REASON Interview: Col. E.C. Harwood

In an exclusive interview before his death, the father of the hard-money movement talks about how he came to gold, his battle with the SEC, and his hopes for the future.


When he walked into our offices that day last fall, we hadn't known quite what to expect. Yes, it was to be Col. Edward C. Harwood, the near-legendary Colonel Harwood, the original "gold bug," the man who, on the basis of understanding inflation as a monetary phenomenon, predicted the Depression; who virtually alone among forecasters understood that a boom, not a recession, would follow World War II; who began advocating gold investments in the 1950s; and whose investment-management operations had nearly been put out of business in 1975 by a Securities and Exchange Commission witchhunt…that Colonel Harwood. But we also knew that this was an 80-year-old man, and, frankly, we didn't know what to expect. Least of all did we expect the tall, broad-shouldered, steely-eyed man who marched into the office that sunny day and sat down to be interviewed. This man was no senile has-been!

For over an hour we talked with Colonel Harwood, reviewing his lifelong devotion to ideas, his West Point and Rensselaer (chemical engineering) education, his self-taught mastery of economics and devotion to scientific method, his founding of the American Institute for Economic Research in 1933 at the suggestion of MIT's Dr. Vannevar Bush and the Institute's work over the years, and his founding also of its offshoot, American Institute Counselors, Inc. (later—after IRS and SEC battles—to be supplanted by a new entity, American Investment Services, Inc,). Through it all we marveled at the man's keen intellect, his appreciation of the forces shaping politics and culture, and above all his sense of life.

When the time came to shut off the recorder, we were genuinely saddened to see him depart, for we knew we had been in the presence of a kindred spirit, a man whose life had been spent in pursuit of purposes we shared. Evidently he thought so too, for several days later a package arrived with a set of his books for our library.

We are especially honored to present this interview. Colonel Harwood died on December 16.

REASON: How did you first become interested in hard money, and how long ago was that?

HARWOOD: Oh, it was a very long time ago. I became interested in economics in 1922 and the hard-money aspect in the 1920s as I became quite concerned about the direction in which we were going. I thought we were overexpanding our credit, and it appeared almost certain that the change to double counting of gold in the reserves of the banks of the world after the Geneva Conference of 1922 could lead to very serious adverse results.

REASON: What was the double counting of gold?

HARWOOD: At the Geneva ConferenceI better start just before that. After World War One there had been a tremendous rise in commodity prices resulting from the credit expansion during the war not being counter-balanced immediately. And afterward, when the to-be-expected recession became a depression in '21, a number of economists around the world were arguing that there was not enough gold in the world, and something should be done to make it be more easily expandable. So there was a conference on the subject in Geneva in 1922, at which general agreement developed that gold in the vaults of one bank, like the Bank of England, would be counted for the Bank of England as gold reserves, and if the Bank of India, say, had deposits or credits at the Bank of England, they would also call those gold. In other words, some of the gold in the Bank of England was counted twiceonce for England's central bank, and once for India's central bank. That made possible much greater credit expansion, which got under way during the 1920s and carried on, as you know, to the great speculative boom reflected in our Florida boom of the early 1920s and of course in our stock market later. By 1928 it was apparent that the expansion limits to credit, even allowing for the double counting of gold, was nearing an end, if the gold standard was to be preserved. In 1928-29 I had focused my attention on that and written a number of articles, which were published in Barron's and the old New York Times Analyst and so on, pointing out that we were approaching such a limit and that the result unfortunately would be a very severe credit collapse. That was on the assumption that we would try to preserve the gold standard. And that is what happened. I was fortunate in the timing of some of the articles—one of them came out in August of '29. I made the statement that we were headed for a very severe crash. Of course you know what happened.

REASON: Was your background in economics academically? What were you doing and what was your business at that time?

HARWOOD: I was an Army officer. I had graduated from West Point in 1920. And it happened that my class and the two preceding classes were put in the regular army after World War IWorld War I officers. And at that time the 12,000 officers in the Army had to wait for someone to die at the top until anybody got promoted. My class and the two preceding had to wait 16 years. So after about a year or two, with no prospects of any more serious or rewarding duties, as I put it, you either chased women or drank or found something to do. I was fortunate in that I found something to do.

