The Domestic Gold Standard Was Ended in 1933 Under President Franklin D. Roosevelt:
During the Great Depression, the U.S. was on a classical gold standard (since the late 19th century), meaning paper dollars were redeemable for a fixed amount of gold. The money supply was tightly linked to gold reserves. The key reasons for abandoning it domestically in 1933 were:
- The country was experiencing massive bank runs and bank failures. People hoarded gold and withdrew their bank deposits, which drained bank reserves.
- The rigid gold standard prevented the government from expanding the money supply to fight deflation and unemployment. History has taught us that the only way to end runaway deflation is for the Federal government to spend money like a drunken sailor.
- Deflation was worsening the Depression (falling prices → debt burdens increased → more defaults → more bank failures).
Actions taken:
- On March 6, 1933, President Roosevelt declared a national banking holiday.
- Executive Order 6102 (April 1933) required citizens to turn in most gold holdings to the government (at $20.67/oz).
- In April 1933, FDR suspended gold convertibility for domestic purposes and prohibited gold exports.
- In 1934, the Gold Reserve Act revalued gold to $35/oz (devaluing the dollar by ~40%), allowing the government to increase the money supply.
This ended the domestic gold standard (Americans could no longer redeem dollars for gold), but the U.S. remained on a modified international gold standard until 1971.
Why Is Gold Soaring Today?
Gold is one of the few assets that is not the debt of another. Remember the above expression. It is super-important. Gold cannot default.
Ever since COVID, Trump, Biden, and Trump have been spending money like drunken sailors. The good news is that this crazy spending is keeping deflation away. Hooray. Believe it or not, economists fear deflation far more than inflation.
The bad news is that no one believes that the US will ever be able to repay our national debt. We will just need to keep printing dollars in order to kick the can down the road.
This means that the value of the dollar is doomed. Hence the attractiveness of gold. Gold has to be mined. This is a slow and expensive process, especially when compared to just printing more dollars.
There is a limited supply of new gold mined every year, and this shortage - this scarcity - is what is driving up the price.