59.06

President Roosevelt sat at his desk facing a dozen White House newshawks. Secretary Morgenthau, Mrs. Morgenthau, Stephen T. Early and Marguerite Le Hand looked over his shoulder. On the blotter before him lay a copy of H.R. 6976. Smiling, he picked up a pen and wrote: "Approved. Franklin D. Roosevelt.'' Thus did the Gold Reserve Act of 1934 become law.

A few minutes later he sat at the same desk with the same bill before him. Secretary Morgenthau, Governor Black of the Federal Reserve, Professor George ("Rubber Dollar") Warren, Governor Harrison of the New York Reserve Bank and Professor James Harvey Rogers looked gravely on. Cameras clicked and newsreel men cranked as the President made motions with a pen. Thus did the U. S. get pictures of what the signing of the Gold Reserve Act of 1934 did not look like.

Next afternoon the President went through a more serious ritual. Some 150 correspondents jampacked his office. The President leaned back in his chair, looked at his watch, lit a cigaret, smiled, waited until the doors were closed. Then, to each correspondent was given a piece of paper on which was mimeographed:

"Whereas, I find, upon investigation, that the foreign commerce of the United States is adversely affected by reason of the depreciation in the value of the currencies of other governments in relation to the present standard value of gold, and that an economic emergency requires an expansion of credit; and

"Whereas, I find, from my investigation, that, in order to stabilize domestic prices and to protect the foreign commerce against the adverse effect of depreciated foreign currencies, it is necessary to fix the weight of the gold dollar at 15 5/21 grains nine-tenths fine, . . .

"Now, therefore, be it known that I, Franklin D. Roosevelt, President of the United States . . . do hereby--proclaim, order, direct, declare and fix the weight of the gold dollar . . ."

Thus did President Roosevelt cite his legal authorities under the Gold Reserve Act of 1934 to reduce the official gold content of the dollar from 100-c- to 59.06-c-. By the same proclamation he took possession of the gold reserve ($3,500,000,000) of the Federal Reserve system, authorized the Treasury to buy gold, foreign or domestic, at $35 an ounce, and put its $2,000,000,000 exchange fund into operation. Next steps:

P:The presses of the Bureau of Engraving & Printing worked night and day turning out new gold certificates in denominations from $10,000 to $100,000. These the Treasury would give to the Reserve banks as payment for their gold. Not intended for public circulation, each certificate had a bright yellow back and bore the words "This is to certify that there is on deposit in the Treasury of the United States of America (so many) dollars in gold, payable to bearer on demand as authorized by law." But as the law prohibited the Treasury from paying out gold dollars and as the value of the gold in each dollar was still subject to presidential juggling, the certificates were worth nothing more than bookkeeping receipts.

P: The gold still lay in the vaults of the Reserve banks, but now it was marked as the property of the U. S. Government. In the bowels of the Treasury a huge new two-storied vault was under construction. Three concrete mixers had poured a coating of stone around its steel walls, and workmen were busy hanging a 39-ton steel door.

P:To inquiring newshawks, Secretary Morgenthau remarked: "You might call this the 1934 model gold bullion standard."

"Streamlined?"

"And airflow," he grinned.

Asked whether he had started operating the $2,000,000,000 exchange fund which the law cloaked in strictest secrecy, Secretary Morgenthau declared: "I will never answer any questions about that fund."

P: Secretary Morgenthau went before the House Ways & Means Committee to get an amendment to the new tax bill which would permit him to hire ten assistants at $10,000 each, some for legal work, some to handle the exchange fund. Referring to the present top salary limit for hiring experts, Mr. Morgenthau told the committee: "I can't get the calibre of men I want for the exchange operations at $8,000."

P: Big banks kept the wires hot to Washington asking if it were really true that the Treasury would pay $35 an ounce for imported gold. Mr. Morgenthau had to issue a second announcement to convince them of this good news. Hoarded gold, however, still commands only the old price of $20.67 per oz.

P: The Treasury's daily statement showed an overnight jump in the value of its gold holdings from $4,123,000,000 to $7,018,000,000. It was the same gold, except the dollar had been cut from 100-c- to 59.06-c-. Result: the Treasury's cash balance rose to $4,434,000,000, an all-time record.

