The Controversial Gold Reserve Act of 1934

A gold-backed currency is key to a strong economy. A Federal Reserve $1 debt note issued in 2009. Public Domain

For decades, families have played the board game Monopoly during holiday get-togethers. Perhaps it’s not just a game but a lesson in economics that teaches how our financial system works. And does gold play into this system as related to paper currency? 

The gold standard has stabilized economies since ancient times when people used the precious metal to trade for items. Later, countries used gold and silver coins to pay for goods. As civilizations developed, printed currency was backed by a combination of gold and silver held in a country’s treasury.

Early in our history, the gold standard supported America’s economy. The United States officially established the Gold Standard Act in 1900 that made gold the only precious metal backing printed currency. In 1913 when the Federal Reserve was set up, this private corporation held all of the country’s gold. Private citizens and businesses could buy gold from the Reserve at a set amount.

A $100,000 gold certificate on display at the "Money in Motion" exhibit at the Philadelphia Federal Reserve Bank in 2003. William Thomas Cain/Getty Images

When World War I broke out, many European countries abandoned the gold standard so they could print as much fiat currency needed to fund the war. For some countries, this was a permanent move; other nations temporarily removed the gold standard during the war, then reinstated it. The United States kept the gold standard throughout the war.

At the beginning of the Great Depression in the 1930s, a law was instituted that no longer required currency to be backed by gold: the Gold Reserve Act of 1934. The act allowed the Federal Reserve to print as much fiat currency as it wanted without a 1:1 ratio of paper notes to the precious metal.

The Depression

During the presidential election in 1932, Democrat President Franklin Roosevelt ran on a platform of doing whatever it took to bring the country out of the Great Depression. In the years after the stock market crash of 1929, people were unemployed, and the economy slowed almost to a standstill and Roosevelt won the election.

In his first year in office, Roosevelt enacted several policies meant to turn the economy around. With so much money being printed, however, the value of the dollar shrank. At an alarming rate, people began to exchange their paper money for gold. Roosevelt took drastic steps to end this drain on the economy.

In March 1933, to prevent the country’s gold reserves from evaporating, Roosevelt mandated a bank holiday for a week, which shut down all transactions. Shortly thereafter, he enacted the Emergency Banking Act that gave the president more power over banks during a crisis.

Executive Order 6102 issued by Franklin D. Roosevelt in 1933 during the Great Depression requiring citizens to surrender their gold for which they were reimbursed. U.S. Government Printing Office. Public Domain

Hand In Your Gold

On April 5, Roosevelt signed Executive Order 6102, which suspended the gold standard. The order gave citizens and businesses less than a month (until May 1) to hand in all of their gold coins, bullion, and certificates to the Federal Reserve, or face up to 10 years in prison and a $10,000 fine.

The Gold Reserve Act of 1934, passed the next year, solidified Roosevelt’s previous actions to suspend the gold standard. The act kept the Treasury from selling gold in exchange for paper money or exporting the precious metal.  Under the new law, all of the gold held by citizens, businesses, and the Federal Reserve was transferred to the U.S. Treasury.

Roosevelt ordered the Secret Service to go house-to-house to find all gold worth more than $100 that Americans had not already handed over to the federal government.

Since 1900, the price of gold had been set at $20.67 per troy ounce; the measurement of troy ounce dates back to the Middle Ages, which measures gold at slightly heavier than the standard 31 grams per ounce. The act raised the price of gold to $35 per troy ounce. This price increase effectively devalued the dollar by 59 percent. It also gave the federal government complete control over the country’s money supply.

Deflation, a decrease in the price of goods and services, kicked off a depression 14 months after the end of World War I in 1921. The Federal Reserve’s index of industrial production fell by 31.6 percent, the unemployment rate increased to 19 percent, and the country saw deflation at a rate of 10.5 percent. According to “Historical Inflation Rates: 1914–2023,” the Gold Reserve Act eliminated this deflation.

However, the Gold Reserve Act also created higher levels of inflation. From 1914 to 1934, the inflation rate was around 1.37 percent per year. After the act was passed and signed into law, inflation averaged 3.67 percent per year from 1934 to 2013.

President Franklin Delano Roosevelt signs the Gold Reserve Act into law in 1934. Standing behind him are (L-R) Henry Morgenthau Jr. (Treasury secretary), Eugene R. Black (Fed chair), George Warren (economist and advisor), Samuel Rosman and James Harvey Rogers (economist and advisor). Public Domain

In 1971, President Richard Nixon officially abandoned the gold standard for foreign exchange, and announced that the country would no longer convert dollars to gold at a fixed amount. With this action, the country changed from a gold standard to a fiat monetary system that is in place today. The move effectively transferred gold from being used as a currency to a commodity.

For decades, Americans could not own gold except as a collectible item. In 1974, President Gerald Ford repealed Roosevelt’s Executive Order of 1933. He also signed a bill which repealed the ban on gold ownership and allowed private citizens and businesses to once again own gold coins, bars, and certificates. In 1977, Congress removed the president’s authority to regulate gold transactions during a national emergency that wasn’t a war.

The Gold Reserve Act of 1934 took America down a new economic path with profound effects. The act restricted individual ownership of gold and gave more power to the federal government. Many experts contend that high inflation today would not exist if the gold standard remained intact as the Federal Reserve could print as much fiat currency as it wanted without the backing of gold.

Perhaps Monopoly and its play money is not just a game, after all.

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