American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold
GoldFinger1969
Posts: 318 ✭✭✭
If you are a collector of gold coins...or are just interested in their history (especially Saint-Gaudens DEs)....or are a lover of history....student of economic or monetary policies.....conspiracy theorist 
.....then this book is for you.
I came across it while reading about the case of the 1933 Double Eagles and the law at that time (early-1933). This book goes into the personalities (FDR, the Supreme Court), the law, the policies, the debates, etc. It focuses on the consolidated 4 cases known as the Gold Clause Cases, which asked if the government could abrogate the clauses in bond indentures requiring payment in gold coin (or gold value) to protect against inflation and/or devaluation of the dollar. It's a fascinating case and alot closer than most realize (mostly 5-4 decisions).
An excellent review of the book which touches upon the political and legal issues is here:
Without history turning out the way it did, the government may not have been able to force compulsory sales of gold from the American people....the 1933 DEs might have been released....and even 1934, 1935, and later years would have seen mintages.
Comments
An interesting read. I was following along OK until I hit this quote by the summary author.
"The unsustainable federal debt is not an accident. It was consciously created by Republican politicians to justify reducing (or eliminating) future federal entitlements."
It was then that I realized this summary was published in 2018, and political. The massive increase in debt since 2018, for Covid relief and vote buying has been from both political parties. That, combined with ZIRP by the Federal Reserve provided politicians with the idea that money is "free", so Congress borrowed excessively for all kinds of programs believing in MMT as a panacea.
Inflation is the result. The positive aspect of the article is that maybe the government will continue to let us buy and hold gold, even if the currency and banking systems are no longer directly connected to it.
National Commemorative Medals of the U.S. Mint:
https://www.pcgs.com/setregistry/alltimeset/195526
When I saw that, the whole article lost any credibility.
Worry is the interest you pay on a debt you may not owe.
To be fair, the actual book and history is probably not all that bad.
It is the review of the book by Gary Richardson, Department of Economics, University of California at Irvine that is politically biased.
National Commemorative Medals of the U.S. Mint:
https://www.pcgs.com/setregistry/alltimeset/195526
That phrase turned me off completely. May go back and look some more... but now seems tainted. Cheers, RickO
I'm very sensitive to political bias but I think that the author (not the reviewer) plays it straight down the middle. I just started the book but he definitely has an opinion on the actual abrogation of the gold clauses and you can tell from the title of the book: DEFAULT.
Author relies heavily on Milton Friedman and Anna Schwart's A MONETARY HISTORY OF THE UNITED STATES, a classic monetarist bible. Edwards (the author) also mentions in the preface that he spoke to both Friedman and Schwartz when they were still alive; he served on a council with Friedman at the behest of then-Governor Schwarzenegger.
Actually, aside from that one line -- which is really more polemical than factually true or false -- the review is very good. Richardson DOES disagree with Edwards on the technical case of default.
Richardson also has some good writings over on the Federal Reserve's historical pages as he mentions in the book review. Some interesting photos, commentary, and historical facts on that time period.
Here's one by a colleague of his on The Great Inflation:
https://www.federalreservehistory.org/essays/great-inflation
This was fascinating by Richardson...the Cleveland Fed dealing with dentists !!
https://www.federalreservehistory.org/essays/gold-reserve-act
@GoldFinger1969: thanks for the two links; excellent articles! I think the Michael Bryan article on the Great Inflation is particularly impressive -- he's summarized some complex and important economic/financial history is a remarkably succinct and cogent manner.
With regard to the Richardson article on the Gold Reserve Act of 1934, though I don't want to whip up too much antigovernment sentiment, it's perhaps worth pointing out an historical detail that Richardson sidesteps in his article (though I guess he is alluding to it in the paragraph on Section X): while the Gold Reserve Act fixed the price of gold at $ 35, FDR paid only $ 20.67 when he confiscated our gold roughly nine months earlier.
Does todays FED have a more daunting task of controlling inflation than that of the 70s/80s due to the unconstrained fiscal policies enacted by Congress?
Knowledge is the enemy of fear
@cohodk asked “Does todays FED have a more daunting task of controlling inflation than that of the 70s/80s due to the unconstrained fiscal policies enacted by Congress?”