P: In Room 267 of the Treasury, behind a black velvet curtain, three tickers furiously spattered paper tape with symbols all day long. At an oval mahogany table Archibald Lochheed, exchange expert, and five assistants studied the tapes, drew red and black lines on graph paper, prepared reports to be submitted to Secretary Morgenthau every evening so that he could plan the next day's exchange operations.

Results. Immediate effect of these Government steps was to start an immense activity in stocks and bonds, which somehow missed almost completely the commodity markets President Roosevelt wanted to boost most. Greatest excitement was in foreign exchange. U. S. banks saw and seized an opportunity for a pretty profit. Because the dollar was still valued at over 61-c- abroad, they bought gold in London for around $34 an ounce, brought it to the U. S. to sell to the Treasury for $35. Their profit was about 3% a week (the time of shipment) on their capital--or 150% a year. In the ensuing scramble the following things happened:

1) A shipping jam quickly developed. Manhattan banks bought foreign gold so furiously that they found difficulty in getting it to the U. S. The U. S. Government had already engaged most of the available cargo space for gold it had secretly bought through the RFC. Lazard Freres prepared to ship $5,750,000, National City Bank booked $3,500,000 on the Berengaria, Bank of the Manhattan Co., $8,400,000 on the Bremen and the Manhattan, etc. etc. Every fast ship sailing from northern Europe in the next two weeks was reported booked up full. The limit on the amount of gold a ship carries is determined by the insurance companies which restrict the amount they will insure on any one vessel. Last week they were demanding five times the usual rate for gold insurance.

2) The pound depreciated faster than the dollar. In two days nearly $30,000,000 of gold was ordered shipped from Europe. Heavy purchases in the London gold market far exceeded the relatively small amount of newly mined gold for sale there. Since the Bank of England is not a seller of gold, the gold merchants turned to gold standard nations, particularly France, sold sterling to buy francs, converted francs into gold for shipment to the U. S. This selling of sterling forced down the pound (which the British equalization fund did not support) faster than the dollar. At one time it touched $4.87 whereas before the proclamation it had been over $5.

3) Gold began to drain rapidly from Holland, Belgium, Switzerland and Italy into France, thence to the U. S. Since France had the most gold and was the freest in letting it go, the drain on France's gold reserve was the heaviest, amounted to 105,000,000 francs. U. S. capital which during the past year had fled abroad was already beginning to come home because of the semi-stabilized dollar. More insistent than ever were predictions that France would have to leave the gold standard if it wanted to check the flight of capital to the U. S. So in spite of heavy purchases of francs to obtain gold, there were even more heavy sales of francs by people who wanted to buy dollars. In consequence the price of the franc fell, making it still more profitable to ship French gold to the U. S.

Significance. So long as capital flowed to the U. S. in the form of gold Secretary Morgenthau did not have to worry about keeping the exchange value of the dollar down. But he was well aware that if France, frightened by the gold exodus, put an embargo on gold exports he would have to use his exchange fund to sell dollars. How many hundreds of millions of dollars he might have to sell to keep the dollar down no one knew.

Last week, however, he did not seem greatly worried about it, for capital coming to the U. S. was having the inflationary effect he wanted. And the long-run inflationary effect was exactly what the President's proclamation aimed at. Last week in spite of the President's proclamation the dollar was worth 61-c- to 63-c- to those who sold it to buy gold in Europe; it was worth 138-c- (according to the Department of Labor's commodity price index) to citizens who used it to buy what they needed in the U. S. The only person in the world to whom the dollar was worth 59-c- was the Secretary of the Treasury who was using it to buy gold at that price.

When the Secretary of the Treasury has bought enough gold or sold enough dollars to take care of the flight of capital to the U. S., the foreign exchange value of the dollar will come down to his figure, 59-c-. Then the Administration hopes that the domestic value of the dollar will gradually come down likewise; that is, prices will gradually rise over a period of months. What the President's proclamation gave U. S. citizens was not a 59-c- dollar today but expectation of rising prices so that eventually a dollar will buy a lot less than it does today.

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