

5

Bruce Wilder 03.11.15 at 6:06 am

Getting off gold was no mean trick. It meant default, bankruptcy. FDR, within a month of the events in the OP would, by proclamation(!), make possession of monetary gold a criminal offense.

The context made these extreme, extraordinary measures plausible. Only 25% of the labor force still had a full-time job after 3 years of runaway deflation.

The reporters are not the fops, who work in television news today. They clearly understand their role in stemming national panic and are eager to collaborate toward that end.

6

david 03.11.15 at 10:27 am

The reporters of the era of Hearst were as much fops as today – but FDR operated at a time when presidents had numerous economic and legal devices to discipline them. Nowadays rationing access to the briefing room is much less effective. People pay less attention to the President – Obama’s office releases chats far more often than FDR’s radio addresses, but it commands far less attention.

7

Peter K. 03.11.15 at 2:23 pm

“One result is that our modern preference for monetary stability over economic growth has led to stagnation and rising inequality.”

The left, liberals and progressives seem to have a blind spot when it comes to monetary policy. The common story one learns is that World War II military spending ended the Great Depression, and no doubt there is truth to that, but the sooner a nation went off gold, the sooner they recovered.

In an enormous irony, Germany is forcing stagnation on the periphery of Europe and even Europe as a whole in the quest for “monetary stability” or the preservation of “money-claims” as the highest priority even superseding democracy.

8

sanbikinoraion 03.11.15 at 2:55 pm

I’m intrigued by this discussion, but can we please refer to things that happened in the past in the past tense? Sentences like “The reporters are not the fops, who work in television news today” are idiotic (assuming this wasn’t an error, but it sure smells like “historical present tense — apologies if it was just a typo).

9

Bloix 03.11.15 at 3:25 pm

Under the authority granted to him by the God Reserve Act of 1934, FDR set the price of gold at $35/oz. The dollar remained fixed at 1/35th of ounce for the next 37 years, until Nixon allowed the dollar to float with respect to gold.

Under Bretton Woods, most countries had exchange rates fixed to the dollar, and since the dollar was fixed to gold, their currencies were also stable with respect to gold. Although ordinary citizens could not convert dollars to gold at a fixed price, foreign governments could and did.

I understand what you mean when you say that Roosevelt took the dollar off the gold standard in 1933, but I think it’s worth noting that gold continued to play an important role in the valuation of the dollar (and through it, other currencies) until 1971.

10

Bruce Wilder 03.11.15 at 3:51 pm

sanbikinoraion @ 8: re: tense

When I wrote about the “reporters” in my last sentence @ 5, I was referring to the linked typescript of FDR’s news conference, interpreting that text as a drama, and making an observation about the way the reporters were playing their roles. I used the present tense to emphasize this perspective. Unfortunately, in my haste, I failed to make explicit this context.

11

Bruce Wilder 03.11.15 at 4:05 pm

Bloix @ 9: Well, France did. I remember the news footage of planes carrying gold taking off from JFK for Paris. Can you imagine what it cost to transport gold by air in the 1960s?

Much of the monetary gold bullion in the world just sits in the basement of the New York Federal Reserve, formed into ingots too big to transport, and the exchanges between governments took place on ledgers, until France started to ask for delivery.

Germany — its central bank (and economy) in the hands of goldbugs and ordo-neoliberals (or is it neo-ordoliberals?) — has asked for its gold back from London and New York, to add to the now considerable pile accumulated by the German central bank. The American and British authorities have not exactly been rushing to respond.

12

Eric 03.11.15 at 5:38 pm

Bloix: as mentioned in the post, the value set on 1/34 was fixed but adjustable. Same for Bretton Woods.

As Edward Bernstein, who helped draft and run Bretton Woods observed,

What was novel in the Fund was the concept of a system of fixed but adjustable par values without the rigidity of the gold standard.… The last time that the Federal Reserve tightened its policy because the gold reserve ratio had fallen close to the legal minimum was on March 3, 1933, when the Federal Reserve Bank of New York raised the discount rate to 3-1/2 per cent. Thereafter, whenever the gold reserve neared the legal minimum, the required reserve ratio was reduced and finally eliminated. A country that loses more than half of its gold reserve, as the United States did in 1958-71, without reducing its money supply is not on the gold standard. What happened in August 1971 was the abandonment of the anomaly of convertibility of the dollar into gold when the United States was not on the gold standard.

