How Franklin Roosevelt Secretly Ended the Gold Standard | Hacker News Reader

How Franklin Roosevelt Secretly Ended the Gold Standard

bloomberg.com

48 pointsnh51 comments

Upvoted the OP in order to call attention to what I consider primarily a propaganda piece by the Bloomberg new service. There was nothing secret about the executive order http://en.wikipedia.org/wiki/Executive_Order_6102 , except possibly that even the Wikipedia article does not explain in what manner Congress granted the President (actually the Secretary of the Treasury) such extraordinary power to confiscate property. That FDR used the Brer Rabbit strategy to call attention to his ending the gold standard only shows he was a skilled politician.

> The recovery from the Great Depression began instantly with Roosevelt’s policy shift...

I think most objective measures do not show recovery from the Great Depression until the ramp-up of arms production prior to American entry in WWII.

"extraordinary power to confiscate property"

Confiscate property? Gold coins were to be traded for $20.67 per ounce, not simply taken. No confiscation occurred; the nation simply ended the practice of using gold currency by taking it out of circulation.

I believe the idea is the "trade" was forced. Choice on when and how to dispose of one's property is what having property is all about.

Forcing someone to sell you something isn't trade, it's theft. If I steal your TV, then give you $5, I still stole your TV.

Confiscating people's property is the act of a despot.

Compensated compensation is explicitly sanctioned in the Constitution.

It explicitly mentions just compensation. A sub-market price isn't just.

It was traded in at the fixed conversion rate between gold and U.S. dollars.

A rate which was fixed by the buyer, with no protestation allowed by the seller.

Hear hear

What if it's not a TV, but a human being?

Just pointing out there are some concepts more sacred than property.

Please explain how confiscating people's gold was necessary to save someone's life. How is the life of the person stealing worth more than the person he is stealing from?

I think that's a red herring. First, slavery is not death and removing someone from slavery is not saving their life. Second, if it could be proven (though I doubt anyone has the means) that confiscation of gold sped economic recovery significantly, being responsible for many millions of lives saved in the past seventy years, would you accept it was the right thing to do?

I suspect your answer is "no", and if so I wonder if you have any idea why.

>>Forcing someone to sell you something isn't trade, it's theft.

[citation needed]

From the Wikipedia article:

"The price of gold from the Treasury for international transactions was thereafter raised to $35 an ounce ($587 in 2010 dollars) resulting in an immediate loss for everyone who had been forced to surrender their gold."

That is theft, plain and simple.

It would've been theft if the conversion rate was raised before the confiscation but people were paid out at a lower rate.

Kind of odd at Bloomberg, which used to be relatively impartial and accurate, has been becoming more and more partisan recently.

Given its founder's actions as mayor, it would seem to fit with their current trend and this article. Looking for historical precedents from respected[1] historical figures is a time honored tradition.

1) please note, I did not say universally respected - for another example, look at your $20 bill and ask what some Americans think of the person pictured

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

An opinion piece is an article, published in a newspaper or magazine, that mainly reflects the author's opinion about the subject. Opinion pieces are featured in many periodicals.

EDIT: I saw it was "economic history"; I didn't realize "bloomberg view" was the opinion section, vs. just bloomberg; too many levels of nesting.

Bloomberg is responding to market forces. In New York, most people read the WSJ for financial news, but ever since Murdock bought the paper it's been trending right. But Wall Street folks really don't lean right that strongly (e.g. Jamie Dimon and Lloyd Blankfein are both registered Democrats), especially the rank-and-file. That leaves a market opening for Bloomberg if they shift to the left. E.g. Bloomberg Businessweek ran a piece a couple of months ago on Wal-Mart that was extremely sympathetic to union interests. That kind of stuff really resonates with a lot of people you wouldn't think it would resonate with.

Indeed, an article like this is entirely consistent with that angle. Without getting into the merits of the gold standard, it is hard to dispute that the banking sector has a greater status in a country with a "managed currency" than they do in a country on the gold standard. You're not going to find a lot of Wall Street types who yearn for a return to the gold standard...

Sometimes secretly means that enough critical mass does not know about something, or it is not discussed in depth to reveal what it means. Forbidding of physical gold ownership could not be secret, could it? since they're calling everyone to bring their gold in. But its repercussion was not immediately obvious. Let's no forget it's 1933s, there's no twitter nor blogs.