Great question, and I think the answer is basically “no” for the time being; I’m happy to outline my reasoning shortly; I look forward to hearing others’ thoughts.
@cohodk said:
No, because fiscal policy is just one lever that moves inflation.
Demographics....energy shocks.....global labor supply....these are all more important than fiscal policy per se. They are all now beginning to REVERSE to a pro-inflationary outlook which means the Fed today has a tougher job than in decades.
Some interesting tidbits from American Default ; I've made it through a few chapters so far:
FDR while campaigning in the final weeks of the 1932 campaign...was cagey and deceptive and objected when attacked as being a "devaulationist" or willing to tinker with the value of gold. While he did not offer any outright hard policy prescriptions or promises or red lines, he did cover his you-know-what by saying he had no plans to do what the Hoover campaign attacked him on. Of course, once in office he did a 180.
Once FDR was elected but before sworn-in, lame-duck Hoover tried to coordinate policies with the incoming FDR team to stop bank failures, currency and gold drain, etc. But FDR wouldn't commit to anything so Hoover's hands were tied. FDR's team really didn't look good as they ended up doing pretty much what the Hoover folks were saying they could have done weeks or months sooner.
A week after the Emergency Banking Act was passed by FDR during his first days, the government sold $800 MM in Treasuries....WITH the gold clause they were eliminating elsewhere !
.
After the EBA was passed, gold holdings continued to decline. By mid-March it was estimated that about $1 BB was being hoarded in gold coins, gold certificates, and currency. They fell $188 MM in 3 weeks from the time of the EBA.
On March 3rd, 1933.....the FRB NY lost $250 MM in gold and $150 MM in currency and fell below the 40% backing of currency with gold ($250 MM short of the target).
He who controls the money, controls the people. Gold got in the way of that over 100 years ago. The bankers had to do something about that. Saddle the treasury with debt. Great plan.
Can't know yourself, 'til you get back to Earth
Not the bankers, the politicians -- FDR and his crew. The Treasury promoted this stuff and they helped rape the Federal Reserve banks.
Not the bankers, the politicians
The bankers AND the politicians. Both are complicit. The bankers on every level create debt out of thin air and then collect interest on it. No reserve requirement. Uncontrolled money creation & spending on what? Strange days.
I knew it would happen.
That's not what happens. If what you said were true, Gross Margins and Net Interest Margins for banks would be much much higher. You are repeating political hyperbole by charlatans selling PMs or other investment products that quite frankly couldn't read a balance sheet, an income statement, or a statement of cash flows if their life depended on it.
Did you see what happened to SIVB today ? Think they can create debt out of thin air ? Maybe you should call the CEO who lost 65% of his $25 MM in stock today along with diluting the hell out of the shareholders. Tell him you have an easy way to "create debt of of thin air...collect interest on it...with no reserve requirement......uncontrolled money creation"
Go for it !!!
Nobody's borrowing which is why their margins suck. You never explained why the reserve requirements are ZERO. How does THAT work?
Just like 2008, there is no accountability in the banking system. I'm sure that they'll have their bought politicians in Congress and the FASAB change the rules again if they can't make it under the current paradigm.
I knew it would happen.
No, margins suck because the yield curve is inverted and the Cost of Funds (COF) has risen.
Reserve Requirements are NOT zero -- we have risk-based capital under Basel III that has various reserve needs.
It's F-A-S-B....FASB
.....if you are talking about mark-to-mark accounting, since the assets had no credit risk at maturity, suspending the rule for everyone was not necessarily unfair.
2008 was about leverage, credit risk, and systemic risk.
FASAB - Federal Accounting Standards Advisory Board.
The banks got special treatment when their managements should have all been fired. Can't sugar-coat it.
I knew it would happen.
The US Treasury " raped" the Federal Reserve ?
I couldn't disagree more with that statement.
Roosevelt did some terrible things. One of the worst was to let the Federal Reserve steal the nation's gold reserves.
When Roosevelt confiscated gold from the American public and negated the gold clause on bonds and currency , it was done so as a bailout of the Federal Reserve.
