The man took a deep breath as he stepped into Chase National Bank on a foggy Manhattan morning. He knew he was in for a battle… and a small fortune was on the line.
It was September 16, 1933, and Frederick Barber Campbell arrived at the bank bearing his receipts. They designated him as the owner of twenty-seven bars of gold bullion, each one marked and numbered – and sitting in a vault beneath Wall Street.
The contract was explicit. It stated that Campbell was the owner of those exact bars of gold, and that he could take possession of them upon request at any time.
Campbell’s bars were worth roughly $135,000 at the official exchange rate. Today, they would be worth $28.7 million.
“Good morning sir,” Campbell greeted the teller as he approached the counter. “I’m here for my bullion – here are the receipts.” He sized up the young man as he pushed his gold receipts across the counter.
He could see that the teller was immediately distraught. “Sir, I’ll have to go get the manager. Please wait just a minute,” the teller replied.
Campbell had done business at Chase National Bank for thirty years. He knew the staff, and they knew him. The bank considered him to be an important customer. But Campbell also knew that everything was suddenly different… and America was at a crossroads.
The teller quickly returned with an older, gray-haired gentleman who immediately explained the situation. “Sir, I’m sorry but we can’t release the gold…”
“I have the receipts right here,” Campbell cut him off immediately. “This is a legally binding contract that says I own those specific gold bars, and that I may take possession of them at any time upon returning the receipts. I’ve already paid a hefty storage fee for the service.”
The manager winced as he chose his next words. “I know that, sir. But the gold is no longer yours to take. It isn’t ours, either. The President issued an order – we have to turn over all our gold to the US Treasury.”
“That’s ridiculous,” Campbell countered. “Just because the President writes something on a piece of paper doesn’t mean he can do whatever he wants. This is clearly unconstitutional and you know it.”
The manager shook his head, visibly sympathetic. “Sir, I’m sorry but the only thing we’re authorized to do is credit you with dollars at the exchange rate of $20.67 per ounce of gold. We will credit your account.”
“Dollars? Gold is what makes dollars have value. If you take away the gold, what good are dollars?” Campbell was incensed. He knew this wasn’t the bank manager’s fault. But his 27 bars of gold represented his life savings.
The manager offered another apology and said there was nothing else he could do. Campbell stormed out of the bank in disgust… but he didn’t let it go.
On September 26, 1933, he filed suit in Manhattan federal court to compel Chase to hand over his gold. His argument was that the executive order was unconstitutional. His suit asserted that Congress had no power to hand its authority over gold to the president in the first place.
It so happens that Campbell was a high-powered lawyer. He graduated from Harvard Law in 1894, and he went on to become a partner in the firm of Campbell & Whipp.
He also served for many years as the American representative of large Russian insurance companies, and he sat on the US boards of three British insurance companies. Campbell was also a well-known clubman, belonging to exclusive Manhattan clubs like the Metropolitan, Union, and Century.
So when he decided to sue Chase National Bank, Campbell didn’t need any help. He wrote the lawsuit filing, and he argued the case himself. Contemporary accounts suggest that he knew exactly what he was doing.
As one account put it, when Campbell filed that suit, he well knew that he was taking on the US government. But as an experienced lawyer, he had full conviction in his assessment that President Franklin D. Roosevelt’s (FDR) executive order was unconstitutional. Nowhere in the law of the land did it say that a sitting US president could confiscate the public’s gold.
But that’s exactly what FDR was doing when he signed Executive Order 6102 on April 5, 1933. Titled “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates,” the order was issued under authority claimed from Section 5(b) of the Trading with the Enemy Act of 1917, as amended by the Emergency Banking Relief Act of March 9, 1933.
In it, Roosevelt declared that a national emergency continued to exist and prohibited the “hoarding” of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations, and corporations.
Per the order, all persons were required to deliver their gold coin, bullion, and certificates on or before May 1, 1933, to a Federal Reserve Bank, branch, agency, or any member bank of the Federal Reserve System.
Willful violation was punishable by a fine of up to $10,000, imprisonment of up to 10 years, or both. The Secretary of the Treasury was authorized to issue further regulations, grant limited extensions for hardship, and oversee licensing.
