(Bloomberg Opinion) -- On Sunday October 22, 1933, President Roosevelt delivered the fourth of his fireside chats that year. He opened by summarizing his administration’s accomplishments.
He talked about public works and the legislation passed during his first Hundred Days; he praised the National Recovery Act and the Agricultural Adjustment Act; and he told the American public that things were improving. He asserted that since his inauguration on March 4, four million people had found work.
He reiterated that the definite goal of the government was to “restore commodity price levels, [and] to make possible the payment of public and private debts more nearly at the price level at which they were incurred.”
With regard to currency values, he stated that “when we have restored the price level, we shall seek to establish and maintain a dollar which will not change its purchasing and debt- paying power during the succeeding generation.” It was important, he asserted, not to put the cart before the horse.
He said that his government was building an “edifice of recovery” with many columns, and that “the work on all of them must proceed without let or hindrance.” He then declared that one of these columns, monetary policy, was less developed than the others and that it was time to strengthen it.
Toward the end of the presentation, the president said that in order to raise prices, he was adopting a new policy: He was establishing a market for gold in the United States. The Reconstruction Finance Corporation would buy newly minted gold at prices determined after consultation with the secretary of the Treasury and the president.
If needed, the RFC would also buy and sell gold in the world market at these prices. It was important, the president declared, that people understood clearly what he was doing: “This is a policy and not an expedient. It is not to be used merely to offset a temporary fall in prices. We are thus continuing to move toward a managed currency.”
FDR then turned to his critics: “Doubtless prophets of evil still exist in our midst. But Government credit will be maintained and a sound currency will accompany a rise in the American commodity price level.”
He ended with an emotional note: “I have told you tonight the story of our steady but sure work in building our common recovery. In my promises to you both before and after March 4th, I made two things plain: First, that I pledged no miracles and, second, that I would do my best.”
The news of the new gold-buying program was received both in the United States and in world financial centers with calm bewilderment. No one knew exactly how the program would work, or how the purchase price would evolve through time. More important, no one knew if the new buying program would be able to move the international market for gold, exchange rates or prices. Markets did not panic; they waited.
After reviewing the president’s speech, lawyers determined that there were three main differences between this new gold-buying program and the more limited program established on August 29 through Executive Order No. 6261.
First, while in the original program gold purchases were at ongoing world prices, the new program permitted the government to set any price it wanted and to alter it as frequently as it desired.
Second, by explicitly allowing buying and selling gold in the global market, this program recognized that what mattered was the international price of the metal. This issue had been a source of contention between two FDR advisers, the economist George Warren, who believed that all that counted was the domestic price, and the banker James Warburg, who insisted that any such program had to change world prices of gold, and through that channel exchange rates.
Only then would commodity prices be affected. What wasn’t clear, however, was how large these foreign purchases would be, and if they would indeed alter the world market for bullion.
And third, under the new plan, payment to sellers was to take place through a complex procedure that involved the issuing of short-term Reconstruction Finance Corporation debentures at significantly below its face value.
In part three of this series, Roosevelt hits a legal stumbling block in his effort to carry out his gold-buying program.
This is the second of four excerpts from "The American Default: The Untold Story of FDR, the Supreme Court and the Battle Over Gold" (Princeton University Press). Read the first excerpt here.
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