Gold Reserve Act
|Other short titles||Gold Reserve Act of 1934|
|Long title||An Act 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.|
|Nicknames||Gold Reserve Act (Devaluation)|
|Enacted by||the 73rd United States Congress|
|Effective||January 30, 1934|
|Statutes at Large||48 Stat. 337|
The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury.
The Gold Reserve Act outlawed most private possession of gold, forcing individuals to sell it to the Treasury, after which it was stored in United States Bullion Depository at Fort Knox and other locations. The act also changed the nominal price of gold from $20.67 per troy ounce to $35. This price change incentivized foreign investors to export their gold to the United States, while simultaneously devaluing the U.S. dollar in an attempt to spark inflation. The increase in gold reserves due to the price change as well as the confiscation clause resulted in a large accumulation of gold in the Federal Reserve and U.S. Treasury. The increase in the money supply lowered real interest rates which increased investment in durable goods.
A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector's coins. These prohibitions were relaxed starting in 1964 – gold certificates were again allowed for private investors on April 24, 1964, although the obligation to pay the certificate holder on demand in gold specie would not be honored. By 1975 Americans could again freely own and trade gold.
- 1 U.S. economic historical narrative
- 2 International economic historical narrative
- 3 Roles of the FRS and Treasury
- 4 Critique of Gold Reserve Act
- 5 Recent events
- 6 See also
- 7 References
- 8 External links
U.S. economic historical narrative
The United States was still suffering the negative effects of the 1929 stock market crash in 1934 when the Gold Reserve Act was enacted. President Roosevelt was challenged with decreasing unemployment, raising wages and increasing the money supply, but was restricted by United States’ strict adherence to the gold standard. The Gold Reserve Act, which banned the export of gold, restricted the ownership of gold and halted the convertibility of gold into paper money helped him overcome this obstacle. This act ratified the previous Executive Order 6102 which required almost all gold to be exchanged for paper currency.
The Gold Reserve Act also revalued the price of gold to $35 per troy ounce. As a result, the Gold Reserve Act, an act of monetary policy, drastically increased the growth rate of the Gross National Product (GNP) from 1933 to 1941. Between 1933 and 1937 the GNP in the United States grew at an average rate of over 8 percent. This growth in real output is due primarily to a growth in the money supply M1, which grew at an average rate of 10 percent per year between 1933 and 1937. Previous held beliefs about the recovery from the Great Depression held that the growth was due to fiscal policy and the United States’ participation in World War II. "Friedman and Schwartz stated that the ‘rapid rate [of growth of the money stock] in three successive years from June 1933 to June 1936… was a consequence of the gold inflow produced by the revaluation of gold plus the flight of capital to the United States’". Treasury holdings of gold in the US tripled from 6,358 in 1930 to 8,998 in 1935 (after the Act) then to 19,543 metric tonnes of fine gold by 1940.
The revaluation of gold referenced was an active policy decision made by the Roosevelt administration in order to devalue the dollar. The largest inflow of gold during this period was in direct response to the revaluation of gold. An increase in M1, which is a result of an inflow of gold, would also lower real interest rates, thus stimulating the purchases of durable consumer goods by reducing the opportunity cost of spending. If the Gold Reserve Act had not been enacted, and money supply would have followed its historical trend, then real GNP would have been approximately 25 percent lower in 1937 and 50 percent lower in 1942.
International economic historical narrative
The international community during the depression began to shift much of its gold reserves to the United States. Foreign investors clamored over the $15 increase in value from $20.67 to $35 per troy ounce, and exported their gold to the United States in record amounts causing U.S. treasury holdings to increase. This data shows two important aspects that involved gold in the early 20th century. The first was the massive expansion of gold as a currency across the globe. This data also demonstrates the rapid rise of gold reserves to the US. Even in 1900 the U.S. only held 602 tonnes of gold in reserve. This was 61 tonnes less than Russia and only 57 tonnes more than France.
