In November 1910 a private railway carriage left New Jersey for an island off the coast of Georgia. On board were some of the most powerful financiers in America. They said they were going duck hunting. What they did there shaped the dollar for the next century.
The panic that came first
The trip to Jekyll Island did not come out of nowhere. Three years earlier New York had suffered a banking panic that frightened the whole country. In October 1907 two speculators lost heavily trying to corner the shares of United Copper. Banks linked to them faced runs as depositors queued to take their money out.
The panic spread to the Knickerbocker Trust, one of the largest trust companies in the city. Depositors withdrew nearly $8 million and the trust suspended business on 22 October. The cost of overnight loans to stockbrokers jumped from 9.5% to 70% that day and reached 100% two days later. At times nobody would lend at all.
There was no central bank to step in. Instead the banker J.P. Morgan gathered cash from large institutions and sent it to the stock exchange to keep it open. A private citizen had held the system together. The Federal Reserve's own history records that the panic spurred the reform movement that led to the Federal Reserve System. Many concluded that America needed a lender of last resort. The question was who would run it.
The duck hunt on Jekyll Island
The party was led by Senator Nelson Aldrich, chairman of the Senate Finance Committee. With him were Frank Vanderlip, president of National City Bank, Paul Warburg of Kuhn, Loeb & Co., Henry Davison, a partner at J.P. Morgan, A. Piatt Andrew of the Treasury and Aldrich's secretary Arthur Shelton. They arrived separately and used first names only. The Federal Reserve's own history records the hunting cover.
For more than a week they worked on a plan for an American central bank. Vanderlip later recalled that they "had disappeared from the world onto a deserted island." The result, the Aldrich Plan, failed in Congress. Its structure survived. In December 1913 President Woodrow Wilson signed the Federal Reserve Act. The design drafted on Jekyll Island was now law.
The creature, in Griffin's words
In 1994 the author G. Edward Griffin published The Creature from Jekyll Island. He contends that the Federal Reserve was built by bankers to serve banks, that it works in effect as a cartel and that the inflation it permits acts as a hidden tax on everyone who saves in dollars.
Mainstream economists dispute much of the book. Yet its central point about money has lasted because it is simple. Once a central bank can create currency at will, the value of every dollar already saved depends on the restraint of the people in charge.
1931: Britain lets go first
When the Federal Reserve opened, the dollar was defined in gold. An ounce was fixed at $20.67. Paper notes could be exchanged for gold coin. That link was the anchor. Britain had an anchor of its own. In 1931 it let go two years before America did.
On 21 September 1931 the Chancellor, Philip Snowden, asked the House of Commons to suspend the Bank of England's duty to sell gold to anyone who asked for it. The Bank had lost more than £200 million in gold and foreign currency in two months. Snowden told MPs that "we had no alternative but to suspend the gold convertibility of the currency." The suspension was meant to last "unless and until" it was reversed. It never was.
The lesson for savers was clear. A promise to pay in gold lasts only as long as the government making it can keep it. When the pressure grows great enough, the promise is the first thing to go.
1933: the gold is called in
The American link did not survive the Depression either. On 5 April 1933 President Roosevelt signed Executive Order 6102. Americans were required to hand most of their gold coin, bullion and gold certificates to the Federal Reserve by 1 May, paid at $20.67 an ounce. Then in January 1934 the Gold Reserve Act moved the Federal Reserve's gold to the Treasury and raised the official price to $35. Overnight the dollar was worth 59% of its former value in gold. Those who handed in their gold took the loss. The government took the gain.
Bretton Woods and the closing of the window
In 1944, at Bretton Woods in New Hampshire, the allied nations built a new system around the dollar. Other currencies were pegged to the dollar. The dollar was pegged to gold at $35 an ounce. Foreign governments could convert dollars into gold at that rate.
The dollars multiplied. The gold did not. By the late 1960s the United States did not hold enough gold to cover the dollars in circulation around the world. On 15 August 1971 President Nixon suspended the dollar's convertibility into gold. In the words of the Federal Reserve's own history, the international monetary system "turned into a fiat one." The last anchor was gone.
What the dollar has lost
The record since 1913 is plain in the official figures. The US Bureau of Labor Statistics puts the consumer price index at 9.9 in 1913 and close to 259 in 2020. That means a dollar in 2020 bought less than four cents' worth of what it bought when the Federal Reserve Act was signed.
The gold link did not stop prices rising. While the dollar was tied to gold, though, there was a limit on how far the money supply could run ahead of the metal behind it. Once the tie was cut, the only limit left was the judgement of the people setting policy.
It is the pattern we described in Currency Debasement: The Oldest Trick in the Book. Rulers once clipped coins. Modern states expand the money supply. The result for savers is the same. The loss is rarely sudden, which is why so few people notice it until it is already done.
Why gold sits outside the system
Gold has no issuer. No committee meets to decide how much of it there should be. No central bank can print it, devalue it or close a window on it. That is why central banks still hold it as a reserve asset, more than fifty years after the dollar left gold behind.
Look again at the story. In 1907 a panic needed a private banker to stop it. In 1913 a central bank was created to make sure that never happened again. In 1931 Britain suspended gold. In 1933 Americans were made to hand theirs in. In 1971 the last link was broken. At every step the people holding paper promises had to accept the new terms. The people holding gold kept what they had.
Who sets the value of money is a live question, as we explored in Who Controls the Printing Press?. Whether or not you share Griffin's view of the Federal Reserve, the history since 1913 shows what happens to money with no anchor. For UK residents, UK legal tender gold coins such as the Britannia and the Sovereign are exempt from Capital Gains Tax, a quiet advantage for anyone holding money outside the system. Gold bars do not share that advantage, because they are not currency.
Speak to a specialist
If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.
Sources
- Federal Reserve History, The Meeting at Jekyll Island
- Federal Reserve History, Gold Reserve Act of 1934
- Federal Reserve History, Nixon Ends Convertibility of U.S. Dollars to Gold
- US Bureau of Labor Statistics, Historical Consumer Price Index (CPI-U)
- Federal Reserve History, The Panic of 1907
- World Gold Council, After the Gold Standard: Philip Snowden to the House of Commons, 21 September 1931
This article is for information only. The value of gold can go down as well as up.