The Gold Reserve Act of 1934, signed into law by President Franklin D. Roosevelt in January 1934, marked a pivotal moment in U.S. economic history. This legislation was the culmination of Roosevelt’s multifaceted gold program, which had been initiated in 1933. At its core, the Act was a response to the challenges posed by the Great Depression and was designed to address various economic issues through measures that drastically altered the country’s relationship with gold.
One of the significant provisions of the Gold Reserve Act was found in Section 2, which transferred ownership of all monetary gold in the United States to the U.S. Treasury. This encompassed not only gold coins but also bullion held by individuals and institutions, including the Federal Reserve. In exchange for this transfer, individuals and institutions received currency at the rate of $35 per ounce of gold. This rate effectively devalued the dollar to 59 percent of the value it had under the Gold Act of 1900, set at $20.67 per ounce. The shift in the dollar’s value was a deliberate move to stimulate economic growth by reducing the real interest rates and increasing investment in durable goods.
The Act also introduced key provisions in Sections 5 and 6, which prohibited the Treasury and financial institutions from redeeming dollars for gold. This marked a significant reversal of the long-standing U.S. policy that had allowed citizens to convert paper currency into gold coins upon request. The government now held the authority to convert gold into dollars, regardless of individual preferences.
To regulate the use of gold within the United States, Sections 3, 4, and 11 were introduced.
These regulations covered various aspects, including the use, acquisition, transportation, import, export, and possession of gold. For instance, monetary gold had to be held in the form of bars, with coins being prohibited. Bars were made available for certain industrial applications, such as in the manufacture of dental appliances, jewelry, and electronics. Transactions involving gold items were also subject to licensing requirements, particularly for heavier items, and penalties were imposed for violations. Furthermore, Section 10 of the Act established a stabilization fund of $2 billion under the Treasury’s control, derived from government profits from raising the price of gold. This fund, known as the Exchange Stabilization Fund (ESF), allowed the Treasury to engage in various financial operations independently, including buying or selling gold, foreign currencies, financial securities, and other instruments. It also played a significant role during World War II by facilitating the transfer of funds to neutral nations and international allies. Lastly, Section 12 authorized the President to establish the gold value of the dollar through proclamation. The President swiftly acted upon this authority, revaluing gold the day after signing the Act. In doing so, he explained that these actions aimed to boost the supply of credit, stabilize domestic prices, and protect foreign commerce from the adverse effects of depreciated foreign currencies.
The Act’s impact on the U.S. economy was profound.
The revaluation of gold led to an influx of gold reserves, boosting the money supply and subsequently lowering real interest rates. This, in turn, spurred investment in durable consumer goods and contributed to a remarkable growth in the Gross National Product (GNP) during the 1930s. The Act was a response to the economic challenges of the Great Depression and aimed to address issues such as unemployment, wage growth, and money supply restrictions, ultimately contributing to economic recovery.
The Gold Reserve Act of 1934 also had an international dimension.
It triggered foreign investors to send their gold to the United States due to the substantial increase in the price of gold, from $20.67 to $35 per troy ounce. This shift of gold reserves to the U.S. was further facilitated by the suspension of the gold standard in Britain in 1931. The Act effectively made the U.S. a magnet for global gold reserves. Prior to the Act, the Federal Reserve System was facing difficulties during the Great Depression, as the central bank’s monetary policy was being challenged. It appeared that monetary policy was under the Treasury’s influence, and Congress had entrusted the Treasury with many of the Federal Reserve’s powers. This shift allowed the Treasury to utilize the gold policy as a tool to achieve its political objectives. The Gold Reserve Act of 1934 was a multifaceted response to the economic turmoil of the Great Depression. It significantly altered the relationship between the United States and gold, influenced economic policy, and had far-reaching effects on domestic and international financial matters.
The Act also brought legal consequences, with several individuals and entities indicted for violating its provisions regarding gold ownership and trade. Gold clauses in contracts, suspended since 1933, remained in the background, only to be reactivated in certain limited circumstances, as determined by subsequent legal decisions.