A NEW WORLD OF ECONOMICS * ECONOMICS FOR THE NEW WORLD

BY: NATHAN LEWIS
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“Better than college”: The Liberal Arts Program in Economics and History

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One Nation Under Gold #2: The Silliness of the Bretton Woods Years

October 14, 2017

We’re continuing our look into One Nation Under Gold (2017), by James Ledbetter.

October 2, 2017: One Nation Under Gold (2017), by James Ledbetter

Ledbetter glided quickly over the period from 1914 to 1931, taking up the story again in earnest with the British devaluation of 1931 and, especially, the U.S. devaluation of 1933. This was treated with some interesting detail. However, Ledbetter made almost no mention of the fact that the U.S. returned to gold at the beginning of 1934 at $35/oz., and maintained that parity through the rest of the 1930s and (nominally, at least) through World War II.

I learned something interesting about the Emergency Banking Act, of March 9, 1933:

The initial version of the Emergency Banking Act originally submitted to Capitol Hill, for example, did not require individuals to relinquishtheir gold to the government …

But when Congress was called into special session on March 9, the legislation was changed; the gold-hoarding protections were apparently the section that was most heavily edited in the office of Senator Carter Glass of Virginia … According to Walter Wyatt, who was advising the Federal Reserve Board, “That morning, when we were in Senator Glass’ office, somebody asked us to change that provision and invest the power in the Secretary of the Treasury to require gold to be paid in to the Treasury Department.” No one seems to have kept any record of who the “somebody” was or why the change was made …

This was typical of the hurried, slapdash approach to one of the most important pieces of financial legislation in American history. … The House of Representatives was denied the ability to amend the bill. There were no committee hearings and no debate, and indeed the bill passed without a roll call taken. Then again, it would have been difficult for members of Congress to discuss a bill they hadn’t read. Reportedly, Alabama representative Henry Steagall was the only member of Congress given a copy of the bill, and that version contained penciled markups; for the rest it was read aloud into the record. The House minority leader, Bertrand Snell of New York, complained that “it is entirely out of the ordinary to pass legislation in this House that, as far as I know, is not even in print at the time it is offered,” although he ended up supporting the bill. According to Moley, the bill “was represented by a folded newspaper in the House because there had not been time to print copies of it.” Within a matter of hours, both houses of Congress had approved the bill on March 9 and the president had signed it. (pp. 92-94).

Well, there you go. This law has since come under a fair amount of scrutiny, and some people were surprised at what it contained. Here is the full text:

Click here for the full text of the Emergency Banking Law, March 9, 1933.

 

The 1917 law was the Trading With the Enemies Act. The 1917 law, and the 1933 law, effectively made Roosevelt (and subsequent presidents) a dictator, at least regarding financial matters. This condition continued at least until 1976; perhaps it continues today. Senate Report 93-549, the report of the Special Committee on the Termination of the National Emergency (November 19, 1973), began:

Since March 9, 1933, the United States has been in a state of declared national emergency. In fact, there are now in effect four presidentially-proclaimed states of national emergency: In addition to the national emergency declared by President Roosevelt in 1933, there are also the national emergency proclaimed by President Truman on December 16, 1950, during the Korean conflict, and the states of national emergency declared by President Nixon on March 23, 1970, and August 15, 1971.

These proclamations give force to 470 provisions of Federal law. These hundreds of statutes delegate to the President extraordinary powers, ordinarily exercised by the Congress, which affect the lives of American citizens in a host of all-encompassing manners. This vast range of powers, taken together, confer enough authority to rule the country without reference to normal Constitutional processes.

Under the powers delegated by these statutes, the President may:
seize property; organize and control the means of production; seize commodities; assign military forces abroad; institute martial law; seize and control all transportation and communication; regulate the operation of private enterprise; restrict travel; and, in a plethora of particular ways, control the lives of all American citizens.

All interesting topics for further study. Let’s continue with Ledbetter:

This bring the story to the problematic Bretton Woods years. I liked this part of the book. It is a bit of treat for people like me who already have a good grasp of the history of the period. It is probably not so good for those that don’t, as it consists — a common pattern in this book — of some picturesque dramatic scenes largely without context. Ledbetter added a lot of colorful detail about the time. In describing the conflict inherent in laws that prohibited ownership of gold bullion products by U.S. citizens, while allowing artisanal uses of gold (such as wedding bands), Ledbetter described an absurd story about a statue of a rooster made of fourteen pounds of pure gold. (The rooster got into trouble because it too-closely resembled a gold ingot.) The real problem was that the U.S. dollar was not being managed properly, and had a tendency to sag alarmingly vs. its official gold parity, including a precarious dip to $40/oz. in 1960. The endless confusion over the “balance of payments” during the Kennedy and Johnson administrations received ample description, although with no apparent understanding of what was causing it. I described the problem in Gold: the Final Standard, and also my other two books. My version of things is not exactly out-of-the-mainstream. In International Monetary Cooperation Since Bretton Woods (1996), Harold James described the problem as:

