Gold Reserve Act of 1934

Gold Reserve Act of 1934 was a pivotal piece of New Deal legislation that fundamentally altered the United States monetary system during the Great Depression. Enacted under President Franklin D. Roosevelt, the act nationalized monetary gold, devalued the United States dollar, and transferred vast authority over currency to the executive branch. Its primary goals were to raise commodity prices, combat deflation, and stimulate economic recovery by increasing the money supply.

Background and context

The act was a direct culmination of Roosevelt's aggressive monetary policies initiated shortly after his first inauguration. In April 1933, he issued Executive Order 6102, which required all persons to deliver their gold coin, bullion, and certificates to the Federal Reserve in exchange for currency, effectively taking the country off the gold standard. This was followed by the Joint Resolution of June 5, 1933, which abrogated gold clauses in public and private contracts. The London Economic Conference of 1933 had collapsed partly due to Roosevelt's unwillingness to stabilize currency values, signaling his commitment to a devaluation strategy. Key advisors, including Secretary of the Treasury Henry Morgenthau Jr. and Professor George F. Warren, advocated devaluation as a tool to reverse the crippling deflation of the Great Depression.

Key provisions

The act contained several transformative provisions. It formally nationalized all monetary gold, requiring the Federal Reserve System to transfer its gold holdings to the Treasury Department. It authorized the President to devalue the dollar by redefining its gold content; Roosevelt immediately set the price of gold at $35 per ounce, a devaluation of nearly 59% from the former $20.67 parity. The act established the Exchange Stabilization Fund (ESF) with $2 billion from the revaluation profits, granting the Treasury Secretary discretionary power to deal in gold and foreign exchange to stabilize the dollar. It also permanently removed gold coinage from circulation and made the dollar no longer redeemable in gold for domestic citizens.

Immediate effects and implementation

Upon signing the act on January 30, 1934, President Roosevelt issued a proclamation setting the new gold price, which instantly increased the nominal value of the government's gold reserve by approximately $2.8 billion. The Exchange Stabilization Fund became an immediate tool for the Treasury, under Henry Morgenthau Jr., to intervene in currency markets. The inflow of gold from abroad, attracted by the higher dollar price, began to swell the Federal Reserve's reserves, enabling a period of easier monetary policy. This action was a cornerstone of the administration's efforts to fulfill the goals of the Agricultural Adjustment Act by raising farm prices through inflationary pressure.

Long-term impact and legacy

The act had profound and lasting consequences for the global monetary system. The fixed $35 gold price became the anchor for the Bretton Woods system established after World War II, making the U.S. dollar the world's primary reserve currency. Domestically, it cemented the federal government's complete control over monetary policy, a shift away from the classical gold standard that defined the pre-Great Depression era. The Exchange Stabilization Fund evolved into a key instrument for foreign exchange intervention, used during events like the Plaza Accord and the Mexican peso crisis. The act's success in helping to end deflation contributed to the political capital of the New Deal and shaped decades of U.S. economic policy.

Legal and constitutional considerations

The act's constitutionality and its abrogation of gold clauses were immediately challenged. In the 1935 landmark case Norman v. Baltimore & Ohio Railroad Co., the Supreme Court of the United States, in a 5-4 decision, upheld the government's power to void gold clauses in private contracts, citing the national economic emergency. The companion case, Nortz v. United States, upheld the government's right to require surrender of gold. However, in Perry v. United States, the Court ruled that abrogating gold clauses in government bonds was technically a breach of contract, though it denied the plaintiff damages because they could not prove actual loss. These decisions, influenced by the Court-packing plan threat, broadly affirmed expansive federal power over monetary policy during a crisis.