When FDR Abandoned the Gold Standard

Exactly 84 years ago, on April 20, 1933, the United States abandoned the gold standard, delinking the value of the dollar to gold. The person responsible for that was President Franklin D. Roosevelt, who had urged Congress to take up reform of the currency system in January that year.

“For example, the free circulation of gold coins is unnecessary, leads to hoarding, and tends to a possible weakening of national financial structures in times of emergency,” he said. (See also: The Gold Standard vs Fiat Currency)

Photo Credit: The New York Times Archive

As a result of Roosevelt's bold move, which he made shortly after taking office, The New York Times reported that the dollar plunged 11.5% against the European gold-based currencies, while inflationary expectations made stocks rise. In what was termed as the most active day of trading since September 1932, NYSE saw a total volume of 5.08 million shares. According to a paper prepared by the Federal Reserve of St. Louis, “The dollar-pound rate leaped 23 cents to $3.85, the highest level since October 31, 1931.”

This was not the President Roosevelt’s first crackdown on gold, nor was it his last. There were a lot of factors, both domestic and international, that led him to take these actions. The United States was languishing under the effects of the Great Recession, and Great Britain had abandoned the gold standard two years prior.

As the Federal Reserve of St. Louis pointed out, on the one hand severe deflation and unemployment was forcing the Fed’s hand to pursue an expansionary monetary policy to stimulate the economy. The American people were in panic mode and were converting their deposits to currency at an alarming rate, threatening a run on banks. The number of notes in circulation increased close to 116% between October 1929 and March 1933. The Fed’s gold to notes and deposit liabilities ratio, “which stood at 81.4 percent a month before Britain left the gold standard, slumped to 51.3 percent in March 1933, the lowest level since 1921.”

(See also: A Brief History of the Gold Standard in the United States)

Britain’s move away from the gold standard caused the pound to devalue, impacting the competitiveness of U.S. exports. Not only that, but “international responsibilities and the threat of gold exports called for the Federal Reserve to tighten credit and demonstrate its commitment to the gold standard.”

So Roosevelt prioritized the domestic situation over international commitments. One of his first moves as President was to declare a four-day bank holiday and suspend gold exports. Within days, the Emergency Banking Act was enforced that prohibited banks to pay out gold coins or bullion or gold certificates except under a government-issued license.

Just two weeks prior to abandoning the gold standard, he issued an executive order prohibiting hoarding of gold coins, bullion or gold certificates. People and corporations were mandated to deposit these with the Federal Reserve or face up to $10,000 in fine or up to 10 years of imprisonment or both. Those who gave up their gold were compensated.

(See also: The Gold Standard Revisited)

And for that he received the backing of some of the biggest players on Wall Street. After the embargo on gold exports, The New York Times quotes J.P. Morgan saying, “It seems to me clear that the way out of the depression is to combat and overcome the deflationary forces. Therefore, I regard the action now taken as being the best possible course under existing circumstances.”