So FDR’s executive order had teeth. And it turns out that the US government was intent on defending it. On September 28, 1933 – two days after Campbell filed his suit – a federal grand jury indicted him for failing to register his gold.
As for his lawsuit against Chase, the judge dismissed it for lack of jurisdiction. He stated that the court did not have the legal authority to hear that particular type of case.
On the criminal side, Campbell filed a demurrer to the hoarding count levied against him. A demurrer is a formal legal objection that says, in effect, that even if everything the government alleges is true, it still does not amount to a valid crime under the law.
The judge agreed with Campbell on that and dismissed the hoarding charge. However, the judge ruled that the failure-to-register charge against Campbell was legally valid, and he allowed it to proceed.
Then, on January 2, 1934, Chase National Bank surrendered Campbell’s gold bars to the US Treasury – all 27 of them. Campbell kept appealing and pushed the case all the way to the Supreme Court, but he ultimately lost… and he never recovered his gold.
Although the failure-to-register count remained open against him, available historical records do not show a final criminal conviction. It appears that Campbell continued to practice law until his death in 1937.
How It Got to That Point
For most of American history up to this point, a dollar was a claim on gold or silver. It’s not even entirely accurate to say that the dollar was “backed” by gold or silver… because dollars were bearer instruments that allowed the holder to legally claim physical gold and silver bullion.
So Americans could turn their dollars in at the bank and walk out with gold or silver whenever they wanted to. And people exercised this right routinely without thinking about it any harder than we think about using a debit card.
But within the space of about nine months, exercising that claim became a federal crime punishable by ten years in prison. It’s hard to overstate how much of a massive change this was.
To understand how America got to that point, we have to examine what happened when the Roaring 20’s came to a fiery end.
As a reminder, the stock market boom of the 1920’s came about largely because Benjamin Strong at the New York Fed held interest rates artificially low throughout the decade. He did this as a favor to his friend Montagu Norman at the Bank of England. That helped prop up the British pound, enabling Britain to return to the classical gold standard at the prewar parity.
Strong’s “cheap money” policies created a frenzy on Wall Street as Americans rushed into the booming stock market – many using margin loans to generate leverage. Those speculators who were early to the boom did quite well. But those who didn’t get out in time experienced massive losses when the market collapsed on October 28, 1929.
It was a quintessential boom-bust cycle. In hindsight, the crash was the predictable result of the Federal Reserve holding interest rates at artificially low levels.
And here’s the irony of it…
Remember how the Federal Reserve was sold to the American public in 1913?
America had suffered through a series of banking panics in 1873, 1893, and 1907. These were episodes where banks failed, depositors lost everything, and credit simply vanished.
The architects of the Federal Reserve (the Fed) promised that a European-style central bank with an “elastic currency” would make financial crises a thing of the past. That was how the Fed was sold to America.
But instead of working for Americans, the Fed went right to work propping up the British pound by cutting interest rates in New York. That fueled a massive bubble in the US stock market… which ultimately led to a major crash that wiped out nearly 90% of the stock market’s value. The Dow Jones Industrial Average would not fully recover for 25 years.
And then came the Great Depression.
Between 1929 and 1933, the American money supply contracted by roughly one third… and 9,000 banks failed. Depositors — people who had done nothing more speculative than keep their savings at a local bank — were wiped out by the thousands.
We should note what that means…
In the 1920s, when the American economy was humming, the Fed cut interest rates and enabled credit to pour into Wall Street. But in the early 1930s, when ordinary depositors were lined up on sidewalks trying to get their savings out of failing institutions, the Fed’s elastic currency seemed to dry up.
There’s a reason for that, and we’ve hit on it several times throughout this series.
The Fed’s creation activated the Cantillon Effect… because its elastic currency flowed freely to people with close ties to Wall Street. That’s easy to see.
As classical economist Richard Cantillon described, whenever you have a financial system that’s capable of creating money and credit at will, that new money does not distribute itself evenly throughout the economy. Instead, it tends to flow to those most connected to the engines of financial power.
The people who receive the new money first get to spend it before prices adjust to account for the extra money in circulation. Then that new money trickles down into the economy after prices have risen. Thus, regular folks have their purchasing power systematically stolen from them whenever such a system is in play.
