In the 1930s, America Defaulted on Its Debt. It Could Happen Again.

FDR’s Decision to Drop the Gold Standard Holds Resonance Today as Big Bills Come Due

In the darkest days of the Great Depression, President Franklin D. Roosevelt, with support from Congress and the Supreme Court, agreed to wipe out more than 40 percent of public and private debts. With that decisive action, the United States staved off bankruptcy and began to claw its way back to stability and, eventually, prosperity.

But could the default scenario repeat itself—especially now that the United States is shouldering about $22 trillion of debt, plus tens of trillions more in Medicare, Social Security, and unfunded state and local pension obligations?

That unsettling prospect was the topic at a Zócalo/UCLA Anderson event titled “Could the United States Ever Go Bankrupt?” held at the RedZone at Gensler, in downtown Los Angeles. Moderator Warren Olney, host of KCRW’s “To the Point,” fired probing questions at Sebastian Edwards, a UCLA Anderson School of Management international economist and author of American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold, as the two men examined the financial perils that nearly sank the United States in 1933, as well as those that could be lurking in 2019 or 2020.

Yet, though their subject was serious, the repartee maintained a light touch. At one point, Edwards disclosed that his publisher had wanted him to sneak the word “Bitcoin” into his book’s subtitle, to sex it up more. Edwards also offered the aside that one of Roosevelt’s celebrated “Brain Trust” of advisers, Burton K. Wheeler, a New Deal Democrat who later broke with FDR, appears as the vice president in President Charles Lindbergh’s administration in Philip Roth’s 2004 semi-fictitious novel The Plot Against America.

“An economist who reads Philip Roth,” Olney joked, “I think that’s pretty good.”

And when an audience member, during the question-and-answer period, asked Edwards what would be the fastest way for a rival world power like China to drive the United States into default and bankruptcy, Olney piped up, “Don’t tell him!”

In fact, Edwards replied, plotting an online attack would be the swiftest means of bringing Uncle Sam to his candy-striped knees. “If a hacker were to stop the payment system, that would be devastating,” he said.

“Devastating” describes the impact of the Great Depression, and the main part of Wednesday’s discussion was devoted to Edwards recounting and dissecting what caused that global financial meltdown, and how FDR mustered economic policy to deal with the resulting social calamity in 1933—a year that, Olney said, “may well have been the most active and change-worthy in the peacetime United States.”

By the time FDR was sworn into office in March of that tumultuous year, America was heading toward unemployment of greater than 30 percent. National income would eventually drop 60 percent. Auto production and agricultural prices each fell about 80 percent, as farmers watched their mortgages sink underwater. Ruined men were jumping off buildings in despair. Small, weak banks were failing by the score.

And FDR’s predecessor, Herbert Hoover, was pressing the incoming Roosevelt administration to declare a bank holiday that would give the country some precious time to catch its breath while searching for ways to restore confidence in the economy. The truth was that nobody, from Wall Street to Washington, really had any idea about how to fix the mess.

Roosevelt, ever the political tactician, had declined Hoover’s proposal. But on April 5, 1933, within a month of taking the oath of office, FDR issued an executive order compelling each and every American, within three weeks, to sell all gold in their possession beyond a value of $100 to the U.S. government, at the official price of $20.67 per ounce. The order, published in newspapers and broadcast over radio, carried a non-compliance penalty of a $10,000 fine, 10 years’ imprisonment, or both.

This applied to all kinds of citizens. Grandmothers who’d stuffed gold coins in their mattresses as a hedge against the meltdown had to fork over their stashes. Kids who’d been given gold coins for a birthday or bar mitzvah were enjoined to turn over their holdings for the sake of the U.S. economy. Only dentists and coin collectors were exempted. “The Secretary of the Treasury was the number one coin collector in the country,” Edwards said, prompting chuckles from the audience.

Why was gold so badly needed by the U.S. government? Ever since Alexander Hamilton founded the U.S. Mint, the United States had operated on the gold standard, Edwards explained. For nearly a century and a half, our gold reserves had guaranteed that the full faith and credit of the United States government stood behind our economy, including our debts. When the Civil War erupted, the gold standard was suspended, and the Union started printing so-called “greenbacks,” but that had been only a temporary measure. During the first years of the Great Depression, the government badly needed to secure the estimated one-third of the gold supply that was being hoarded by the public and corporations. Adding that sum to the federal reserves, even if it required drastic action, was designed to shore up faith that the government would remain solvent.

But what FDR ordered had never happened before, and it left a bitter legacy for some Americans. Olney said that his grandmother always hated FDR because he made her surrender her gold coins. She wasn’t the only one. “That is, from today’s perspective, very un-American,” Edwards said.

Still, Roosevelt’s stratagem ultimately worked. The combination of decisive action and his “Fireside Chat” radio addresses soothed an anxious public. Before reopening the banks, he’d managed to reassure ordinary Americans that their money would be safe.” And since by that time the economy was beginning to improve, Edwards said, “they gave him the benefit of the doubt.”

“It seems to me to suggest that public confidence is more important than gold,” said Olney, in his own calming, made-for-radio timbre.

“That’s a great way to put it,” Edwards said.

But the question framing the discussion remained, and Olney raised it: Could we be due for a sequel?

Our debt is indeed huge, standing at 104 percent of national Gross Domestic Product. (A percentage of greater than 90 is considered by economists to be a red flag.) Our actual total debt is closer to $80 trillion, Edwards said, when you add in all the government’s social service funding obligations.

“I think it’s a real possibility that we will default on some of that debt,” Edwards said. And, as there was in the 1930s, there could be another massive legal battle if the government tries to reduce benefits to save money, culminating in another Supreme Court showdown. In the wake of the 2007-2009 Great Recession, lawyers for economically strapped countries like Greece have used the so-called “excusable debt” argument to avoid paying back their creditors. It’s likely that Venezuela, which is spiraling into bankruptcy, or worse, will use similar arguments to try and fend off its debt collectors.

As the evening drew to a close, one audience member asked if we might ever return to the gold standard, as a way to keep our financial house in order. Edwards, who spends a chunk of his working life flying around the world, giving lectures, and supplying economic counsel to foreign governments, said that U.S. Sen. Rand Paul of Kentucky and The Wall Street Journal’s editorial page writers would like us to return to a gold standard. But, despite its glittery allure, the precious metal that once bailed out Franklin D. Roosevelt may not be available to rescue some future administration that spends too much and saves too little.

“I think it’s good conversation,” Edwards said of a gold standard revival, “but not feasible.”


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