Gold Standard Ends: Depression Policy Shifts

Congress destroyed the gold standard in a single paragraph. House Joint Resolution 192, passed on June 5, 1933, voided every gold clause in every public and private contract in the United States. Creditors could no longer demand repayment in gold or its equivalent. Every debt in America, from Treasury bonds to farm mortgages, would be paid in paper dollars at whatever value the government chose to assign them. The resolution was the most radical monetary action in American history since the Civil War. The gold standard had been strangling the economy. Under the classical system, every dollar was backed by a fixed quantity of gold, which meant the money supply could not expand faster than the gold reserves. During the Depression, this constraint was catastrophic. Banks failed by the thousands, deflation crushed farmers and debtors, and the Federal Reserve could not inject liquidity into the system without violating its gold obligations. Countries that abandoned gold earlier, like Britain in 1931, recovered faster. President Franklin Roosevelt had already taken the United States off the gold standard domestically in April 1933, prohibiting private gold ownership and halting gold exports. The June 5 resolution completed the break by eliminating the legal requirement that debts be payable in gold. Roosevelt then used his new monetary freedom to devalue the dollar by 41 percent, raising the official price of gold from $20.67 to $35.00 per ounce in January 1934. The devaluation made American exports cheaper, raised commodity prices, and provided the inflation that debtors desperately needed. The Supreme Court upheld the resolution in a contentious 5-4 decision in 1935, with the dissent warning that the government had effectively repudiated its own obligations. The gold standard never returned. The Bretton Woods system of 1944 maintained a limited gold link for international transactions, but Richard Nixon severed that final connection in 1971. The paper dollar, unbacked by anything except the full faith and credit of the United States government, became the foundation of global commerce.