This is why the Federal Reserve is an instrument of extraction. It enables those connected to the halls of power to effectively transfer value from the unsuspecting public to themselves. Then they can use that wealth transfer to finance virtually anything they want.
As we’ve noted, Alexander Hamilton seemed to understand that dynamic when he insisted America’s money be tied to specie (gold and silver). He also advocated the principle of productive credit – the idea that bank credit should primarily fuel productive economic activity.
The stock market boom of the Roaring 20’s demonstrates exactly why that principle has merit. Hamilton wanted an economy based on real money where credit was backed by real savings and funneled towards production.
The Federal Reserve was based on Paul Warburg’s design… and it had no such principle. Upon opening its doors in 1914, the Fed’s “elastic currency” went wherever the men nearest the spigot pointed it.
So the historical record shows that the period following Black Monday in 1929 was the first major financial crisis the Federal Reserve faced… and it failed catastrophically.
Here was an institution created in secret and sold to the public as something that would prevent financial panics, and it failed at the specific task it was created to perform.
One might think that would be cause to reassess the institution and perhaps wind it down. After all, if it can’t do what it’s supposed to do, what’s the point?
But as we’ve seen throughout modern history, the Fed’s failure became the justification for handing Washington powers it could never have obtained any other way.
Enemy Powers, Turned Inward
By early 1933, the American banking system was in open collapse.
Throughout February and the first days of March, the public pulled roughly $1.8 billion in gold and currency out of the banks. Nearly two-thirds of those withdrawals came in the single week ending Friday, March 3.
Americans were not dumb. They had watched thousands of banks fail, so they rushed to take possession of their savings.
In response, 25 states had declared bank holidays or restricted withdrawals by March 3, 1933. The system was seizing up, state by state.
President Franklin Roosevelt was inaugurated on Saturday, March 4, 1933. At one o’clock in the morning on Monday, March 6, he proclaimed a national bank holiday and suspended banking transactions across the entire country.
Three days later, on March 9, Congress passed the Emergency Banking Act. FDR signed off on the legislation the very same day. This confirmed and expanded the president’s emergency powers over the banking system in a number of ways.
For starters, it retroactively approved the national bank holiday and the other actions FDR had already taken. It also gave the president broad authority to regulate banking transactions, foreign exchange, and the “hoarding” or export of gold and silver.
In addition, the Act permitted the Federal Reserve to issue additional emergency currency (Federal Reserve Notes) backed by the assets of commercial banks rather than solely by gold.
What’s more, the legislation amended the Trading with the Enemy Act of 1917. This was especially cunning.
The Trading with the Enemy Act of 1917 was a wartime statute that let the US government control transactions with enemy nations during World War I. The 1933 amendment added five words that changed the scope of the statute entirely: “or during any other period of national emergency declared by the President”.
With that phrase inserted, the president gained authority to investigate, regulate, or prohibit the hoarding, melting, earmarking, or export of gold by any person in the United States.
So a statute designed to curtail enemy agents was turned on the American people. The penalty attached to that power was a fine of up to $10,000, up to ten years in prison, or both.
That is the legal instrument that took Frederick Barber Campbell’s gold… an emergency amendment to a wartime statute that was passed in one day, at the height of a panic the Federal Reserve had helped create.
And guess what?
That statute is still in place today. Emergency powers, once taken, are almost never returned.
Executive Order 6102 and the Confiscation
With those moves in place, President Roosevelt signed Executive Order 6102 on April 5, 1933. That order forbade the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.
The order defined “hoarding” as withdrawing gold from “the recognized and customary channels of trade.” Which is to say: owning it. If you had gold and you were keeping it, you were hoarding.
Every American was required to deliver their gold to a member bank of the Federal Reserve by May 1. That gave people less than four weeks. Within thirty days, more than a third of the gold circulating in America had been turned in.
Now, we typically refer to this as confiscation, though Americans were compensated for their gold. They received $20.67 per ounce in paper currency in exchange.
And get this – there was an exemption buried within the executive order that allowed foreign governments and central banks to keep the gold they had stored in American vaults. Meaning, the US Treasury did not confiscate the gold American banks were warehousing for foreign entities. Only American citizens had to turn in their gold… or face prison time.
