Economics and The Public Welfare

Chapter 52

The Gold Reserve Act of 1934

Measure Forced Through With Little Discussion. The Gold Reserve Act became law on January 30, 1934. It was passed through both Houses of Congress with a minimum of discussion. The hearings before the House Committee on Banking and Currency were exceedingly brief. Those before the Senate Committee on Banking and Currency lasted from January 19 to January 23 only. There was no time for witnesses called by the Committee to make adequate study of the bill or to plan carefully prepared statements.

Moreover, there was a very deliberate effort made by Administration Senators on the Committee to prevent the introduction of testimony adverse to the measure, by constant interruptions with irrelevant questions, and by interruption of partially completed answers to these questions by more irrelevant questions.1

Gold of Federal Reserve Banks Seized—“Gold Certificates” The measure was a shocking one. It deliberately took away from the Federal Reserve banks the legal title to all their gold and vested the title in the United States Treasury. The Act provided that in exchange for this gold the Federal Reserve banks were to be given “gold certificates,” but what a “gold certificate” meant was exceedingly vague and indefinite. No gold was to be specifically segregated against the “gold certificates” and no specific value in gold was to be assigned to the “gold certificates.” Following a protest on this point before the Senate Committee, the witness was taken aside by one of the Administration Senators, who grinned and said, “Doctor, you don’t understand about these gold certificates. These are not certificates that you can get gold. These are certificates that gold has been taken away from you.”

Gold Content Placed at Between 50% and 60% of Old Par, at President’s Discretion. The measure amended the Thomas Amendment to the Agricultural Act of May 12, 1933, by directing the President to reduce the weight of the gold dollar by not less than 40% and not more than 50%, and gave the President the power to revalue the gold dollar within the specified limits from time to time.

The cutting of the gold content of the dollar by 40% meant that, by what some called an act of magic, but what was really an act of theft, a great “gold profit” was created.

Placed at 59.06% of Old Par, January 31, 1934. The President promptly on January 31, 1934, the day after the passage of the bill, fixed the weight of the gold dollar at 15 5/21 grains of gold, nine-tenths fine. This was a reduction of 40.94 per cent in the gold content of the dollar, the new dollar containing 59.06% of the old standard, which had been 25.8 grains, nine-tenths fine. The price of gold was thus fixed at $35.00 per ounce instead of the old figure of $20.67 per ounce. As a result of this change in the gold content of the dollar, there was an overnight increase in the number of gold dollars in the hands of the Treasury and the Federal Reserve banks. The monetary gold stock stood on January 31, 1934, at $4,033,000,000, all of which was either in the Treasury or Federal Reserve banks.2 On February 1, 1934, this was increased by $2,985,000,000, of which $2,806,000,000 was the “increment” resulting from the reduction in the weight of the gold dollar, and the remainder was gold which had been purchased by the Treasury but not previously added to the figures for gold monetary stock. This $2,806,000,000 was the so-called gold profit. What was to be done with the gold profit?

$2,000,000,000 Stabilization Fund Created Out of “Gold Profit.” The Gold Reserve Act provided that 2 billions of this should be segregated in a Stabilization Fund to be used in foreign exchange transactions and in dealing in gold in foreign exchange under the control of the Treasury. This Stabilization Fund also had power to deal in Government securities.

One of the points made by the opponents in testimony regarding the Bill was that no part of the gold profit could be used without a further increase in member bank reserves, and in the surplus reserves of the member banks, which had already grown to an ominous figure. The Treasury evidently felt the force of this consideration, because in the course of a few months it used the major part of the surplus left after the Stabilization Fund had been created in retiring the Government bonds which secured National Bank notes, with the resultant retirement of the National Bank notes, thus removing from the money supply of the country an amount equal to the gold (or “gold certificates”) thus employed. Moreover, only $200,000,000 of the Stabilization Fund of $2,000,000,000 of gold was put into use, prior to the Bretton Woods legislation of 1945, which established liens upon it.

Divides Control of Money Market Between Treasury and Federal Reserve. One consequence of the Stabilization Fund in the hands of the Treasury was to split the control of the money market between the Federal Reserve System and the Treasury. It was now in the power of the Treasury by the use of its Stabilization Fund to offset action by the Federal Reserve System designed to take up excess reserves or to tighten the money market.