Over the next 20 years countries' reserves grew as the amount of gold in the market increased and as normal trading occurred. However, in the 1930s there was a sudden shift up in reserves in the U.S. From 1930 to 1940, treasury holdings had tripled, mostly due to foreign investing. Another reason behind the shift of reserves to the US was the suspension of the gold standard in Britain on September 21, 1931. Gold reserves in the Bank of England also grew over ten times from 1930 to 1940, but it was still less than the amount the U.S. had. The Bank of France also saw over 200 tonnes of gold get transferred to New York following the raising of prices in America.
Foreign gold holdings affected
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Although hard to find and interpret the raw data, according to data collected by Goldsmith in their 1955 report, somewhere between 2 and 3.2 billion dollars' worth of imported gold stock was being held. At 20 dollars an ounce, that would represent between 100 and 160 million ounces of gold, which would be worth between 125 and 200 billion dollars today at $1250/ oz, which was about half of the gold held by the U.S. treasury at the time. When the price changed, it would take $35 instead of $20 for foreign countries to buy back their gold. This implies a loss of 41% of their invested gold stock. This would be between 41 and 65 billion dollars' worth of gold (in today's money) or 800+ million dollars in 1934 dollars. But, this change did incentivize transferring additional gold to the U.S., at the higher price.
Wealth transferred compared to the US economy
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There are multiple ways to illustrate how much the money was transferred by the Act compared to the GDP. The Real GDP in 1934 was $860 billion. (0.86 trillion in chained 2009 dollars inflation adjusted). The ratio of wealth taken by the price change of gold (125+ billion in today's dollars) to GDP of 1934 ($860 billion in 2009 dollars) is 14.5%. To compare that ratio to today's U.S. GDP of $15.7 trillion, 14.5% would be about 2.3 trillion dollars today. The nominal GDP of 1934 was $66.8 billion. The $800+ million of wealth (in 1934 dollars) transferred would only be 1.2% of the GDP, if we use 1934 dollars. 1.2% of 2012's GDP would be about $190 billion today.
Roles of the FRS and Treasury
Gove Griffith Johnson, an economist and author said: "One may be skeptical of the wisdom with which monetary instruments will be used, but the possibility of abuse extends throughout the whole sphere of governmental activity and is a risk which must be assumed under a democratic or any other form of government".
Prior to Gold Reserve Act 1934, the Federal Reserve System was in trouble as the Great Depression had swept over the country and people looked to the Fed for solutions. Some people[who?] claim that "market failure" was not the cause of this trouble. Instead, they place the blame for the years of the Great Contraction (from 1929 to 1933) on the mismanagement of the monetary policy by the central bank. That explains why Congress handed over the Fed’s powers to the Treasury. Johnson explains that the Treasury’s gold policy "was an essential instrument for producing desired political aims". In other words, the Federal Reserve System had served more as a "technical instrument for effecting the Treasury’s policies," says Johnson.
Roosevelt justified Gold Reserve Act 1934 by saying that, "Since there was not enough gold to pay all holders of gold obligations, . . . the federal government should expropriate and keep all of the gold".
Since the Central Banking Act of 1935, the Federal Open Market Committee (FOMC) has authorized the Fed Bank of New York to purchase and/or sell U.S. government securities in the open market in order to determine the stock of money in the U.S. The Fed Board also gained its power over member bank reserve requirements as a result. Since the FOMC was determining the quantity of money in circulation, the quantity of gold in the system did not affect the stock of money in the U.S. economy. Due to the Banking Act, the secretary of the Treasury was no longer the Fed’s Board of Governors. However, being a chairman gave the secretary enough power to influence the Fed.
Treasury managers wished to halt monetary expansion in 1936 by stagnating gold and increasing reserve requirements. For all intents and purposes, this led to a freeze of the monetary system and U.S. economy. The Treasury began its own gold sterilization policy in order to stop inflation from potentially increasing due to an increase in inflow of gold into the U.S. soon after the Fed enacted the same policy. Gold holdings more than doubled in the period of 1935 to 1940. This lasted for 16 months from 1936 to 1938. In more efforts, as of the end of 1936, the Treasury noted its gold purchases as part of "inactive" account. In other words, the Treasury met the price of gold through sales of government securities in financial markets in order to keep the pile of gold high but they would not be converted into currency in the Treasury.
