What Is the Gold Reserve Act of 1934?
The term Gold Reserve Act of 1934 refers to a law that took away the title of all gold and gold certificates held by private individuals and institutions and transferred ti to the United States Treasury. The Act, 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 U.S. dollars for gold.
- 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 U.S.
- Gold reserves were transferred from the Federal Reserve bank to the U.S. Treasury at a discount.
- The precious metal was effectively converted from a currency to a commodity with the passage of the Act.
- 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 in his first 100 days in office, which fell during the 1933 banking crisis. In March and April of 1933, Roosevelt declared a national bank holiday to stem a run on the banks and passed the Emergency Banking Act of 1933 that 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 Act, which created deposit insurance and other policies to stabilize banking.
On April 5, 1933, Roosevelt issued Executive Order 6102, forbidding "the hoarding of gold coin, 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 the trade and possession of gold of more than $100 a criminal offense. This, in effect, suspended the gold standard that the U.S. followed since the 1800s.
The subsequent passing of the Gold Reserve Act of 1934 completed this suspension and the transfer of gold from private hands to the U.S. Treasury. As mentioned above, the law required that the Federal Reserve, private individuals, and business entities remit any gold in their possession over the value of $100 to the government.
Gold was functionally converted from a currency to a commodity. Even gold coins at the Treasury were ordered to be melted down and converted to gold bars. The act also fixed 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 to $35. By doing this, the Treasury saw the value of their gold holdings 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 U.S. dollars into gold.
Though the Act didn't technically take the U.S. off the gold standard, it did give the government more control over the domestic money supply. It also allowed the Treasury to buy gold internationally to further devalue the dollar in foreign exchange markets.
Roosevelt and the Congress's action were not entirely popular, though, and several cases were brought before the U.S. Supreme Court in 1935 to test the constitutionality of the government's requisitioning of domestic gold, notably:
- Norman v. Baltimore & Ohio Railroad
- United States v. Bankers Trust Co.
- Nortz v. United States
- Perry v. United States
These cases rested on the Fifth Amendment to the Constitution, which forbids private property to be taken for public use without just compensation.
In the first two cases, the question before the court was whether the federal government had the power to regulate contracts with gold clauses. In a five-to-four ruling, the court said the government has plenary power over the money supply, and therefore it also had the power to abrogate gold clauses in contracts.
In the other two cases, the plaintiffs argued that they were not justly compensated for their gold because they paid the lower price of $20.67 after the price of gold on the international market rose to more than $50. The Supreme Court held that the compensation given to the plaintiffs was fair because the remuneration was for the face amount of the currency, not for the intrinsic value of the 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: A Half-Century of American Monetary Law."