Gold Reserve Act

The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury. It also prohibited the Treasury and financial institutions from redeeming dollar bills for gold, established the Exchange Stabilization Fund under control of the Treasury to control the dollar's value without the assistance (or approval) of the Federal Reserve, and authorized the president to establish the gold value of the dollar by proclamation. A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector's coins.

Immediately following passage of the Act, the President, Franklin D. Roosevelt, changed the statutory price of gold from $20.67 per troy ounce to $35. This price change incentivized gold miners globally to expand production and foreigners to export their gold to the United States, while simultaneously devaluing the U.S. dollar by increasing inflation. The increase in gold reserves due to the price change resulted in a large accumulation of gold in the Federal Reserve and U.S. Treasury, much of which was stored in the United States Bullion Depository at Fort Knox and other locations. The increase in gold reserves increased the money supply, lowering real interest rates which in turn increased investment in durable goods.

The Gold Reserve Act limitations on private gold ownership were repealed in a rider to the International Development Association Appropriations Act of 1975, signed by President Gerald Ford on August 14, 1974, and effective December 31, 1974.

The United States was still suffering the negative effects of the 1929 stock market crash in 1934 when the Gold Reserve Act was enacted. President Roosevelt was challenged to decrease unemployment, raise wages and increase the money supply, but was restricted in doing so by the United States' strict adherence to the gold standard. The Gold Reserve Act, which banned the export of gold, restricted the ownership of gold and halted the convertibility of paper money into gold helped him overcome this obstacle. This act ratified the previous Executive Order 6102 which required almost all gold to be exchanged for paper currency.

Immediately following passage of the Act, the President revalued the price of gold to $35 per troy ounce. This devaluation of the dollar drastically increased the growth rate of the Gross National Product (GNP) from 1933 to 1941. Between 1933 and 1937 the GNP in the United States grew at an average rate of over 8 percent. This growth in real output is due primarily to a growth in the money supply M1, which grew at an average rate of 10 percent per year between 1933 and 1937. Traditional beliefs about the recovery from the Great Depression hold that the growth was due to fiscal policy and the United States' participation in World War II. Friedman and Schwartz claimed that the "rapid rate [of growth of the money stock] in three successive years from June 1933 to June 1936 ... was a consequence of the gold inflow produced by the revaluation of gold plus the flight of capital to the United States". Treasury holdings of gold in the US tripled from 6,358 in 1930 to 8,998 in 1935 (after the Act) then to 19,543 metric tonnes of fine gold by 1940.

The revaluation of gold referenced was an active policy decision made by the Roosevelt administration in order to devalue the dollar. The largest inflow of gold during this period was in direct response to the revaluation of gold. An increase in M1, which is a result of an inflow of gold, would also lower real interest rates, thus stimulating the purchases of durable consumer goods by reducing the opportunity cost of spending. If the Gold Reserve Act had not been enacted, and money supply had followed its historical trend, then real GNP would have been approximately 25 percent lower in 1937 and 50 percent lower in 1942.

The international community during the depression began to shift much of its gold reserves to the United States. Foreign investors clamored over the $15 increase in value from $20.67 to $35 per troy ounce, and exported their gold to the United States in record amounts causing U.S. treasury holdings to increase. This data shows two important aspects that involved gold in the early 20th century. The first was the massive expansion of gold as a currency across the globe. This data also demonstrates the rapid increase of gold reserves to the US. Even in 1900 the U.S. only held 602 tonnes of gold in reserve. This was 61 tonnes less than Russia and only 57 tonnes more than France.

Over the next 20 years the countries' reserves grew as the amount of gold in the market increased and as normal trading occurred. However, in the 1930s there was a sudden shift up in reserves in the U.S. From 1930 to 1940, treasury holdings had tripled, mostly due to foreign investing. Another reason behind the shift of reserves to the US was the suspension of the gold standard in Britain on September 21, 1931. Gold reserves in the Bank of England also grew over ten times from 1930 to 1940, but it was still less than the amount the U.S. had. The Bank of France also saw over 200 tonnes of gold get transferred to New York following the raising of prices in America.