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By Eric Rauchway Mar 21, 2013 4:28 PM GMT+0200

On March 4, 1933, Franklin D. Roosevelt became president for the first time, promising an “adequate but sound” currency. The next day, a Sunday, he closed the nation’s banks. “We are now off the gold standard,” he privately declared to a group of advisers. Goldbugs in the president’s circle immediately began prophesying doom. One of his aides, Lewis Douglas, proclaimed “the end of Western civilization.”

How Roosevelt took this fateful step has been the subject of debate among historians, many of whom believe that the president flailed his way through his first weeks in office, and only gradually came to the decision to take the country off gold that April. But the evidence suggests that Roosevelt intended to do so from Day One for very specific reasons, although he delayed letting the rest of the country in on his plans.

Minutes after FDR had made his unsettling private disclosure, a secretary told him that reporters were clamoring to know if the U.S. had left the gold standard. “Tell them to ask a banker,” Roosevelt said. He clearly did not yet wish to say the truth publicly. First, he needed depositors to return the gold they had withdrawn in panic in the weeks preceding his inauguration.

Shame, Fear

By Tuesday, Americans had begun to bring gold in large quantities back to the banks. Perhaps they were shamed by the president’s identifying hoarding as the source of the panic, or maybe they feared prosecution under new penalties, including a tax on hoarding, then being discussed in Washington as ways of ensuring that gold came back to the Treasury. The Federal Reserve announced that it had the names of those who had taken out gold.

On Wednesday, Roosevelt convened his first press conference. More than 100 reporters crowded into a small office he had chosen to ensure intimacy, clustering at his desk. Then FDR said cheerfully, “As long as nobody asks me whether we are off the gold standard or gold basis, that is all right” -- which is to say, by professing he didn’t want to talk about the gold standard, Roosevelt artfully steered the conversation to the gold standard, and then discussed it at length, if obliquely.

First, FDR ran through various requirements for being on the gold standard. He made clear that paper money was no longer convertible into gold, nor was the metal available for export. But he declared that so far as buying gold back with other currency, “we are still on the gold standard.” When pressed as to whether these measures were a temporary expedient or permanent policy, Roosevelt said the U.S. would have a permanently “managed currency” and that “it may expand one week and it may contract another week. That part is all off the record.”

Thus did the reporters learn Roosevelt’s intentions. The U.S. was no longer on the gold standard, except so far as receiving gold was concerned, and he meant to adopt a permanent policy of managing the quantity of the currency. This way, he could bring commodity prices back up and maintain them at a level that would ensure producers a higher standard of living. But he didn’t want to announce the policy too abruptly, lest he induce panic.

War Chest

Meanwhile, the Federal Reserve continued to take in gold. Guards, many of them former Marines armed with machine guns, oversaw the trucks bringing back the treasure, which would never again leave. “I am keeping my finger on gold,” Roosevelt said that Friday, and he did.

It would take the next nine months for Roosevelt’s program to take shape in law, but when it had, he controlled the value of the dollar, and had a war chest full of gold to defend it on international markets. He had the power to adjust the value of the currency in keeping with domestic economic needs, and he used it to drive commodity prices back up. In time, the new dollar -- managed to promote prosperity, a paper promise of gold stored, but always unavailable -- would become the basis for a world of such currencies defined by the Bretton Woods agreements.

Though some contemporary critics of Roosevelt never forgave him -- gold retained an alchemical power to turn nonsense into received wisdom -- others eventually endorsed his policy. The banker James Warburg initially complained that “sacred cows were being slaughtered,” but later reversed himself, as he said in an oral history he gave decades later. “I had to learn through being wrong that none of these things worked by the book,” he said. “A man can do idiotic things, but if the man in the street thinks the fellow is all right and going in the right direction, they don’t notice the idiotic things,” Warburg reflected. “So all you do is scare a bunch of orthodox economists and bankers, and they’re scared anyway, so it doesn’t make any difference.”

The recovery from the Great Depression began instantly with Roosevelt’s policy shift, in March 1933. He had changed expectations, and begun an administration that would use money as a tool to bring widespread prosperity -- rather than serve as a tool of moneyed interests.

(Eric Rauchway

is a professor of history at the University of California, Davis, and the author of the forthcoming “The Money-Makers: The Invention of Prosperity From Bullion to Bretton Woods” and “The Great Depression and the New Deal: A Very Short Introduction.” The opinions expressed are his own.)

