Part 1. FDR's Hayseed Coalition: Roots Of Modern Money Printing

Excerpted From "The Great Deformation: The Corruption of Capitalism In America" (pp 182-186) (Part 1 of Two Parts)


It was not the anti-gold fulminations of J. M. Keynes at the time of the British crisis in 1931 that finally brought down the gold standard and sound money. Instead, its real demise came two years later in the form of the Thomas Amendment, a powerful expression of the monetary populism which animated FDR’s hayseed coalition.

The amendment was hatched at midnight on April 18, 1933, during FDR’s famous White House rendezvous with the fiery leader of the hard-scrabble farm belt, and embodied four “discretionary” presidential options to debauch the gold dollar. These measures have been dismissed by historians as a casual sop by FDR to farm state radicals, but they could not be more mistaken.

The Thomas Amendment was a nascent version of today’s delusion that economic setbacks, shortfalls, and disappointments are caused by too little money. The true cause, both in the early 1930s and today, was actually an excess of debt. This explanation is never appealing to politicians because there is no real cure for the liquidation of excess debt, except the passage of time and the forfeiture of the ill-gotten gains from the financial bubbles preceding it.

By contrast, the populists of the New Deal era believed that the state could easily and quickly remedy a shortage of money by printing more of it. In this respect they are in a line of descent that extends to the depreda- tions of the Bernanke Fed in the present era.

The line of continuity started with FDR and Senator Thomas and in- cluded the latter’s guru, Professor Irving Fisher of Yale. It then extended into the present era via Professor Milton Friedman of Chicago, who em- braced wholeheartedly Fisher’s quirky theory of deflation. The latter, in turn, became the virtual obsession of Friedman’s acolyte, Professor Bernanke of Princeton, whose academic work is based on Friedman’s erroneous interpretation of the Great Depression.

Upon becoming chairman of the Fed, Bernanke then foisted the Fisher-Thomas-Friedman deflation theory upon the nation’s economy in a panicked response to the Wall Street meltdown of September 2008. Yet monetary deflation was no more the cause of the 2008 crisis than it had been the cause of the Great Depression.

The monetary populists of the 1920s and 1930s, including Professor Fisher, had “cause and effect” backward. The sharp reduction after 1929 in the money supply was an inexorable consequence of the liquidation of bad debt, not an avoidable cause of the depression. The measured money supply (M1) even in those times consisted mostly of bank deposit money rather than hand-to-hand currency. And checking account money had declined sharply as an arithmetic consequence of the collapse of what had previously been a fifteen-year buildup of bad loans and speculative credit.

During 1929–1933 commercial bank loans outstanding declined from
$36 billion to $16 billion. Not surprisingly, as customer loan balances fell sharply, so did checking accounts or what can be termed “bank deposit money” as opposed to currency in circulation. The latter actually grew by
$1.1 billion during the four years after 1929, to about $5.5 billion.

By contrast, it was the loan-driven checking account portion of M1 which dried up, declining from $25 billion to $17 billion over the same period. And the reason was no mystery: the way banks create demand de- posits is to first issue loan credits to their customers. Indeed, in the modern world money supply follows credit, and rarely do central bankers inordinately restrict the growth of the latter.

In truth, loan balances and checking account money rose to inordinate heights during the financial bubble preceding the 1929 crash and unavoidably declined thereafter. This had nothing to do with causing the depression. The real reason the American economy was stalled in the early 1930s is that it had lost its foreign customers.

The reduction of M1 owing to the liquidation of bad credit, by contrast, was a sign of returning financial health. Indeed, the major component of bank credit shrinkage had been the virtual evaporation of the $9 billion of margin loans against stock prices that had reached lunatic levels before the crash. In blaming the Fed for the Great Depression, therefore, Professors Friedman and Bernanke implicitly held that the Fed should have under- written the margin-loan-based speculative mania of 1926–1929 in order to keep M1 from shrinking!


The Thomas Amendment thus amounted to a road map for the Bernanke
money-printing policies of the present era. While some of its specific mechanisms for injecting money into the economy had a slightly archaic aura, they nevertheless embodied the same destructive theories of monetary central planning that plague policy even today.

