The Gold Reserve Act of 1934: A Historical Overview
The Gold Reserve Act of 1934 stands as a pivotal moment in U.S. economic history. This legislation, signed into law by President Franklin D. Roosevelt, had far-reaching implications for the nation's monetary system and economic landscape. In this comprehensive exploration, we will delve into the significance, historical context, and consequences of the Gold Reserve Act of 1934.
The transfer of all privately held gold and gold certificates to the United States Treasury was mandated by the Gold Reserve Act of 1934, also referred to as the Gold Act. This action included gold held by individuals, financial institutions, and the Federal Reserve. As a result, private entities and banks were no longer able to exchange U.S. dollars for gold.
Emergence of the Act
The Gold Reserve Act of 1934 marked the culmination of a series of emergency measures and banking laws enacted during Franklin D. Roosevelt's first 100 days in office. These measures were implemented in response to the 1933 banking crisis, which had severely shaken the U.S. economy.
- The Banking Crisis of 1933: In March and April of 1933, President Roosevelt declared a national bank holiday to halt a wave of bank runs. This move was followed by the passage of the Emergency Banking Act of 1933, which allowed the Federal Reserve Bank to recapitalize struggling banks.
- Glass-Steagall Act: In June of the same year, Congress enacted the Banking Act of 1933, commonly known as the Glass-Steagall Act. This legislation introduced deposit insurance and other policies aimed at stabilizing the banking system.
Executive Order 6102
President Roosevelt issued Executive Order 6102 on April 5, 1933, which served as a pivotal precursor to the Gold Reserve Act. This executive order forbade the hoarding of gold coins, gold bullion, and gold certificates within the continental United States. Individuals, businesses, and banks were mandated to surrender their gold holdings and gold certificates to the Federal Reserve in exchange for $20.67 per troy ounce. Consequently, the possession or trade of gold valued at over $100 became a criminal offense. This effectively suspended the gold standard that the U.S. had adhered to since the 1800s.
Transition of Gold and Fixed Price for Gold
The Gold Reserve Act of 1934 finalized the transition of gold from a currency to a commodity. It required the Federal Reserve, private individuals, and business entities to relinquish all gold in their possession exceeding a value of $100 to the U.S. government. Furthermore, the Act mandated the melting down of gold coins at the Treasury, which were then transformed into gold bars. The legislation also established a new fixed weight for the dollar: 15.715 grains of nine-tenths fine gold. The nominal price of gold was adjusted from $20.67 per troy ounce to $35, resulting in a significant increase in the value of the Treasury's gold holdings by $2.81 billion. This fixed price for gold remained in effect until 1971 when President Richard Nixon discontinued the convertibility of U.S. dollars into gold, transitioning the nation to a fiat currency system.
Legal Challenges and Supreme Court Cases
Although the Gold Reserve Act of 1934 did not formally remove the U.S. from the gold standard, it granted the government increased control over the domestic money supply. Additionally, it empowered the Treasury to purchase gold on the international market to further devalue the dollar in foreign exchange markets.
However, the actions of President Roosevelt and Congress were met with opposition and legal challenges. Several cases were brought before the U.S. Supreme Court in 1935, challenging the constitutionality of the government's requisitioning of domestic gold. Notable cases included:
- Perry v. United States
- Norman v. Baltimore & Ohio Railroad
- United States v. Bankers Trust Co.
- Nortz v. United States
These cases hinged on the Fifth Amendment to the Constitution, which prohibits the taking of private property for public use without just compensation.
Central Question Addressed by the Court
In the first two cases, the central question addressed by the court was whether the federal government possessed the authority to regulate contracts with gold clauses. In a close five-to-four decision, the Supreme Court ruled in favor of the government, asserting that it had comprehensive authority over the money supply, including the ability to invalidate gold clauses in contracts.
Issue of Fair Compensation
The latter two cases revolved around the issue of fair compensation. Plaintiffs argued that they were not justly compensated for their gold because they had received the lower price of $20.67 per troy ounce when the international market price had exceeded $50. The Supreme Court held that the compensation provided to the plaintiffs was fair, as it was based on the face value of the currency rather than the intrinsic value of the gold. The legal reasoning underpinning these decisions is intricate, and a detailed analysis can be found in Kenneth W. Dam's work, "From the Gold Clause Cases to the Gold Commission: A Half-Century of American Monetary Law."
The Gold Reserve Act of 1934 had a significant impact on the U.S. monetary system and the country's approach to gold. This legislation involved transferring privately held gold to the U.S. Treasury and setting a fixed price for gold. It marked a turning point in the nation's economic history, although it did not formally abandon the gold standard. Instead, it provided the government with increased control over the money supply and exerted a lasting influence on the country's economic policies.