In 1933, in one of the most shocking events in the history of the United States, Franklin Roosevelt issued a series of executive orders, backed by Congress, that required the American people, on pain of fine and imprisonment, to surrender their gold coins to the federal government, for which they would receive irredeemable federal bills and notes. Although many, if not most, Americans today remain unaware of his nationalization of gold, his seizure nonetheless ranks as one of the most notorious acts in the history of the country. It was really no different, in principle, from the nationalizations of private property that characterized communist regimes in various parts of the world.
Remember: The American people had been using gold coins as their official money for 150 years. That’s because the Constitution, which called the federal government into existence, established a gold-coin standard for the United States. The Constitution had empowered the federal government “to coin money and regulate the value thereof.” Moreover, it had not granted the federal government the power to issue paper money or to make paper money legal tender. The Constitution had also expressly prohibited the states from issuing paper money (i.e., emitting bills of credit) and from making anything but gold coins and silver coins legal tender.
Any reasonable reading of the Constitution can lead to but one conclusion: Having personally experienced hyperinflation during the Revolution with the Continental currency (“Not worth a Continental”) and having been familiar with the ravages of inflation throughout history, the last thing the Framers wanted was a paper-money standard for the new government that they were calling into existence with the Constitution. Their clear intent was to establish a monetary system based on sound money — money that consisted of gold coins and silver coins.
That monetary system of sound money contributed to making the United States the most prosperous nation in history. For the first time ever, people did not have to concern themselves with the possibility of government debasement of the currency. There was virtually complete confidence in the trustworthiness of U.S. gold coins and silver coins — that is, that such coins contained the weight and fineness that they purported to contain. Few people gave much thought to the possibility that the federal government might shave the edges of the coins to make new coins — a larcenous process known as “clipping the coin,” which governments throughout history had used to enrich themselves.
In fact, there was so much trust in the U.S. gold-coin standard that people showed no reluctance to lend enormous amounts of money to private companies in return for bonds that didn’t mature for 100 years. Why would people do that? Because they didn’t fear that their bonds would be wiped out by inflation over that long period. That’s because the bonds had “gold clauses” — clauses that expressly provided that the bond had to be repaid in the value of gold coins that existed at the time the debts were incurred.
Thus, if for some reason later generations of Americans were to reject the gold-coin standard in favor of a paper-money standard, the bonds, by virtue of their gold clauses, would nonetheless still have to be paid back in gold coins of the same value that were lent at the time the contract was originally entered into.
Yet, in 1933 — 150 years after the Constitution was ratified — the money that had been the official money of the United States was nationalized and confiscated by U.S. officials. Even worse, Americans who were caught owning or possessing what had been the official money of the United States for a century and a half were criminally prosecuted for committing a felony, suffered forfeiture of their gold, and were fined double the amount of any gold they were caught possessing.
Adding insult to injury, soon after the gold nationalization, U.S. officials devalued the paper dollar by 40 percent relative to gold. That effectively meant that people had lost 40 percent of the value of their gold holdings that the Roosevelt administration had taken from them, with the gain going instead to the benefit of the federal government.
In one of the more laughable aspects of this sordid act, Roosevelt justified the gold seizure by saying the people’s “hoarding” of gold contributed to the Great Depression.
It was part of the government’s shameful campaign to convince Americans that the Great Depression reflected the failure of America’s free-enterprise system rather than the failure of the Federal Reserve System, which had come into existence 20 years before.
With the federal government’s adoption of a fiat-money monetary system, irredeemable paper money replaced gold coins as the official money of the United States. That meant the floodgates for federal spending could be opened to fund ever-growing expenditures of the federal government.
One of the most fascinating aspects is how it was accomplished. The fundamental and permanent altering of America’s economic way of life wrought by the adoption of a fiat-money standard was done through presidential decrees and congressional acts rather than by amendments to the Constitution, the charter that had established the gold-coin standard in the first place.
What about the gold clauses in those 100-year bonds that had been issued by American companies? Roosevelt felt that they were interfering with his new-fangled monetary system, and so he simply decreed that those private contractual obligations were null and void. Never mind that the Constitution did not delegate to the federal government the power to impair contracts.
When the Gold Clause Cases came before the U.S. Supreme Court, the Court, in a 5-4 decision, upheld the constitutionality of Roosevelt’s actions. Even though the gold clauses had been expressly agreed to between lender and borrower, the Court held that the debtor could nonetheless pay the debt back with devalued paper money. The dissent in the Gold Clauses Cases had the better position:
[If] given effect, the enactments here challenged will bring about confiscation of property rights and repudiation of national obligations. Acquiescence in the decisions just announced is impossible; the circumstances demand statement of our views. “To let oneself slide down the easy slope offered by the course of events and to dull one’s mind against the extent of the danger, … that is precisely to fail in one’s obligation of responsibility.”
Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both. No definite delegation of such a power exists; and we cannot believe the farseeing framers, who labored with hope of establishing justice and securing the blessings of liberty, intended that the expected government should have authority to annihilate its own obligations and destroy the very rights which they were endeavoring to protect. Not only is there no permission for such actions, they are inhibited. And no plenitude of words can conform them to our charter.
The Roosevelt regime revolutionized America’s governmental system in at least two other major ways, which worked perfectly in tandem with Roosevelt’s embrace of a fiat-money standard.
One of the changes was to firmly convert the United States to a welfare state in which the federal government would be charged with the paternalistic responsibility of taking care of people. Roosevelt’s New Deal, of course, marked the beginning of Social Security, a permanent government program that taxed young people in order to give the money to seniors. The Constitution had never authorized the federal government to adopt such a program. The idea was imported from Germany, where socialistic programs had already become and were becoming increasingly popular.
Another fundamental change in America’s governmental structure occurred as a result of World War II, the war in which Roosevelt was bound and determined to involve the United States, notwithstanding the fierce opposition of the American people to involvement in another European war. World War II set the stage for the Cold War against America’s partner and ally, the Soviet Union. The Cold War, in turn, gave the United States an enormous permanent military establishment; an overseas empire of military bases; the role as international policeman, judge, and executioner; the job of containing communism all over the world; a national-security state apparatus; the CIA; the NSA; foreign aid to dictatorships; and all the dark-side practices and policies (e.g., torture, assassination, invasions, occupations, indefinite detention, secret prisons, and renditions) that came with this fundamental altering of America’s governmental system — again, all without even the semblance of a constitutional amendment.
It was no surprise that the welfare-warfare state proved to be expensive, with decade after decade of ever-growing federal expenditures to fund ever-growing welfare-state and warfare-state programs.
That’s where the income tax and Federal Reserve, both of which had been authorized in 1913, and Roosevelt’s adoption of a fiat-money standard in 1933 came in handy. The income tax and the power to debase the currency provided the federal government, decade after decade, with the ability to fund ever-increasing welfare-warfare state expenses.
Whenever the overall price level rose to reflect the lower value of the dollar, federal officials would blame the situation on private greed and rapaciousness. Most people, not knowing any better, would chime in by condemning the evil, greedy, profit-seeking bourgeois businessmen who were supposedly gouging the public with ever-rising prices, or labor unions that were demanding higher wages and more benefits.
It’s no surprise that the value of the paper dollar today is equal to about 5 percent of its value in 1913. That’s what happens when a government, decade after decade, debases the currency. The ever-lowering value of the dollar certainly would not have surprised the Framers. That’s precisely what they were attempting to avoid when they established the gold-coin standard with the Constitution.
It is interesting that, while the federal government was punishing Americans caught possessing gold coins, the people were still legally permitted to own silver coins. Gradually though, the silver coins were driven out of circulation, a process that Roosevelt would have called “hoarding.” That’s because “bad money drives out good money,” as Gresham’s Law holds. Today, while it would be legal to put silver quarters into a vending machine to purchase a $1 soft drink, everyone knows that it would be stupid to do so, because even one silver quarter is worth much more in paper dollars. That’s what happens when a government inflates the amount of paper money in circulation — its value depreciates relative to gold and silver and nearly everything else.
So, where do we go from here?
One option is to continue the status quo, as statists want us to do. That would be one gigantic mistake. The statist road on which the statists have taken our country is the road to bankruptcy, impoverishment, high taxation, inflation, moral debauchery, and loss of freedom.
The better route is to build on what our American ancestors accomplished in 1787.
Many years ago, the Nobel Prize-winning Austrian economist Friedrich Hayek published an essay entitled “The Denationalization of Money,” in which he proposed a free-market monetary system, one in which people would be free to use whatever money they choose — gold coins, silver coins, banknotes, bitcoins, or anything else.
That’s the monetary system that the American people should embrace for the third century of our nation’s existence — a monetary system based on America’s heritage of competition and free markets.
Such a system would necessarily entail an abolition of the Federal Reserve System, a system that has done nothing but produce never-ending cycles of boom and bust and inflation, recession, and depression. Such consequences shouldn’t surprise us. After all, the Fed is nothing but a variant of socialist central planning, one in which a small group of monetary officials labor under what Hayek called the “fatal conceit” that they can actually plan the complex monetary activities of hundreds of millions of people. By now, it should be obvious that chaos inevitably comes with socialist central planning of any economic endeavor.
The ideal would be not only a free-market monetary system but also a total dismantling of the welfare-warfare-state way of life that has wrought so much damage and destruction to the lives, resources, and liberties of the American people.
By dismantling the welfare-warfare state apparatus that statists grafted on our constitutional order while ending the twin engines that have provided the funding for welfare-warfare state programs — the income tax and the fiat-money system — Americans would lead the world into a new millennium — toward societies based on peace, prosperity, harmony, and freedom.
This article was originally published in the July 2014 edition of Future of Freedom.