Roosevelt, the Supreme Court and Gold

Originally a campaign slogan, the New Deal refers to the set of public policies implemented during the presidency of Franklin D. Roosevelt. Historians and economists—some of whom took part in its design and implementation—continue to wonder whether it ended the Great Depression. The answer is all the more difficult because it is characterized not only by its diversity, but also by the multiplicity of its sources of inspiration: major public works, the attempt to reorganize industrial production under the aegis of the National Recovery Administrationor the adoption of a Keynesian recovery policy from 1938, are all examples of these “bold experiments” that candidate Roosevelt called for in 1932. Among these experiments, monetary policy decisions, while never absent from the great narratives devoted to the New Deal, have seen their importance reassessed; the contemporary consensus attributes to them a major role in the recovery of activity. In American Default. The Untold Story of FDRthe Supreme Court, and the Battle over GoldSebastian Edwards returns to one aspect of this policy: the validation, by the Supreme Court of the United States, of the vote of Congress repealing the “gold clause”. The latter, present in most private and public debt contracts since the Civil War, stipulated that the borrower committed, if requested by the lender, to repay his debt in gold (or in dollars for a value equivalent to the same quantity of precious metal). The author aims to restore its full dimension to an episode that the title of the book describes as a “default” of the United States.

The Hundred Days of the New Deal

A professor of economics at the University of California, Los Angeles, Edwards brings to his project the experience acquired during the Argentine debt crisis in the early 2000s. Organized into seventeen chapters, the subject follows a chronological progression. The introduction is embellished with a chronology and a useful presentation of the main actors.

The body of the book begins with a sketch of America during the Great Depression—Edwards rightly points out the dilemma that deflation posed to policymakers and economists of the time, which particularly affected American agriculture. By the time Roosevelt was sworn in on March 4, 1933, the banking crisis was at its height, particularly in the form of hoarding of gold. He ordered the temporary closure of all banks, and on March 9, Congress passed an emergency bill (Emergency Banking Act) containing restrictions on the possession of precious metal; these were supplemented and reinforced on April 5 by a presidential decree.

During the New Deal’s famous “First Hundred Days,” elected officials from farm states advocated the remonetization of silver to combat deflation. An amendment proposed by Senator Elmer Thomas gave the president wide latitude to change the gold parity of the dollar at will. On April 18, Roosevelt announced that he was accepting it, thereby taking his country off the gold standard. Although the official parity of $20.67 per ounce remained unchanged, the American currency depreciated against the pound and the franc; agricultural prices recovered. In his “Fireside Talk” of May 7, the president declared that the United States’ gold stock would not be sufficient to repay all creditors if they demanded it; in the interests of fairness, he believed, the “gold clause” should be eliminated. Its repeal was passed by both houses of Congress on May 29 and June 3.

Edwards shows clearly that Roosevelt’s policy was driven by a national priority: to raise domestic prices and thus end deflation. It aimed neither to revive world trade nor to stabilize the international monetary system. These were precisely the objectives of the London Economic Conference, which met on June 12. Convinced that monetary stabilization was contradictory to his inflationary objective, Roosevelt scuttled the compromise reached with great difficulty by the participants.

In the weeks that followed, the president began to listen attentively to Cornell University professor George F. Warren, an agricultural specialist. Inspired by Warren, he announced in October that his country would implement a gold-buying program to depress the dollar; during the last months of 1933, he met with Warren every morning to determine the price. The program proved disappointing in its anti-deflationary results, and he eventually abandoned it. On January 30, 1934, Roosevelt signed into law the Gold Reserve Actwhich established a new official parity of 35 dollars per ounce.

The economy is restarting

The year 1934 was the year of the economic recovery. The great reforms of the New Deal (National Industrial Recovery Act, Agricultural Adjustment Actetc.) contributed to the return of confidence; the money supply increased, through the combined effect of the expansionist policy implemented by the Federal Government and the inflow of precious metals from a Europe where the dangers were mounting; the vicious circle of deflation was broken. But the Gold Reserve Act had also opened a period of legal uncertainty. In the name of respect for contracts, several investors demanded that the bonds they held be reimbursed at the new parity of 35 dollars per ounce – the bearer of a Liberty Bond of $10,000, issued by the Federal Government, could thus have demanded its repayment in the amount of $16,932 ((10,000 / 20.67) x 35 = 16,932). Many cases were brought before the courts; the Supreme Court was called upon to rule on four of them.