To contact the writer of this post: Eric Rauchway at earauchway@ucdavis.edu.

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.






Any business - whether large or small, profit-seeking or not-for-profit – has important financial concerns:

How to get the funds needed to run the business on favourable terms and how to make sure that the funds are used effectively?

In this connection modern businesses have financial managers to look after these problems, whose major objective is to maximize the value of the firm for its owners, i.e. to maximize the shareholders' wealth, which is represented by the market price of a firm's common stock.

Managers daily face questions like the following:

• What assets to acquire?

• Will a particular investment be profitable?

• Where will the funds come from to finance the investment?

• How much to maintain as equity capital?

• Does the firm have adequate cash or access to cash - through bank borrowing agreements, for example, to meet its daily operating needs?

• Which customers should be offered credit and how much should they be offered?

• How much inventory should be held?

• Is the merger or acquisition advisable?

• How should profits be used or distributed? What is the optimal dividend policy?

• How should the firm behave in the situation of exchange rate variations and interest rate changes?

• How should risk to which the firm is exposed and return be balanced?

Financial managers are primarily concerned with the management of fixed assets, working capital management, including management of current assets and current liabilities, cash management, receivables management and inventory management; they are responsible for designing capital structure, choosing long- and short-term financing techniques.

The financial manager has to take these decisions with reference to the objectives of the firm.

To have a better understanding of how managers go about all these concerns one should know what resources managers typically have at their disposal. The position of an enterprise, its assets and capital are best illustrated by its financial statements - the balance sheet and the income statement.

The first major component of the balance sheet of an enterprise is its assets, which are the resources owned by the enterprise. The standard classification of assets divides them into: 1) fixed assets, 2) current assets, 3) investments and 4) other assets.

Fixed assets are assets purchased for use in the business on a permanent basis, e.g. land and buildings, plant and machinery, furniture, motor vehicles, etc.

Current assets are short-term in nature. They are also known as liquid assets and include cash, marketable securities, accounts receivable (debtors), notes/bills receivable and inventory, including finished goods or work in process.

Investments represent investment of funds in the securities of another company, the purpose of which is either to earn a return or/and to control another company.

The second major component of the balance sheet is liabilities of the enterprise, which represent the amount that the enterprise owes to other enterprises, or the outside sources which the enterprise uses to finance its assets. They are: long-term liabilities (obligations payable after the accounting period) - debentures, bonds, mortgages, secured loans - and current liabilities (obligations usually repayable within the accounting period) - accounts payable, bills/notes payable, accrued expenses, deferred income and short-term bank credit.

The third major component of a balance sheet is the owners' equity-part of the resources of a firm which are supplied by its owners - shareholders. The owners' equity may consist of two elements: paid-up capital (the initial amount of funds contributed by the shareholders) and retained earnings (part of the profits of the shareholders which is not paid out to them as dividends but ploughed back in the business).

Capital is the store of accumulated wealth contributed to the firm by its proprietors - it is the net worth of the business to the owners. Fixed capital is capital tied up in fixed assets. Working capital is the capital available for working the business. When an enterprise has bought fixed assets it still needs further capital to buy raw materials, etc., or money to pay wages.

The finance function in a firm is usually headed by a chief financial officer (CFO), who reports to the firm's president.

The chief financial officer distributes the financial management responsibilities between the controller and the treasurer.





A financial ratio is a relationship between particular groups of assets or liabilities of an enterprise and corresponding totals of assets or liabilities, or between assets or liabilities and flows like turnover or revenue.

A leading example is the price/earnings ratio which is the ratio of the current quoted stock exchange price of an equity to the most recent declared dividend per share.

Another is the ratio of equity to debt finance (gearing ratio) within a company's overall capital structure.

Financial ratios are used to give summary indications of the financial performance, prospects or strength of a company which help financial managers to make a comparison of a firm's financial condition over time or in relation to other firms.

No single financial ratio can answer all questions analysts may have.

In fact, five different groups of ratios have been developed:

a) liquidity ratios indicating a firm's ability to meet short-term financial obligations;

b) activity ratios indicating how efficiently a firm is using its assets to generate sales;

c) financial leverage ratios indicating a firm's capacity to meet short- and long-term debt obligations;

d) profitability ratios measuring how effectively a firm's management generates profits on sales, assets, and stockholders' investments;

e) market-based ratios measuring the financial market's evaluation of a company's stock.



Date: 2015-01-02; view: 831

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