I had been sent up to Rensselaer Polytechnic Institute for further engineering studies and started reading in the library on economic matters. By 1923 I had become sufficiently well informed so that leading economic journals would accept articles that I wrote, which was a great encouragement to me, as you can imaginea lieutenant with a family coming, trying to live on $125 a month. So, with that encouragement I continued my studies and have continued them ever since. Of course, when I originally was writing, nothing appeared about my Army connections, just my name. And it was quite a long time before anyone knew that E.C. Harwood who was writing those articles on money and so on was an Army officer!

REASON: How long did you stay in the Army?

HARWOOD: I retired in 1937. Then it became apparent we would get into World War Two, so I went back in 1940 and served through 1946 and retired a second time. In the meantime, I had started this organization in 1933.

REASON: The American Institute for Economic Research. What motivated you to start it?

HARWOOD: Well, I discovered that I had learned enough so that my judgment as to what was happening and what was going to happen was sound, sound enough to warrant trying to continue. At that time there was a Senator Flanders and Thompson and Simons of Simons Saw & Steel and some other businessmen who had been consulting with me. I happened to be on duty at MIT, and I was continuing writing all the time. They wanted a cure for the depression and were quite confident that a good economist could produce a cure in six months, and they urged me. They had pledges for several million dollars and wanted me to start a Committee for Economic Development, which I believe is still functioning.


HARWOOD: And I turned it down. I told them I had learned enough about the field of economics to realize that it wouldn't take six months but I guessed at least 25 years. You can see how great an optimist I was! But I thought there should be an organization working on these problems, so with a couple hundred dollars, I started the Institute. It's grown up now. It has rather substantial funds, well over $50 million in the backgroundnot for current use yet, but it will be.

REASON: As an endowment essentially?

HARWOOD: It's reserve life income contributions, and it's making out very well.

REASON: What's the total number of people who subscribe to AlER's bulletin and who are on the mailing list?

HARWOOD: Well, the mailing list is well over a million people. That's everybody who has bought an Institute publication in recent years, going back about 10-12 years. Annual sustaining members are nearly 8,000. And it owns an investment advisory service which had to be split off from the Institute and has about 12,000 subscribers. You might think of the investment advisory service as being like the farm that an agricultural college operates.

REASON: A way of proving it out in the real world. Was yours the first organization to advocate gold investment in this country?

HARWOOD: Yes, I think so. I know that there's one investment advisor who claims to have been the first, but we started in 1958 recommending South African gold stocks, and I know he claims that he started in 1960 and I think he probably did.

REASON: One of the things I do want to cover is your battle with the SEC. A few years ago the SEC launched a major attack against the investment programs that you were offering. [At the time, about $150 million in gold, gold stocks, and other gold-related assets was being held in Swiss banks under American Institute Counselors investment programs. About 4,000 US investors were involved.] What did the SEC claim was wrong with what you were doing?

HARWOOD: Well, the claim was that we were violatinglet's see, how did they word it?practically every provision of the securities laws. That was the burden of their allegation. And they viewed me as the principal culprit. They went to a judge on I think it was Thanksgiving evening, 1975, and convinced him that he should issue an injunction immediately. I didn't even know there was going to be an action; I happened at the time to be in Switzerland. I didn't know until nearly a month laterI had no official notice till nearly a month laterthat it was even going on. And the judge held the first several sessions of court without me being represented and was asking the SEC how he could subpoena my Army retirement pay. He practically decided the case and announced the decision before I even had an official notice. He's an interesting person; he's changed his mind considerably since…

REASON: Was it Judge Gessell all along?


REASON: He was quoted in the Wall Street Journal in '78 as saying to the SEC man, "My problem is that your notion of safety is diametrically opposed to the notion of the investors. All of these investors believe that they want to get away from anything to do with United States money or United States bonds." So it sounds like over the period of three years you turned him around pretty much.

HARWOOD: He got educated.

REASON: You didn't contest the fact that your program was not registered with the SEC, is that correct?