Gold Content on “Twenty-four Hour” Basis. Not even the passage of the Bill and the President’s proclamation fixing the gold content of the dollar at 59.06% of the old parity brought the dollar immediately to the new parity. The dollar fought hard in the foreign exchanges. It was necessary, in order to bring it down, to continue heavy buying of gold and heavy selling of dollars in European markets. There was continued fear that before the process was complete the gold standard countries would be shaken from their moorings. When at last the process was complete and the dollar reached its new parity, reports came from Washington that the Administration had breathed a great sigh of relief, and had no disposition to play with the manipulation of the gold content of the dollar any further. The only official announcement on the subject was a statement from the Treasury that the gold content of the dollar was on a twenty-four hour basis. But in fact no change was made in the figure set in the President’s proclamation of January 31, 1934, until his power to make a change was taken away from him by the Congress, or rather by the inaction of Congress, in the summer of 1943.

Opponents Put Three-year Time Limit on President’s Power to Devalue Further. Opponents of the measure could accomplish little with respect to its main provisions. They were, however, successful in putting a time limit upon the President’s power to alter the gold content of the dollar within the 50% to 60% range, and in putting a time limit upon the life of the Stabilization Fund. The Act limited these powers to two years, though they could be extended for one year further by proclamation of the President. In 1937 the renewal was accomplished for two more years without great difficulty. In 1939 the light was close, and on a vote in the Senate the extension of the powers was denied. But the President, through a deal with the silver Senators, was able to reverse this and have the powers extended for two more years, to 1941. In 1941, through a surprising reversal of attitude on the part of Senator Carter Glass, who took the position that the President ought to have all the powers he asked for in the war situation, the power was again renewed.

No Further Change Made and Power Finally Expired in 1943. But in 1943 the Congress refused to renew the President’s power with respect to the gold content of the dollar, and it thereupon expired, leaving the gold content of the dollar at 59.06% of the old parity, as a matter of law.

At the same time the Congress, in renewing the power of the Secretary of the Treasury over the Exchange Stabilization fund, imposed limitations upon these powers, designed to prevent the use of the fund in an international foreign exchange stabilization institution along the lines of the Keynes-Morgenthau proposals of 1943.

“Buying Price” and “Selling Price” of Gold. The Congress has at last reasserted its authority over the gold content of the dollar. But there remain ambiguities and uncertainties growing out of the Gold Reserve Act of 1934. This Act really contained three provisions regarding the relation of gold to the dollar. In addition to the provision regarding the gold content of the dollar, Section 8 of the Act authorizes the Secretary of the Treasury to purchase gold in any amounts at home or abroad at such rates and upon such terms and conditions as he may deem most advantageous to the public interest, “any provision of law relating to the maintenance of parity . . . to the contrary notwithstanding.” Section 9 of the Act provides that “he may sell gold in any amounts, at home or abroad, in such manner and at such rates and upon such terms and conditions as he may deem most advantageous to the public interest, and the proceeds of any gold so sold shall be covered into the general fund of the Treasury.”

These two provisions have no relation to the provisions of Section 12, which covers the gold content of the dollar, nor have they any relation to one another. There remains a dangerous ambiguity in our law regarding the gold content until this matter is rectified. It is apparently possible under the law, as it still stands, for the Treasury to have a buying price of gold different from its selling price, and to have both buying price and selling price of gold different from the gold content of the dollar.

The Gold Reserve Act of 1934 amended all preceding Federal Reserve legislation by substituting the words “gold certificates” for the word “gold” in provisions relating to the reserve against Federal Reserve notes and against deposits, and relating to the collateral for Federal Reserve notes.

Not yet is the story complete of the extraordinary currency legislation of the New Deal. There remains the ghastly and iniquitous silver legislation of 1934, and the scandals which followed it. But it is convenient to defer discussion of this until we have considered the new spending programme of the Administration.

Senator Glass: “I suggest the witness be allowed to answer one question before he is asked another.”

Senator Bankhead: “I have not been able to get him to answer one yet.”

Senator Glass: “You do not give him a chance.” Gold Reserve Act of 1934. Hearings before the Committee on Banking and Currency, United States Senate. 73d Congress, 2d session, p. 122.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.