The Roosevelt administration’s policies regarding gold and dollars were controversial and consequential.
The United States had been on a de facto gold standard since the 1830s and de jure gold standard since 1900. In 1913 the gold standard was built into the framework of the Federal Reserve. The law required the Federal Reserve to hold gold equal to 40 percent of the value of the currency it issued (technically termed the Federal Reserve Note but colloquially called the dollar) and to convert those dollars into gold at a fixed price of $20.67 per ounce of pure gold.
The Federal Reserve typically held more than enough gold to back the currency it had issued. Bankers called the excess “free gold.” The Federal Reserve needed a stock of free gold sufficient to satisfy redemption requests that might occur in the near future. The Federal Reserve could increase the stock of free gold by increasing interest rates, which encouraged Americans to deposit in banks and encouraged foreigners to invest in the United States, shifting gold from the pockets of the public (both here and abroad) to the vaults of Federal Reserve district and member banks. Conversely, when the Federal Reserve lowered interest rates, gold would flow from its coffers into the hands of the public both at home and overseas.
During the financial crisis of 1933 that culminated in the banking holiday in March 1933, large quantities of gold flowed out from the Federal Reserve. Some of this outflow went to individuals and firms in the United States. This domestic drain occurred because individuals and firms preferred holding metallic gold to bank deposits or paper currency. Some of the gold flowed to foreign nations. This external drain occurred because foreign investors feared a devaluation of the dollar. Together, the internal and external drains consumed the Federal Reserve’s free gold. In March 1933, when the Federal Reserve Bank of New York could no longer honor its commitment to convert currency to gold, President Franklin Roosevelt declared a national banking holiday.
Gary Richardson is the historian of the Federal Reserve System in the research department of the Federal Reserve Bank of Richmond. Alejandro Komai is a PhD candidate in economics at the University of California, Irvine. Michael Gou is a PhD student in economics at the University of California, Irvine.
The Supreme Court cases included United States v. Bankers Trust Co, 294 U.S. 240 (1935); Nortz v. United States, 294 U.S. 317 (1935); and Perry v. United States, 294 U.S. 330 (1935).
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Written as of November 22, 2013. See disclaimer.