How’s that for harsh?
Frederick Barber Campbell, a lawyer with a signed and paid gold storage contract, could not get his 27 numbered bars out of a vault on Wall Street. Yet, the Bank of England could have walked out with its gold the same afternoon.
This is a common thread that we’ve seen running through 20th-century American history. Gradually, America’s institutions began to cater to international interests more so than American citizens.
But the cruelty didn’t end there…
The Markup
Through the second half of 1933, the Roosevelt administration deliberately drove the dollar’s value relative to gold down. They did this primarily by suspending the gold standard, allowing the dollar to float, and then actively intervening in the gold market.
By early September, gold that had been fixed at $20.67 an ounce for more than a century was fetching close to $30 on international markets. That’s gold rising roughly 44% against the dollar in a matter of months — which is the same thing as the dollar losing about a third of its value relative to gold.
The net effect of this was to increase the value of the US government’s gold relative to dollars. That means the gold that it had just confiscated from every American was suddenly worth materially more.
For example, Campbell’s 27 bars of gold were worth around $135,000 when they were taken from him. After FDR’s revaluation, those same bars were worth over $200,500. Except it was the US Treasury, not Campbell, who benefited from the relative increase in value.
Then, on January 30, 1934, Congress passed the Gold Reserve Act. That allowed Roosevelt to fix the new official price of gold by proclamation the very next day. Henceforth, gold would be valued at $35 an ounce.
The record shows that the US government realized over $2 billion in profits from its gold confiscation and subsequent revaluation. And they used that money to establish the Exchange Stabilization Fund, which allowed the US Treasury to buy and sell gold, foreign currencies, and securities in order to manage the dollar’s value.
This completely flipped the logic of how the monetary system worked.
Under the old arrangement, Americans could convert paper dollars into gold whenever they wanted. But from 1934 forward, it was the US government that could convert gold into paper dollars at will – whether Americans wanted those paper dollars or not.
And that brings us to the final monetary transformation of that era.
Who Controls the Lever of Power
There’s a question we’ve been circling since we examined the Fed’s creation on Jekyll Island: who actually controls the lever of monetary policy?
In 1913, the answer was formally the Fed’s board of governors in Washington… but in practice it was the president of the New York Fed who exercised the most power.
In 1935, that changed. A single man was at the heart of this change… and he wasn’t from New York. He was from Utah. His name was Marriner Eccles.
Eccles was a Mormon banker out of Ogden who had done something almost nobody else in America could claim. He had held a chain of banks together through the worst of the Depression, and he managed to keep every single one of them open. Not one failed.
While 9,000 banks went under across the country, the ones in Eccles’ care held up. That record gave him enormous credibility at precisely the moment Washington was desperate for someone who seemed to know what they were doing.
So in November of 1934, Eccles was made governor of the Federal Reserve Board. And he came in with his diagnosis already formed.
In his view, the Fed hadn’t failed because its powers were too broad. It had failed because they were too scattered.
Eccles looked at the twelve semi-autonomous reserve banks, each with its own board, its own president, its own discount rate, and its own regional loyalties — and he saw no one with the authority to make them work together.
When the crisis came, the system didn’t respond as a system. It responded as twelve independent actors, each with their own priorities.
And Eccles wasn’t wrong in his assessment.
In 1933, at the height of the crisis, several reserve banks flatly refused to cooperate with system-wide policy or to extend help to other districts that were begging for liquidity. Eccles watched that happen. And he concluded that the confederated structure the reformers had bolted on in 1913 would never work.
He was right about the breakdown. What he did with that conclusion is another matter entirely.
Eccles structured reform legislation and helped bring a bill to Congress in February of 1935. In its original form, the bill was one of the most sweeping consolidations of financial authority ever proposed in peacetime.
The initial draft would have allowed the president to replace a majority of the Federal Reserve Board at will. And the president’s new appointees, in turn, could have replaced the leadership of every regional reserve bank within a year.
With that logic, a newly elected president could clean house at the Fed upon taking office. Suddenly, the entire monetary apparatus of the United States would swing on every election result.
The draft would have also removed the requirement that the Fed back its elastic currency with certain collateral, in addition to the 40% gold-backing. So Eccles’ “reforms” sought to remove most of the constraints originally placed upon the Fed.
