January 14, 2018 Reading Time: 5 minutes

Immediately following the inauguration in 1933, President Franklin D. Roosevelt focussed on what his advisers told him was the real problem: the fall in the prices of everything. The theory, which is completely wrong, is that falling prices were causing the fall in productivity. They believed that by boosting the prices of stocks and other financials, in addition to commodities, profits and wages would rise and recovery would dawn. They would achieve this by wrecking the dollar. 

It’s a classic case of what bad theory can do. It produces terrible policy that makes matters worse rather than better. Wages needed to fall. Markets needed to clear. Institutions holding bad assets needed to pay the price. The price system needed the speak the truth, not be manipulated into telling more lies. At that very time, all of Washington became dedicated to the opposite.

Three Blows

FDR undertook three dramatic monetary moves. First, he shut the banks. With this action, he told all customers that the money in those buildings belongs to government and not the people. He wanted to boost confidence but the result was the opposite: people would not trust the banks again for a generation.

The second action was executive order 6102. This did what would have been unthinkable a few years earlier. It forbade the private holding of gold money. It demanded that people who had gold turn it in and get “lawful money” in return. A banking act passed by Congress the previous month had done the same but with this order came the teeth: a fine of $10,000 ($200,000 in today’s terms) or ten years in prison. It was enforced. There were dozens of prosecutions.

It seems amazing in retrospect that government (in the land of the free) would ever engage in such an outrageously tyrannical act of seizing the physical assets that served as the foundation of the money system. It would not be legal to own gold as money until 1975.

The third action in 1933 was the devaluation of the dollar itself, from 1/20th a gold ounce to 1/35th. The redefinition amounted to an instant 41% tax on dollars. Thus did this administration seek to wreck the money at the very time when monetary soundness was essential to recovery. Behind it all, again, was bad theory, the belief that falling prices were causing the depression rather than the reverse.

The Resistance Born

It was at this moment that Col. E.C. Harwood, then teaching at MIT, decided that he must speak out and he must do so from an institution that would be independent of both government and academia. He founded the American Institute for Economic Research in 1933. Its very first publication (1934) was “What Will Devaluation Mean to You?

“Devaluation, or clipping the coinage, as the process was called in the days of the Robber Kings, is a subtle form of taxation,” he wrote. “Like most other taxes, those imposed by this insidious method will be borne by the Forgotten Man…. The effects of devaluation upon the Forgotten Man, who is the warp and woof of our civilization, are of vital significance. He has a right to know what these things mean.”

The monograph went on to make an entirely reasonable prediction. He expected prices to rise and rise, thus making everyone even worse off. He urged all Americans to take every precaution against this through massive thrift and personal protection of property.

It’s pretty awesome to think of the risks that AIER was taking at the time with such advice. Washington was basically waging war on the public (invoking even wartime statutes from 1917 to do so). AIER and Harwood did not sign up. In fact, they became the resistance.

Failed Inflation

When you read the original document, you might also be struck that the prediction of inflation turned out to be imprecise. Prices did stabilize but the much-feared inflation never actually happened. Why was this? Both banks and the public became hugely risk averse, and this caused a collapse in money velocity after 1930 and following. The process of inflation under a central bank requires the cooperation of the industry and depositors. So, yes, “all else equal,” the inflation would have happened, but the crisis environment dramatically changed public and business psychology.

Instead of a puffed-up recovery, what actually happened was the creation of a lost decade of prosperity, ending in war and all-round wartime economic planning complete with production mandates, price controls, the draft, and wage controls. It turned out that the economy didn’t really recover from the Great Depression until the end of World War Two.

Later in 1934, Harwood and his associates noted this behavior and predicted correctly that the new savings (hoarding) would form the basis of economic recovery as soon as Washington stopped its interventions in wages, prices, and production. He was exactly correct about this.

1930 and 2008

This all might sound familiar to you if you lived through the 2008 financial crisis. The Treasury, the Fed, and two presidential administrations set out to manufacture a big monetary inflation, based on the belief that rising real estate prices and financials would restore confidence and economic growth. It didn’t happen. What we saw instead was a huge fall in money velocity, new caution in lending, and a rise in savings – all of which conspired to keep inflation at bay. But just as in the 1930s, the result was to prolong the downturn for a full decade.

(By the way, if you are curious about the relationship of prices and money velocity, you would enjoy this great paper: “Money and Velocity During Financial Crises: From the Great Depression to the Great Recession” by Richard G. Anderson, Michael Bordo, and John V. Duca. The parallels between to the two periods are striking.)

In both cases, policy set out to manufacture a huge inflation as a way of fixing the problem. In neither case did the policy achieve its aims. The reason was the same in both: risk aversion led depositors to hoarding-style behavior and banks to pull back lending, thus changing the relationship of money supply and demand. The widespread predictions of hyperinflation (I made one myself in 2009) turned out to be wrong. It’s a great lesson in humility here, both on the part of government and those who would presume perfectly to predict economic outcomes of government policy.

Wall Between Money and State

It’s glorious to live in times when we are seeing the gradual emergence of a new and competitive money system, rooted in private provision and management, and trending toward disintermediation. Cryptocurrency is capable of smashing the traditional government monopoly over time, and providing the ultimate protection against confiscatory government policy. FDR was able to confiscate gold and devalue the dollar because he was the head of a money cartel. Break the money and banking cartel and you go a long way to ending the greatest threat to prosperity we face.

It is for this reason, and in light of this long and grim history, that every fan of technology, Bitcoin, blockchain, and cryptoassets generally should fight against every form of government regulation, management, or involvement in this sector, and favor a rollback of every intervention thus far. It is no different now from 1933. Government cannot be trusted with the slightest ownership stake in money. It never ends well.

Jeffrey A. Tucker

Jeffrey A. Tucker served as Editorial Director for the American Institute for Economic Research from 2017 to 2021.

Get notified of new articles from Jeffrey A. Tucker and AIER.

Related Articles – Central Banking, Monetary Policy