FARM ECONOMICS Department of Agricultural Economics NEW YORK STATE COLLEGE OF AGRICULTURE CORNELL UNIVERSITY, ITHACA, N. Y. Published and distributed in furtherance of the purposes provided for in the Acts of Congress of May 8, 1949, M. C. Bond, Director of Extension Service No. 211 December 1957 WARREN AS PRESIDENTIAL ADVISER CONTENTS Section page Section, continued page The Broken Promise 5598 Much-Needed Rest 5629 Warren Gold Legend 5600 Two-Price System 5630 Two Solutions 5600 Regulation on Hoarding 5631 The Gold Theory 5601 Silver, Paper Money, Gold 5633 Sound and Fury .. 5601 Pre-Fireside Chat 5634 Preparedness 5602 Let's Look at the Record 5637 Credit 5602 Preparation for Fireside Chat 5638 Position of Sound-Moneyites 5603 Moley's Role 5640 Bankruptcy Abhorrent to Fireside Chat 5640 Everyone 5604 "The Magic of Economic Misunderstood Debtor-Creditor Evangelism" 5641 Relationships 5604 RFC Buys Gold 5642 Closing the Banks 5605 Headed in the Wrong Direction.... 5644 The Bank Holiday 5608 Two Prices for Gold 5644 The First Day 5609 Is Seeing Believing? 5645 Public Elation and Delays Have Dangerous Ends 5647 Disappointment 5610 Opposition Incorporated 5648 "There's No Making Out To Stabilize Without Stabilizing. .. 5655 Anything" 5611 Yuletide Appraisals 5656 Behind the Eight Ball 5612 Fight for Possession of Gold 5656 Rosy Hue 5613 The Struggle Over the Gold Now, the Less Important 5614 Reserve Act 5657 F.D.R. Meets the Press 5615 Inflation—Fears vs. Desires 5661 Thomas Amendment 5615 Commodity Dollar 5662 Antis.. 5616 Warren in an Eclipse 5662 F.D.R. Calls and Smashes Warren Goes to Europe 5664 Conference 5617 Not in the Doghouse 5666 The Trap 5619 The Gold Clause 5667 Stabilization of Prices 5620 Predicted Inflation Fails to Hazy Hue 5621 Materialize 5668 Cotton, Pigs and Prices 5623 Pre-Hyde Park Dinner 5625 Two Invitations—A Year Apart 5669 Hyde Park Dinner 5625 Yesterday and Tomorrow 5670 Meet the Press. 5626 Appraisal 5670 Tailpiece 5676 Digitized for BulFRASERl Marke t and Reaction 5628 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5598 WARREN AS PRESIDENTIAL ADVISER THE BROKEN PROMISE George F. Warren was the first person who ever advised a President of the United States to raise the price of gold. Warren's task of advising Franklin D. Roosevelt on the well-understood cause of the great depression was relatively simple. The task of advising this unpredictable President on the little-understood and highly contro- versial solution was an impossible one. Only a paragon could have per- formed it perfectly. Warren's task was to advise the President to break a national promise that had been kept for more than half a century. The national promise was the so-called gold clause that appeared on a legion of contracts including federal, state, municipal, railroad and industrial bonds. It frequently appeared even on personal notes. Substantially, all debtors unconsciously promised to make the interest and principal pay- ments on their obligations in dollars which contained 23.22 grains of gold. The federal government promised to redeem its paper money in gold at the rate of 23.22 grains to the dollar. For more than a half century, however, the gold clause had been ignored, as few persons demanded gold; they were quite content to accept paper money.1 With the great deflation of the thirties, all this was reversed. When the value of gold doubled in four years, there was suddenly a sharp increase in the demand that the long forgotten promises made by debtors be kept. The gold clause appeared on an estimated $100 billion of federal, state, municipal, railroad and industrial bonds and other obligations.2 The gold clause also appeared on $1.6 billion of gold certificates. The broken promise, the prohibition of gold payments of any kind, violated the sanctity of contracts and raised a great hue and cry.3 A promise is an expectation and a hope, a pledge, a word of honor, a con- tract that men can't live without and sometimes can't live with. From birth to death millions of people have been taught that promises must be kept. In the case of the gold clause, many who were confused by the legal, economic and monetary implications were well informed on the moral issues. The Bible abounds in discussions of honest weights, measures, coins and dishonest money-changers. Moses emphasized the importance of maintaining a money of unvarying weight, "And all thy estimations shall be according to the shekel of the sanctuary: twenty gerahs shall be the shekel." 