June 8, 2008

FDR and the "Gold Clause"

I've read with interest upon these pages the vigorous debates between Perry and JK over the demise of the gold standard which once backed the US dollar. There are good points on both sides but neither has me fully convinced.

Consider the related issue of the "gold clause" once used in private contracts and also outlawed on FDR's watch. A fascinating essay on the history of these events was written for the Wall Street Journal by Amity Shales. Here is just a morsel:

The market rally in the spring of 1933 slowed as investors watched FDR fiddle with the dollar and commodities over the course of the fall. In 1934, FDR thought better of it all and fixed the dollar to gold again, albeit now at $35 dollars an ounce. But the abrogation of the gold clause suggested that Washington had no regard for property rights. The general uncertainty generated by government economic policies did not abate. Capital went on strike. The Great Depression endured to the end of the decade. The positive transparency that the Securities and Exchange Commission or the creation of deposit insurance brought to markets was offset by losses like that of the gold clause.

None of us should despair our inability to judge the rectitude of current monetary practices, however:

After a majority of the Supreme Court upheld the constitutionality of the gold clause abrogation, Justice James McReynolds read the dissent. Today McReynolds is generally regarded as an irrelevant reactionary, a footnote himself. But his rueful words ring true for those trying to reckon the dollar's future. It was, he said, "impossible to estimate the result of what has been done."

To get the whole story you'll have to read it all, but it is brief and you'll be glad you did.

Hat tip: 'The American' magazine, again.

Economics and Markets Posted by JohnGalt at June 8, 2008 12:51 PM

Somebody's hawking The American Magazine on ThreeSources and it's not me -- awesome.

Amity Shlaes is incredible. I cannot recommend any book more highly than her "The Forgotten Man." I just learned last weekend that she is married to Seth Lipsky (of New York Sun fame). I wouldn't mind a dinner invitation there. (Shlaes got a highly positive review corner last year and I received a nice thank you email from her. Well, I did give her five stars!)

Posted by: jk at June 8, 2008 7:06 PM

I will take credit for JG, "hawking," The American. I picked up this article,

http://american.com/archive/2008/may-june-magazine-contents/can-money-buy-happiness/

in a client lobby and found it to be about 95% philosophically correct. That is bordering on miraculous by my standards. I recommended the article to him. He apparently found plenty of other stuff to read as well.

My favorite line from the article above, "How we use this power and freedom is up to us, and depends on our values: We can make decisions that lead to happiness, or we can make decisions that make us miserable. But to throw out free markets because capitalism does not bring happiness directly would be senseless: It would be like trashing your computer because it didn't make your coffee."

Posted by: dagny at June 9, 2008 11:46 AM

I don't mind paper money *inherently*. My problem is that there are people who are not accountable to me in the slightest, who have the power to create more of something I use as a medium of exchange (which means devaluing what I've saved).

In the same way I don't want others to force me to use paper money, I don't want to force others to use gold-backed currency. What I do demand is that we have the freedom to use gold if we want. Paraphrasing Lincoln on being a slave and being a master, the beginning of true libertarianism is when a person realizes, "So as I would not be forced, so as I would not force you." Now, U.S. law makes Federal Reserve notes artificially competitive. We aren't required to use it, but there's artificial confidence (borne of an implied government-backed guarantee) in Federal Reserve notes, and most people (including Schlaes?) don't know that the Gold Clause Resolution of 1933 is still in effect -- you can't insert a clause into a contract stipulating that repayment be made in gold. It's not necessarily a criminal act, but your contract can be ruled null and void. Why shouldn't people be able to receive payment in gold if they so desire, without being made into criminals? And didn't the other person enter into the contract freely, with the clause right there to read? So Congress legislatively blackmailing mortgage lenders into freezing rates is not the first time that the federal government forced the rewriting of contracts (especially when detrimental to those expecting repayment).

Resultingly, the Fed's control over our money supply is virtually a monopoly. A true monopoly, unlike this myth of Microsoft's "uncompetitive practices." Thus it's much harder for us to use other mediums of exchange, whether we're buying or selling. We've been *bred* to like paper and look funny at hard metal. Again, the former isn't inherently bad, but the people in charge can render your savings less valuable, if not worthless like in Zimbabwe. Think about how oil prices would impact you less if you could have used gold-backed money issued by private banks. As gold prices increased, indicating an increase in demand but more so the weakening dollar, people who saved in gold could better afford $4/gallon gasoline.

Bringing this back to Schlaes, she wrote a good piece, but why must she hold back? Of course the federal government had no regard for property rights -- it was clear to anyone who had gold and was forced to sell it, or else face prison time and fines. And FDR, that evil bastard who I hope to God is rotting in hell as we speak, *lied* during 1932 campaign, campaigning on a platform that advocated sound, gold-backed money. Mere days after he was inaugurated, he issued Executive Order 6102, making it a crime to hoard more than $100 in gold unless for "collecting" (which has been gradually done with firearms). It's just like Ayn Rand said:

"There's no way to rule innocent men. The only power government has is the power to crack down on criminals. When there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws."

Posted by: Perry Eidelbus at June 10, 2008 4:25 PM | What do you think? [3]