NCPA - National Center for Policy Analysis


June 6, 2008

People these days fear both inflation and changing rates of inflation, says Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of "The Forgotten Man: A New History of the Great Depression." 

Most of the tools we might use to protect ourselves from inflation, such as the Treasury Inflation-Protected Securities (TIPS) bond or gold stocks, are imperfect, says Shlaes.  So it's worth remembering that, 75 years ago today, President Franklin D. Roosevelt (FDR) destroyed an inflation hedge that was literally as good as gold: the so-called "gold clause."

Snatching away from investors the perfect inflation hedge only hurt the struggling economy during the Depression, he explains:

  • The abrogation of the gold clause suggested that Washington had no regard for property rights.
  • The market rally in the spring of 1933 slowed as investors watched FDR fiddle with the dollar and commodities over the course of the fall.
  • During this period, the price went up on most stocks and bonds, even gold-clause bonds.
  • In 1934, FDR thought better of it all and fixed the dollar to gold again, now at $35 dollars an ounce.
  • The positive transparency that the Securities and Exchange Commission and the creation of deposit insurance brought to markets was offset by losses like that of the gold clause.
  • This helped prolong the Depression and has been causing damage ever since.

Today, as in the last days of the gold clause, the Federal Reserve is weighing a difficult choice between efficient crisis management and property rights.  Let's hope they make the right decision this time, says Shlaes.

Source: Amity Shlaes, "Contracts as Good as Gold," Wall Street Journal, June 5, 2008.

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