In 1933, the United States Treasury held 6,000 metric tons of gold.
During the 20-year period leading up to 1933, the US Treasury issued Gold Certificates in the amount of 16,000 metric tons worth. During this same period, the Federal Reserve Banks issued "Federal Reserve Notes" that stated on them that they were redeemable in gold on demand. These Federal Reserve Notes amounted to 56,000 metric tons of gold. But the Federal Reserve had none.
When Roosevelt confiscated gold and recalled the US Treasury Gold Certificates, those Gold Certificated were traded to the Federal Reserve Bank in exchange for new Federal Reserve Notes of Series 1934 that were not redeemable in gold. This action essentially turned over title to the nation's gold reserves to the banking cartel that is the Federal Reserve.
Here are the details:
moonlightmint.com/bailout.htm
.
The Treasury promoted this stuff and they helped rape the Federal Reserve banks.
Perhaps you should read, "The Creature from Jekyll Island" for a much better understanding.
I knew it would happen.
The FRB is not a "banking cartel" and their leaders largely OPPOSED the actions of FDR and the Treasury, led by William Woodin (a coin collector who allegedly had several 1933 Double Eagles).
Yes, the U.S. had 40% of the world's gold. There was no reason to confiscate gold from private hands and certainly one could devalue without seizing gold. The % backing of certificates and the money supply was irrelevant, it was the BOND that mattered (hence the book's focus on the Gold Clauses for $120 billion in bond debt).
18 years later, the Fed got revenge on the Treasury and the government in the Treasury-Fed Accord of 1951:
https://www.federalreservehistory.org/essays/treasury-fed-accord
Why should they all have been fired ? Most did a good job of not engaging in reckless management. Did you see how many banks failed in 2008-09 compared to the 1980's S&L Crisis or the Depression ?
I read it before it was a book. He's a smart guy but has no rationale solutions for a modern global economy.
I was a Fed Watcher in the 1980's -- that provides alot more knowledge than any book.
FDR handed over title to all the nation's gold reserves, which were owned by the people, to the Federal Reserve.
By statute, the Federal Reserve remits 94% of their profits to the US Treasury. The remaining 6% is still a huge amount.
Whose pockets does that profit go to ?
No, your sources are WRONG. The gold went to the Treasury. They sucked the regional Fed banks dry. Why do you think the Treasury folks were chortling and the Fed folks pissed as hell ?
The Fed acts as CUSTODIAN for the U.S. Treasury. The Fed makes money on open market operations....check clearing...and other functions. The balance is entirely sent back to the Treasury.
The pockets it goes back to ? The American People.
With some $$$ earmarked for the ESF.
The US Treasury already held the gold in 1933 and is still the custodian of what is left (after a quantity went to the New York Federal Reserve Bank).
But when US Treasury Gold Certificates were exchanged for new Federal Reserve notes and/or balances, the Gold Certificates were transferred to the Federal Reserve, This gave title of the gold to the Federal Reserve.
6% of the Fed's profits are distributed via dividends to the "stockholders" of the Federal Reserve.
Who are the "stockholders" ?
>
What about Over The Counter Derivatives held by the major banks, in particular the TBTF banks from 2009. That's all opaque and on paper "valued" at $600 TRILL or thereabouts. 80% of it in interest rate contract bets. The other 20% in bets in currency, commodities, PMs, credit default swaps, etc. Much of that created out of thin air by the banks themselves. There is essentially no underlying "asset". The margin supposedly runs around 2-4%. Leverage running 25X-50X. The banks earn interest and commissions each year on those bets. It's essentially the bankers off-balance sheet monetary system. There's essentially no reserve requirement for those bets/assets, just ill-conceived mathematical marked to model accounting (the marked to market was tossed out in 2009 FASB because they couldn't legitimately cover these bets). The total change in these "assets" was from under $1 TRILL in 1989 to the current stated value of approx $600 TRILL. The entire pile is "debt money" ....and created out of thin air....uncontrolled and unauthorized money creation entirely divorced from the Central Banking Monetary Systems. When $30-$60 TRILL in CDS, and MBS failures occurred in 2008-2009 the FED and other Central Banks paid off the winners. The interest rate contracts of the OTC derivatives have really never been strongly tested before. Maybe SVB will get that rolling? SVB was dealing in mainly "real" assets and contracts. A drop in the bucket compared to the huge dark pools of contrived money out there held by the biggest banks. If/when the contagion ever spreads to JPM, BoA, Citi, WF, GS, MS, etc that's a different story.
