Gold Reserve Act of 1934

What Is the Gold Reserve Act of 1934?

The term Gold Reserve Act of 1934 alludes to a law that removed the title of all gold and gold certificates held by private people and institutions and transferred ti to the United States Treasury. The Act, which additionally included gold held by the Federal Reserve Bank, was endorsed into law by President Franklin D. Roosevelt. Banks, financial institutions, and the Federal Reserve could never again exchange U.S. dollars for gold.

Understanding the Gold Reserve Act of 1934

The Gold Reserve Act of 1934 was the zenith of emergency executive measures and banking laws passed under Franklin D. Roosevelt in his initial 100 days in office, which fell during the 1933 banking crisis. In March and April of 1933, Roosevelt pronounced a national bank holiday to stem a run on the banks and passed the Emergency Banking Act of 1933 that permitted the recapitalization of banks by the Federal Reserve Bank. Congress additionally passed the Banking Act of 1933 in June, otherwise called the Glass-Steagall Act, which made deposit insurance and different policies to balance out banking.

On April 5, 1933, Roosevelt issued Executive Order 6102, prohibiting "the hoarding of gold coin, gold bullion, and gold certificates inside the continental United States." The order required people, 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 referenced over, the law required that the Federal Reserve, private people, and business elements dispatch any gold in their possession more than the value of $100 to the government.

Gold was practically converted from a currency to a commodity. Even gold coins at the Treasury were ordered to be broken down and converted to gold bars. The act likewise 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, at that point President Richard Nixon made a fiat currency system by ending the convertibility of U.S. dollars into gold.

Special Considerations

However 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 additionally permitted the Treasury to buy gold internationally to advance devalue the dollar in foreign exchange markets.

Roosevelt and the Congress' action were not altogether well known, however, and several cases were brought before the U.S. High Court in 1935 to test the constitutionality of the government's ordering of domestic gold, eminently:

• Norman v. Baltimore and Ohio Railroad
• United States v. Bankers Trust Co.
• Nortz v. United States
• Perry v. United States

These cases laid on the Fifth Amendment to the Constitution, which prohibits private property to be taken for public use without just compensation.

In the initial two cases, the inquiry before the court was whether the federal government had the power to control contracts with gold clauses. In a five-to-four ruling, the court said the government has whole power over the money supply, and in this manner it likewise had the power to repeal gold clauses in contracts.

In the other two cases, the offended parties contended that they were not justly compensated for their gold since 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 offended parties was fair in light of the fact that the remuneration was for the face amount of the currency, not for the intrinsic value of the gold. The legal thinking is complicated, and an exhaustive survey is given by Kenneth W. Dam in "From the Gold Clause Cases to the Gold Commission: A Half-Century of American Monetary Law."

Features

• 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 section of the Act.
• The expected effect of the law was to increase the money supply and stem deflation by degrading the dollar, remembering for foreign exchange markets.
• The Gold Reserve Act of 1934 was passed under President Franklin D. Roosevelt at the level of the Great Depression to balance out the money supply in the U.S.