The Gold Reserve Act of 1934 was signed by President Roosevelt on January 30, 1934. The purpose of the law was, “To protect the currency system of the United States, to provide for the better use of the monetary gold stock of the United States, and for other purposes” [1]. It ended the free use of gold as money domestically and effectively devalued the dollar internationally.
In the 19th century, Britain, the leading economic and political power of the age, adopted a “gold standard” and many other countries followed suit. This meant that national currencies were valued in relation to gold, and that coins and paper money could officially be redeemed for an equivalent amount of gold. The history of the gold standard in America and the nation’s monetary system is complex and often fought over (e.g., the Free Silver movement of the 1880s). A true gold standard only existed in the U.S. between 1879 and 1933. At other times, the nation has relied on a mixture of gold and silver coins, the use of gold for international settlements, and, during wars, printing paper currency not backed by precious metals [2].
With the onset of the Great Depression and collapsing international trade, the gold situation facing the United States grew dire. Large quantities of gold were flowing out from the vaults of the Federal Reserve Bank, both domestically and internationally. This occurred because in a financial crisis, most people, companies and governments prefer hard currency over bank deposits or paper, which can suddenly lose their value. By March 1933, when “…the Federal Reserve Bank of New York could no longer honor its commitment to convert currency to gold, President Franklin Roosevelt declared a national banking holiday” [3]. (See the Emergency Banking Relief Act of 1933)
The Gold Reserve Act of 1934 came later, following a series of other attempts to stop the financial bleeding, including the bank holiday, suspension of international gold payments, and an increase in gold purchases by the Treasury. The Gold Reserve Act ended all private holding and use of gold as money. The government called in gold held by private hands and thereafter prohibited the Treasury from redeeming dollars for gold. It then “authorized the president to establish the gold value of the dollar by proclamation” [4]. This signaled the end of the classic Gold Standard and the beginning of a long period in which the United States would be the principal arbiter of international money.
Ending the old gold standard was controversial. Nonetheless, economists ranging from Milton Friedman to Ben Bernanke to Christina Romer credit the New Deal’s drastic monetary reforms with stabilizing the banking system, making American goods more competitive through devaluation of the dollar, and reflating the economy [5]. After World War II, the U.S. dollar would become the effective “reserve currency” for the world, in place of gold, and most of the world’s stock of gold would sit in the vaults of Fort Knox, Kentucky. But pressure gradually built up from a huge outflow of dollars, and in the early 1970s President Nixon ended domestic redemption of dollars for silver and international settlements in gold. International currencies were allowed to ‘float’. In 1976, Congress made it official, and “the definition of the dollar in terms of gold was removed from statute” [6].
Sources
(1) “Public Law 73-87, 73d Congress, H.R. 6976,” Federal Reserve Archive, https://fraser.stlouisfed.org/scribd/?title_id=1085&filepath=/docs/historical/congressional/goldreserveact1934.pdf#scribd-open, accessed May 1, 2015. (2) Craig K. Elwell, “Brief History of the Gold Standard in the United States,” Congressional Research Service, June 23, 2011, pp. 9-11 (based on earlier work by G. Thomas Woodward and available to read or download at https://fas.org/sgp/crs/misc/R41887.pdf). (3) Gary Richardson, “Roosevelt’s Gold Program,” Federal Reserve History, https://www.federalreservehistory.org/Events/DetailView/24, accessed May 1, 2015. (4) Gary Richardson, “Gold Reserve Act of 1934,” Federal Reserve History, https://www.federalreservehistory.org/Events/DetailView/13, accessed May 2, 2015. (5) See note 3, and also Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, New York: Oxford University Press, 1992. (6) See note 2 at p. 13.
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