PROBLEM TWO: TO SEIZE ECONOMIC POWER
This was the critical problem. The brilliant solution of it will doubtless make a classic chapter in the text books of revolutionary technic. In a highly evolved money economy, such as this one, the shortest and surest road to economic power would be what? It would be control of money, banking, and credit. The New Deal knew that answer. It knew also the steps and how to take them, and above all, it knew its opportunity.
It arrived at the seat of government in the midst of that well known phenomenon called a banking crisis, such as comes at the end of every great depression. It is like the crisis of a fever. When the banks begin to fail, pulling one another down, that is the worst that can happen. If the patient does not die then he will recover. We were not going to die. The same thing had happened to us before, once or twice in every twenty years, and always before the cure had brought itself to pass as it was bound to do again.
In his inaugural address, March 4, 1933, the President declared that the people had "asked for discipline and direction under leadership"; that he would seek to bring speedy action "within my Constitutional authority"; and that he hoped the "normal balance of executive and legislative authority" could be maintained, and then said: "But in the event that Congress shall fail ... and in the event that the national emergency is still critical ... I shall ask Congress for the one remaining instrument to meet the crisis--broad executive power to make war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe."
It is true that people wanted action. It is true that they were in a mood to accept any pain-killer, and damn the normal balance of authority between the executive and legislative authority. That was an emotional state of mind perfectly suited to a revolutionary purpose, and the President took advantage of it to make the first startling exposition of New Deal philosophy. Note his assertion of the leadership principle over any other. Discipline under leadership. Note the threat to Congress-"in the event that Congress shall fail." But who was to say if the Congress had failed? The leader, of course. If in his judgment the Congress failed, then, with the people behind him, he would demand war powers to deal with an economic emergency.
The word emergency was then understood to mean what the dictionaries said it meant-namely, a sudden juncture of events demanding immediate action. It was supposed to refer only to the panic and the banking crisis, both temporary.
But what it meant to the President, as nobody then knew, was a very different thing. Writing a year later, in his book, On Our Way, he said: "Strictly speaking, the banking crisis lasted only one week. ... But the full meaning of that word emergency related to far more than banks; it covered the whole economic and there fore the whole social structure of the country. It was an emergency that went to the roots of our agriculture, our commerce, our industry; it was an emergency that has existed for a whole generation in its underlying causes and for three-and-one-half years in its visible effects. It could be cured only by a complete reorganization and measured control of the economic structure.... It called for a long series of new laws, new administrative agencies. It required separate measures affecting different subjects; but all of them component parts of a fairly definite broad plan."
So, what the New Deal really intended to do, what it meant to do within the Constitution if possible, with the collaboration of Congress if Congress did not fail, but with war powers if necessary, was to reorganize and control the "whole economic and therefore the whole social structure of the country." And therein lay the meaning-the only consistent meaning-of a series of acts touching money, banking and credit which, debated as monetary policy, made no sense whatever.
The first step, three days before the new Congress convened, was an executive decree suspending all activities of banking throughout the country. Simply, every bank was shut up. The same decree forbade, under pain of fine and imprisonment, any dealing in foreign exchange or any transfer of credit from the United States to any place abroad, and that was to slam the door against the wicked rich who might be tempted to run out.
The second step ·was an act of Congress, saying, "Acts of the President and Secretary of the Treasury since March 4, 1933, are hereby confirmed and approved."
That made everything legal after the fact: and it was the first use of Congress as a rubber stamp. The same act of Congress provided that no bank in the Federal Reserve System should resume business except subject to rules and regulations to be promulgated by the Secretary of the Treasury, gave the President absolute power over foreign exchange and authorized the Federal government to invest public funds in private bank stock, thereby providing banks with new capital owned by the government. And that was the act that authorized the President to require people to surrender their gold. Congress did not write any of these acts. It received them from the White House and passed them.
The third step was a decree by the President requiring all persons and corporations whatever to divest themselves of gold and hand it over to the government. The law authorizing him to do that had fixed the penalty of non-compliance at a fine equal to twice the value of the gold. The executive decree added the penalty of imprisonment.
In view of further intentions not yet disclosed it was imperative for the government to get possession of all the gold. With a lot of gold in private hands its control of money, banking, and credit could have been seriously challenged. All that the government asked for at first was possession of the gold, as if it were a trust. For their gold as they gave it up people received paper money, but this paper money was still gold standard money-that is to say, it had always been exchangeable for gold dollar for dollar, and people supposed that it would be so again, when the crisis passed. Not a word had yet been said about devaluing the dollar or repudiating the gold standard. The idea held out was that as people surrendered their gold they were supporting the nation's credit.
