The Untold Story of FDR and the Battle Over Gold

First of four excerpts from “American Default,” on one of the strangest and most enduring chapters of the Roosevelt era.

By Sebastian Edwards

May 22, 2018, 6:00 AM PDT

FDR with Henry Morgenthau Jr., second from left, and George Warren, fourth from left.

Photographer: Bettmann/Getty Images

During the second half of 1933, George F. Warren was the most influential economist in the world. Almost every morning during November and December, he met with Franklin Roosevelt while the president was still in bed, and helped him decide the price at which the government would buy gold during the next 24 hours.

Henry Morgenthau Jr., who often attended these meetings, confided to his diary that the process had a cabalistic dimension to it. In selecting the daily price, FDR would, jokingly, consider the meaning of numbers, or flip coins.

On one occasion, he decided that the price would go up by 21 cents with respect to the previous day. He then asked the group assembled around his bed if they knew why he had chosen that figure. When they said that they didn’t, the president smiled broadly and remarked that it was a lucky number — “it’s three times seven.” He would then write the new price on a piece of paper, which he handed to Jesse Jones, the chairman of the Reconstruction Finance Corporation. According to Warren’s theories, higher domestic prices of gold would result in rapid and proportional increases in the price level and especially in commodity prices.

The fact that today almost no one recognizes George F. Warren’s name, let alone knows about his theories, illustrates how strange that period was.

The New York Times Sunday Magazine described Professor Warren as “mysterious” — “a sturdy man in his late fifties; not very tall, dressy or professorial; not remarkable in any outward particular except for his common-sense air and for a quiet, kindly dignity of the sort that comes from years of hard work.”

His influence could be traced back to April 19, 1933, when President Roosevelt, in office only since March 4, announced that he was taking the United States off the gold standard. All gold holdings had to be sold to the Federal Reserve, and bullion shipments were forbidden. He explained that the fundamental goal of abandoning the monetary system that had prevailed since Independence was to end the Depression, and to help the agricultural sector. The president declared: “The whole problem before us is to raise commodity prices.”

Six weeks later, on June 5, Congress passed a Joint Resolution annulling all gold clauses from future and past contracts. These clauses stated that debts had to be paid in “gold currency” or in “gold equivalent.” Republicans were dismayed and argued that the nation’s reputation was at risk. The government, on the other hand, claimed that the Joint Resolution did not imply “a repudiation of contracts.”

In late August 1933, FDR took a further step toward officially devaluing the dollar with respect to gold, when he decided to implement a program for buying newly minted gold. This program was the brainchild of Professor Warren.

George Frederick Warren was born on a Nebraska farm in 1874. After college, he worked as a high school teacher, and at age 25 he became superintendent of schools in Kearney County. In 1902, he decided to pursue a doctorate in agronomy at Cornell, where he stayed for the rest of his life and where he had a distinguished academic career.

FDR met Warren in the 1920s through Morgenthau, who had a close connection to Cornell’s farm management faculty. As governor of New York, Roosevelt relied on Warren’s advice on issues related to land conservation and reclamation. During the first part of his career, Warren focused on farm management techniques, on how to rotate crops efficiently, and how to grow alfalfa. He also devised way to improve hens’ productivity, and to build better barns and stables.

In 1931 he published, jointly with his colleague the statistician Frank A. Pearson, “Prices,” a thick volume where they examined data for dozens of commodities for over 200 years in a number of countries. Soon after it was published, the book, which allegedly showed the close relationship between the prices of gold and other commodities, became the bible for devaluationists. At around that time Warren became associated with the Committee for the Nation, the pro-devaluation lobbying group supported by publisher William Randolph Hearst, and during the next few years he helped the group develop some of its more technical arguments in favor of abandoning the gold standard.

This meant that the solution for the deflation that had gripped the nation for so long was rather simple: The availability of monetary gold had to increase dramatically. The easiest way of doing this was by increasing the dollar value of the existing physical stock of gold through a devaluation of the currency.

“Prices” was impressive and a bit intimidating. It was full of charts and tables, and it contained long explanations of why there were price cycles. Warren and Pearson’s conclusion was that prices went up and down because the world’s stock of monetary gold increased and decreased through time. These fluctuations were the results of new gold discoveries and of increased demand for nonmonetary purposes. Price jumps were also the consequence of countries going in and out of the gold standard.

Warren and Pearson further argued that future price cycles could be avoided by frequently adjusting the value of the metal. The relation between the dollar and gold would not be rigid any longer; it would “slide” up or down depending on the availability of monetary gold in the world. There was a similarity between the Warren-Pearson “sliding dollar” — often ridiculed by their opponents as a “rubber dollar” or “baloney dollar” — and Irving Fisher’s “compensated dollar.”

But the similarities were superficial. The two professors had very different mechanisms in mind when they recommended unhinging the currency from gold. For Fisher this was only one component in a complex plan with many parts; for the process to operate properly the Federal Reserve needed to “cooperate” through the provision of the right amount of liquidity (credit and money).

For Warren and Pearson, on the other hand, raising the price of gold was enough to unleash the forces required to end deflation; there was no direct role for the Fed or for traditional monetary policy.

By September 29, 1933, one month after the president had authorized the purchase of newly minted gold at arbitrarily high prices, the commodity markets continued to be depressed. The price of corn was 28 percent lower than on July 15; the price of cotton, rye and wheat had declined by 13 percent, 30 percent and 21 percent relative to that date. The plan was not working as the president had anticipated.

In the meantime, and almost by stealth, the government was making changes to its public debt policy. On October 11, the Treasury retired 30 percent of the Fourth Liberty Loan — which had been originally issued with the now defunct gold clause — and replaced it with 12-year bonds with a 1 percent coupon.

The new offer was vastly oversubscribed, suggesting that contrary to what many conservatives had argued, the abrogation of the gold clause had not generated serious damage to the government’s reputation, or to the demand for government securities. Moreover, the low interest rate on the new debt signaled that expectations of inflation continued to be depressed.

Meanwhile, the legal machinery continued to move forward. On October 11, the Advisory and Protective Committee for American Investments was formed in London. Its purpose was to take part in legal actions that would protect British investors from the “default in gold payment and gold-clause situation.”

This body was supposed to complement the work of the International Committee against the Repudiation of the Gold Clause that had been formed by French, Swiss and Belgian debt holders on July 4, a day after FDR had cabled his bombshell message to the London Conferencestating that the United States was not interested in “stabilizing the exchanges.” What FDR wanted was higher commodity prices, even if this meant a weaker dollar.

The main concern of these committees was to get the courts to protect their rights and rule that debts that carried the gold clause had to be paid in gold-equivalent, or paper money that would buy the same amount of gold.

Part Two of these excerpts will describe the policies undertaken in late 1933 to end deflation; the details of the “revised gold buying” program; and the reaction of the markets.

(This is the first of four excerpts from “The American Default: The Untold Story of FDR, the Supreme Court and the Battle Over Gold,” to be published by Princeton University Press on May 29.)