On November 8, 1932, the voters of the US voted for a change…and change they would get in spades. One of these was the beginning of the end of the US emphasis on gold.
The Criminalization of Gold Currency
The stated concern by the Roosevelt Administration was that economic recovery was being hindered by hoarding of gold by individual owners. Thus, on April 5, 1933, just a month after he had been sworn into office, FDR issued Executive Order 6102, which forbade “the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”, with penalties up to $10,000 in fines and up to ten years imprisonment. Exemptions were made for jewelry, gold fillings, coins totaling $100 in value, and recognized collections. Owners had until May 1st to give the federal government all but a small portion of their gold in exchange for $20.67 ($408 in 2019) per troy ounce. Although this was the official market rate, it was below what it was trading for at the time. Along with the order, two laws were passed further cementing the Roosevelt Administration’s policies on gold.
The first was the Gold Clause Resolution of 1933, which took the domestic United States off the gold standard by not only prohibiting gold clauses in future contracts but invalidating them in already existing contracts. Thus, creditors could no longer demand payment in gold. The second was the Gold Reserve Act of 1934, which required all gold held by the Federal Reserve to be transferred to the U.S. Treasury, barred the exchange of gold for currency by the Treasury, and gave the president the power to change the value of gold by proclamation. After passage of this act, Roosevelt increased the price of gold from $20.67 per troy ounce to $35 to stimulate inflation, a 69% increase in the value. The federal government profited while the private gold owners were forced to sell at a compromised price. Inflation also served to help many farmers who were in debt and their plight as well as the potential political consequences troubled FDR greatly, writing “if we continued a week or so longer without having made this move (Gold Reserve Act) on gold, we would have had an agrarian revolution in this country” (Dallek, 174). Indeed, the currency debates of old were fundamentally a conflict of creditors and debtors. However, Roosevelt’s critics as well as economist John Maynard Keynes were of the belief that his manipulation of gold prices was being done recklessly and not on an economic basis. This is confirmed by an account of his Secretary of the Treasury Henry Morgenthau, when one morning Roosevelt told him that the price of gold would be increased by 21 cents. When he asked why, Roosevelt responded, “Because ‘three times seven’ is a lucky number” (Dallek, 174).
Prosecutions and Legal Battles
Executive Order 6102 didn’t last long itself as a legal challenge to it brought its defeat on a technicality: Judge John M. Woolsey ruled that the order was only signed by the president, and not the Secretary of the Treasury as legally required. Thus, two new orders, 6260 and 6261, were issued. Congress’s Gold Reserve Act of 1934 ratified them.
Numerous individuals and companies were prosecuted for their failure to give gold to the government at a loss. Among the prosecutions were of a diamond and jewelry merchant in San Francisco, the father and son owners of a refining company, and a resident of Sutter Creek, California, convicted of holding 78 ounces of gold. With several cases going before the Supreme Court, they were bundled into one as the Gold Clause Cases. Legal challenges to gold seizures ended in 1935 when the Supreme Court ruled 5-4 that they were all constitutional. Had the Supreme Court ruled against Roosevelt, he was prepared to defy it as Andrew Jackson had defied the Supreme Court on Indian removal.
The Legalization of Gold
In 1964, the first of a series of actions loosening the federal government’s control over gold was enacted with the legalization of private ownership of gold certificates, but they were not redeemable in gold. On August 15, 1971, President Nixon fully took the United States off the gold standard when he stopped pegging the dollar to the price of gold, which served to eliminate any obligation of the U.S. to pay its international obligations in gold. This finalized U.S. currency becoming completely fiat, but it also severely undercut the strength of the arguments for continuing making gold illegal to own and the prohibition of gold clauses in contracts. Some of the newer members of Congress thought it was time for this prohibition to end, most notably Phil Crane (R-Ill.). Crane was a rising star in the conservative movement and was often at the forefront of conservative initiatives in the 1970s. In 1973, his amendment to end the prohibition on gold ownership almost passed the House, losing by one vote. The next year, however, Crane managed to tack on a gold legalization resolution to a foreign aid bill, which was ultimately signed into law by President Ford intact, private ownership of gold becoming legal on December 31, 1974. Gold clauses, however, remained illegal. Enter Jesse Helms.
The battle for gold ownership had been won, but the battle for restoring gold clauses had begun. Although Crane worked on this one too in the House, the credit goes most to Senator Jesse Helms (R-N.C.). He spearheaded this effort and again, it was achieved by tacking the legalization on as an amendment, authored by the senator himself. This time it was to an otherwise routine and non-controversial bill in 1977.
In 1980, legislation passed to create a committee to examine the idea of resuming the gold standard, but the committee ultimately demurred, instead seeking scrutiny and reform of the Federal Reserve. However, a minority report, with Rep. Ron Paul (R-Texas) as one of its authors, called for a complete return to the gold standard. Gold confiscation and the abrogation of gold clauses in contracts is unlikely to occur again given that the United States has maintained a fiat currency. However, should the gold standard be restored and another economic crisis befalls us, such policies could return under a Democratic administration.
Dallek, R. (2017). Franklin D. Roosevelt: a political life. New York, NY: Penguin Books.
Ganz, D.L. (2011). The essential guide to investing in precious metals: how to begin, build and maintain a properly diversified portfolio. Iola, WI: Krause Publications.
Invalidation of the Gold Clause. CQ Researcher.
Ledbetter, J. (2017). One nation under gold: how one precious metal has dominated the American imagination for four centuries. New York, NY: Liveright Publishing Corporation.
Magliocca, G.N. (2012, October 17). The gold clause cases and constitutional necessity. Florida Law Review, 64(5).