L’Attorney General Homer S. Cummings himself led the team of lawyers representing the Federal Government before the Court. Edwards recalls that this was the first time that “briefs” (memoranda presenting the facts and arguments) set out macroeconomic reasoning based on graphs and statistical data. A major argument was that of necessity: the devaluation of the dollar was necessary to end the Great Depression; it was unachievable without the repeal of the “gold clause”. The “briefs” also developed two other arguments. First, that of impossibility, already put forward by the president: the gold stock was insufficient to satisfy all the creditors. The reasoning was rather specious, insofar as the latter did not demand to be reimbursed in precious metal, but in dollars at the new parity defined by the Gold Reserve ActThe second argument was more convincing: since the country was emerging from a long period of deflation, the plaintiffs could not claim financial damages since the dollar of 1934-1935 had a purchasing power greater than that which had been itss when the loan contracts were signed.

The hearings were held from January 8 to 10, 1935, in a tense atmosphere. The Supreme Court was very divided: conservative “four horsemen” opposed “three liberal musketeers” – in the American sense of the term -; two of their colleagues, including the Chief Justice Charles E. Hughes, occupied a middle ground. Fearing a negative decision, Roosevelt even considered appealing directly to American citizens – at the risk of precipitating the institutional crisis that was to occur shortly after. The Court announced its decision on February 18. By five votes to four, it approved the constitutionality of the repeal of the “gold clause” for private contracts. On the other hand, with regard to the public debt, the Court declared, by eight votes to one, that the repeal was unconstitutional. But by five votes to four, it took up one of the arguments of the Federal Government: the repeal had not caused any harm, in terms of purchasing power, for investors; on the contrary, the latter could not take advantage of the “gold clause” to enrich themselves unjustly. Furious, “Cavalier” McReynolds expressed his disapproval in vehement terms, predicting chaos and lamenting the loss of America’s reputation.

While the economic recovery continued in 1935, the conflict between the Executive and the Supreme Court became an open war that resulted in the invalidation of entire sections of the New Deal. Asking what would have happened if the same had been true for the repeal of the “gold clause”, Edwards notes that investor interest in American public debt has not disappeared and that chaos has not occurred. But the United States has gone back on its word and the book ends with the prediction that such an episode could be repeated in another part of the world – the author, briefly mentioning the hypothesis of Greece abandoning the euro and returning to the drachma, asserts that the Supreme Court’s decision would not fail to be cited as a precedent by the parties concerned.

International Monetary Disorder

The subject, at the crossroads of economics, law and history, is complex; despite its aridity, Edwards demonstrates an enthusiasm that he knows how to communicate to the reader. The plot is effectively scripted; it is interspersed with picturesque portraits, such as that of Judge McReynolds, or vignettes borrowed from the press of the time. The functioning of the Supreme Court, with its pomp and its announcements, lends itself to such a staging. An economist rather than a historian, Edwards dares to make enlightening comparisons with the Argentine crisis.

The main contribution of the work lies in the detailed analysis of the economic, legal and political issues of the repeal of the ” gold clause ” The latter is often presented as a rather secondary technical aspect – thus in the book by Milton Friedman and Anna Schwartz, A Monetary History of the United States (Princeton University Press, 1963). It is not, however, ignored by economic historians, nor is it absent from the many works devoted to the confrontation between the Executive and the Supreme Court during Roosevelt’s first term – this is the case, in particular, of Supreme Powerby Jeff Shesol (WW Norton & Company, 2010), or even FDR and Chief Justice Hughesby James F. Simon (Simon & Schuster, 2012). It is therefore a bit excessive to claim, as Edwards does, that the controversy sparked by the repeal of the “gold clause” has been the subject of a “collective amnesia.”

A substantial portion of the book consists of illustrated contextualization of episodes well known to New Deal historians and their readers—Henry Morgenthau Jr.’s diary of Warren’s bedroom conversations with Roosevelt is often cited by the president’s biographers. This necessary contextualization would have benefited from a fuller and more thorough presentation of the international monetary disorder of the interwar period and the then-hot issue of war debts.

A more careful proofreading by the editor would also have avoided some errors. For example, on page 24, there is mention of the Refinance Finance Corporation, while it is the Reconstruction Finance Corporation – she is later correctly identified; on page 53, James F. Byrnes is presented as the senator from South Dakota, while he is the senator from South Carolina – in the political geography of the United States, these two states belong to two very different subsets, the Midwest and the old South.

Nonetheless, Edwards was able to capture the climate of intellectual and institutional uncertainty at the beginning of the New Deal. In this respect, American Default helps to do justice to its experimental and innovative character.