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Thursday, March 6, 2008

There, Our Troubles Began: Garet Garrett & The Revolution of 1933

With the US dollar today trading at historic lows against the Euro and other major currencies, it's helpful (albeit in a post-terminal-diagnosis sense) to understand how our economy and our country got into this mess.

And understand - a collapsing dollar, while supportive of US exports by reducing prices for American goods shipped to importing countries, means that Americans pay more for every single item being imported into this country. Food, oil, textiles, industrial raw materials - everything imported costs more per unit in dollar terms when each of those dollars is worth less and less each day.

How did we get here? The story begins more than eighty years ago, with the run-up to the Great Stock Market Crash of 1929. Although controversy remains as to the causes of the Crash, there is considerable agreement that a contributing factor was the widespread availability of low-interest credit during the Twenties. That credit was used to both expand production and, more ominously, for debt-based speculation in stocks and bonds.

One of the first writers to advance this theory - that the speculative bubble of the Twenties led naturally to a correction to the overvalued stock prices that resulted - was Garet Garrett (photo above). In 1931, Garrett wrote The Bubble That Broke The World, in which Garrett, according to this article by Jeffrey Tucker:

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...ascribes the crash to the pile up of debt, which in turn was made possible by the Fed's printing machine. This created distortions in the production structure that cried out for correction.

What is the answer, according to Garrett? Let the correction happen and learn from our mistakes.

Such is the thesis, but take note: this book was a big seller in 1931. In other words, two years before FDR arrived with his destructive New Deal, ascribing the depression to capitalism and speculation, Garrett had already explained what was really behind the correction...
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Garrett spent the rest of his life sounding the alarm as to the unprecedented power-grab by FDR and other advocates of limitless government. His essay The Revolution Was is essential, as are the articles contained in the collection Salvos Against The New Deal. "The Revolution Was" is joined with two other essays - "Ex America" and "Rise of Empire" - in what was one of Garrett's last works, The People's Pottage.

Most relevant to today's economic tribulations is this article by Garrett, from the March 3, 1934 Saturday Evening Post, in which he explains how the Democratic Presidential candidate in the 1932 election first vehemently vowed to support the gold backing of the US dollar, and then, upon election, reversed course.

Here's a sample from that article:

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..."One of the most commonly repeated misrepresentations by Republican speakers," said Mr. Roosevelt, "including the President, has been the claim that the Democratic position with regard to money has not been made sufficiently clear. The President is seeing visions of rubber dollars. This is only part of his campaign fear. I am not going to characterize these statements. I merely present the facts. The Democratic platform specifically declares, ‘We advocate a sound currency to be preserved at all hazards.' That's plain English."

In so far as the popular vote that delivered the Government to the Democratic Party was touched by thought of money or monetary principles, it was a vote for sound money and for the gold standard. That is to say, what followed was without color or suggestion of a mandate from the people.

And what was it that followed?

First, gold payments were suspended. Next, the gold standard was forsaken, though, as it were, temporarily. Then it was flatly repudiated by law, the President referring to it as one of the "old fetishes of so-called international bankers," now to be replaced by an idea of planned currency. "The United States seeks," he said, "the kind of dollar which a generation hence will have the same purchasing power as the dollar value we hope to obtain in the future."

To take the country off the gold standard, certain steps had been necessary.

It did not happen all at one stroke. The time it took altogether was three months; and during these three months the Government sold to banks and investors $1,400,000,000 of securities, all of them bearing the engraved words, "Principal and interest payable in gold coin of the present standard of value."

On March 9th the Congress enacted an emergency law investing the President and the Secretary of the Treasury with absolute power to control money and banking, including the power, if necessary, to require all private owners of gold to deliver it up to the United States Treasury in exchange for paper money. Then, as the banks began to reopen under strict Treasury regulations, they were forbidden to pay out gold, except by particular permission of the Government. Gold payments, therefore, were suspended by all banks, though not yet by the Government. The country was still on the gold standard. To suspend gold payments in a great emergency is by no means the same as to abandon or repudiate the gold standard.

On March 12th, the United States Treasury sold $800,000,000 short-term bonds, called certificates of indebtedness, and on each bond was engraved the promise of the Government to redeem the principle and pay the interest "in United States gold coin of the present standard of value." On March 15th it sold $100,000,000 Treasury bills, which is a form of IOU, and these also were payable in gold.

