May 27, 1933 - Article - What About Gold, by Frank A. Vanderlip
There are few words so deeply ingrained in our minds as is this word "gold." It has deep-rooted significance in human thinking for 3000 years. The uses of the metal have been so complex that is doubtful if the most highly-trained specialists have more than a vague conception of its complete economic ramifications. But the word has an elemental concept in every mind; gold is the epitome of wealth.
If I were asked to recommend a course of reading designed to give one as complete knowledge as possible regarding gold, I would not start with any book on economics nor any address made by a banker. I would rather head the list with such a book as Frazer's Golden Bough, which is an anthropological study of primitive psychology, particularly a history of superstitions and social taboos. The reason for that is that to understand the subject of gold first requires a mental housecleaning.. One ought to get rid of preconceptions, of misconceptions, economic superstitions and hereditary beliefs. That is extremely difficult and has been accomplished by few among the whole breed of economists and bankers, to say nothing about the layman's state of mind. Veritable golden streets in paradise rest on no better foundation than do many soberly regarded, orthodox views concerning the functions of gold in our present economy.
Throughout primitive time, so it came about, after man abandoned shells, sheep and cattle as measures of value in exchange for other things, the money used was hard money. It was coined copper, silver and gold, and its function was easily understood.
The next step grew out of the necessity for the safekeeping of any hoard of gold. Thieves might break in and there was need of strong boxes. The safest strong boxes were the property of the goldsmiths, so it naturally came about that men would take coin to a goldsmith in whom they had confidence and leave it with him. Written receipts for the deposited coin was the next obvious step. If there was general reliance on the probity of the goldsmith, those paper receipts became in a sense the equivalent of the gold itself. Instead of drawing out the gold when wanted, such a receipt might be as acceptable for the time being as the actual gold coin which had been warehoused in the goldsmith's strong box. The amount of the receipt might no correspond with the size of a particular payment, and it came about that the individual would write an order on the goldsmith. Up to the time of that phase, the goldsmith, who was ultimately to become the banker, was merely a warehouseman, but the goldsmith's receipts were in circulation and were performing the function of money. There was then, or should have been, always an amount of gold in the strong box equal to the amount of receipts outstanding.
Let us try to picture what was the next phase, for it was an important step. Let us imagine a small cargo of rugs arriving at a Mediterranean port. Suppose there were two wealthy and experienced merchants who were prepared to compete for the cargo, and who each had, in his own or in the goldsmith's strong box, the gold necessary to complete the transaction. There were thus two competitors, and the resulting price would have been withing the range of their particular ideas of value.
Now let us suppose that there was also a shrewd, adventurous and successful young merchant, confident he could successfully resell the rugs, but lacking sufficient gold to make the original purchase. Reflecting on this situation, eager to develop his business, he conceived an economic invention. He may have looked toward the goldsmith, whose coffers were filled with other people's coin, against which there was outstanding an equal amount of the goldsmith's receipts. These receipts were "as good as gold"; they were passing from hand to hand; few were presented, and the actual gold lay there uncalled for.
Our adventurous young merchant convinced the goldsmith that if he would loan him, not gold but merely a written receipt for gold, he could compete for the rugs. He convinced the goldsmith that when the owner of the cargo of rugs had completed their sale, he in turn intended to purchase another cargo of goods in the local market, that this same gold receipt would be the means by which the sale of the rugs and the purchase of the new cargo were to be consummated , and that the gold itself was likely to remain untouched. The receipt the merchant borrowed would thus in turn be used by the original rug seller to buy other goods; and in due course, after the rugs had been retailed, the debt, with interest, would be paid and there would be profit both to the merchant and the goldsmith. It was impressed upon the goldsmith's mind that if he thus wrote a receipt for gold, it would not mean that someone would come with it and demand coin, but that the order would circulate as other orders were circulating - as money - and could be cancelled as the rugs found ultimate purchasers. The goldsmith agreed to the plan, and modern commercial-deposit banking was born. (pp. 6-7)
Let us come forward a few hundred years and examine our own money today. First, we have exactly the same type of paper that the goldsmith originally used: Warehouse receipts. As metal was more unwieldy than paper and as we grew used to the convenience of paper money, the Government issued gold and silver certificates. They represented gold and silver coin actually deposited in the Treasury, against which the Government issued its receipts.
A gold certificate, on which is printed the statement that there has been deposited gold in the Treasury which will be returned on demand in exchange for the certificate, meant that anyone holding such a gold certificate was free to make that exchange. The contract was the simplest and plainest of agreements. The gold had been deposited in the Treasury, a receipt had been given for it, just as the early goldsmiths gave receipts, and on surrender of the receipt the gold was to be handed over. That was not an easy contract to change. In effect, it was changed by the emergency legislation passed early in March, although we still professed to be on the gold basis.
Emergency legislation was hurriedly passed under which the President directed that no more gold should be paid out, that none should be shipped abroad except under special licenses, that all gold coin held by individuals should be returned, and severe penalties were suggested compelling such return. More than five hundred millions of gold were returned in exchange for paper money which still legally promised that it was convertible into gold. Instead of the Government frankly breaking that promise, when it was found impossible to keep it, it was made a crime to hoard gold. It was still declared that we were on a gold basis. (pp. 7, 38)
Practically all debt obligations of the Government are also payable in gold by their terms. That obligation has broken down. In spite of that fact, nine hundred millions of Treasury notes were sold on the fifteenth of March, and those notes still contained the provision that they were payable in gold of the present standard. This was a curious example of anthropological taboo, illustrating the adherence in form to an engagement regarding which there was in fact no true intention to discharge the obligation.
Suppose one is contemplating providing for old age by purchasing an annuity. He knows what his dollars are worth in exchange for things today, and he is inclined toward the presumption that the dollars will be substantially as valuable, will purchase relatively the same number of things twenty or thirty years hence.
If all instinct for thrift and careful provision for the future is not to be destroyed, it is necessary that the log-range value of the dollar should not change substantially from the present value. (pg. 38)
Of course, it is obvious that if there is a sufficient increase in a country's currency, prices will advance. We saw that when a postage stamp in Germany cost six hundred thousand marks.
Nearly all countries that have abandoned the gold standard, and part of those that are nominally left on it, have already devalued their currency. That is to say, they have reduced the amount of gold represented by the unit of their national currency. (pg. 40)
Comments: So, the government deceived the people when they issued the $900,000,000 of Treasury notes that were supposed to be redeemable in gold. They did this as a ploy to get people to turn in their gold thinking they could get it back in the future after things stabilized. FDR and his associates knew that they were not going to honor this promise. What makes you think that the FDIC will keep their promises if things get bad? The FDIC came into being during the FDR administration. It was part of the emergency banking legislation.