Three features had characterized the evolving international financial system in the 1960s:

  • Increasing freedom of capital movements
  • An insistence on autonomy and growth-orientation in the national policy setting [independent domestic monetary policy and “easy money”]
  • A fixed exchange rate system

The development of the second half of the decade showed that these characteristics were mutually incompatible. (p. 226)

The book was commissioned by the IMF for its 50th anniversary. So, it is not as if today’s economists, or those of twenty years ago, don’t understand these things, at least in a hazy way. Certainly Ledbetter, or one of his six named research assistants, might have picked up on these things. Instead, the presentation in the book was largely “from the eyes of those participating,” that is, reflective of the ignorance of those at the time.

Wrapping up the golden rooster affair, Ledbetter moved on to a little-known effort within the Johnson Administration to find new mining sources of gold, with an eye toward replacing the U.S. Treasury’s dwindling official reserves. This included some funny daydreaming, such as turning bismuth to gold via a particle collider, or using nuclear detonations as a way to accelerate mining production. It also included some old-fashioned prospecting in Nevada or Venezuela. Again, it is good for a laugh, but even Ledbetter admitted that it was irrelevant. Following this is a pretty good account of the failure of the London Gold Pool in 1968, albeit one again with hardly any insight as to what was causing the problem. This is somewhat permissible, since it appears that those at the time didn’t have much of a clue either, but we really do know better now, even the academic economists.

During the 1950s and 1960s, it was illegal for Americans to buy, sell or hold gold domestically. This left a loophole: Americans were soon buying, selling and holding gold overseas, in London or Canada. This was a perfectly sensible thing to do — throughout the Bretton Woods period, the dollar was in constant threat of losing its gold peg and being devalued, which had already happened in Britain, France and other countries in 1949 and numerous times thereafter, and which eventually did happen to the U.S. in 1971. In 1961, these overseas gold holdings were also made illegal. Thus, the story of the time was, largely, that Americans involved in gold were in violation of the laws of the day. This fits Ledbetter’s themes quite nicely, casting all those involved or interested in gold as being part of the black-market fringes of society. Nevertheless, I am struck by how strenuously he attempts to paint all those involved in the gold trade as thieves and charlatans. In the 1950s, a Canadian firm, Doherty, Roadhouse & Co., offered a program to sell gold bars to Americans, which was still legal at that time.

The very idea that a significant number of Americans would be buying and holding gold abroad was so novel that it’s not surprising that some of those responsible for it skirted the law. Doherty, Roadhouse, for example, was an important firm on the Toronto Stock Exchange; one of the company’s principals, D’Arcy M. Doherty, had been the president of the Exchange in the early 1950s and sat on its Board of Governors after that. Nonetheless, the firm’s ties to Canada’s mining interests had drawn the wrath of Canadian regulators. In 1957, the Toronto Stock Exchange discovered that Doherty had failed to disclose that he had accepted stock options in a mining firm at the time it began trading on the Exchange. A flurry of trading several months after the firm — Aconic Mining Corporation, which had gold as well as other mining claims and projects–went public had caused the stock to plummet and its executive director to declare bankruptcy. The Stock Exchange’s Board of Governors declared Doherty “guilty of conduct detrimental to the interests of the Exchange and unbecoming a member,” and suspended him for the Exchange for three months.

The chances are strong, however, that most Americans buying gold bars on 3 percent margin from Doherty, Roadhouse neither knew nor cared much about the firm’s other activities. (p. 158)

What does this mean? Again, it is a collection of unconnected images intended (cue Miley) to generate a sort of emotional response. First of all, the passage conflates the individual D’Arcy M. Doherty with the firm Doherty, Roadhouse. It was apparently D’Arcy M. Doherty, the person, who had “failed to disclose that he had accepted stock options in a mining firm,” and got a slap on the wrist as a result. So what? Toronto is the world center for the mining industry. An estimated 70 percent of all global mining-related capital today is raised via Toronto. Wherever in the world the mine or mineral deposit might be, it is owned by a Canadian company listed on the Toronto exchange. Stock options are commonly handed out to securities dealers and others involved — Doherty, Roadhouse was apparently one of the top firms in Toronto — during all stages of financing, and especially at an IPO. A big securities house could do hundreds of deals a year for mining firms, and receive options on every one of them. The fact that Doherty (the person) “failed to disclose” that he had some options was probably a procedural oversight of no great significance. Perhaps it was a kind of kickback by the mining firm. “A flurry of trading” doesn’t mean anything. Perhaps Aconic’s drilling results stank, or they failed to get a mining permit from the government, or a tailings dam collapsed, causing a big environmental mess. This could easily lead to the inability for a perennially cash-burning junior miner to raise capital, and thus declare bankruptcy. What does the failure of Aconic have to do with the failure of D’Arcy M. Doherty to disclose that he received stock options in an IPO deal? (It probably means that his options were worthless.) And what does this have to do with Doherty, Roadhouse, the securities dealer? And what does this have to do with Doherty, Roadhouse’s bullion-selling service? And what does this have to do with gold, itself? Here is the likely answer: nothing, nothing, nothing, nothing and nothing. So, why are we reading about it?

