It was in 1933 that the U.S. went off the gold standard. America had been suffering from the Great Depression since 1929 and it was believed that moving away from the gold standard would help in stimulating the economy. More than eight decades later, economists are still divided on whether an economy must be based on the gold standard or not.
Gold, depression, and economic growth
In October 1929, the U.S. stock market crashed, wiping out millions of dollars from investor accounts. Over the next few years, employment and industrial output declined. In 1933, when the Great Depression was at its lowest point, almost 15 million American citizens were out of jobs and half the country’s banks had shut down.
It is under these circumstances that Franklin Roosevelt was chosen as the 32nd President of the United States. In 1933, Roosevelt effectively ended the gold standard. And in 1934, he passed the Gold Reserve Act, which ruled that the metal could not be privately owned. All American citizens were asked to exchange their gold with the government for a fixed price of US$20.67 per ounce.
“The law required that gold certificates held by the Federal Reserve through private ownership be surrendered and vested in the Department of the Treasury. Only licensed jewelers were allowed to have gold for sales purposes… The Gold Reserve Act entrenched the nationalization of money and epitomized a clear, unjustified encroachment of the central government on the economy,” according to FEE.
After the act came into effect, the government was able to increase its gold reserves. Subsequently, the price of gold was raised to US$35 per ounce and the Federal Reserve was able to increase the money supply. This allowed industries to find their way back, created more jobs, increased consumer spending, and eventually pulled the U.S. out of the Great Depression by 1939. So yes, getting off the gold standard did end up creating the short-term prosperity that followed in the decades after the Great Depression. But it also created an unsustainable economic system that we have today.
Being off the gold standard means that there is no hard asset to back the currency. The banks that control the currency can keep printing as much money as they like, creating an oversupply of wealth, causing inflation and massive manipulation of currency prices. Many economists feel that the current system is a recipe for disaster in the long run.
Judy Sheldon, an economic advisor to President Trump, is an advocate of returning the U.S. to the gold standard, as she believes it will stabilize the economy with strong tangible foundations. “It’s supposed to be a dependable store of value… It’s not supposed to be just another government policy instrument to try to engineer outcomes. And what we’ve seen is central banks trying too hard to do just that, and they’ve engineered us right into a negative rate scenario, which completely undermines the idea of having faith in the future,” she said in an interview (CNN).
However, not many are convinced that returning to a gold standard would benefit the U.S. in any way. On the contrary, it is argued that such a decision would crush the American economy and is completely unworkable due to the complex financial markets active at present. So a complete overhaul might be necessary, and considering the complex financial instruments employed at scale by Wall Street at present, a painful clean-up will be inevitable.