HARWOOD: The judge never did or said anything about that. On August 1st of 1976 or '77 he dismissed or terminated all the charges against me with prejudice to the SEC. So they never got to first base with anything. And I don't think they ever hoped to. I don't think they had any plan to go to court in the sense of trying the alleged violations. What they hoped to do, of course, when the thing broke in the newspapers on the 26th of November of '75 on the front page of the Journal and New York Times and everythingI think they just assumed that they would crush the organizations, both organizations, right off the bat. Because that's what would ordinarily happen. People would lose confidence; there'd be any number of class action suits. But three months after the SEC broke their charges to the public, the London Economist sent an inquiry to the SEC and asked them how many complaints they had had from investors. And the SEC replied, none.

REASON: So they initiated this completely on their own because someone there apparently didn't like the look of it. And apparently your subscribers and investors stood behind the program and your organization.

HARWOOD: Very much so. And there are some interesting little sidelights on it. My wife and I had gone to Bermuda in October and from there to Switzerland. I had had a little indication of the threat of it inwhen was it?early November. And knowing how the SEC proceeds, I figured the first thing those damned fools would try to do would be to liquidate everything, and I'd better try to block what they might propose to do. In fact their first proposal to the judge was to set up a schedule of how everything would be liquidated in the summer of '76. And of course the summer of '76 was when gold had fallen to a low of 103, and naturally all the gold stocks were down and so on. Instead of having the attitude of a trusteewhen there's that sort of a panic condition to wait until it's overthe SEC had no such idea at all. As I said, though, I didn't know then that they were going to propose it, but I suspected they would. They don't know the first thing about investments. It's just ridiculous.

Well, so a key part of the Swiss organization was the Mondial Corporation [one of the Swiss entities that operated AIC's investment programs]. And the SEC had endeavored through attorneys who were subservient to them, supposedly representing the Institute, to get control of that organization in Switzerland. But it happened that I had given control to the Progress Foundation in Switzerland, which is an organization I'd developed to do in Europe more or less what AIER is doing in the US, and I knew that this Mondial was the key. When I gave it to the Progress Foundation I retained a life interest in it, waiving the income, but I had foreign trustees, and I just thought that sometime in the future they might diverge from the direction we're trying to go here, and if they do I want to yank this away from them and get another bunch to run it. So, I went to the judge of the little court there in Lugano and put in a legal complaint or whatever to have that stock put in the custody of the court. So he took custody of it. This is just a small municipal judge in Lugano.

But I got that court to act, as it happened, on the same date the SEC was going to court, but eight hours ahead. I didn't know they were going to courtit was just by chance. And when the SEC saw the date of my action they just flew through the roof and went to the judge and tried to have me tried for contempt of court and put in prison or anything, you know. They were just practically frothing at the mouth, I guess. But then I told my attorney how it happened, that it was only eight hours ahead because of the time difference. So obviously I hadn't been trying to thwart the court.

REASON: Just as a sidelight to this, having gone through all of this experience with the US law and bureaucracy and with Swiss law and banks and bureaucracy, what's your general impression of the protection of rights in Switzerland versus the protection of rights in the United States?

HARWOOD: I'm now convinced that there's no place in the world that you're going to have protection from the bureaucrats. I'm sure that if the SEC and IRS and whatever agency of our government wants to get into any country in the world, they're going to get into it.

REASON: Is this because they just have enough leverage with the governments?

HARWOOD: That's right, and all the bureaucracies are just like our bureaucracies.

REASON: And the bank secrecy laws and other things in Switzerland don't provide that much protection?

HARWOOD: What bank secrecy laws?

REASON: That's pretty chilling.

HARWOOD: I mean as far as governments are concerned. It isn't so much the bank people as it is the government bureaucrats. In our particular case, though, all the assets were in Swiss Credit Bank. They knewhad the means of knowingthat everything was as it should be. But they had that big Ciaso scandal going on, remember?involving the bank president, his deputy, and other bank people who ordinarily graduate to the Swiss Banking Commission when they retire. And they had so much to hide they backed way and couldn't stand up to it.

But let me go back a little. My wife and I were still in Switzerland and by February of '76 we were down to only 3,000 francs. Everything I could put my hands on ordinarily was blocked. They had even sealed my safe deposit box in the Swiss bank, but after I had taken out what I had in there, fortunately. And what I had in there gave me the opportunity to start a little publication, Phoenix Economic Bulletin, in Canadapublished it in Canadaand invite people to contribute to our legal expenses. Well, before I had any results from that I was required by the court procedures in Switzerland to put up 500,000 Swiss francs to maintain my suit there. I didn't know where in the world I was going to get 500,000 Swiss francs, and a person whom I may have met sometime, but had no recollection of having met, flew to Switzerland in her private jet, with her financial man, invited me to dinner, and asked me how things were. When I told them the story she gave me 500,000 Swiss francs.