Leaving gold standard is one of the big controversies for any nation as it allows governments to inflate the supply of the money and deflate its value. Essentially that's what happened eventually. Inflation is a silent tax on the citizens.

Despite what you may have been told by others or simply be assuming because of your political convictions, there was no significant inflation in the United States in the 1930s. The decade was in fact characterized by overall deflation, with prices lower at the end of the decade than they were at the start.

Abandoning the gold standard was a crucial and positive factor in stopping deflation during a time when it was wreaking wholesale and unprecedented destruction on the American and global economy. The move was entirely necessary, and did not lead to inflation as you can hopefully see from the actual historical data:

http://www.usinflationcalculator.com/inflation/historical-in...

The federal budget did turn expansionary (until 1937 when Roosevelt slowed spending in the face of evidence suggesting a mild recovery was underway), but the overall increase in federal spending under the New Deal was offset by shrinking state budgets and a series of bank failures across the interior which shrank the money supply. Look at the E. Cary Brown essay "Fiscal Policy in the Thirties" for the aggregate budget stats across the entire United States. Or just look at the inflation stats -- are they consistent with a story of unfettered government spending?

I am not sure I understand you correctly. Abandoning gold standard is one thing, abusing money after abandoning gold standard is another. When governments need money they can create it out of thin air, and leaving a standard that you can not control gives you this ability. Check the following web site.

http://www.paulvaneeden.com/What.is.money

The link you provided (http://www.usinflationcalculator.com/) calculated me the following: an item worth $20 in 1933 would cost $469.02 in 2013 and cumulative rate of inflation is 2245.1%. How is that not an inflation?

In moderate amounts inflation is healthy: it keeps unemployment down while inducing asset holders to invest in productive forms of growth. This is why most central banks try to keep the inflation rate above one percent, and in cases where monetary authorities have tried to push it lower (Canada in the mid-1990s) economic growth has suffered and unemployment has gone up.

Realistically, if you want to talk about hidden taxes on society, the costs of unemployment trump those of low inflation: in addition to affecting the most vulnerable members of society in a disproportionate way, unemployment makes everyone worse off over time because stagnant economies suffer compound losses to growth potential. This is one reason the US Fed has a dual mandate to both currency stability as well as low unemployment.

And just look at the numbers. Over the time period you mention (your stats are actually 1913-2013 not 1933-2013), American GDP grew from 39.1 billion to 56.4 billion in the 1913-1933 period where American was on the gold standard, before soaring to 14.5 trillion afterwards. Even adjusting for inflation and population growth, you have a story where the benefits of growth vastly outweighed the costs of the inflation which played a role in delivering it. And it isn't even as if you don't have inflation under the gold standard either (it is just that currency debasement happens through the private sector -- theft rather than a tax).

There is still very much an open question of what policies best keep economies balanced in the "sweet spot" between unemployment and high inflation. Unfortunately for goldbugs, while central banks are comparing things like "inflation targeting" or "GDP targeting" as general approaches, economic history clearly shows that economic growth has been far faster and more stable in the last forty years under fiat systems with independent monetary authorities than we saw in the heyday of the gold standard. So accusing Bloomberg of running a propaganda piece (parent poster) is wrong.

Barry Eichengreen's excellent book "Golden Fetters" actually demonstrates very convincingly using cross-national time series analysis that economic recovery across the world began on average around six months after countries left the gold standard. This is now the mainstream understanding of the Great Depression in economic history.

His sample size is something like 30-35 countries, and shows clearly that countries which stayed on the gold standard longer suffered more deflation and higher unemployment than their counterparts who abandoned it early. So Bloomberg is in fact correct on this point. And it may also be worth noting that the observed changes are about as instantaneous as you get in economic policy, given that even today changes to the Fed rate are assumed to hit the economy with a six-month lag.

His paper shows that countries who held onto the gold standard longer were more likely to adopt protectionist policies.

It wasn't abandoning the gold standard that allowed for recovery, but the protectionist policies that went with it.

It is a really thick book not a paper. And while it doesn't hypothesize about protectionism as far as I remember, if you really want to argue that the gold standard forced countries to embrace destructive trade policies in a statistically-significant way, you are not doing its advocates any favors.