On April 5th the President issued an order commanding all private persons and all private banks to deliver, by May 1st, their gold and gold certificates to the nearest Federal Reserve Bank in exchange for paper money, under penalty of fine and imprisonment. After that it was a crime to have more than $100 in gold or gold certificates in one's possession. A gold certificate is, or was, simply a Treasury receipt for gold coin, reading on its face: "This certifies that there have been deposited in the Treasury of the United States ten dollars" [twenty, one hundred or one thousand dollars] "in gold coin, payable to the bearer on demand." This had been, for longer than anyone could remember, the finest money in the world - simply a receipt by the United States Treasury for coin held in trust in its vaults, payable to the bearer on demand. And now suddenly, both as money and as faith, it was broken...... April 5th, parallel to the President's order commanding privately owned gold to be surrendered, the Secretary of the Treasury issued a statement, saying: "Those surrendering gold, receive an equivalent amount of other forms of currency, and other forms of currency may be used for obtaining gold in an equivalent amount when authorized for proper purposes." That is a fairly good statement of what gold-standard money is. It is paper money that may be exchanged for gold, dollar for dollar, when one wants the gold for any purpose for which gold itself may be properly and rationally required. The Secretary of the Treasury added: "Gold held in private hoards serves no useful purpose under present circumstances. When added to the stock of the Federal Reserve Banks, it serves as a basis for credit and currency."

Thus people understood they were surrendering gold in time of emergency only to strengthen the banking system and that the paper money they received for it was, as the Secretary of the Treasury said, the equivalent of gold. There was yet no the slightest suggestion that the Government intended to devalue the standard gold dollar by reducing its gold content, purposely to destroy the equivalent value of that paper money, nor was there even a remote suggestion that it was writing a law to repudiate its gold contracts.

On April 19th the President proclaimed an embargo on exports of gold. That meant that the Government had decided to let the dollar go. Foreign holders of United States Government bonds could no longer expect to receive the principle and interest in gold - at least, not for a while - foreign holders of the United States Treasury receipts, called gold certificates, could no longer convert them into gold at any bank in the world. All over the world the value of the American dollar began to fall. As it turned out, that is precisely what the Government wanted. It wished the value of the dollar to fall in the international money market, thinking that this would cause American commodity prices to rise..... And yet only in a sense of payment were we off the gold standard. We had stopped paying gold, yes, but that is not the same as to repudiate the gold standard. Once before for nearly two decades the American Government had to pay with paper money. That was during and immediately after the Civil War. But it held all the time to the gold standard and ultimately restored all its paper money to gold parity. And now what immediately followed gave many people the idea that such was the case again.

On April 23rd, only four days after the President had proclaimed the embargo on gold exports, thereby serving notice to the world that the American Government would no longer hold its dollar to the gold standard - for that is what the embargo meant, and every banker and speculator in the world so understood it - only four days after this, the United States Treasury offered and sold $500,000,000 short-term bonds, called three-year notes. It made them in small denominations and recommended them to small investors; and in the Treasury circular offering these bond the Government said: "The principle and interest of these notes will be payable in United States gold coin of the present standard of value." People bought them on that representation, unaware that the Government was then writing the law to repudiate the contract.

On April 28th, five days later, the Senate passed the inflation law - namely, the Thomas amendment to the Agricultural Adjustment Act, authorizing the President to debase the gold-standard dollar by reducing its gold content one-half, to print and issue three billions of fiat money, and to exchange three billions of paper currency for outstanding Government bonds. Even that was not final. There was one more step.

On June 5th, responding to the wishes of the Administration, the Congress by joint resolution repudiated the gold clause in every form of public and private contract; as to all existing Government bonds, Treasury notes and certificates of indebtedness, bearing on their face the unqualified promise of the Government to pay them, principle and interest, in gold - including the $900,000,000 sold by the Treasury 12 weeks before and the $500,000,000 sold 6 weeks before - it declared they were payable, not in gold according to the covenant, not in paper money equivalent to gold, but in any kind of paper money the Government might see fit to print.

Thus in three months the Democratic Party had not only thrown the country off the gold standard; it had repudiated the gold standard utterly. More, it had repudiated the contract on every existing obligation of the United States Treasury in the form of a gold bond, a gold note or a gold receipt. The only thing left was the silver certificate, redeemable in silver coin on demand. That had not been repudiated; but the right to repudiate it had been reserved...
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Thus, with affirmation of this grandest larceny by the Supreme Court in U.S. vs. Bankers' Trust Co., 294 U.S. 240 (1935), was set the course that brings us to today. The repudiation of silver redemption having been accomplished by 1968, we Americans are left with a collapsing fiat currency, backed by no more than the dubious promise of a thoroughly bankrupt United States government.

Take the time to read the entire article. The audacity of the monetary bait-and-switch is simply appalling, as someone who was raised on the myth of the sainted Roosevelt.

Then read The People's Pottage and Salvos.

You'll be a sadder but wiser camper as the coming Storm grows in fury.

Tempus fugit.

4 Comments:

Blogger chris horton said...

Thanks for this post....

March 6, 2008 at 3:10 PM  
Blogger Hollywood said...

It's available as a free PDF, my preferred method, since it helps my personal financial situation :-)


http://www.mises.org/books/bubbleworld.pdf

March 6, 2008 at 8:20 PM  
Anonymous TC said...

Those dirty bastards...

March 6, 2008 at 11:47 PM  
Blogger Cabinboy said...

Appreciate the link to the .pdf for "Bubble". I have updated the link to take the reader to it.

Glad ya liked it, fellas. Wish the story would have a happier ending....

;-)

March 7, 2008 at 1:45 AM  

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