REASON: This was one of your subscribers?

HARWOOD: Yes. And it was just manna from heaven. And then a week or two afterwards, contributions began to come in from people who'd gotten the first Phoenix publication in January. And from then on we managed to have enough money. AIER had to go through three firms of attorneys before they found one who'd stand up on its hind legs and take the SEC. And hiring each group and giving them enough money to get familiar with the situation would cost $25,000. So it sewed the Institute up, too.

REASON: After the SEC got finished and the thing was finally resolved, did the investors get all of their money back? [AIC, and later Harwood, settled with the SEC; although court proceedings and a court-appointed audit found no embezzlement or destruction of records, under a 1976 Swiss Banking Commission order, all the Swiss-held assets had to be returned to US investors.]

HARWOOD: All of the investors now have all of the money they were entitled to, with a very minor exception in the case of people who had sovereigns on deposit, where there had been a guarantee of a relatively small amount, and they are still short about two percent of the sovereigns. However, the money for that is sitting in Switzerland, and eventually they'll get that, I'm quite sure. But the legal processes are still going on over there.

REASON: As a result of all of this experience with the SEC, what's your overall assessment of it as an institution to protect investors, which is what it was set up to do?

HARWOOD: It's a horribly big minus quantity.

REASON: It's worse than nothing at all?

HARWOOD: Worse than nothing. I'll tell you why it's worse than nothing. It has facilitated tremendous losses for investors by the red herring. You know what the red herring is? Any firm that wants to sell securities has to get out this voluminous documentation, but there's red print on the front of it indicating that the SEC has not approved it. Any investor confronted with all that paperwork thinks, Well, of course, maybe they haven't approved it, but what are they there for but to protect me? Why do they exist if not to protect me? So he assumes that somehow they're protecting him.

REASON: Giving him a false sense of security.

HARWOOD: And here's what happens as a result of that. I'd have to compare it with '29. In the latter part of '28 and '29 there was a tremendous amount of new issues. And of course the Wall Street procedure for selling a new issue is bring it out at a price and a number of brokers get an allocation of it, and they run the price up. They just jigger the price, that's all, back and forth, and it's the rising price that attracts investors. And when they figure they've got enough attracted, they unload. In a period like '28-'29 the brokers' profits from this are enormous, of course, and they're encouraged to bring out any old thing and sell it to the public. And the losses to the public, as a result of the sort of stuff that was brought out at that time, ran into the billions.

But there was a similar situation in 1967 and '68, shortly after the peak of the prolonged bull market. The peak came in late '65, early '66, and in this instance the peak of new offerings came after the peak of the market, instead of before. You see, it was a different situation. After the peak of the market in '29 there was a great panic, and you couldn't sell any securities to anybody. That came very quickly. But after the peak of the stock market and the prolonged boom from about 1935 or '36 until 1965 or '66, the peak there came before the tremendous new offerings, and there was no catastrophic decline to discourage the new offerings. There was still the hope that the stock market would continue up. Well, the brokers just made a killing. The SEC approved a tremendous volume of new issues in '67-68, and the brokers kited those upmost of them within a few weeks were up to double their offering price. You can imagine how that pulled in the suckers. And I calculated, from the actual prices of those things and what happened to them, what the losses to investors were, and it was many times the 1929 one.

REASON: You mean in terms of subsequent price declines from the artificial price at the offering?

HARWOOD: Yes. I published an article on that, and the SEC didn't like it. But anyway, there's no doubt in my mind that it never would have happened to that extent but for the SEC. Now, every time there's been some kind of a scandal, like the Vesco scandal and so on, the SEC has stepped in and made a big hurrah about it. But damnit, they've never stopped any losses to investors. They're always after the fact. I don't think they can cite one example. I'll bet you they can't cite one example where they have stepped in in time to stop a big swindle like that.