And that anomaly was, as noted, highly circumscribed. You or I couldn’t do it; only central banks.

People understood this at the time better than we do today. Dennis Robertson, the British economist who was also a Bretton Woods delegate, referred to the gold dollar as a “rara avis which, since it is forbidden to be hatched, nobody has ever seen.”

13

CJColucci 03.11.15 at 9:02 pm

Somewhat — OK, a lot — off-topic, but is there anything good about monetary and banking policy from the First Bank of the United States through the ante-bellum era? Not the politics or constitutional law of it, but the economics of it, and what sorts of alternatives policymakers and whatever passed for experts at the time believed they had available to them?

14

CJColucci 03.11.15 at 9:04 pm

On re-reading, I may need to clarify that I am not asking if there was anything good about the policies of the time. I’m asking if there are good studies about them.

15

stevenjohnson 03.11.15 at 9:33 pm

Bray Hammond Banks and Politics in America is still highly esteemed so far as I know.

Friedman and Schwartz Monetary History of the United States I think is highly regarded by mainstream economists.

16

Eric 03.11.15 at 10:32 pm

Also, you might want to start with a standard, which is even on Google Books for nothin’ – Davis Rich Dewey, Financial History of the United States.

There is also Richard H. Timberlake, Monetary Policy in the United States, though the author makes clear where his preferences lie, to be sure.

If you’re interested in a pre-history, Jack Rakove’s Beginnings of National Politics in the United States has some quite good stuff on the monetary and financial history of the Continental Congress.

17

Bill 03.12.15 at 12:44 am

18

Bloix 03.12.15 at 12:53 am

As I understand it:

1) until the late 1960’s, when the gold reserve ratio was eliminated over a period of years, the Treasury had to hold enough gold at $35/oz to redeem at least 25% of the money supply.
2) Even after that, foreign governments could redeem dollars for gold.
3) In 1971, Nixon eliminated convertibility to prevent a run on gold.

I don’t mean to denigrate the importance of what FDR did in 1933. What I am saying is that vestiges of the gold standard hung on for another 28 years. The Nixon Shock was a real thing, and it couldn’t have been if there hadn’t been some remaining faith in the gold-backed dollar to be destroyed.

19

Eric 03.12.15 at 1:53 am

Bloix, please read Bernstein’s comment as I quoted it above.

20

john c. halasz 03.12.15 at 1:56 am

Bloix:

Please look up the Triffin dilemma.

21

Bloix 03.12.15 at 3:19 am

In some people’s lexicons, “please” is the most insulting word in the language. Not sure why, but there you are.

john c. halasz – as I understand it, the Triffin dilemma – the ability, and therefore the irresistible temptation, of the US to run persistent trade deficits due to the role of the dollar as the world’s reserve currency – manifested itself in the Bretton Woods period as a gap between the fixed price of gold in the US and the market price elsewhere, making it profitable for foreign governments to convert dollars they amassed by virtue of the US trade deficit into gold. During the 60’s, the US “managed” the problem, but by 1971 that wasn’t possible and Nixon did away with convertibility.

Unless I am being paranoid or uncharitable, your use of “please” is intended to demonstrate that I’m an idiot. But as far as I can tell, the Triffin dilemma supports my assertion that the US did not entirely rid itself of the dollar-gold linkage until 1971, and this linkage did have practical effects that were resolved only by the destruction of Bretton Woods. If I’m wrong about that, go ahead and tell me and perhaps I will learn something.

Not that Wikipedia is always right, but it’s an easy thing to link to:

http://en.wikipedia.org/wiki/Triffin_dilemma

22

Bloix 03.12.15 at 3:38 am

Eric – there’s a strong whiff of “no true Scotsman” about the Bernstein quote Many people say that we had a quasi-gold standard until Nixon – who wasn’t willing to take the inflation that would have occurred if he had done a serious “adjustment” – took us off it. Bernstein says that because the politicians decided to break the standard instead of adjusting it, it had never been a real standard in the first place.