Effect on inflation/deflation
After the act of 1934, deflation, which would sometimes be a great as -10.5% in the bust of 1921 (which was preceded by over 14% inflation for 4 consecutive years immediately prior to 1921), would never again drop below -2.1%. Before 1934, from 1914 to 1934, inflation was a (geometric) average of 1.37% per year. After 1934, from 1934 until 2013, inflation was a (geometric) average of 3.67% per year. Inflation was more stabilized, but still higher than the previous period. This may be due to leaving the gold standard, over time.
Critique of Gold Reserve Act
The Gold Reserve Act came at a point when the world had experienced World War I, and was preparing for World War II. The war had brought the world into a monetary chaos that caused many economies in the world to falter. The American government viewed gold confiscation as a way to protect the United States’ currency. The international economic order disintegrated into a state of chaos that led to the flotation of the exchange rates. In essence, the gold policy enacted by Roosevelt brought the devaluations of the competing currencies in the market. In addition, the exchange controls is the period that brought the country’s currency power down.
Litigation arising from GRA
The passage of the Gold Reserve Act of 1934 signified that the American people could no longer hold gold, with the exception of jewelry and collectors coins. After the passage of the Gold Reserve Act several people were indicted for violating the clauses that restricted gold ownership and trade. Frederick Barber Campbell (who was actually convicted under the Gold Reserve Act’s predecessor, Executive Order 6102), was convicted of hoarding gold when he tried to withdraw 5,000 troy ounces of gold he had at Chase National bank. Gus Farber, a diamond and jewelry merchant was arrested with his father and 12 others for illegally selling $20 gold coins without a license. The Baraban family was arrested for operating a gold scrap business under a false license. Foreign companies even had their gold confiscated. The Uebersee Finanz-Korporation, a Swiss banking company, had $1,250,000 in gold coins that were being held in the United States.
In the Consolidated Gold Clause Cases (independently known as Perry v. U.S., U.S. v. Bankers Trust Co., Norman v. Baltimore & Ohio R. Co., Nortz v. U.S.) the Gold Reserve act was subject to scrutiny by the United States Supreme Court, which narrowly upheld Roosevelt’s gold confiscation policy.
The 2008 decision 216 Jamaica Avenue, LLC vs S&R Playhouse Realty Co. established that a gold clause in contracts signed before 1933 was only suspended not erased, and under certain limited circumstances might be reactivated.
- "White House Statement on Proclamation 2072 - Franklin D. Roosevelt" (PDF). FAME - Foundation for the Advancement of Monetary Education. January 31, 1934.
- http://famguardian.org/Subjects/MoneyBanking/FederalReserve/CentralBankGoldReserves.pdf Central Bank Gold Reserves
- http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=4155464&fileId=S002205070001189X What ended the great depression?
- http://www.nber.org/databases/jones-obstfeld/text/usa_curr_ac.txt The National Bureau of Economic Research
- http://www.multpl.com/us-gdp-inflation-adjusted/table US Real GDP by Year
- http://useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm U.S. GDP by Year
- http://www.independent.org/publications/article.asp?id=165 Gold Policy in the 1930s by Mark Thornton
- http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ US inflation calculator
- http://mises.org/money.asp What has government done to our money?
- 216 Jamaica Avenue, LLC vs S&R Playhouse Realty Co.
- "Public Law 73-87, 73d Congress, H. R. 6976: Gold Reserve Act of 1934" (PDF). Federal Reserve Archival System for Economic Research (FRASER).
- "Gold Reserve Act of 1934: Hearings before the Committee on Coinage Weights and Measures House of Representatives Seventy-Third Congress Second Session on H.R. 6976" (PDF). Federal Reserve Archival System for Economic Research (FRASER). January 15, 1934.