AMERICAN DEFAULT: The Untold Story of FDR, the Supreme Court and the Battle over Gold
by Sebastian Edwards
Princeton UP, New Jersey
Hardcover: 288 pages
Reviewed by Colin Teese
Just when one might have imagined that the last word had been spoken about the Great Depression that hit the United States and then the world back in 1929, Sebastian Edwards comes out with American Default.
Happily Edwards, Professor of International Economics at UCLA, isn’t going to add to the confusion by advancing yet another opinion to the many already in existence about what caused the crash. Rather, in a beautifully written and painstakingly researched book, he has chosen to throw light on a little known aspect of the U.S. response to the crash.
President Franklin D. Roosevelt came into office in 1933 convinced that his most pressing immediate problem was to arrest the descent into deflation. He was especially concerned about the plight of the U.S. farm sector, which was being devastated by the collapse of prices being paid for farm output.
His response was radical. On April 5, 1933, a mere three months after he took office, Roosevelt ordered all Americans to sell their gold to the government. Why was this necessary? The President wanted to devalue the U.S. dollar.
For virtually the whole of its existence, the U.S. republic had tied its currency to the gold standard. So, if the U.S. was to devalue its currency, it had to come off the gold standard and the government had to get hold of the U.S. stock of gold.
The President’s decision to devalue was widely condemned. For most Americans of influence a currency tied to gold was seen as the accepted means of maintaining “sound money”. This, they believed, was something an incoming Democrat President of limited experience could not be expected to understand.
Since the Civil War, there had been another special feature in U.S. financial practice that was also destined to disappear as the U.S. came off the gold standard. Contracts, both between individuals and involving the government and individuals, could be, and usually were, specified to be payable in gold or bullion equivalent. This practice was adopted at the end of the Civil War when there were two currencies, one of them, the Confederate dollar, being practically worthless.
In the circumstances, making it possible for contracts to be settled in bullion was a necessary safeguard.
If Roosevelt was to have his way and devalue, the so-called “gold clause” must disappear. And to be effective, the gold clause must be removed from both new and existing contracts, government and private alike.
Radical and controversial as these measures were, the President’s advisers had convinced him they were necessary if he was to achieve his aim of pushing up prices.
In the view of Professor Sebastian Edwards, removal of the gold clause from existing government contracts amounted to default by the U.S. government on its contractual and financial obligations – hence the title of his book.
Professor Edwards has chosen to guide us through the economic and legal consequences that followed one of Roosevelt’s most controversial (and little recorded) decisions taken soon after he became President.
It will surprise no one that this generated both anger and discontent. Careful administrative action and some discreet legislation were necessary to avoid a banking crisis. This Roosevelt was able to achieve, though not without difficulty.
The President’s response to his many detractors was to observe first that 10 million unemployed was a more serious matter than getting rid of the gold clause. Beyond that, there was the consideration of common sense and equity.
The government and the private sector had issued $US120 billion of debt. All the gold in the United States amounted to only $US3 billion worth – indeed, the whole world could only muster $US11 billion worth.
On equity grounds alone, the only reasonable solution was for the gold clause to be removed from all contracts.
On May 5, 1933, Congress passed legislation that enabled the President to devalue the U.S. dollar. With it went the gold clause. Nobody believed the matter would end there. Sooner or later the U.S. Supreme Court would be asked to rule on the legality of the President’s actions.
And so it did, in 1935. The arguments, both by the government and those protesting its actions, were complicated. So were the court’s rulings. A majority found that Congress could make laws regarding private contracts, but was not empowered to legislate changing government contracts. However, the majority also found that the plaintiff who had brought the case failed to demonstrate that he had lost money and so his case failed.
The result was bizarre. The legislation was ruled to be illegal but it stood because it had no adverse financial effect on the parties.
Edwards takes us through all this in great detail, and it seems obvious, at least to this writer, that he has little sympathy for Roosevelt or his policies. He also explains how he got interested in what he describes as an “American default”. As part of his professional life, Edwards was required to examine the matter of the recent Argentinian default, of which he was somewhat critical, since it paid only 23¢ in the dollar, compared with 93¢ paid by Uruguay.
He noted that Roosevelt justified his actions back in 1933 by declaring that they were “necessary”. So did Argentina. The implication being that a U.S. “default” justified in 1933 based on necessity might have set an unfortunate precedent for subsequent government defaults or debt restructuring.
This is not easy to follow. First, can the U.S. government be said to have defaulted back in 1933 when the U.S. Supreme Court found that no one had suffered financial loss as a result of the abandoning of the gold clause? And, second, in cases where governments default, is there ever any circumstance other than “necessity”?
These latter observations should not, however, deter any reader interested in the subject of a controversy associated with the early days of the Roosevelt administration.
Edwards deals with his subject in such an interesting and appealing way it makes one wonder why it has taken so long for the facts of Roosevelt’s actions on currency to receive scrutiny.