Realistically, Eichengreen's argument is considered so solid these days that even fringe nutjobs with an anti-FDR or anti-Keynes agenda don't tackle it straight on. Instead, the typical plan is to insinuate that fiscal stimulus doesn't work because the US did not achieve full recovery before WWII.

Of course, anyone who has taken even an undergraduate course in US economic history should know that fiscal contractions on the state-level throughout the mid-1930s basically offset expansionary fiscal policy on the federal level (the seminal paper is E. Cary Brown's "Fiscal Policy in the Thirties" [1956]). This is why no-one in mainstream economics believes fiscal policy was truly expansionary in the US during the 1930s. That said, if you're asking why this is relevant that is a good point, since the important thing about leaving the gold standard is not that it led to immediate INFLATION so much as that it stopped DEFLATION and began the slow process of recovery. And this is the observation made by the piece and it is absolutely correct: once the United States left the gold standard the country's near double-digit annual deflation stopped and its process of recovery - however slow and faltering - began.

Coming off the gold standard was probably the correct monetary policy at the time. But one cannot correlate the ending of deflation with a 'recovery', especially one that is sustainable and not at the expense of others (i.e. those who left the gold standard later; if a country devalues its currency it would see an 'immediate recovery', but really it's a case of taking from one hand and giving to another).

Furthermore, it may be that looser monetary policy went hand in hand with war production in leading a recovery. Convertibility was often suspended in previous wars to help finance them.

There's no consensus on this matter.

Respectfully, time series analysis involves the use of statistical techniques which have been designed precisely to tease out these kinds of correlations. So what you claim to be impossible is not only statistically possible, but in fact constitutes mainstream econometrics.

There is a clear consensus that fiscal stimulus in war spending played a key role in pulling the United States back to full employment. There is also a clear consensus that the gold standard served as a transmission mechanism for deflationary pressures internationally. If you do not believe this, I'd challenge you to find even a single NBER paper that argues otherwise.

It's easy to engineer a credit expansion--inflation--in the economy when all of the real estate and stocks have been discounted--lost--80%+ off their pre-depression price levels.

Bernanke has been trying to create inflation--credit expansion--since December 2008 and even a trillion dollar unfundable deficit can't do it! Why?

Asset prices aren't cheap.

The fact that unemployment strangles wage increases-inflation--and might be enjoyed by corporates seems lost on everyone in these discussions.

It's taken trillions and billions of guarantees--insurance--, subsidized purchase programs, credits and special financing programs to take the SP500 just back to October 2007 levels. The Nasdaq is still, what, 40% off of the tech top from over a decade ago?

But wait, Apple is minting money--true-- and AMZN is still losing money! The NDX is nothing without those two favored stocks.

Correlation vs. causation, pal. Don't conflate the two!

Cheap assets and labor drive credit expansions and economic fortunes.

Whoops...overlooked that this was an opinion piece (tries to extract foot from mouth)

The article omits an important fact:

The public's gold was exchanged at $20.67 per troy ounce, but months later, the official price of gold was raised to $35.00 per troy ounce. Essentially, the public were not properly compensated for turning in their gold.

"In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the gold on the Federal Reserve's balance sheets by 69 percent. This increase in assets allowed the Federal Reserve to further inflate the money supply."[1]

[1] http://www.history.com/this-day-in-history/fdr-takes-united-...

EDIT: The article also fails to mention that "violation of the order was punishable by fine up to $10,000 or up to ten years in prison, or both." http://en.wikipedia.org/wiki/Executive_Order_6102

> Essentially, the public were not properly compensated for turning in their gold.

I known pretty much nothing about economics or the history here, but I don't see how this follows. The value of the dollar (in terms of what it would buy aside from gold) didn't suddenly shift. Are you saying that the shift in the worth of gold would have happened even if the government hadn't moved off the gold standard? If so, how is it that the government "set" it? And if not, then how did folk lose anything?

"The recovery from the Great Depression began instantly with Roosevelt’s policy shift, in March 1933"

uhm... no.... more like 1946 - if the recovery had happened before WWII then we wouldn't have had to ration and do all the massaging to get the economy up to war production.

Uh, the economy was producing for war in many areas by 1938. Those Naval battleships at Pearl Harbor didn't simply build themselves, the Army didn't create millions of rifles out of thin air in 1941, etc.

