Devaluing the Dollar Against Gold in 1934

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Can you imagine a situation where you agreed to work for $10 per hour and then went off to buy something after work that usually costs $10? When you get the store though, the person behind the counter tells you the item is no longer $10; that it's actually $20 and will be from that point on. In fact, everything will be twice as much from that point on. Now, if you're not a saver, this would be fine. You'll hopefully (eventually) make twice as much an hour, so things will balance out. But what if someone owes you $100? When you loaned them the money, that $100 was worth whatever things were worth at the moment. Whether that be labor or goods. When they pay you back though, they're only paying you back half of what that labor or goods are worth. They make out very well. If it was you who owned someone else money, you'd make out well.

In situations like these, who does well? Again, if you're a debtholder, you win. Currency devaluation is always good for debtholders. They get to borrow when money is worth a lot and pay that money back when it's not worth so much. It's the lender who gets stuck being paid back devalued money. If you're a saver and have got tons of money sitting in your bank account, you'd lose out big. The more a currency devalues, the less buying power your savings will have. In cases like these, the banks would win. Seems strange, doesn't it? We all know that currency devaluation happens on a daily basis. It's called inflation. We also know that borrowing somehow seems irresponsible and wrong. Beyond that, we know that saving seems responsible and right. Yet, it's the borrowers who make out better than the savers. If you're into fairness, give this quandary some thought.

Back in January of 1934, President Roosevelt signed an executive order that changed the price of gold from around $20 to $35. If you went to the bank on a Monday and placed $20 on the counter, you'd walk out with an ounce of gold in your pocket. If you walked in the same bank on Tuesday, you'd have to place $35 on the counter for the very same weight in gold. Can you imagine being one of the very few people who actually turned their gold over to the Federal Reserve when the United States government demanded you to? They would have paid you $20 per ounce and then right afterward, they would have said, "Sorry, but it's now worth $35 an ounce. You lose." As you can imagine, hardly anyone turned their gold over. Only 22% of the gold in circulation was given to the bank. For those who held onto theirs, they earned a hefty profit. What they had sitting in their drawer one day doubled in value the next. Not bad. Well, actually it didn't double in value. It doubled in currency.

The worst thing about what Roosevelt did pertained to international trade. The price of imports practically doubled overnight, putting great strain on the U.S. population. Businesses who needed goods and supplies from other nations had to pay double. The problem was, they only had so much in their bank accounts. And the everyday Joe had to pay double too because the increased prices trickled down quickly. It was a mess. But if anyone owed money to anyone else abroad though, boy were they happy. They only needed to pay half.

It wasn't all bad. Yes, some people were hurt, but the bigger banking picture was quite rosy. By devaluing the dollar and by increasing the price of gold, the U.S. government saved the fractional reserve system and all but stopped international runs on the dollar. If you look at the grand scheme of things, this was a preferable outcome to what could have happened.

Basically, what was happening at the time was that there wasn't enough gold in storage to balance against how many dollars were in the system. There were far too many dollars due to a number of reasons - primarily money printing and lending. Since the balance was so off, the government had to rebalance things by changing how many dollars it took to buy a piece of gold. It used to be 20 dollars and after a certain point, it took 35 dollars. After the dollar was revalued, there was balance again.

What's the moral of this story? It's that banks and governments are fiscally irresponsible. They'll never not create more money. That's what they do. They create and lend and borrow and spend. It's the name of the game. The problem is, there's this pesky little thing called gold out there that seems to get in the way of everything. It's built into the laws of economics and no matter how hard people and institutions try to avoid it, there's always a reckoning. Too many people trust gold and not enough trust fiat currency. So when the time comes, currencies are revalued against gold. It's always the same story. The more money there is floating around the economies of the world, the higher the price of gold. It may not happen gracefully or gradually, but it will happen. And from recent events, you can see that it happens dramatically. Currency revaluation will take place and those who own and keep gold will win. All you need to do is a little reading of history to see how and why.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
Devaluing the Dollar Against Gold in 1934 was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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