Gold has had a fundamental role in monetary systems for thousands of years. It also has a track-record as a store of value and wealth of over 5000 years. In the first century of America’s history, gold and silver coins were used as currency in some fashion. However, the civil war provoked people to believe that a change of what was used as money was in need, and a gold fiasco ensued.
Before the civil war, the United States had a free banking system. For more information on that see my post about the National Currency act of 1863. Once the banking system was centralized, the money was next. The Gold Standard act of 1900 changed was the answer to this.
Gold Standard Act of 1900- Setting the gold standard
After the conclusion of the civil war, the country returned to a monetary system based on gold and silver specie. This system was heavily debated. Near the closing of the 19th century, debates lead to the idea of the federal currency being backed by gold or silver at a fixed value.
Unsurprisingly, after the civil war, a populism movement became prominent. They wanted to back the currency with silver to inflate the prices of farms. Silver is much more plentiful than gold, so by using it as a backing of a fiat currency, more money could be printed. By increasing the money supply, the asset prices would be more likely to increase.
However, in the end the government went on the official gold standard and set the value of gold at a fixed price of $20.67 per troy ounce. Silver coinage could still be used as currency, the dollar just wasn’t backed by silver. This means that dollars could be redeemed for gold, and gold only, and the fixed rate of $20.67 per troy ounce.
Gold Reserve Act of 1934
Now, our good old friend Franklin Delano Roosevelt came along and passed the Gold Reserve Act of 1934. This one was one of those acts that he passed at the very beginning of his term, around the same time as the Glass-Steagall act. I have a post about that one if you are interested in learning about how it changed the banking system at the time.
The major thing that this piece of legislation did was confiscate all private ownership of monetary gold. The ownership of any gold coins, bullion, or gold backed certificates was transferred to the treasury. This included the gold owned by the federal reserve. The previous owners were “justly” compensated for their gold at the $20.67 per troy ounces rate.
“Small” Pieces of Pork
Once the transfer of ownership to the treasury was complete, FDR raised the price of gold to $35 and ounce. By his proclamation. This lovely form of oversight is due to section 12 in the act, that allowed the president to establish the dollar value of gold by proclamation. This was for the purpose of increasing the supply of credit according to the federal reserve’s website. There will be multiple links in the reference section for this one.
Once this was done, no financial institution or the treasury could redeem any dollars for gold. At least the domestic citizens and financial institutions.
All gold coins were now forbidden, so the coins that were now in the possession of the Treasury were smelted and casted into bars. These bars could be used for industrial uses and had to be requested from the government.
Thankfully, gold items like jewelry were still allowed for us common folk, with contingencies. You were allowed to trade your gold items if they were below 15 ounces in weight; however, if the item weighed more than 15 ounces you needed to obtain a license for the transfer. Any violators of this provision faced steep penalties.
Oh, and by the way, if you decided not to turn in your monetary gold, and you were caught, if it was worth more than $100 it was considered a criminal offense.
From Gold Standard to Gold EXCHANGE Standard
The dollar was still backed by gold, there were just some changes to how the system worked. Since dollars could no longer be redeemed for gold by Americans or American institutions, the dollar was no longer on the same type of gold standard. However, foreign countries could still redeem their dollars for gold, and international trade was settled in gold. So foreign entities could receive American gold, just not American citizens. That is the distinction between the gold standard and gold exchange standard.
Exchange Stabilization Fund
The Gold Reserve Act of 1934 also established the Exchange Stabilization Fund (ESF). This was a fund of about $2 billion that is controlled by the treasury. The treasury can use this fund to trade gold, foreign currencies, or other financial instruments to control the value of the dollar. This allowed the treasury to conduct open market operations without the assistance or approval of the federal reserve. This fund is still in use today.
The Theft of Power
Keep in mind that the federal reserve was established in 1913. So, with the ESF and the treasury now owning the federal reserve’s gold, the federal reserve lost a lot of power with this legislation. So basically, the treasury and therefore the government was in control of monetary policy during this time. At this point, the Fed just executed the policies of the treasury in terms of monetary policy. This did not change until the Fed-Treasury Accord of 1951 when the fed regained some of its original power.
Legacy
As stated above, the Exchange Stabilization Fund is still active today. During the great financial crisis (GFC), the treasury used the ESF to run an insurance program for money-market funds. Basically, the ESF would guarantee the liabilities of the money market funds for up to a year with about $50 billion of the ESF’s assets. At least according to the website of the Federal Reserve bank of Cleveland.
Futile Fight
As you can imagine, people were not too happy about the government “justly” taking their gold. Even though the purpose of the legislation was to increase the money supply and stop the massive deflation of the great depression, citizens did not take this kindly.
There were four supreme court cases that arose from this, all banking on the 5th amendment. Specifically, the part of the 5th amendment that forbids the confiscation of private property without just compensation. This is why the word “just” has been in quotes throughout this post. These cases were Perry v. U.S., Nortz v. U.S., U.S. v. Bankers Trust Co., and Norman v. Baltimore and Ohio Railroad.
The former two cases involved the plaintiffs arguing that they were not justly compensated for their gold. The previous owners of the gold were paid $20.67 an ounce by the government, even though the international market value of the same ounce of gold was around $50. The court ruled that the lower amount was paid because it was the face value of the currency, and the government did not have to compensate for the intrinsic value of the gold.
The latter two cases involved the question of if the government had the power to regulate contracts that involved clauses pertaining to gold. The court ruled that the government had “plenary power” over the money supply, so it did possess that power. More information about the court cases can be found in the Investopedia link in the reference section.
Graphs of the price of gold, priced in dollars, for not adjusted for inflation (left) and adjusted for inflation (right). Notice the scales on the vertical axis to see the effect of inflation. The grey areas are times that the united states was in a recession. This information can be found at macrotrends.net. This link is to the gold price graph, but they have plenty of data for different things. Gold Prices – 100 Year Historical Chart
Conclusions
This post is mostly for the history lesson. A lot of people argue that there is no point in buying gold because the government can always just come and take it from you. President Ford made it legal for citizens to own gold again in 1974, so it is perfectly fine to go buy some. Also, to government can do the same thing with real-estate, it’s called eminent domain.
History is something that always needs to be kept in mind. People are prone to recency bias. They like to think that if it didn’t happen in the past 20 to 40 years, it wound never happen here.
I would highly encourage you to become a student of history. Because once you understand what has been done in the past, you may realize what exactly people are willing to do, and they will always find a way to seem to be in the right.
To your wealth and future,
James Forsythe
Link to the National Currency act post
https://jamesdforsythe.com/national-banking-act-of-1863/
Link to Glass-Steagall act
https://www.investopedia.com/terms/g/gold-reserve-act-1934.asp
https://www.federalreservehistory.org/essays/gold-reserve-act
PDF of the act. Its 220 pages. But here you go if you are curious
https://fraser.stlouisfed.org/files/docs/historical/house/1934hr_goldresact.pdf
