Golden Standard Act: Law And History

The Gold Standard Act was an Act of the United States Congress signed into law by President William McKinley on March 14, 1900. The Act defined the United States dollar by gold weight and required the United States Treasury to redeem paper currency on demand and in gold coin only. It formalised the American gold standard that had already been established by default by the Coinage Act of 1873 and the Resumption Act of 1875.

The Gold Standard Act's impact on the US dollar

The Gold Standard Act, which came into effect on March 14, 1900, defined the United States dollar in terms of gold weight, fixing the value of one dollar at 25.8 grains of 90% pure gold, equivalent to about $20.67 per troy ounce. This had a significant impact on the US dollar, its purchasing power, and its role in the global economy, both in the short and long term.

In the short term, the Gold Standard Act's definition of the US dollar by gold weight ensured that the money supply and price level would not vary much. The Act also required the US Treasury to redeem paper currency for gold coins on demand, further stabilising the dollar's value.

In the longer term, the Act's formalisation of the gold standard in the US had a significant impact on the role of the US dollar in the global economy. The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. The US dollar's value was now tied to gold, and this, in turn, affected its value relative to other currencies. For example, as the US had fixed the price of gold at $20.67 per ounce, and Britain fixed the price at £3 17s. 10½ per ounce, the exchange rate between the two currencies was necessarily fixed at $4.867 per pound.

The gold standard also caused price levels around the world to move together. If a technological innovation brought about faster real economic growth in the US, US prices would fall relative to the prices of imports, causing a US trade surplus. This would lead to an inflow of gold from other countries, increasing the US money supply and reversing the initial fall in prices. The outflow of gold from the country experiencing the trade deficit would reduce its money supply and lower its price level.

The gold standard was abandoned in 1933, and the US dollar was fully severed from the gold standard in 1971. However, the impact of the Gold Standard Act on the US dollar continued to be felt even after its abrogation. The US dollar remained the dominant reserve currency in the post-World War II Bretton Woods system, and its value continued to be linked, albeit indirectly, to gold.

The Act's influence on the gold standard

The Gold Standard Act, which became law on March 14, 1900, defined the United States dollar in terms of gold weight, formalising the American gold standard. The Act required the United States Treasury to redeem paper currency on demand and exclusively in gold coin. It fixed the value of one dollar at 25.8 grains of 90% pure gold, equivalent to about $20.67 per troy ounce.

The Gold Standard Act also had wider implications for the international gold standard. By 1900, the majority of developed nations were linked to the gold standard, and the US adoption of the standard further strengthened its position. The standard dictated that international trade imbalances were settled using physical gold, leading to governments stockpiling gold. These stockpiles still exist today.

The gold standard was abandoned in the US after the 1932 election, following the onset of the Great Depression. A series of policy changes, including executive orders by President Franklin D. Roosevelt, new laws, and Supreme Court rulings, led to the abrogation of the Act in March 1933. The US suspension of the gold standard in 1933, following similar actions by Britain in 1931, ended the international gold standard that had been in place since 1871.

However, the influence of the gold standard persisted. The US dollar became the dominant reserve currency after World War II, and international agreements allowed foreign central banks to exchange US dollars for gold at a fixed price, a system known as the Bretton Woods system. This system was abandoned in 1971 when President Nixon terminated the convertibility of the US dollar to gold, marking the end of any semblance of a gold standard.

How the Act affected the Federal Reserve

The Gold Standard Act was signed into law by President William McKinley on March 14, 1900. The Act defined the United States dollar in terms of gold weight, fixing the value of one dollar at 25.8 grains of 90% pure gold, equivalent to about $20.67 per troy ounce. This Act formalised the American gold standard, which had already been established by default through the Coinage Act of 1873 and the Resumption Act of 1875.

Now, onto how the Act affected the Federal Reserve:

The Federal Reserve's Power to Inflate the Money Supply

The Gold Standard Act of 1900 allowed the Federal Reserve to increase the money supply. With the dollar's value now tied to gold, the Federal Reserve could inflate the money supply by increasing the amount of gold it held. This power was particularly significant during the Great Depression of the 1930s, when President Franklin D. Roosevelt wanted to increase the money supply to stimulate the economy.

Limitations on the Federal Reserve's Monetary Policy

The Act constrained the Federal Reserve's ability to enact monetary policy. The Federal Reserve Act of 1913 required 40% gold backing of Federal Reserve Notes. By the late 1920s, the Federal Reserve had nearly reached the limit of allowable credit, and the gold standard prevented them from issuing more. This limitation was a contributing factor to the Great Depression, as it hindered the Federal Reserve's ability to stabilise the economy.