REASON: You're basically saying that all it does is cast a security blanket, a deceptive security blanket, over…

HARWOOD: Over the fast buck artist and so on. And they know how to take advantage of it, believe you me. From the day the SEC was formed, every publication the Institute issued was sent right away to the SEC. We never advised investors to do a thing that we didn't send to the SEC.

REASON: Were you required to do this?

HARWOOD: No, we made it a policy.

REASON: Did you ever in all that time hear any word back from them until this whole incident?

HARWOOD: Never. I doubt if they ever read the stuff. They couldn't have read itthey wouldn't have been so dumb.

REASON: Were there any specific economists, economic thinkers, on whom a lot of the Institute's work relied for inspiration over the years?

HARWOOD: I would say, generally speaking, the older school of economistsnot Keynesians, but people who had themselves published very scholarly criticisms of Keynes's work, like Professor Hutt, Henry Hazlitt, and Hayek. They are people who saw at the same time that I did the fallacies in Keynes's work and had written extensively about it, all of which helped to confirm me in my viewpoint.

REASON: Are you acquainted with any of these people?

HARWOOD: Oh, yes, I've known them for a long time.

REASON: And have they written for publications of the Institute?

HARWOOD: No, no. AEIR has a by-laws provision, that the Institute will publish only the work of its staff and associated members.

REASON: I see. Hayek several years ago proposed a relatively new ideathat the only real solution to the problem of unsound currencies is to remove the government monopoly on issuing of money. What's your reaction to that?

HARWOOD: I think it's probably a good idea. I don't expect to see it happen. I think Hayek, whom I've corresponded with and feel I've gotten to know, although he's spent his whole life trying to counterattack these unsound economic ideas, to some extent we do not agree fully with him. He is one of the older school of economists who unfortunately, though they did some remarkable work and in many respects I think are sound, also are in difficulties in spots because they have used the older procedures of inquiry. Long ago it became apparent to me that economists did not agree even before Keynesianism, and so I began to probe this. What is it that accounts for the disagreement? And that took me into the field of philosophy, of scientific methods, and so on. And after a number of years I had grasped what Dewey and Bentley were talking about. The work had begun earlier with Charles Sanders Pierce and William James, and then it was Dewey and Bentley who brought that line of thinking to a useful stage of development. And I could see that they had put their finger on one of the reasons for the divergences among economists. And I formed the Behavioral Research Council with Dr. Handy and others in order to give wider circulation to what seemed to be sound ideas of useful procedures, and we published a couple of books along those lines, which have not yet had a great deal of influence.

REASON: Who's Dr. Handy?

HARWOOD: He is now the president of AIER. In my opinion, he is one of the most brilliant and able men alive today. He is well ahead of whatever I was, and I'm very happy to see him there. And I'm sure that he's going to have a very brilliant future.

REASON: Is he an economist by training or…

HARWOOD: No, he's a philosopher I met in the '50s or '60s, and we got together on forming the Council. But it's surprising how slow the cultural lag is. I thought that in a lifetime I could do what then seemed to be needed to be done, but I find it's going to take two lifetimes, and I haven't got the other lifetime, so…maybe it'll take more.

REASON: What's your view of two proposals that have been talked about a lot recently: a constitutional amendment on the one hand to balance the federal budget, as the National Taxpayers Union has proposed, and on the other to limit federal spending?

HARWOOD: Well, perhaps both would be useful. Anything that would limit spending and cause a careful look at things and full consideration of more distant costs versus today's costs would undoubtedly be helpful. I'm not at all sure they would solve the problem, though, and I think that until we get disciplined money, the discipline of gold in the system…You see, money is so pervasive. And when you've got a polluted money supply, you've got problems everywhere, and you hardly know where to begin to solve them.

REASON: So you see the basic answer as going back to a classical gold standard?