Rationing was required because the government was directing available resources to war production, not because the economy was shit. People could afford food just fine throughout much of WWII, if only the shops had been allowed to sell it to them.

The rationing and price controls wouldn't have been needed if we hadn't been in such a hole at the start of the war. We did produce, but our national production in 1947 was actually 17% higher than in 1941. That is a pretty sad considering the amount of government war spending.

The Roosevelt administration also sued farmers who attempted to grow food to feed themselves, in his insane attempts to control market prices.

Filburn was ordered to destroy his crops and pay a fine, even though he was producing the excess wheat for his own use and had no intention of selling it.

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

The Roosevelt administration sued farmers who attempted to grow food in violation of a law passed by Congress to regulate interstate commerce, in this case to stabilize crop prices.

The Supreme Court ruled unanimously in Wickard v. Filburn that this was constitutional.

The interesting part is how they found "interstate commerce" in chicken feed which wasn't actually sold and didn't actually leave the state (didn't leave the farm even):

The Court decided that Filburn's wheat growing activities reduced the amount of wheat he would buy for chicken feed on the open market, and because wheat was traded nationally, Filburn's production of more wheat than he was allotted was affecting interstate commerce. Thus, Filburn's production could be regulated by the federal government.

By this reasoning, even free open-source software is interstate commerce, if it has a commercial competitor. Imagine a federal law restricting FOSS, as part of an economic stimulus for the software industry.

(edit: My FOSS analogy is actually too weak! You wouldn't need to distribute anything. It'd be enough to write your own code, for your personal use, if this prevents you from purchasing some commercial product).

This in turn led to the Raich case where the Supreme Court ruled the government could prohibit state-permitted personal private activity on the grounds that it affected interstate commerce by reducing demand for a federally illegal product.

It's a tricky discussion in this thread because we're mixing together the questions of "Is this allowed (constitutional)?" and "Is this a good idea?" I believe that in both the Filburn case and in your hypothetical FOSS example, that yes, Congress has the power to regulate them.

But that doesn't mean it's a good idea. At some point, the elected representatives in Congress have to make a law to regulate the interstate commerce. In Filburn's case, a majority of the democratically-elected officials in Congress decided that price stabilization of crops was important enough to restrict growing "private stashes" that weren't going to be sold. If supporters of Filburn didn't agree with that, then they would have to elect new representatives to do overturn the law. (Which by the way, will probably finally happen sometime in the next decade.) But there is zero support in Congress for restricting FOSS, even when it competes with commercial software. The benefits of FOSS to all Americans are so obvious that it won't happen.

Thereby demonstrating, conclusively, the uselessness of relying on the federal government to decide how much power the federal government has.

That sounds like something from Atlas Shrugged. Amazing it actually happened!

Look at the date on the case (1942). Maybe it's relevant.

This is one of the barest forms of propaganda you'll read in a while.

This way, he could bring commodity prices back up and maintain them at a level that would ensure producers a higher standard of living

A high standard of living is precluded by high commodity prices.

Case in point: during the Depression the Agriculture Department estimated that 25% of the population was malnourished, something the military confirmed to their satisfaction during the draft, which later was an input into the Federal school lunch program.

The article fails to mention that though the US came off the (fixed) gold standard, convertability of the US$ to gold was retained as part of the Bretton-Woods system all the way through WWII, through the post-war "Golden Age of Capitalism" period uptil 15 August 1971 when Nixon unilaterally turned the US dollar into a fiat currency.

"The recovery from the Great Depression began instantly with Roosevelt’s policy shift, in March 1933. He had changed expectations, and begun an administration that would use money as a tool to bring widespread prosperity -- rather than serve as a tool of moneyed interests."

This is pure economic propaganda. Anyone with a whit of knowledge of the period knows that the depression lasted through the entire 30s, with unemployment remaining very high for the whole decade (it was 19% in 1938)

Gold buggery articles are like one of the four horsemen of the web site apocalypse. It's one of those quasi-religious subjects that only creates flames.

That was an OK article but I think the best current reference on the gold standard is "Currency Wars: The Making of the Next Global Crisis" by James Richards. He doesn't so much try to predict the future. Instead he provides a historical perspective and gives the reader the tools to understand events as they happen.

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