4 Solomon, the wise son of David, recorded, "A false balance is abomination to the Lord: but a just weight is his delight."6 Centuries later one of the disciples described Christ driving the money-changers from the temple.6 It is probable that the emphasis on the importance of keeping promises 1 The gold clause was the result of a long, bitter controversy over whether the interest and principal payments on the federal debt should be paid in paper money. During the War Between the States and most of the seventies the farmer received greenbacks for his wheat, and the holder of government bonds received gold for his interest. The greenback value of wheat fell, and both the greenback and the gold values of the bonds rose. The government kept its promise with the bond owners. Following the resump- tion of specie payment in 1879 it was customary to insert in bonds, real estate mortgages and other public and private obligations a provision for the interest and principal payments "in gold coins of present stand- ard weight and fineness." From 1863 to 1928 the large-sized and the small-sized gold certificates carried various phrases to the effect that they were payable in gold, gold coins and the like. This, of course, was the same as saying that they were redeemable at the rate of 23.22 grains of fine gold to the dollar. Further discussion appears on page 5667. 2 MacDonald, W., The Menace of Recovery, The Macmillan Company, New York, page 100, MCMXXXIV [1934]. 3 Since 1933 the gold clause has not appeared on the federal currency or on federal, state, municipal Digitizedor industria for FRASERl bonds an d is not missed. 4 5 6 http://fraser.stlouisfed.org/ Leviticus 27:25. Proverbs 11 :1. Matthew 21:12. Federal Reserve Bank of St. Louis 5599 would be more effective if there was more discussion of promises that should be broken and of promises that should never be made. Concerning the keeping of promises, Cicero has some wise words, "Promises are not to be kept if the keeping of them is harmful to those to whom you have made them." 7 On the making of promises, Abraham Lincoln said, "We must not promise what we ought not, lest we be called upon to perform what we cannot." The gold clause is an excellent example of the Cicero and Lincoln dicta. The Ten Commandments comprise a moral code involving promises either implied or expressed that are often broken. "Thou shalt not steal" is a case in point. For centuries young people have promised to love, honor and obey. Businessmen have promised to make certain interest and princi- pal payments on their debts. Nations have promised to redeem their currencies in certain amounts of a precious metal. Except for the last, these promises have been broken so often down through the ages that legal procedures—larceny, divorce and bankruptcy laws—have been developed to solve their respective problems. Governments' broken promises concern- ing the redemption of their currencies in terms of hard money have been, on the other hand, so rare that no code of laws has been developed to deal with the issue. At the depths of the depression of 1933, the dollar had to be devalued, a promise had to be broken, and it was Dr. Warren's fate to advise the President who had to do it. Atten- tion will be focused on (a) the neces- sity of breaking the promise, the devaluation of the dollar; (b) the effect on our economy of breaking the promise—that is, the effect of the devaluation of the dollar on commodity prices; and (c) the sound and fury that accompanied the breaking of a national promise. This part of the Warren story 8 endeavors to give a detailed account of what happened during about one year, 1933-34, and has proved to be the most difficult to present. The narrative is built on a foundation composed of Warren's notes and the biographers' interpretations. In casting about for a method of presentation it was decided to keep direct quotations to a minimum, as an overdose generally results in in- tellectual nausea. They are used to Harris & Ewing PORTRAIT 1. GEORGE F. WARREN—THE point up leading administrative de- PRESIDENTIAL ADVISER cisions or important principles and to Little would one suspect that he would challenge a national promise and the longstanding theories of portray the thoughts, idiosyncrasies, economists. A formidable undertaking. 7 Cicero, De Officiis, Book i, Chapter 10. 8 This phase of Warren's activities was described only briefly in the February 1957 issue of Farm Eco- nomics. To have presented it adequately would have required a more detailed account than was given the rest of his life and would have been out of proportion to the remainder of the story. Therefore, the technique has been to extract and magnify this portion in order to examine it more minutely. Pearson, F. A., and Myers, W. 1., The Fact-Finder, Farm Economics, No. 208, pages 5470-5516, February 1957, and Pearson, F.