On taking office in March 1933, Franklin D. Roosevelt took the dollar off the gold standard. At his first press conference he was cagey about his actions, noting that the US still qualified as a gold standard country in some respects, though noting implicitly that it did not in others, and he stated further, “In other words, what you are coming to now really is a managed currency, the adequateness of which will depend on the conditions of the moment. It may expand one week and it may contract another week. That part is all off the record.” Asked if this were temporary or permanent, he replied, “It ought to be part of the permanent system [-] that is off the record – it ought to be part of the permanent system, so we don’t run into this thing again …”
Within a month or so these off-the-record comments became common understanding: the US gold standard was over. Americans had to turn in their gold in exchange for paper dollars. The dollar fell in value on international exchanges from its previously fixed value of $20.67 to an ounce of gold, and eventually, under the Gold Reserve Act of January 1934, settled legally – for the purposes of international exchange only – at $35 to an ounce.
On June 7, 1934, Harry Dexter White, then a professor at Lawrence College in Appleton, Wisconsin, received an invitation from Jacob Viner to work on the US Treasury’s “comprehensive survey of our monetary and banking legislation and institutions.” White accepted and in about three months wrote a report on monetary standards, examining the possibilities of various options and making recommendations.
White said the US faced a choice between a gold standard and a managed currency – i.e., between fixed and flexible exchange rates. A gold standard, he said, would be better for trade – stable exchange rates allowed traders to make contracts across borders with greater confidence. But, he said, any increased trade would be more than offset by the bad effects of a gold standard in an economic crisis, when capital would flee the country, obliging the government to tighten monetary policy so the dollar could remain on gold – thus making the crisis worse. Meanwhile, White said, a managed currency would give the US greater independence in its monetary policy (it wouldn’t be tied to every other country on gold) and would permit a domestic policy aimed at a stable cost of living.
You might think White could rest there having made the cast for a flexible exchange rate. But he went on: Read the rest of this entry »