HARWOOD: I wouldn't call it going back. But anyway. You have to realize that the gold standard as it came to exist before World War One was not something that some economists dreamed up; it was not a theory developed or anything like thatit was an evolutionary process, part of the cultural evolution that made possible sufficient money to enable the transactions that occur with vastly expanding production. If you'd told any economists in the worldor anybody else for that matterafter the Civil War that in the next 80 or 90 years the production of things men want and are willing to buy is going to multiply 50 times, and asked, "Please tell us how to provide a money supply?" who would have had any idea how to do it? But it evolved, from practical experience, and what it became was sound commercial banking, where the things that were produced and sent to market were monetized by bankers who credited the account of the manufacturer with the gold exchange value of that item. You realize that when a checking account is credited by a bank not by your bringing in cash and putting it there, but by the bank just writing on the books a credit to your accountwell, that puts money, checking accounts, in circulation. But as long as the flow of new checking accounts represented things flowing into the markets, there could be a balance. You had all of the money, so-called, in circulation or potentially in circulation represented either by gold, which the banks were always offering on the market, or by things coming into the market. Then you don't get an imbalance, except as the bankers become over-optimistic and misjudge the gold exchange value of some items, or if other unfortunate things interfere with the system.

REASON: Critics of the gold standard say there isn't enough gold to go around to permit trade to expand as it otherwise would. How do you respond to that charge?

HARWOOD: That's exactly why there was the cultural evolution of commercial bankingbecause there wasn't enough gold to take care of all the transactions. So they devised commercial banking. No economists started it off, though; there was never an economist alive who had the wit to think that up. It just evolved because it was obviously necessaryobvious to a banker. He's got a gold reserve, and he can create more claims against it and not go broke provided those claims are covered by an equal value of something else.

REASON: What about the charge that's been made of late that what we've seen in the gold price over the last five years demonstrates that gold is too unstable a commodity to be the basis of a money system?

HARWOOD: Well, of course, the thing that's unstable is the paper money. Suppose you have a piece of gold. Russia goes into Afghanistan. Does it change in any way? Is there any danger it's going to change? The gold in that might have been mined 4,000 years ago. That's stable. Given enough time, enough decades, it's stable in relation to human labor, in relation to most of the commodities you think about, and so on. But why are people concerned about the paper dollar when Russia goes into Afghanistan? Maybe a war is imminent, maybe the dollar will be worth much less in a little while than it is now. They want to get into something that will be stable when the excitement is over.

REASON: As you look at politics today [September 1980], particularly the presidential race, do you see that any of the candidates seem to evidence a good understanding of money and financial matters?

HARWOOD: One might almost say, obviously not. Reagan does have as an advisor this chap Kemp, Congressman Kemp, whose idea of reducing taxes and thereby encouraging more production has some use, but it is not a panacea. If it just resulted in a wider spread between government expenditures and government intake it would only expedite inflating, and the psychological effects of starting it are difficult to judge. But I understand that they're thinking of trying to make use of it gradually over a period of three years. If they did that, and took other steps to cope with various problems, it might in some degree work. I don't think anyone can say. It's a neat theory, with a beautiful curve.

REASON: The Laffer curve.

HARWOOD: But that's the sort of thing that is typical of the older economists and the less useful methods of inquiry. It's the thing that in a particular set of circumstances can be correct. It might be that at a lower rate of taxes you get more total tax collections, but just because it happened once is not an assurance it'll happen again. So it should be tackled very slowly.

REASON: There have been, over the last few years, what seem to be important shiftsa shift of policy on the Federal Reserve Board toward deciding to get the money supply under control, or at least saying they're going to. There's a new mood of budget balancing in Congress. There's a general tax revolt going on in this country. Are you any more optimistic about the future of this country now than you were, say, five years ago?

HARWOOD: If I weren't, I probably would have cut my throat. I think that some of the people are being hurt so much that they're waking up. It's now, I would guess, about two or three years that, in spite of all sorts of increases in wages, people's real incomes have been going down. And I think that's a very strong inducement to common sense. It makes you think. And get enough people thinking, and you can't tell what they'll do. They may do a wise thing. And I think they made enough noise, particularly out here in California, so they've got the politicians running scared. After all, what does a politician want? He wants his job. And no politician, no man, no human being, can do what a politician has to do, go around and cultivate all those votes and satisfy all those people, and still know anything about what he's doing. So what we've got to have, if we're going to be saved, is enough people hollering loudly enough that the politicians react to it.

REASON: So you are encouraged by the kinds of things that people are hollering about nowadays as opposed to four or five years ago?

HARWOOD: I'm always encouraged when I see a little bit of evidence of more people exercising common sense than they seemed to before.

REASON: Okay. Thank you very, very much. It's been quite enjoyable and really a treat.