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President Franklin D. Roosevelt: Architect of Monetary Madness and a U.S. Debt Default

June 25, 2018 in Economics

By Steve H. Hanke

Steve H. Hanke

Every schoolchild is dutifully taught that President Franklin D.
Roosevelt (FDR) was America’s savior. They are repeatedly
told that FDR and his New Deal policies pulled the U.S. out of the
Great Depression. What nonsense. In fact, FDR was the architect of
monetary madness and an American debt default. Yes, FDR engineered
a U.S. debt default in 1933.

This story is brilliantly told in a new scholarly book by
Sebastian Edwards, the Henry Ford II Professor of International
Economics at the University of California at Los Angeles.
Edward’s book,
American Default: The Untold Story of FDR, the Supreme Court, and
the Battle over Gold
, has just been released by the
Princeton University Press.

FDR entered the White House on March 4, 1933, and in less than
two months (April 19, 1933), he announced that he was taking the
U.S. off the gold standard. FDR asserted that he was doing this to
end the Great Depression and to raise farm prices. As FDR put it:
“the whole problem before us is to raise commodity

FDR gave Congress license, and Congress used it to abrogate the
Gold Clause via a joint resolution in June of 1933. Before that, a
gold clause was included in most private and public bond covenants.
These covenants insured that bond holders would receive interest
and principle payments in dollars that contained as much gold as
the dollar had contained when the bonds were issued.

The U.S. government manipulated the price of gold upward until
President Roosevelt redefined the dollar in gold terms under the
Gold Reserve Act of January 1934. Overnight, the dollar became 41%
lighter. This left gold-clause bond holders out to dry.

Because of the Congress’ abrogation of the gold clause,
bondholders could only receive the nominal dollar amounts of
interest and principle, as stated on their bonds. They could not
receive enough additional dollars to make their payments equal in
value to the amount of gold originally stipulated. In short, they
were stuck with new “light” dollars, not the original
“heavy” ones that had been specified in the original
bond covenants.

Bondholders, of course, sued over this theft. But, the Supreme
Court, in 1935, held that the abrogation of the gold clause for
private bonds was constitutional. The Court’s decision rested
on the fallacious argument that contracts, which contained the gold
clauses, interfered with Congress’ authority to coin money
and regulate its value (Article 1, Section 8 of the U.S.
Constitution). Never mind.

For bonds issued by the U.S. government, the situation was
different, as Congress does not have the authority to repudiate
obligations of the U.S. government. But, because the legal briefs
were …read more

Source: OP-EDS

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