Gold Clause Repealed
The repeal of the gold clause on June 5, 1933, marked a significant shift in the United States' monetary policy during the Great Depression. This action, taken by Congress, eliminated the requirement that federal and private obligations be paid in gold, transitioning to a system where legal tender currency became the standard for fulfilling contracts. The move was part of President Franklin D. Roosevelt's broader strategy to abandon the gold standard, which he believed was contributing to deflation and hindering economic recovery. The previous gold standard restricted the money supply and discouraged inflation, which was becoming increasingly problematic during the economic crisis.
Roosevelt’s administration aimed to gain more control over the dollar's value, believing that a controlled devaluation would stimulate exports, raise domestic prices, and enhance production. Following the repeal, the government implemented measures such as calling in gold and limiting its export, while also adjusting the price of gold in subsequent years to stabilize the economy. This period saw a transition to a modified gold standard, known as the gold bullion standard, which persisted until 1970 when the dollar was fully detached from gold backing. The eventual permission of private gold ownership in 1974 marked the end of restrictions that had been in place for over four decades. This historical shift reflects the complex interplay between monetary policy and economic recovery efforts during a significant national crisis.
Gold Clause Repealed
Gold Clause Repealed
On June 5, 1933, Congress, by joint resolution, revoked the clause in federal and private obligations that stipulated that payment was to be made in gold. Henceforth legal tender currency would be the accepted medium for fulfilling such contracts. This action, which came close to the end of Franklin Delano Roosevelt's famous first “100 Days” as president, was an attempt to make the government's then-recent abandonment of the gold standard more effective.
Under a gold standard monetary system the basic unit is a fixed weight of gold or is kept at the value of such a fixed weight. The Currency Act of March 14, 1900, had made the gold dollar, which weighed 25.8 grains, nine-tenths fine, the basic unit of value. The system was fiscally conservative in that it did not allow the money supply to keep pace with the world economy's increasing need for currency and because the provision that the holder of any type of American legal tender could exchange it for gold on demand discouraged any moves toward inflation.
Roosevelt, believing that the gold standard only reinforced the deflationary trend present in the Great Depression, which had plagued the nation since 1929, sought to secure greater control over the value of the dollar for the government. The president had plans to achieve recovery through monetary manipulation; he thought that a controlled devaluation of the dollar would encourage exports, raise domestic prices, and lead to an increase in production. A presidential proclamation on March 5, 1933, invalidated the redemption in gold provision of the Currency Act of 1900 and forbade the exportation of the metal without United States Treasury approval. The Emergency Banking Relief Act of March 9 authorized the secretary of the Treasury to call in all gold and gold certificates, and provided a maximum penalty of ten years' imprisonment and a fine of $10,000 for those who hoarded the metal. On April 19 Roosevelt announced that the United States was no longer on the gold standard.
The abandonment of the gold standard did boost prices temporarily as the exchange value of the dollar declined, but when winter approached the economy faltered. Following the theories of Professors George Warren and Frank Pearson of Cornell University, the government again resorted to currency inflation and began to buy gold until its per-ounce value rose in December 1933 to $34.06 from the October level of $29.01. This action was ineffective in improving the economy, however, and Roosevelt finally decided to stabilize the dollar. In accordance with the Gold Reserve Act of January 30, 1934, he set the price of gold at $35 an ounce, thereby reducing the dollar to 59.06 percent of its pre-1933 value. Further, Roosevelt lowered the amount of gold reserves that the Treasury was required to maintain to only 25 percent of the value of paper money in circulation. Thus, from 1934 to 1970 the nation was on a modified gold standard, sometimes called a gold bullion standard. In 1970, however, the dollar was cut free from virtually any gold standard when the Treasury was no longer required to maintain even a 25 percent gold backing of its notes, and as of December 31, 1974, the United States government once again permitted the private ownership of gold for the first time since 1933.