Contrary to popular belief, the Federal Reserve actually holds no gold, and has not owned any in quite a long time. In fact, the Gold Reserve Act of 1934 required the Federal Reserve to transfer all of its gold to the Department of the Treasury. What the Fed actually owns are collateral claims to paper gold certificates, which are paid out in fiat currency.
This historical act came right on the heels of Executive Order 6102 which we know, prohibited the ownership and trade of gold by US citizens. In addition to turning all gold over to the treasury, this act authorized the president to decree the gold value of the dollar, which FDR promptly raised from $20.67 per oz to $35.
This sneaky move was supposed to encourage new gold production and the import of gold to the US, as well as devalue the dollar to stave off that pesky deflation. But this act carried with it a more sinister underlying intention.
In an effort to prohibit the “hoarding of gold and silver coin or bullion or currency” FDR evoked a wartime statute to push forward EO 6102 (carrying with it a hefty fine and jail time of up to 10 years). The ultimate goal of these combined efforts was to lift the restrictions on the Fed’s ability to expand to money supply relative to its gold reserves.
The 1913 Federal Reserve Act actually prohibited the Fed from increasing the money supply beyond the 40% gold backing of federal reserve notes, and prior to the 1929 stock market crash, the Fed had already run into its limit of allowable monetary expansion.
Notice the sharp increase in the US money supply, starting in 1915 (2 years after the Federal Reserve Act) and leading up to the eventual contraction starting in 1929. Then notice the rate of monetary expansion following banking reforms which began in 1933. It is this monetary expansion, which sends false economic signals to entrepreneurs, that can be directly attributed to the stock market crash of 1929. Rather than allowing mal-investment to liquidate, the Fed immediately set to create a condition of easy money to postpone and even perpetuate these signals. Malinvestment is always painful, and no one ever wishes for it, but certainly it is this same path of expansionary monetary policy that causes us problems to this day.
We will continue to explore these events in the future. However, it is important to remember that the inevitable contraction of money supply (deflation) (which led to the stock market crash and subsequent Great Depression) always follows monetary expansion, which the Fed had engaged in since it’s infancy.
Book of the Month:
-“Paper money must not be confused with credit money made out of paper, or with money certificates made out of paper. The latter can be redeemed into commodity money; the former cannot”
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