23

john c. halasz 03.12.15 at 4:36 am

@21:

No, though Triffin articulated the problem around 1960, it was baked-into-the-cake from the beginning of the Bretton Woods U.S. $/pseudo gold standard. The dilemma was that in order to serve as the lynch-pin of the international FX and trade system, the U.S. $ needed to maintain a high constant value, but it also needed to be supplied abroad (regardless of any ostensible link to gold), in order to provide reserves for other countries, which implied the running of C current account deficits that would lead to the depreciation of the FX value of the $. So the over-issuing of $ with respect to U.S. gold reserves was bound to occur. Further, with a fixed rate system, higher inflation than the rest-of-the-world means that a country’s currency is de facto appreciating, which might not be a problem for any other country, which could always adjust its peg, but was a big problem for the U.S. as it experienced higher inflation in the late 1960’s due to Vietnam War spending.

The main point is that the U.S. $ peg was really a $ peg and not a gold standard peg, which is exactly as the U.S. gov. chose it to be in sponsoring the Bretton Woods system. At that time, the U.S. not only constituted 50% of global output, but possessed immense gold reserves, as well as being owed immense war debt by Britain et alia, which they wanted to make sure were repaid in “hard” rather than depreciated currency, (even as the U.S. gov. inflated away much of its own domestic war debt). Initially, such things as the Marshall Plan transferred dollars abroad while reviving trading partners and providing investment opportunities for excess U.S. capital. But eventually, U.S. $ issuance exceeded U.S. gold reserves, on a relative basis, as was bound to happen, and foreign industries grew increasingly competitive with U.S. industries, requiring an appreciation of some foreign currencies over the $, to balance trade accounts, which is precisely what couldn’t happen under the BW arrangement.

Now please look up the International Clearing Union/Bancor proposal that Keynes put forward at Bretton Woods and that the U.S. nixed. And understand that the unilateral scuttling of the Bretton Woods system by Nixon was not only almost inevitable, but a key contributor to the stagflation crisis of the 1970’s, for which the “solution” was the rise of neo-liberal policy regimes. Then you might begin to get up-to-date in your understandings of international political economy.

24

Bill 03.12.15 at 4:58 am

Bloix
Another good history is Golden Fetters by Temin. Perhaps the best way took at Roosevelts action was as a regime change. Yes there was some vestiges of the gold standard left. But the monetary base wasn’t determined by it. Prior to that monetary policy was essentially a foreign exchange problem. Gold flows out, raise interest rates, gold flows back. After monetary policy focused more on the domestic economy and issues related to unemployment and inflation.

25

Bruce Wilder 03.12.15 at 6:13 am

Bloix @ 22: . . . there’s a strong whiff of “no true Scotsman” about . . .

You think Bernstein has a whiff, wait till you encounter Timberlake! He doesn’t think there was a gold standard for FDR to end; its self-regulating beauty had been ruined by palsied policymakers after the First World War and never recovered.

The negotiations and machinations of the world’s central bankers in trying to provide a human design to the world’s monetary system did not work. Their blueprint retained only the outward and visible sign of the previous era’s working gold standard; it had been deprived of the inward and spiritual grace of that system.

No really, he talks that way — like the gold standard was Catholic sacrament! Corey Robin might make more headway with the history of monetary policy than a half-dozen economic historians.

The historiography of monetary policy in general is hazardous territory. Cause-and-effect is ambiguous and subject to strongly ideological dispute. The ideological disputes, which can be deep and politically profound, but may have only a tenuous connection to the operations of policy institutions, are confused with both the terrible mix of cant, jargon and misleading clichéd metaphors that only an economist unused to interpreting not theory but events can produce, and a documentary record filled to overflowing with the airy, serious, frequently meaningless misdirection and humbug of the politician and the policy apparatchik.

Look at the throwaway narrative Bloix wrote next @ 22: . . . we had a quasi-gold standard until Nixon – who wasn’t willing to take the inflation that would have occurred if he had done a serious “adjustment”. The mind boggles. But, it is hardly Bloix’s fault. How would one narrate Nixon’s economic policy? Presumably, he did not entirely understand what he was doing. Ensuring his own re-election was a priority, and he must have had some grasp of Keynesian principle alongside a feel for what would make him popular or unpopular with voters. He was acting in opposition to political rivals and in cooperation with other branches of government. The structure of the economy itself was evolving under strategic, policy pressure, and ending convertibility was, itself, a strategic intervention. To prevent inflation or enable it? Given the proximate consequences, “enable” would be easier to sell me, but ymmv.

