On this day, the first of February, in 1934, the New York Times carried Franklin Roosevelt’s proclamation of a new gold value for the US dollar. Previously it had been worth 25 8/10 ounces of gold 9/10 fine; now it would be worth 15 5/21 ounces of gold 9/10 fine—or, as it is more commonly said, the dollar had been valued at $20.67 to an ounce of pure gold and now it would be $35 to an ounce of pure gold. But the US was not in 1934, nor would it ever again be, on a gold standard.

Roosevelt’s action was authorized by the Gold Reserve Act he signed two days before—coincidentally, the president’s birthday. The new law transferred title in the United States’ gold holdings from the Federal Reserve to the Treasury, which is why George Harrison, president of the New York Federal Reserve Bank, told Roosevelt the Act was “me giving you a birthday present—the largest ever presented.” Upon assigning title in the nation’s gold to the Treasury, the Act gave the president the power to control the dollar’s value in terms of that gold, should he find that the US was adversely affected by foreign currency depreciation, that the US economy required an emergency expansion of credit, or that he needed that expansion to secure international agreement on currency stabilization. He could vary the dollar’s value between fifty and sixty percent of its current weight.

On 31 January, the president met his advisors to talk about what value to choose. Harrison wanted a sixty percent dollar—“to give the appearance of finality” in the revaluation game by choosing a round number. As one advisor recorded in his diary, the president demurred: “Roosevelt said that he did not want the appearance of finality.” The weight they chose was about 59% of the old one; Roosevelt understood he was signaling he would change the value of the dollar if he saw fit.

John Maynard Keynes applauded the new law and the president’s new policy of pegging the dollar to a gold value while retaining the right to adjust it. Only a few weeks earlier he had admonished Roosevelt for his policy of stepwise devaluation, comparing it to “a gold standard on the booze.”1 But now he cheered unreservedly. The new policy “means real progress,” Keynes wrote. It was not only “likely to succeed in putting the United States on the road to recovery” but also to provide the basis for an international system in which nations committed to “provisional parities from which the parties to the conference would agree not to depart except for substantial reasons arising out of their balance of trade or the exigencies of domestic price policy.” Which is to say, the American adoption of an adjustable peg, movable in case of domestic need, paved the way for an international system of such currencies—which came to pass ten years later, at Bretton Woods.2

The US dollar under the Gold Reserve Act and under the Bretton Woods system is frequently characterized by uncareful observers as being on a gold standard. It wasn’t, as the economist Edward Bernstein (who was in the Roosevelt Treasury, at Bretton Woods, and later served in the IMF) succinctly explained, years later.

In spite of the Gold Reserve Act, the United States was not really on a gold standard after 1933. The essence of the gold standard is that the money supply must be limited by the gold reserve. The last time that the Federal Reserve tightened its policy because the gold reserve ratio had fallen close to the legal minimum was on March 3, 1933, when the Federal Reserve Bank of New York raised the discount rate to 3-1/2 per cent. Thereafter, whenever the gold reserve neared the legal minimum, the required reserve ratio was reduced and finally eliminated. A country that loses more than half of its gold reserve, as the United States did in 1958-71, without reducing its money supply is not on the gold standard.

If your gold holdings don’t constrain your monetary policy, you’re not on a gold standard, whatever you claim about your currency’s gold value.


1Keynes’s irritation at Roosevelt’s 1933 devaluation may have had less to do with its policy soundness and more to do with its effect on his personal portfolio: “Keynes bet that the United States dollar would appreciate—just before Franklin Delano Roosevelt abandoned the gold standard in 1933, a move that caused the dollar to lose value.”

2It’s because the essential elements of Bretton Woods were already in place early in 1934, before Harry Dexter White even joined the Roosevelt administration, that White’s role in drafting that system is less important than sometimes believed.