Riding the Wave
A cold in the head and a slight sore throat kept President Roosevelt indoors the beginning of last week. It was not bad enough for him to go to bed or call in a doctor but he did spend two days away from his. executive office and get a prescription refilled at the Naval Hospital. He continued to transact public business in the Oval Room on the second floor of the White House which with books, easy chairs and marine prints he has fixed up as a study. Thither one noon last week he summoned the Press, 100 correspondents strong, to give them the most important "story" yet of his administration. Not in the memory of the oldest Washington reporter had a President dispensed such news from the living quarters of the White House.
Sitting easily at his desk, and between handkerchief dabs at his nose, the President revealed that he had taken the U. S. definitely off the gold standard and headed it in the direction of currency inflation. There was no formal statement and the newshawks, scribbling frantically to catch his husky words, were warned that they could not direct-quote the President. But there was the stark fact: the President was embargoing the export of gold. It meant that the dollar, no longer convertible into gold, would have to shift for itself in foreign exchange and seek its own level downward. Was this a sudden decision by the President? No, he had planned the embargo order four days before. What was his primary purpose? To raise domestic commodity prices and halt the grueling pressure of deflation. If the dollar depreciated 10% in the world market, cotton, for example, should automatically appreciate by the same amount. By cutting the dollar adrift from gold, the U. S. would be on equal monetary footing with Britain and the 34 other powers which have let their currency slip. Out of such equality might grow an international agreement for a new gold standard for world exchange-- but at a lower ratio.
When asked about his next move, President Roosevelt likened himself to a football quarterback who knows his general strategy and the play immediately ahead but waits to see how it works out before calling signals for the second or third or fourth play.
The newshawks dashed from the Oval Room to spread tidings which sent the dollar slumping abroad, churned the stock market to 1933 highs,* ballooned commodity prices, startled Britain's MacDonald and France's Herriot in mid-Atlantic on their way to Washington, chilled conservative financiers with fear and revived the hopes of millions & millions of debt-ridden citizens who instantly imagined plenty of cheap money in their pockets. Reluctantly Secretary of the Treasury Woodin, a financial conservative, had to admit for the first time: "Yes, we're off the gold stand ard -- for the time being. But -- ." He decided to keep to himself his skepticism of the results.
President Roosevelt's decision to abandon gold as the basis of U. S. currency had its roots in developments weeks, months, years ago. The echo of the 1929 stock crash had hardly died away be fore the political cry for more and cheaper money took its place. This cry increased as the value of the dollar climbed higher and higher against the value of goods. President Hoover bucked the demand for currency inflation by attempts at credit inflation, most of them unsuccessful.
Standing firmly against a cheap dollar, he ran for re-election on a gold-standard, sound-money platform. At Des Moines he shocked his followers by declaring that a few months prior, the U. S. had been within two weeks of being forced off gold. To the Republicans the gold standard and "hard money" became a political fetish with which to frighten the electorate. But the electorate refused to be frightened and the Republicans lost the Presidency. Last January in the Senate inflationists mustered 18 votes for the Bryanesque 16-to-1 free coinage of silver, most discredited of the quantitative money proposals, and their drive seemed definitely halted (TIME, Feb. 6).
At his inaugural President Roosevelt declared for an "adequate but sound currency" and two days later took the U. S. off gold, for all practical purposes, with his bank-closing proclamation which ended the conversion of paper currency into metal. But deflation ground on. In banks which failed to reopen was tied up some $4,000,000,000. Government economies to balance the budget reduced private spending. Unemployment rose to 13,000,000. The fear of riots and social unrest in Cleveland and Detroit kept Washington on nervous edge.
These deflationary measures were only one-half of the comprehensive plan President Roosevelt had worked out to put the U. S. back on its feet. The other half called for a much-greater-than-Hoover program of credit expansion--the spending of billions of dollars in public works, mortgage refinancing, Tennessee Valley developments, etc., etc. If the President could once get that other half into operation, he believed that he could break the grip of deflation. Last week he was forging ahead with the expansive "inflationary" side of his big plan when he was suddenly stopped in his tracks by another Senate vote on outright currency inflation.
To the farm bill Senator Wheeler from silver-producing Montana offered an amendment for 16-to-1 free coinage of the metal. Close on its heels trod Senator Frazier with an amendment for fiat money, Senator Connally for dollar devaluation, many another. The Democratic leadership, unable to stave off a vote, decided to stand and fight the currency inflationists. That meant standing and fighting one man--John William Elmer Thomas, senior Senator from Oklahoma, who for two years has been the ringleader of Congressional inflationists. This tall (6 ft. 2 in.) well-groomed Senator with slick, grey hair above a round, solemn face was born in Indiana 56 years ago. Graduated from De Pauw University, he went to Oklahoma at the turn of the Century, practiced law, plunged into state politics. He served two inconspicuous terms in the House before going to the Senate in 1927. His first love is Oklahoma oil, his second, more money for everyone. The 71st Congress ended in failure and confusion because of his dogged filibuster for a Senate inquiry into the oil industry. He ardently embraced the Bonus bill because its payment called for fiat money. He likes to roll the word "Revolution!" off his tongue, put on overalls for news photographers, talk about the "under dog." No ranter, he visits bankers.