"Member" banks (stockholders) of the Federal Reserve can essentially bail themselves out, if desired. So if JPM, BoA, Citi, WF, GS, MS get into trouble, they can easily "print" their way out of it (the cost of doing so is dilution of the value of the US Dollar).
I posted this last year in the currency forum, but it is probably of some interest here since not everybody saw it.
My best eBay find of 2022:
I rarely see US Treasury bearer bonds of any kind, so I am always curious when I see one. I think they are under-appreciated (and under-valued) compared to a lot of other US currency. They are very much like currency in appearance and in the way they are printed. I think the values would be a lot higher if they were listed in catalogs as interest bearing notes. Some interest bearing notes are already listed as currency, such as the Compound Interest Treasury Notes of 1863-1864, Interest Bearing Notes of 1861-1864, and the 1879 Refunding Certificates. The bearer bonds that I refer to were issued during the time frame of WW1 through the Great Depression.
Starting around WW2 Savings Bonds were no longer payable to the bearer on demand. They were only payable to the registered owner and were not transferable except to the heirs of an estate. They had the name of the registered owner typed on the bonds themselves. At any given time there is usually quite a few of the WW2 era (or newer) savings bonds on eBay (most are already redeemed and cancelled). The bearer bonds are a lot rarer because they are older, and the physical bearer bond had to be completely surrendered when cashed in.
This bond that I was able to buy is a 2% United States Treasury Certificate, First Series, 1-year duration, maturing on March 15 1933. It came with two coupons. It was also known as a "certificate of indebtedness" in the "tax anticipation" series. The buyer would purchase the bond for $50 in March 1932. After six months the first coupon could be cashed in for 50 cents. After one year, the second coupon and the principal bond could be cashed in for $50.50 in "gold coin of the present standard of value". So a $50 investment would yield $1 in interest for one year (2%).
Bonds such as this were serial-numbered, just like currency. Apparently, nobody besides myself (not even the seller) realized that it was serial number 1.
The bond came with a signed letter from Treasury Secretary Ogden L Mills, to Wall Street banker Guy Emerson.
It is interesting that a purpose of this bond series was "anti hoarding". The Treasury wanted people to buy the paper bonds and not hoard gold coins. By this time there were way too many paper claims on gold and not enough gold coins.
The "Statement of the Public Debt of the United States", released at the end of February 1933, shows the quantity of the various bonds that were issued and outstanding. The bond issuance of this particular bond is highlighted in red. Note that the quantity issued is far lower than most other bond types. I attribute this to the fact that the bond only paid 2%, while other bond types generally paid 4% or more (but had a longer duration).
After some research, I have discovered a somewhat dubious (but historically significant) aspect to this bond.
All United States bonds issued from 1917 through March 1933 were clearly payable in "gold coin" upon maturity. On March 9 1933 President Roosevelt signed into law the "Emergency Banking Act of 1933". At that point, the gold coin obligations were negated. Any bonds presented after that would not receive gold. Instead, they would receive "lawful money" that was soon to be devalued by 60% in relation to gold. This was the first time that United States gold bonds were defaulted on.
This is quoted from "The American Spectator":
https://spectator.org/42298_was-there-ever-default-us-treasury-debt/
When the gold clause on government debt was negated on March 9 1933, that was six days prior to the maturity of the 2% United States Treasury Certificate (of Indebtedness) of 1932-1933. This was the first bond type to reach maturity that would be affected by the default. The bond featured in this posting is the first one issued of the type due on March 15 1933, and it is serial number 1 (the very first bond issued with the earliest maturity date after March 9 1933). That means that this specific bond is literally the very first one ever defaulted on by the United States.
A couple months after I purchased the bond, I found and purchased this 1923 vintage photograph:
Great post, DCarr !!