The Power of Gold: The History of an Obsession

By Peter L. Bernstein | Go to book overview

Switzerland, Holland, and Belgium remained on the gold standard; six years later, not a single country permitted their citizens to convert their currency or bank deposits into gold.25 The golden hoards were to be defended by rendering them inactive!

The dash toward gold hit America hard. This urgency to get out of dollars was a surprise, for the official U.S. gold stock at that moment amounted to $4.5 billion—over 40 percent of the gold reserves of all central banks and treasuries around the world and 65 percent larger than France’s gold holdings.26 Nevertheless, on September 22, 1931, the Belgian national bank pulled $106 million in gold from New York in one fell swoop; France took $50 million on that day and another $70 million a few weeks later. From the end of September to the end of October, a total of $755 million in gold flowed out of the United States, of which nearly half went to France and the rest mainly to Belgium, Switzerland, and the Netherlands. About one in every seven gold bricks in the vaults of the Federal Reserve banks had departed.27 The panic induced by this news led Americans to follow suit by making massive withdrawals from commercial banks in the form of currency and gold coin, leading almost at once to another eight hundred bank failures.

The prescription for dealing with this crisis was once again the conventional one: deflate and create unemployment. The Federal Reserve lost no time in more than doubling the Discount Rate, boosting it in one giant step from 1½ percent to 3½ percent. The prescription performed as expected. The gold outflow ceased—for the moment. Deflation and the creation of additional unemployment were also successfully achieved. Manufacturing production, already down by a third from 1929, sank by an additional 25 percent over the next nine months. Unemployment doubled from a worrisome 10 percent of the labor force to well over 20 percent, while wholesale prices dropped by 25 percent and would end up in 1932 almost 40 percent below their 1929 levels.

At this point, hoarding of currency and coin by the public was restricting even further the ability of the banks to provide credit to their customers. In the middle of 1930, Americans had held $11 in bank deposits for every dollar of currency in their pockets and cash registers, but this ratio dropped over the next twelve months to only $6 in deposits per dollar of currency.28 President Hoover then invited Colonel Frank Knox of Chicago to conduct an educational campaign to discourage

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