What is the Gold Reserve Act of 1934?
The term Gold Reserve Act of 1934 refers to a law that removed title from all gold and gold certificates held by individuals and institutions and transferred to the United States Treasury. The law, which also included gold held by the Federal Reserve Bank, was signed into law by President Franklin D. Roosevelt. Banks, financial institutions and the Federal Reserve could no longer exchange US dollars for gold.
Key points to remember
- The Gold Reserve Act of 1934 was passed under President Franklin D. Roosevelt at the height of the Great Depression to stabilize the money supply in the United States.
- Gold reserves were transferred from the Federal Reserve to the US Treasury at a discount.
- The precious metal was effectively converted from a currency to a commodity with the passing of the law.
- The intended effect of the law was to increase the money supply and stem deflation by devaluing the dollar, including in foreign exchange markets.
Understanding the Gold Reserve Act of 1934
The Gold Reserve Act of 1934 was the culmination of emergency executive measures and banking laws passed under Franklin D. Roosevelt during his first 100 days in office, which fell during the banking crisis of 1933. In March and April 1933, Roosevelt declared a national holiday to stem a race on the banks and passed the Emergency Banking Act of 1933 which allowed the recapitalization of banks by the Federal Reserve Bank. Congress also passed the Banking Act of 1933 in June, also known as the Glass–Steagall Actwhich created deposit insurance and other policies to stabilize the banking sector.
On April 5, 1933, Roosevelt issued Executive Order 6102, prohibiting “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States”. The order required individuals, businesses and banks to deliver their gold and gold certificates to the Federal Reserve in exchange for $20.67. This made trading in and possessing gold over $100 a criminal offence. This, in effect, suspended the gold standard that the United States has tracked since the 1800s.
The subsequent passage of the Gold Reserve Act of 1934 completed this suspension and the transfer of gold from private hands to the US Treasury. As mentioned above, the law required the Federal Reserve, individuals, and corporations to surrender to the government any gold in their possession worth more than $100.
Gold has been functionally converted from a currency to a commodity. Even the gold coins in the treasury had to be melted down and converted into gold bars. The law also fixes the weight of the dollar at 15.715 grains of nine-tenths fine gold. It changed the nominal price of gold from $20.67 per troy ounce at $35. In doing so, the Treasury saw the value of its gold assets increase by $2.81 billion.
The price of gold was fixed until 1971, when then-President Richard Nixon created a fiat currency system by ending the convertibility of the US dollar into gold.
While the act didn’t technically take the United States off the gold standard, it did give the government more control over the domestic market. money income. It also allowed the Treasury to buy gold internationally for devalue the dollar in foreign exchange markets.
Roosevelt and the congressional action were not entirely popular, however, and several cases were brought before the United States Supreme Court in 1935 to test the constitutionality of the government’s requisition of national gold, including:
- Norman v. Baltimore & Ohio Railroad
- United States v Bankers Trust Co.
- Nortz v. United States
- Perry v. United States
These cases were based on the Fifth Amendment to the Constitution, which prohibits private property from being taken for public use without just compensation.
In the first two cases, the issue before the court was whether the federal government had the power to regulate contracts with gold clauses. In a five-to-four decision, the court said the government had full power over the money supply and therefore also had the power to repeal gold clauses in contracts.
In the other two cases, the plaintiffs argued that they had not been fairly compensated for their gold because they had paid the lower price of $20.67 after the price of gold on the international market. market went over $50. The Supreme Court held that the compensation awarded to plaintiffs was just because remuneration was for the nominal amount of the currency, not for the intrinsic value gold. The legal reasoning is complicated, and a thorough review is given by Kenneth W. Dam in “From the Gold Clause Cases to the Gold Commission: Half a Century of American Monetary Law.”