A:

The Gold Reserve Act of 1934 gave the government the power to peg the value of the dollar to gold and adjust it as it pleased. The dollar was devalued the following day, from $20.67 to buy a troy ounce of gold to $35. Devaluing the currency prompted an influx of gold from other nations because the purchasing power of the U.S. dollar was still relatively high. Unfortunately, the problem with sweeping economic policy changes is that the short-term thinking often leads to long-term problems.

Normally the nationalization of a commodity would have been a huge controversy, but the Gold Reserve Act was seen as a necessary step to ending the Great Depression. Its shock value was also moderated by the fact that an executive order had already made the private ownership or trading of gold a criminal offense.

When Bretton Woods permanently fixed the U.S. dollar at $35 per ounce and the real value of the currency plummeted below that, those same countries who built up the U.S. gold supply began raiding it, leading the U.S. to stop honoring gold redemption internationally – something it had long ceased doing domestically. This eliminated the gold standard and set the stage for inflationary money policies where the government could print more money, but any additional money caused the purchasing power of each dollar to drop because there was nothing backing it.

The Gold Reserve Act also stripped the Fed of its gold reserves in return for "Gold Certificates," and gave the title for the gold to the U.S. Treasury. As these certificates didn't actually represent a given value of gold, they were more like a paper trail saying that the gold had been taken rather than a certificate that could be redeemed to get the gold back. Nationalizing the Fed's holdings technically should have been outside the government's abilities because the Fed is, by design, independent. The Fed on paper and the Fed in practice, however, have long been beasts of a different breed. The Gold Reserve Act arguably met the short-term goals of the government but at the cost of compromising the Fed, violating citizens property rights (gold is property), and setting the stage for the stagflation of the 1970s.

To learn more about the Fed, take a look at our tutorial on The Federal Reserve.

This question was answered by Andrew Beattie.

RELATED FAQS

  1. In what manner will a recession likely affect the marginal-propensity-to-save rate ...

    Learn why recessions are often accompanied by an increase in the marginal propensity to save and whether this is a concerning ...
  2. Why would a country's gross domestic product (GDP) and gross national income (GNI) ...

    Understand the economic metrics, gross domestic product, or GDP, and gross national income, or GNI, and why the two evaluations ...
  3. While closely related, how do gross domestic product (GDP) and gross national income ...

    Learn how gross national income is different from gross domestic product due to net foreign income received by a country's ...
  4. How does the neoclassical growth theory predict real GDP?

    Understand what neoclassical growth theory is and how the ideology come about. Learn how the neoclassical growth theory predict ...
RELATED TERMS
  1. Deflationary Spiral

    A deflationary spiral is when a period of decreasing prices (deflation) ...
  2. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  3. Nordic Model

    The social welfare and economic systems adopted by Nordic countries.
  4. Welfare Capitalism

    Definition of welfare capitalism.
  5. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  6. Global Recession

    An extended period of economic decline around the world. The ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without ...

  2. Economics

    10 Most Influential Chinese Companies

  3. Chart Advisor

    Expect These Gold-Related Assets To ...

  4. Stock Analysis

    Is Now the Time to Bet on Vacation Spending?

  5. Economics

    Why Israel Is Attracting Chinese Investors

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!