Changes to the Federal Reserve's Balance Sheets

The gold standard, and the subsequent Gold Reserve Act of 1934, had a direct impact on the Federal Reserve's balance sheets. When the gold content of the dollar was increased from $20.67 to $35 per ounce in 1934, the gold on the Federal Reserve's balance sheets increased by 69%. This increase in assets gave the Federal Reserve more flexibility in managing the country's money supply.

The Federal Reserve's Relationship with the Treasury

The Gold Standard Act also impacted the dynamic between the Federal Reserve and the Treasury. The gold standard gave the Treasury more influence over the Federal Reserve. For example, the Exchange Stabilization Fund, established by the Gold Reserve Act, was controlled by the Treasury without the involvement of the Federal Reserve. Additionally, the gold standard policies often required the cooperation of both entities, as seen with the gold inflows during the Great Depression.

The Federal Reserve's Role in Implementing the Gold Standard

The Federal Reserve played a crucial role in enforcing the gold standard. For instance, Executive Order 6102, issued by President Roosevelt in 1933, required individuals to surrender their gold holdings to the Federal Reserve in exchange for $20.67 per troy ounce. The Federal Reserve was at the forefront of implementing this policy, which aimed to prevent gold hoarding and stimulate the economy during the Great Depression.

The Act's role in Executive Order 6102

The Gold Standard Act, signed by President William McKinley, became law on March 14, 1900. The Act defined the United States dollar by gold weight, requiring the United States Treasury to redeem paper currency in gold coin.

Executive Order 6102, enacted on April 5, 1933, by President Franklin D. Roosevelt, was a significant event in US history. It forbade the hoarding of gold coins, gold bullion, and gold certificates within the continental United States. This order was intended to alleviate the economic hardships of the Great Depression, which began in 1929 with the stock market crash. The order impacted individual liberties, the monetary system, and the role of gold in the country.

The Gold Standard Act of 1900, which established the gold standard for the US dollar, was in direct conflict with Executive Order 6102. Critics of the Order asserted that it violated the promises made under the Gold Standard Act and to purchasers of Liberty and Victory Loans during World War I. They also argued that the Order would lead to an inflated supply of credit and currency, causing an artificial economic boom that would inevitably bust and result in another depression.

Despite these criticisms and concerns, the Order required all persons to deliver all but a small amount of their gold coins, bullion, and certificates to the Federal Reserve by May 1, 1933, in exchange for $20.67 per troy ounce. This forced sale to the Federal Reserve was authorized under the Trading with the Enemy Act of 1917 and its amendments. Violation of the Order carried a penalty of a fine of up to $10,000 (a hefty sum, equivalent to $240,000 in 2024 dollars), a prison term of ten years, or both.

The Order included exceptions for certain uses of gold, such as in industry, professions like dentistry, and the arts, including jewellery making. Additionally, individuals were permitted to hold up to $100 in gold coins, equivalent to about five troy ounces of gold, valued at approximately $10,000 in 2020. Rare and unusual gold coin collections were also protected from legal seizure.

The impact of Executive Order 6102 extended beyond the economic realm. It led to the extreme rarity of certain gold coins, such as the 1933 Saint-Gaudens Gold Double Eagle, which still commands a high premium today. The Order also caused all gold coin production to cease, and all minted 1933 coins were ordered to be destroyed. However, about 20 such coins were stolen, leading to an outstanding US Secret Service warrant for their arrest and confiscation.

The Order's role in addressing the Great Depression and its impact on gold ownership and the economy were significant. It demonstrated the government's willingness to take drastic measures to address economic crises and marked a shift in the country's monetary policies.

The Act's legacy in the 20th and 21st centuries

The Gold Standard Act, which became law in 1900, was abandoned in 1933 following the Great Depression. However, its legacy has extended into the 20th and 21st centuries.

In the 20th century, the Gold Standard Act's legacy was felt in the continued attempts to stabilise the economy and prevent economic crises. The Gold Reserve Act of 1934, for instance, prohibited the Treasury and financial institutions from redeeming dollar bills for gold, and established the Exchange Stabilization Fund to control the dollar's value. This Act also ratified Executive Order 6102, which made it a criminal offence for US citizens to own or trade gold anywhere in the world.

The Gold Standard Act's legacy was also seen in the Bretton Woods system, which emerged after World War II. This system established the US dollar as the global reserve currency, linked indirectly to gold. However, this system collapsed in the early 1970s, marking the full abandonment of the gold standard.

In the 21st century, the gold standard is no longer used by any government. Instead, fiat currencies are now used, where the value of money is determined by government decree rather than being tied to a physical commodity. Despite this, the gold standard's historical significance and influence continue to shape monetary policies and discussions. For example, in 2019, Judy Shelton, an economic advisor to former President Donald Trump, supported a return to the gold standard.

The gold standard's legacy in the 20th and 21st centuries demonstrates the continued efforts to stabilise the economy and prevent economic crises, as well as the evolution of monetary systems towards more flexible and dynamic approaches.

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