This decree calling in the gold was put forth on April 5. There was then an awkward interlude. The Treasury was empty. It had to sell some bonds. If people knew what was going to happen they might hesitate to buy new Treasury bonds. Knowing that it was going to devalue the dollar, knowing that it was going to repudiate the gold redemption clause in its bonds, even while it was writing the law of repudiation, the government nevertheless issued and sold to the people bonds engraved as usual, that is, with the promise of the United States Government to pay the interest and redeem the principal "in United States gold coin of the present standard of value."
The fourth step was the so-called Inflation Amendment attached to the Emergency Farm Relief Act. This law made sure that the Treasury need not be caught that way again. It forcibly opened the tills of the Federal Reserve Bank System to three billions of Treasury notes, authorized three billions of fiat money to be issued in the President's discretion, and gave the President power in his own discretion to devalue the dollar by one-half.
The fifth step was the act of repudiation. By resolution June 5, 1933, the Congress repudiated the gold redemption clause in all government obligations, saying they should be payable when due in any kind of money the government might see fit to provide; and, going further, it declared that the same traditional redemption clause in all private contracts, such, for ex ample, as railroad and other corporation bonds, was contrary to public policy and therefore invalid.
The sixth step was a new banking act giving the Federal government power to say how private banks should lend their money, on what kinds of collateral and in what proportions, and the arbitrary power to cut them off from credit with Federal Reserve Banks. This arbitrary power to cut them off from credit was a strangle hold, and it was gained by changing one little word in the country's organic banking law. From the beginning until then the law was that a Federal Reserve Bank "shall" lend to a private bank on suitable security. This word was changed to "may." Thus a right became a privilege and a privilege that could be suspended at will.
The seventh step-and it was the one most oblique -was to produce what may be described as monetary pandemonium. This continued for six months. To understand it will require some effort of attention.
When by the Inflation Amendment the dollar was cut loose from gold it did not immediately fall. That was because, in spite of everything, it was the best piece of money in the whole world. Well then, when the dollar did not fall headlong of its own weight the government began to club it down, and the club it used to beat it with was gold. In the President's words the procedure was like this: "I am authorizing the Reconstruction Finance Corporation to buy newly mined gold in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President. Whenever necessary to the end in view we shall also buy or sell gold in the world market. My aim in taking this step is to establish and maintain continuous control. This is a policy and not an expedient."
Each morning thereafter the Treasury announced the price the government would pay for gold in paper dollars, one day 30 paper dollars for one ounce of gold, the next day 32 dollars, two days later 34 dollars, and so on; and not only the newly mined gold in this country but anybody's gold anywhere in the world.
Thus day by day the President and the Secretary of the Treasury determined the value of gold priced in American paper dollars, or the value of American paper dollars priced in gold, which was the same thing; and how they did it or by what rule, if any, nobody ever knew.
The spectacle of a great, solvent government paying a fictitious price for gold it did not want and did not need and doing it on purpose to debase the value of its own paper currency was one to astonish the world.
What did it mean? Regarded as monetary policy it made no meaning whatever. But again, if you will regard it from the point of view of revolutionary technic, it has meaning enough.
One effect was that private borrowing and lending, except from day to day, practically ceased. With the value of the dollar being posted daily at the Treasury like a lottery number, who would lend money for six months or a year, with no way of even guessing what a dollar would be worth when it came to be paid back?
"No man outside of a lunatic asylum," said Senator Glass, "will loan his money today on a farm mortgage." But the New Deal had a train of Federal lending agencies ready to start. The locomotive was the Reconstruction Finance Corporation. The signal for the train to start was a blast of propaganda denouncing Wall Street, the banks and all private owners of capital for their unwillingness to lend. So the government, in their place, became the great provider of credit and capital for all purposes. It loaned public funds to farmers and home owners to enable them to pay off their mortgages; it loaned also to banks, railroads, business, industry, new enterprise, even to foreign borrowers. Thereby private debt was converted into public debt in a very large and popular way. It was popular because the government, having none of the problems of a bank or a private lender, with no fetish of solvency to restrain it, with nothing really to lose even though the money should never come back, was a benevolent lender. It loaned public money to private borrowers on terms and at rates of interest with which no bank nor any private lender could compete; and the effect was to create a kind of fictitious, self-serving necessity. The government could say to the people, and did say to them : "Look. It is as we said. The money changers, hating the New Deal, are trying to make a credit famine. But your government will beat them."
In a Fireside Chat, October 22, 1933, the President said: "I have publicly asked that foreclosures on farms and chattels and on homes be delayed until every mortgagor in the country shall have had full opportunity to take advantage of Federal credit. I make the further request, which many of you know has already been made through the great Federal credit organizations, that if there is any family in the United States about to lose its home or about to lose its chattels, that family should telegraph at once either to the Farm Credit Administration or to the Home Owners Loan Corporation in Washington requesting their help. Two other great agencies are in full swing. The Reconstruction Finance Corporation continues to lend large sums to industry and finance, with the definite objective of making easy the extending of credit to industry, commerce and finance."