Last week like a generalissimo on the battlefield Senator Thomas was in complete command of the Senate inflationists. Into the silver debate he sent his cohorts --Louisiana's Long, Nevada's Pittman, Utah's King--to make his arguments for him while he sat back and egged them on. When the roll was called, the nation was amazed to learn that 33 Senators plumped for inflation by the coinage of silver--a clear gain of 15 votes in three months.
President Roosevelt needed no college professor to tell him what the Senate vote meant. Another month or two and Senator Thomas & friends would have a majority with which to dictate to the Administration a wild program. Happy politician that he is, the President quickly summoned Senator Thomas to the White House. They shut the office door. They faced each other across a desk. They began talking--the unsmiling Oklahoma lawyer dead set on putting out more money, the genial Hyde Park squire equally determined to effect a friendly settlement by conciliation and compromise. Minutes ticked into hours. When they rose and said goodby, President Roosevelt had taken Senator Thomas completely into camp.
The White House bargain: Senator Thomas was to drop his own drive for mandatory inflation and sponsor a bill of the President's making which would give the President authority to do any or all of the things demanded by inflationists. President Roosevelt had surrendered in principle to the Thomas school of thought but he had also won a strategic victory. Not only had he changed Senator Thomas into an Administrative ally but he had stripped Congress of the power to inflate recklessly. The White House and one man. not the Capitol and 531 would hereafter fix the currency of the U. S. Assistant Secretary of State Moley went over to the White House to help the President draft his bill. When finished, it was turned over to Senator Thomas to carry to the Capitol.
The Moley-Thomas bill required the President to do nothing, but it gave him enough power to knock the dollar down to 50-c- or less if he sees fit. Assuming that he uses up to the hilt all the authority Congress is about to vote him, the following things will occur:
1) The Federal Reserve Banks will resume open-market operations on a grand scale. At the Treasury's order they will buy up to $3,000,000,000 worth of Federal securities and hold them for a specified time. Thus $3,000,000,000 in cash will pass along to the banks and presumably into commercial credit. But last year President Hoover tried the same method of credit inflation and failed to produce results. In three months the Federal Reserve bought $950,000,000 worth of "Governments," but their payments lodged in the banks and never got out to the country. Last week the governors of the twelve Reserve Banks, meeting in Washington, promised to help the Administration carry out this feature of the bill. If it fails, then--
2) The President will issue up to $3,000,000,000 in new paper money under the Greenback law of 1862. Behind this currency will be neither gold nor bonds-- only the good faith of the Government. What saves it from being out & out green-backery is a redemption system whereby 4% will be retired annually from appro-" priation by Congress. This paper money will be put into circulation by the Treasury's using it to meet Federal obligations. By diluting the value of outstanding currency, it is supposed to inflate prices proportionately. If the deflation is still unbeaten, then--
3) The President will cut the gold content of the dollar up to 50 per cent. This power will permit him to cooperate with other powers for the restoration of an international gold standard at a lower level. If no such agreement can be reached at the World Economic Conference, the President will proclaim a devaluation of the dollar to meet that of foreign currencies whose depreciation is hurting U. S. trade.
4) The President will accept up to $100,000,000 in silver as payment on War debts at a rate of not more than 50-c- an ounce. This sop to boost the silver market holds good for only one year. The silver payments will be used for coinage to back an issue of silver certificates.
The President intended to use these enormous powers to inflate prices to the 1926 level and to stop there. Once he starts, can he, will he stop?
Answer 1. So far as outright currency inflation is concerned, the President still hoped last week that he might not have to start at all. The full and terrible threat of inflation might be enough not only to send prices up but to start real velocity in trade.
Answer 2. The President still plans to try credit inflation by building public works out of his extraordinary budget. But whereas two weeks ago he did not call it inflation today he delights in calling it by that name. The theory is that when the time comes to control inflation the extraordinary budget can simply be cut out, which may not be as easy as it sounds. Then may come the supreme test of Mr. Roosevelt's character: whether he can resist demands for more inflation. One of his Democratic predecessors, Cleveland, stern of character, faced such a crisis, saved the dollar and wrecked his own popularity in doing so.
Answer3. Complete demoralization of currency, the spectre of post-War Germany, the nightmare of roast beef selling at $5,000,000 a pound, is still too far away for intelligent discussion.
Answer 4. Devaluation of the dollar, which the President was all against three weeks ago, he is now willing to consider-- partly to please the ardent inflation block developing in Congress, and more important, to solve the problems of international exchange. But having cut the gold content of the dollar to 80-c- who can be sure that he will not cut it again to 60-c-. So the question remains:
Having started, can he, will he stop?
* Typical of stocks which last week hit their 1933 highs as a result of the gold embargo and subsequent developments were: 1933 1933 Low High U. S. Steel 23 3/8 44 1/2 General Motors 10 18 7/8 International Nickel 6 3/4 15 American Can 49 1/2 7 6 Homestake 145 204 7/8 Anaconda Copper 5 15 1/8 Liggett & Myers 49 1/2 79 National Lead 43 1/4 90 Utah Copper 35 60 New York Central 14 25
This file is automatically generated by a robot program, so reader's discretion is required.