The first Thomas Amendment option was an authorization for the Federal Reserve to purchase up to $3 billion of government bonds in the open market. This would have more than doubled the Fed’s holdings of government debt (from $2.4 billion to $5.4 billion) in a manner similar to what the Bernanke Fed actually did in 2008–2011. While massive government bond buying, or debt monetization, is supposed to put “money” in the banking system, the contemporary Bernanke escapade proves otherwise.

In the context of systematic private debt liquidation, central bank bond buying mainly results in a huge buildup of excess reserves in member bank accounts stored in the Fed’s own vaults. In other words, money grows mainly when commercial bank credit expands, and no amount of Fed bond buying can force member banks to lend into a debt-saturated marketplace.

The second option crafted by FDR and Senator Thomas was based on their recognition that the still sober minded Fed of that day might actually refuse to crank up the printing presses in order to go on a bond-buying spree. Therefore, the amendment also authorized the Treasury Department to activate its own printing press and issue $3 billion of new paper currency, or literally greenbacks.

As a practical matter that option was beside the point. It would have nearly doubled the amount of currency in circulation, yet by late April 1933 the banking panic was over, and $2 billion of hoarded currency was already coming out of mattresses and flowing back into the banking system. Since there was no longer a shortage of currency, any greenbacks issued under the Thomas Amendment would have had no effect on household or business spending.

This seemingly archaic option to print greenbacks, however, actually illuminates the folly of the Fed’s modern bond-buying campaigns. Had the White House chosen to exercise the currency-printing option it could have temporarily paid its bills by issuing interest-free greenbacks rather than the 2.5 percent Treasury bonds of the day, but that was a step even Roosevelt shied away from because it amounted to crackpot finance.

Yet eight decades later, Washington finances itself exactly as the Thomas Amendment envisioned. The fact of the matter is that the “greenbacks” of historical ill repute were simply noninterest-bearing debt issued to finance the Civil War. Today the US Treasury issues greenback equivalents. Three- year notes that yield a fractional thirty-five basis points of interest, for ex- ample, are only a tiny step removed from printing-press currency.

The US Treasury is able to sell notes at such aberrationally low yields only because the Fed stands ready to absorb any amount of issuance that does not clear the market at its targeted rates. That’s currency printing by any other name.
The third option embraced by leaders of the hayseed coalition involved yet another way to artificially inject “money” into the economy. In this in- stance, the nation’s silver miners and speculators were to be the agents of economic uplift. Accordingly, the Treasury was authorized to purchase the entire output of America’s silver mines at approximately $1.25 per ounce and then coin these bullion purchases into circulating money.

At the time, the world market price of silver was just $0.35 cents per ounce, so FDR and Senator Thomas were proposing to monetize silver at 3.5X its market value. While this evokes the crank economics of William Jennings Bryan, it involves the same principle as today’s money printing by the Bernanke Fed, except the markup on the Fed’s coining of digital dollars is nearly infinite.

The resemblance of the Thomas Amendment’s silver option to today’s Fed policies was evident in another respect, as well. Massive silver purchases at way above world market prices would have obviously delivered a mighty windfall gain to the mining towns and silver speculators.

Yet the New Deal could have created similar ill-gotten windfalls by monetizing tungsten or cow-hides. Indeed, monetization inherently showers speculators with ill-gotten gains. The windfalls harvested today by front- running traders who buy classes of Treasury securities and GSE paper targeted for purchase by the Fed would put to shame the modest windfalls harvested by silver speculators when FDR implemented this feature of the Thomas Amendment in 1934.

The final option of the Thomas Amendment was the basis for FDR gold- tinkering campaigns, and for his January 1934 decree that gold would hence be worth $35 per ounce versus the $20 per ounce standard that had prevailed since 1832. Obviously, drastically altering the hundred-year-old gold content of the dollar amounted to the same thing as destroying the gold standard. After all, a “standard” which can be changed radically on a whim of the state is not a standard at all.

However, the underlying rationale for changing the dollar’s gold content was the truly dangerous feature of the Thomas Amendment. It was the forerunner of today’s monetary central planning and embodied the notion that the nation’s entire GDP could be managed by simply raising the dollar price of a market basket of commodities. After an initial “reflation” of commodity prices, including gold, the depression would be ended instantly and thereafter the business cycle would be permanently eliminated.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access