Another of Ledbetter’s obvious overreaches takes place near the end of his account of the Bretton Woods period:

Arlington House [a book publisher] followed up Browne’s hit with How to Beat Inflation by Using It, and then in 1972 with Everything You Need to Know Now About Gold and Silver. Each chapter of the latter featured an interview with an expert–Harry Browne, Franz Pick, Murray Rothbard, and others. Tellingly, the copyright for the book was owned not by any of the authors, but by the Pacific Coast Coin Exchange, a California-based numismatic trading outfit whose founder, Louis Carabini, wrote the book’s introduction (and presumably conducted the interviews). The book was republished several times; a transition was under way, from advising readers to buy gold to out-and-out selling it to them. (p. 244)

Let’s get this straight: Louis Carabini interviewed some people, wrote an introduction, and assembled the results into a book. Since when do interviewees hold copyright to the results of their interview? When Inc. magazine interviews some financial expert, does that interviewee hold the copyright to the results? You would think that Ledbetter, the editor of Inc. magazine, would know the answer to that. Of course he does know that, and writes this anyway, because you might not know it. What does this fact “tellingly” tell us? That Arlington House doesn’t do things any differently than anyone else? The fact that Carabini also acted as a dealer in gold and silver coins is supposed to mean something: what it means is that dealers in gold and silver coins are no different than dealers in stocks, bonds, fine art, real estate or collectible stamps — they produce and publish research into the markets they specialize in, most of it with a bullish bias. If there was any “transition” involved — probably not — it was that coin dealers were finally getting a little sophisticated; or, perhaps, that business had picked up enough, due to broader macroeconomic forces in play, that their budgets could support a little more than a sales flyer.

Ledbetter spent some time describing the “hard money” enthusiasts of the time, focusing on Harry Browne, author (in 1970) of the bestselling book How You Can Profit From the Coming Devaluation. Browne went a few steps beyond simply “profiting,” also recommending that families have a “retreat” in a rural area, stocked with gold and silver and enough supplies to last a year. Was this silly? Barton Biggs, partner of Morgan Stanley and the founder of Morgan Stanley Investment Management, and later founder of multibillion-dollar hedge fund Traxis Partners, said virtually the same thing in War, Wealth and Wisdom (2009). The fact of the matter was that gold enormously outperformed both stocks and bonds during the 1970s. Browne was as right as right can be. Did Ledbetter give him any credit for this? Not a whit. Browne’s warnings about urban unrest were hardly farfetched. In the late 1960s, inner-city areas were already the site of regular riots. Prosperous whites were already fleeing for suburban areas — which were mostly “rural areas” before all the new neighbors arrived. How much worse could it get in an environment of currency decline? A lot worse — an indeed it did get a lot worse, such that, by the end of the 1970s, large swathes of Manhattan consisted of abandoned buildings, and unattended fires were a nightly occurrence. The other four boroughs did no better. The U.S. never slid into hyperinflation, but there was a real risk that it could have, around 1980 — this risk is exactly what spurred Paul Volcker into action, to prevent this debacle.

In the end, Ledbetter’s treatment of the 1930s and the Bretton Woods period amounted to something of a nothingburger. The fact that the Bretton Woods era, the 1950s and 1960s, had the best economic performance (in the U.S. and globally) of the entire century since 1914 — that the gold standard, even in its beleaguered Bretton Woods form, worked very well — is apparently too minor a fact to mention or contend with, a waste of breath compared to the legal adventures of the golden rooster. His account of the difficulties of the Johnson years are long on detail but short on insight. The message throughout is that gold is strange, silly, bizarre. And yet, the United States had embraced the principle of a currency based on gold for over 180 years. The other countries of the world did the same, and for a longer time period too, stretching back into antiquity. In the U.S. case, this resulted in the best economic performance of any major country in the world; in the 1960s, this was capped by some of the best economic performance in U.S. history. While distracting us with amusing but irrelevant detail, Ledbetter ignored this, and all of the other big questions surrounding monetary issues.

 

We will continue with One Nation Under Gold soon.