The causes of the Great Depression were numerous, and after the stock market crash of 1929, a number of complex factors helped to create the conditions necessary for the longest and deepest economic downturn in modern history. President Franklin D. Roosevelt’s decision to take the United States off the gold standard may have helped to ease the worst effects of the Depression.
What is the gold standard?
The gold standard is a monetary system in which a nation’s currency is pegged to the value of gold. In a gold standard system, a given amount of paper money can be converted into a fixed amount of gold. Countries on the gold standard can’t increase the amount of paper money in circulation without also increasing their reserves of gold.
From the late 1800s until the 1930s, most countries in the world—including the United States—adhered to an international gold standard. (Many European countries temporarily abandoned the gold standard during World War I so they could print more money to finance war efforts.)
Bank failures led ordinary citizens to hoard gold.
The U.S. economy boomed during the first part of the 1920s—the Roaring Twenties—with industries such as construction and automobiles driving the post-war recovery. In an effort to combat inflation, the Federal Reserve raised interest rates in 1928.
But European countries that had borrowed money from the United States during World War I had trouble paying off their debts. As a result, demand for U.S. exports slowed.
A slowing economy combined with the stock market crash of 1929 and a subsequent wave of bank failures in 1930 and 1931 led to crippling levels of deflation. Soon, the frightened public began hoarding gold.
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European countries began to abandon the gold standard
The United States and other countries on the gold standard couldn’t increase their money supplies to stimulate the economy. Great Britain became the first to drop off the gold standard in 1931. Other countries soon followed.
But the United States didn’t abandon gold for another two years, deepening the pain of the Great Depression.
The Gold Reserve Act increased government gold reserves
In 1933, President Roosevelt took the U.S. off the gold standard when he signed the Gold Reserve Act in 1934. This bill made it illegal for the public to possess most forms of gold.
People were required to exchange their gold coins, gold bullion and gold certificates for paper money at a set price of $20.67 per ounce.
Abandoning the gold standard helped the economy grow
This exchange of gold for paper money allowed the United States to increase the amount of gold reserves at the United States Bullion Depository at Fort Knox. The government raised the price of gold to $35 per ounce, which allowed the Federal Reserve to increase the money supply.
The economy slowly began to grow again, but it would take the United States most of the 1930s to fully recover from the depths of the Great Depression.