The bill did not pass in its initial form, however. Ironically, Senator Carter Glass went to war against it.
If we remember, Glass was the Virginia senator who championed the Federal Reserve Act of 1913 – believing that he was curtailing Wall Street’s power. Twenty-two years later, Glass was viciously opposed to reforming it.
Adding to the irony, Glass arranged for Winthrop Aldrich and James Warburg to testify against the bill in front of Congress. Winthrop was the son of Nelson Aldrich, and James was the son of Paul Warburg – two of the Fed’s original champions.
What that was, in evidence, was a fight over who would control the Fed’s lever of power. Would it be Washington, at the direction of the president of the United States? Or would it be New York, at the direction of the president of the New York Fed?
A modified version of the legislation passed, but Glass won several concessions. He ensured that the Treasury Secretary would not sit on the Fed’s board of directors. And he pushed through 14-year terms for the Fed’s board members. Doing so ensured that a new president could not clean house at will.
Still, the core of Eccles’ reforms passed when President Roosevelt signed the amended bill on August 23, 1935.
That’s what created the modern version of the Federal Open Market Committee (FOMC) that still operates today. It consists of seven members of the Fed’s Board of Governors in Washington, the president of the New York Fed, and four other regional presidents who are on a rotating schedule.
The FOMC was empowered to engage in “open market operations”, which quickly became the single most powerful tool in monetary policy. Open-market operations are the buying and selling of government securities (mainly US Treasury securities) in the open market by the Federal Reserve.
When the FOMC directs the New York Fed’s trading desk to buy securities, it injects reserves into the banking system. This expands the money supply and puts downward pressure on short-term interest rates.
And when the Fed sells securities, that drains dollar reserves and contracts the money supply. Doing so puts upward pressure on interest rates.
Because these operations can be conducted in large volume, with precision, and on a continuous basis, they quickly became—and remain—the Federal Reserve’s primary and most flexible tool for implementing monetary policy and influencing overall credit conditions in the economy.
The amended bill also gave the Fed’s board direct control over its own reserve requirements and allowed it to purchase government debt in unlimited quantities at will. The Fed didn’t use that power immediately, but it eventually would.
The bill also gave the Fed’s board oversight over the interest rates member banks could pay on deposits. That is to say, the final version of Eccles’ bill effectively created a national discount rate… which would go on to become central to American monetary policy.
Before 1935, each of the twelve regional Federal Reserve banks set its own discount rate for its own district. Washington had to approve changes, but it could not compel a district to change its rate, and it was not supposed to impose a single uniform rate across the country.
This may seem a little arcane, but it was critically important.
If credit demand in a particular district ran hot, the local interest rate would increase. So if business was booming in Chicago, for example, borrowing money in the region would gradually become more expensive.
That created something of a restraining mechanism… because interest rates increasing in Chicago would not impact rates in other regions. Thus, it may be cheaper to borrow money in a certain area at any given time, and that might attract capital investment to the region.
In other words, businesses looking for a cheaper place to expand might zero in on regions where the cost of capital was lower.
So the original Federal Reserve System had something of an economic governor built into the machine. Money became expensive where it was scarce relative to demand, and cheap where it was abundant. Thus, capital didn’t aggregate in one region. It tended to spread outward based on market forces.
The Banking Act of 1935 dismantled that economic governor… because it created a single discount rate for the entire nation. And that rate is controlled by the FOMC, at the direction of the newly created position of Federal Reserve Chairman.
Here’s why that matters…
We have spent the better part of a century watching capital and talent drain out of “middle America” and pool in a handful of coastal metropolitan cities. There are numerous factors that contributed to this, and the Fed’s oversight over regional interest rates in 1935 is one of them. To be fair, this is probably more of a minor factor… but a factor nonetheless.
And the end result was that control over the Fed’s lever of power shifted to a board of political appointees in Washington, sitting a few blocks from the Treasury that had just taken title to the nation’s gold. This paved the way for the Federal Reserve to become the most consequential institution in American history.
And guess what the Federal Reserve’s headquarters in Washington came to be named?
The Eccles Building. The reformer certainly left his mark.
More on that to come…
-Joe Withrow