26

Bruce Wilder 03.12.15 at 6:19 am

Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 by Barry Eichengreen.

Lessons from the Great Depression by Peter Temin

Quite different books, worthy, but each is also narrow.

27

Bruce Wilder 03.12.15 at 6:51 am

Bill: Perhaps the best way to look at Roosevelts action was as a regime change.

Yes. Probably the only effective way to trace out the history of monetary and economic policy and institutions would be to mark out the course of events as dynamic evolution forming a pattern of punctuated equilibrium. Money is simply not the same from one era to another, nor are the institutional structures of production and finance.

Mainstream economic theory posits an ahistorical stasis, which makes it particularly ill-suited to the interpretation of historical developments. That ahistorical frame also contributes to making much of economics total rubbish. So, basically, it would be pretty tough to, say, adequately explain the Great Depression without also profoundly restructuring the whole of macro-economic and monetary theory. And, the economists will come at any substantive narrative with tendentious, largely irrelevant counterfactuals. What can be done?

28

Shelley 03.12.15 at 2:54 pm

“I am keeping my finger on gold.”

There’s just something about the way that man talked, even offhandedly.

The tongue was gold, too.

29

Bill 03.13.15 at 12:34 am

Check out this paper:
MLA
Romer, Christina D. “What ended the great depression?.” The Journal of Economic History 52.04 (1992): 757-784.
APA
Romer, C. D. (1992). What ended the great depression?. The Journal of Economic History, 52(04), 757-784.
Chicago
Romer, Christina D. “What ended the great depression?.” The Journal of Economic History 52, no. 04 (1992): 757-784.
BibTeX EndNote RefMan RefWorks

30

Eric 03.13.15 at 1:23 pm

There comes a point when the “no true Scotsman” argument has to shade into truth. For example, “No true Scotsman would ever be born, raised, and die in Italy, all the while breathing no word about Scotland, though having a fondness for salmon.”

If you don’t let the volume of gold you have on hand affect the volume of money in circulation, your relation to a gold standard is pretty darn tenuous.

31

A H 03.13.15 at 7:36 pm

Samuel Knafo has done some very interesting work on the gold standard. He argues that even under the classic gold standard, goverments did not act in accordance with a Price–specie flow mechanism, but that they had room for control of the money supply.

‘The Politics of Liberal Financial Governance and the Gold Standard’

‘The Gold Standard and the Origins of the Modern International System’

He has a book out on the subject as well.

32

Bloix 03.14.15 at 2:53 am

#30 – But if for 37 years you say you’re on a flexible gold standard, and for decades your economy is so strong that you never have to adjust the exchange rate – and then, when you decide to pay for a lengthy and expensive war by deficit spending, and the resulting run on your gold means you have two choices, either to adjust the exchange rate or eliminate convertibility entirely, and you choose the second – then although in hindsight it may look like you were only pretending to be on a gold standard for those four decades, people who lived through that time may be excused for having believed and behaved as if you were on a gold standard for all those years.

33

A H 03.14.15 at 4:15 am

# Bretton woods was a fixed dollar standard. Other currencies going starting to float against the dollar is what caused Nixon to abandon gold redeemability. The change from a fixed to floating rate is the economically significant event.

34

john c. halasz 03.14.15 at 10:08 pm

35

Bruce Wilder 03.16.15 at 2:48 pm

Bill @ 29: Romer, Christina D. “What ended the great depression?.” The Journal of Economic History

And, over and against Romer, there are the several papers by Cole and Ohanian, which argue a Real Business Cycles case that the New Deal was counterproductive, and prolonged the Depression.

I like Romer and despise Cole and Ohanian, because the former is closer to my politics, but neither is arguing a case that engages critically with the historical facts. They are just demonstrations of the vacuity of mainstream macro, exercises in alternative history built around isolated facts. Recovery from the hole dug by the deflationary spiral ended by FDR in the dramatic events of the OP was prolonged, but not exclusively a “macro” business of aggregate demand or sticky wages. The new economy of the 1920s had serious structural and institutional problems, problems of income distribution — between classes, sectors and internationally — that made the crisis possible, and much of the New Deal was a matter of institutional reforms uncountenanced by Keynes’ views.

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