Review: One Nation Under Gold, part 3

Hoover lost the 1932 election because he, the Federal Reserve, and he Republican party would not loosen monetary policy in the Great Depression. Roosevelt was much more action-oriented, even if his administration was more haphazard. There were winners and losers to his expansion of the federal government, and the effects were long-lasting.

• Chapter 4: FDR Bids Goodbye to Gold. The Gold Standard Act of 1900 set a price of $20 per ounce, but by outlawing private gold ownership and concentrating all gold in government hands, Roosevelt was able to set the price at $35 per ounce. This was, in essence, a devaluation. What remained a problem, though, was that many long term loans had "gold clauses," which would have required debtors to pay back the loans with gold, and at the $20/oz rate. Railroads, big businesses, and home owners faced a crisis.
  
  The gold clauses had made the loans less risky, and allowed lower interest rates, but with the weaker dollar, debtors faced the prospect of seeing their loan balances ballooning up. Lawsuits made it to the conservative Supreme Court, at which point Roosevelt not-so subtly hinted that he'd pack the Court if he didn't get his way.
  
  Some justices on the Court saw Roosevelt's devaluation as a stain on the "national honor" -- an abrogation of its commitments to its creditors. Others saw it as offensive and immoral for the government to set the value of its money -- a huge overreach. Creditors, along with those in the economic orthodoxy, supported the gold clauses. Others, like anti-Semites, found common cause with extremists and isolationists in opposing Roosevelt.
  
  Nevertheless, the Roosevelt administration won the cases, and the new relationship between gold and the dollar prevailed. Fort Knox's gold vault began construction in 1933, and by 1936 it held over $11 billion in gold -- over 50 percent of all the gold in the world.
  
  
• Chapter 5: Arsenal of Gold. The United States got through World War II without abandoning it's official $35/oz gold exchange standard (despite massive amounts of borrowing). With victory in sight, Western economists met at Bretton Woods in 1944 to develop a new international system.
  
  John Maynard Keynes imagined currency values being based on the strength of national economies, with an international central bank to act as arbiter. This idea would have worked well, but it would have required universal buy-in, and that was an issue, to say the least. First, the war-ravaged world had too few economies which were in the position to push for such an arrangement. Second, it would have required a central storage of the world's gold, and Communist countries were not about to agree to that.
  
  In the end, Bretton Woods settled on a practical solution. The U.S. dollar would maintain its theoretical value at $35/oz, and other countries would peg their currencies to the dollar, with their central banks allowing a 1% deviation. Larger deviations would have to be approved by the International Monetary Fund.
  
  The Bretton Woods system was a decent arrangement for its time, and it lasted about 30 years. By 1985, the world's real commodity output had quadrupled, and real commodity trade had grown six-fold. Yet there was a long-term cost. Those who were dissatisfied with the New Deal's prohibition of gold ownership, together with the financial conservatives and those who opposed big government, would form a core of support for the Republican party for decades to come.
  
  
• Chapter 6: Out of Balance. Americans could not own gold privately, but that didn't apply overseas, and maintaining the $35/oz price required the U.S. to operate within a global market that had grown faster than the domestic U.S. economy. Gold was undervalued.
  
  In 1960, the U.S. economy entered a recession, and the dollar-gold peg looked increasingly at risk. If the new president were to devalue the dollar to energize the economy, then it would make sense to pay a slight premium to take advantage of that opportunity. A "run" on gold ensued, spiking the price above $40/oz internationally.
  
  This put pressure on the U.S. to either sell its gold stocks, devalue the dollar, or work with other countries to bring the global price back down to $35/oz. They went with the third option, and the crisis was averted.
  
  The situation exemplified the problem of a fixed currency experiencing balance-of-payments problems. As the world's post-war economies grew, there were more dollars floating around, and those dollars represented potential claims on the U.S.'s (essentially) fixed quantity of gold. The global money supply was growing (and dollars were pouring out of the U.S.'s military bases overseas), but the supply of gold was not keeping pace.
  
  In time, the balance-of-payments problem would force the U.S. to either:
  1. Accept deflation (hurting debtors and helping the rich in a time of downward economic cycle),
  2. Change its gold reserve requirement (a dollar devaluation),
  3. Adjust the dollar value of gold (another type of devaluation),
  4. Impose currency controls (ending the dollar's role as the world's foundational currency),
  5. End its overseas military presence (not an option during the Cold War), or
  6. Actively work with foreign countries to manipulate the gold market (which was only ever a temporary fix).
  
  There was another type of currency control the U.S. could impose, and that was to forbid U.S. private ownership of gold abroad. In an effort to "plug the gold leak," despite any hard data that this was a real problem, Eisenhower issued an executive order in January 1961. In terms of economic logic, it was sound, but it represented an even greater overreach of governmental authority than anything Roosevelt would (or could) have done.
  
  The extent to which the government went to enforce the ban on private gold ownership would border on absurd. Yet this was matched by market forces eager to meet demand by consumers who romanticized gold ownership.
  
  In 1962, two men in New York were arrested for selling 200 ounces (three gold bars) at $45/oz. The assistant U.S. attorney in the case stated, "The government regards this as a most serious offense, particularly in view of the serious situation this country faces regarding the gold situation." And in another case, the Treasury Department felt it was in the national interest to arrest a 14-pound 18k solid gold rooster from a Las Vegas casino lobby. [Link]