The other great lending agency to which he referred was the one that dispensed Federal credit to states, cities, towns, and worthy private organizations for works of public and social benefit. In the same Fireside Chat he urged them to come on with their projects.
"Washington," he said, "has the money and is waiting for the proper projects to which to allot it."
Then began to be heard the saying that Washington had become the country's Wall Street, which was literally true. Anyone wanting credit for any purpose went no longer to Wall Street but to Washington. The transfer of the financial capital of the nation to Washington, the President said, would be remembered, as "one of the two important happenings of my Administration." What was the source of the money? Partly it was imaginary money, from inflation. Largely it was the taxpayer's money. If the government lost it the tax payer would have to find it again. And some of it, as the sequel revealed, was going to be confiscated money. By this time the New Deal had got control of the public purse. The Congress had surrendered control of it by two acts of self-abnegation. One was the Inflation Amendment and the other was an appropriation of $3,300,000,000 put into the hands of the President to do with what he liked as the architect of recovery.
All through the commotion of these unnatural events one end was held steadily in view, and that was a modern version of the act for which kings had been hated and sometimes hanged, namely to clip the coin of the realm and take the profit into the king's revenue.
The eighth step was the act of confiscation. At the President's request the Congress, on January 30, 1934, passed a law vesting in the Federal government absolute title to all that gold which people had been obliged to exchange for gold standard paper dollars the year before, thinking as they did that it was for the duration of the emergency only and that they were supporting the nation's credit. They believed the statement issued at the time by the Secretary of the Treasury, saying: "Those surrendering the gold of course receive an equivalent amount of other forms of currency and those other forms of currency may be used for obtaining gold in an equivalent amount when authorized for proper purposes." Having by such means got physical possession of the gold, it was a very simple matter for the government to confiscate it. All that it had to do was to have Congress pass a law vesting title in the government.
The ninth and last step was to devalue the dollar. In his message to Congress asking for the law that confiscated the gold the President said: "I do not believe it desirable in the public interest that an exact value be now fixed." Nevertheless, on January 31, 1934, the day after the act of confiscation was passed, he did fix the exact value of the dollar at 59 per cent of its former gold content. The difference, which was 41 cents in every dollar of gold that had been confiscated, was counted as government profit and took the form of a free fund of two billions in the Treasury, called a stabilization fund, with which the President could do almost anything he liked. Actually it was used to take control of the foreign exchange market out of the hands of international finance.
Control of money, banking, and credit had passed to Washington. Thus problem number two was solved.
The reason for giving so much attention to it is that it was the New Deal's most brilliant feat; and certainly not the least remarkable fact about it was the skill with which criticism was played into making its fight on false and baited ground. Each step as it occurred was defended, and therefore attacked, on ground of monetary policy, whereas the ultimate meaning was not there at all.
Consider first the logical sequence of the nine steps; consider secondly that if national recovery had been the end in view many alternative steps were possible, whereas from the point of view of revolutionary technic these nine were the imperative steps and the order in which they were taken was the necessary order. Then ask if it could have happened that way by chance.
Not even a New Dealer any longer maintains that the four steps directly involving gold, namely, the seizure of it, the repudiation of the government's gold contracts, then the confiscation of the gold, and lastly the devaluation of the dollar, were necessary merely as measures toward national recovery. In the history of the case there is no more dramatic bit of testimony than that of Senator Glass, formerly Secretary of the Treasury, who in April, 1933, rose from a sick bed and appeared in the Senate to speak against the Inflation Amendment. He said:
"I wrote with my own hand that provision of the national Democratic platform which declared for a sound currency to be maintained at all hazards.... With nearly 40 per cent of the entire gold supply of the world, why are we going off the gold standard? With all the earmarked gold, with all the securities of ours they hold, foreign governments could withdraw in total less than $700,000,000 of our gold, which would leave us an ample fund of gold, in the extremest case, to maintain gold payments both at home and abroad.... To me the suggestion that we may devalue the gold dollar 59 per cent means national repudiation. To me it means dishonor. In my conception of it, it is immoral. ... There was never any necessity for a gold embargo. There is no necessity for making statutory criminals of citizens of the United States who may please to take their property in the shape of gold or currency out of the banks and use it for their own purposes as they may please. We have gone beyond the cruel extremities of the French, and they made it a capital crime, punishable at the guillotine, for any tradesman or individual citizens of the realm to discriminate in favor of gold and against their printing press currency. We have gone beyond that. We have said that no man may have his gold, under penalty of ten years in the penitentiary or $10,000 fine."
And when the "gold cases" went to the United States Supreme Court--the unreconstructed court--the judgment was one that will be forever a blot on a certain page of American history. The Court said that what the government had done was immoral but not illegal. How could that be? Because the American government, like any other government, has the sovereign power to commit an immoral act. Until then the American government was the only great government in the world that had never repudiated the word engraved upon its bond.