The U.S. Dollar: Good as Gold?

by Thomas D. Blackburn, Ph.D.
Part 2

It was early in the reign of Franklin Delano Roosevelt that things began to change. Using the Great Depression as an excuse, FDR called in all gold. A law was passed making it illegal for U.S. citizens to own gold (other than in the form of jewelry or rare collectibles). Shortly after the gold was collected from all private citizens, the value of the dollar was changed. Henceforth, an ounce of gold would be worth $35 rather than the previous $20. Doing this made a lot more paper money available for a given amount of gold. Had gold not been collected from citizens, they would have had the extra money instead of the government having it. Our elected representatives consider themselves smarter than the people who elected them, so they thought it made sense for the government to decide how to spend the extra money.

Another phenomenon visited upon many peoples of the civilized world was the politicians' reading of an economic theory published by John Maynard Keynes. Keynes thought that the government could help level out the cyclical nature of the market by spending money when business was slow and cutting spending when things were hot. Politicians easily understood the mandate to spend, but could not grapple with the idea of cutting spending. Thus FDR could enlist the aid of congress to build new social programs. He could justify doing so because Keynes said to spend more than the government takes in when business is slow. The programs started by FDR had a lot of appeal, so long as no one asked the question "Who pays for this?" People who did ask were told ridiculous things like "Nobody pays, we owe it to ourselves!" Today's massive budget deficit is testimony to these facts.

Meanwhile, the U.S. continued to honor foreign claims for gold; it was only U.S. citizens who were forbidden to actually have gold in our possession. Also, we could still redeem our paper for silver. This situation regarding currency remained reasonably stable through World War II. In the aftermath of WWII an agreement was reached at Bretton Woods to make all of the world's major currencies stable in terms of the Dollar. That is, fixed exchange rates were established, so everyone could know that a dollar was worth so many Pounds, or Marks, or Francs. This agreement was a real boon to business around the world. Firms now knew how much to charge in a foreign currency in order to collect the right amount in their own currency.

There followed some years of stability in the world currency markets. The U.S. involvement in Indochina brought changes. That was not a popular undertaking. Given the uncertain outcome of the Korean war, Americans were not anxious to engage in another "no win" war. This brought a lot of pressure on President Johnson. Some of you may recall his "Guns and Butter" speech. Economists have thought that, given the fact that there are limited resources in the world, a people would have to choose how they used their resources. It was thought that we could choose to make guns or to make butter, but that the limited nature of resources being what it is, we could not make both. Johnson declared that this was a mistaken idea. He said that in our Great Society, we could indeed make both guns and butter. That meant in practical terms that fighting the war in Viet Nam would not cause the shortages we had experienced in WWII. It meant that we could go onward and upward building great social programs that would be the equivalent of waging a war on poverty.

There were consequences to the President's attempt to repeal the laws of economics. In 1965 silver was taken out of our coins. Unlike the gold confiscation of FDR, silver was not called in, but silver coins disappeared almost overnight. This happened despite the government's assurances that both a silver dime and a clad dime were absolutely equal in value. Even the fifty-cent coins made in 1965 through 1969, which had only 40% silver rather than the old 90%, disappeared from circulation. People anticipated that the dollar would be devalued again, and that the silver they had held onto would rise in value. The people were right of course, but they had to wait for Richard Nixon to actually announce the devaluation.

(An interesting side note to this gold and silver question relates to copper. While copper is not considered a precious metal, the dollar was taking such a pounding on world markets that pennies began to be worth more than one cent. The last copper pennies were minted in 1982. In order to avoid the problem of having all the old pennies disappear, new pennies were made to look like they were still made of copper. You will still find an occasional copper penny in circulation, but the word has reached almost everyone and they are getting scarcer all the time.)

Copyright 2006 by T. D. Blackburn Permission hereby granted to reproduce with this copyright notice included.

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