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By Root 852 0

loans to banks equal to 100 percent of the par value of any government securities and 90 percent of the face value of any checks or other liquid short-term paper they held. The Fed could also make unsecured loans to any bank that was a member of the Federal Reserve System. In practice, this meant that banks could obtain all the cash they needed to deal with bank runs. It was not quite deposit insurance, which would come later that year, but it was the functional equivalent because now depositors did not have to worry that banks would literally run out of cash.

Interestingly, Roosevelt’s initial statutory authority for the bank closure in March was the 1917 Trading with the Enemy Act, which had become law during World War I and granted any president plenary emergency economic powers to protect national security. In case the courts might later express any doubt about the president’s authority to declare the bank holiday under this 1917 wartime statute, the Emergency Banking Act of 1933 ratified the original bank holiday after the fact and gave the president explicit rather than merely implicit authority to close the banks.

When the banks did reopen on March 13, 1933, depositors lined up in many instances not to withdraw money but to redeposit it from their coffee cans and mattresses, where it had been hoarded during the panic of the preceding months. Although very little had changed on bank balance sheets, the mere appearance of a housecleaning during the holiday combined with the Fed’s new emergency lending powers had restored confidence in the banks. With that behind him, FDR now confronted an even more pernicious problem than a bank run. This was the problem of deflation now being imported into the United States from around the world through exchange rate channels. CWI had now arrived at the White House doorstep.

When England and others went off the gold standard in 1931, the costs of their exports went down compared to costs in other competing nations. This meant that competing nations had to find ways to lower their costs to also remain competitive in world markets. Sometimes this cost cutting took the form of wage reductions or layoffs, which made the unemployment problem worse. In effect, the nations that had devalued by abandoning gold were now exporting deflation around the world, exacerbating global deflationary trends.

Inflation was the obvious antidote to deflation, but the question was how to achieve inflation when a vicious cycle of declining spending, higher debt burdens, higher unemployment, money hoarding and further spending declines had taken hold. Inflation and currency devaluation are substantially the same thing in terms of their economic effects: both decrease the domestic cost structure and make imports more expensive and exports less expensive to other countries, thus helping to create domestic jobs. England, the Commonwealth and Japan had gone this route in 1931 with some success. The United States could, if it so chose, simply devalue against sterling and other currencies, but this might have prompted further devaluations against the dollar with no net gain. Continuation of paper currency wars on a tit-for-tat basis did not seem to offer a permanent solution. Rather than devalue against other paper currencies, FDR chose to devalue against the ultimate currency—gold.

But gold posed a unique problem in the United States. In addition to official holdings in the Federal Reserve Banks, gold was in private circulation in the form of gold coins used as legal tender and coins or bars held in safe-deposit boxes and other secure locations. This gold could properly be viewed as money, but it was money being hoarded and not spent or put into circulation. The easiest way to devalue the dollar against gold was to increase the dollar price of gold, which Roosevelt could do with his emergency economic powers. FDR could declare that gold would now be convertible at $25 per ounce or $30 per ounce instead of the gold standard price of $20.67 per ounce. The problem was that the benefit of this increase in the gold