What Is the Gold Reserve Act of 1934?
The Gold Reserve Act of 1934 took away the title of all gold and gold certificates that was held by private individuals and institutions, including the Federal Reserve Bank, and transferred it to the Treasury of the United States.
- The Gold Reserve Act of 1933 was passed under President Franklin 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 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 Roosevelt in his famous first 100 days in office. In March and April of 1933, Roosevelt had 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.
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 all persons, 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.
In June, Congress passed the Banking Act of 1933, also known as the Glass-Steagall Act, that created deposit insurance and other policies to stabilize banking.
The Gold Reserve Act of 1934 completed the transfer of gold from private hands to the U.S. Treasury by requiring the Federal Reserve and all private persons and entities to remit gold over the value of $100 to the government.
Real-World Effects of the Gold Reserve Act of 1934
Functionally, this ended the period of gold as a currency and made it into 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.
Though the act didn't technically take the U.S. off the gold standard, it gave 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, 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: Norman v. Baltimore & Ohio Railroad, United States v. Bankers Trust Co., Nortz v. United States, and Perry v. United States. These cases rested on the Fifth Amendment to the constitution that forbids private property to be taken for public use, without just compensation.
In the former 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 latter two cases, the plaintiffs argued that they had not been justly compensated for their gold because they paid the lower price of $20.67 after the price of gold on the international market had risen to more than $50. The Supreme Court held that the compensation given to the plaintiffs was fair and that because the remuneration was for the face amount of the currency and not for the intrinsic worth 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."