As the U.S. banking crisis ebbed in early 1933, central-bank gold reserves were rising, and gold-based currency notes were steadily flowing back into accounts. The country was experiencing a positive balance of trade.
"Not one of the conditions usually attendant to a suspension of gold payments was present at the time," the Economist magazine would write in May.
Yet on April 20, President Franklin D. Roosevelt signed an executive order banning the export of gold to settle international accounts. This followed an April 5 executive order that removed gold from commercial circulation and an April 17 decision to sever the dollar’s value from gold’s price, "letting it float."
Given that the U.S. possessed more than one-third of the world’s supply of the metal, what was going on?
After years of contraction and deflation, rural Democrats called for abandoning the gold standard, devaluing the dollar and thus making exports cheaper and imports more expensive, all of which they hoped would increase the prices of farm products.
Their critics argued that such maneuvers could set off uncontrollable inflation. Former German Foreign Minister Richard von Kuehlmann compared it to the runaway price increases that crashed post-armistice Germany's financial system.
If the U.S. left the gold standard, he said, "Germany would have to go off the gold standard immediately, and France would eventually have to follow. A race for the worst currency would result because of the advantages of depreciation."
But von Kuehlmann failed to note the dramatic differences between Germany’s postwar military and economic collapse and the more placid circumstances that prevailed in the U.S. in 1933.
In late April, Yale professor of political economy James Harvey Rogers argued for calm: "Once the excitement of leaving the gold standard is over, the depreciation of the dollar, in the absence of other inflationary measures, is unlikely to remain great."
When Britain was forced off the gold standard in 1931, the pound’s value gradually slid from almost $5 to about $3.60, making it difficult for U.S. exporters to sell to the U.K. and its empire. When the U.S. abandoned the gold standard, the pound began steadily appreciating toward its earlier dollar level, cheering U.S. traders.
Complaints surfaced. Americans living abroad experienced increasingly unfavorable exchange rates, and some American bankers wanted the whole global process unwound, with the U.K. and the U.S. both returning to the gold standard.
But the plan to arrest deflation was working.
"We blinked and shuddered, but at last everybody realized that we were irrevocably off of gold," economist Stuart Chase wrote. "Whereupon prices of raw materials and common stocks began to shoot upward, the unmistakable sign of inflation. After almost four years of grinding deflation, with prices, wages, profits, standards of living whirling in a vicious spiral downward, the process halts as the gold standard publicly collapses, and prices begin to turn upward.”
Ending deflation was fundamental, but would quitting the gold standard lead to economic revival?
(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)
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