Currency Wars_ The Making of the Next Global Crisis - James Rickards [39]
Today’s electronic social media have a powerful amplifying effect on popular sentiment, but it is still the sentiment that counts. The residue of trust in leadership and economic policy in the early twenty-first century has worn thin. It is not difficult to imagine some future dollar collapse necessitating gold seizures by the government. It is difficult to imagine that U.S. citizens would willingly go along as they did in 1933.
Roosevelt’s gold confiscation left unanswered the question of what new value the dollar would have relative to gold for purposes of international trade and settlements. Having confiscated Americans’ gold at the official price of $20.67 per ounce, FDR proceeded to buy more gold in the open market beginning in October 1933, driving up its price slowly and thereby devaluing the dollar against it. Economist and historian Alan Meltzer describes how FDR would occasionally choose the price of gold while lying in bed in his pajamas, in one instance instructing the Treasury to bid up the price by twenty-one cents because it was three times his lucky number, seven. The story would be humorous if it did not describe an act of theft from the American people; profits from the increased value of gold now accrued to the Treasury and not the citizens who had formerly owned it. Over the next three months, FDR gradually moved the price of gold up to $35 per ounce, at which point he decided to stabilize the price. From start to finish, the dollar was devalued about 70 percent when measured against gold.
As the coup de grace, Congress passed the Gold Reserve Act of 1934, which ratified the new $35 per ounce price of gold and voided so-called gold clauses in contracts. A gold clause was a covenant designed to protect both parties from the uncertainties of inflation or deflation. A typical provision said that in the event of a change in the dollar price of gold, any dollar payments under the contract would be adjusted so that the new dollar obligation equaled the former dollar obligation when measured against a constant weight of gold. FDR’s attack on gold clauses was highly controversial and was litigated to the Supreme Court in the 1935 case of Norman v. Baltimore & Ohio Railroad Co., which finally upheld the elimination of gold clauses in a narrow 5–4 decision, with the majority opinion written by Chief Justice Charles Evans Hughes. It was only in 1977 that Congress once again permitted the use of gold clauses in contracts.
Finally the Gold Reserve Act of 1934 also established the Treasury’s exchange stabilization fund, to be financed with the profits from gold confiscation, which the Treasury could use on a discretionary basis for currency market exchange intervention and other open market operations. The exchange stabilization fund is sometimes referred to as the Treasury’s slush fund, because the money does not have to be appropriated by Congress as part of the budget process. The fund was famously used by Treasury Secretary Robert Rubin in 1994 to stabilize Mexican money markets after the collapse of the peso in December of that year. The exchange stabilization fund had been little used and was mostly unknown even inside Washington policy circles from 1934 to 1994. Members of Congress voting for the Gold Reserve Act in 1934 could hardly have conceived that they might be facilitating a Mexican bailout sixty years later.
The English break with gold in 1931 and the U.S. devaluation against gold in 1933 had the intended effects. Both the English and U.S. economies showed immediate benefits from their devaluations