What happened when the dollar was devalued to $35 against an ounce of gold?

[Prashanth_Perumal]

I believe a dollar denoted a particular weight of gold in those times of the classical gold standard. So, when the US government suddenly changed the exchange ratio between gold and a dollar note, how did people react? I mean, till the day before a dollar would have meant 1/20 of an ounce of gold (just as a meter would have meant 100 centimeters), and suddenly the ratio would be redefined as 1/35 of an ounce of gold. What was people’s reaction?

1. Did people, once and for all, stop believing that a dollar denotes a fixed, universal measurement relation to gold?

2. Did people start to recognize that dollars were just paper notes, and gold was just gold; with no real link between the two anymore?

3. If the dollar and the gold were now considered to be two different “commodities” (assume paper is a commodity), did the fixed price ratio between gold and paper dollar bring in the scope of Gresham’s law? I mean, if the exchange rate of $35 = 1 ounce of gold did not reflect the true exchange ratio between dollar and gold in the market, did that cause the undervalued commodity (in this case being gold) to be driven out of the regular market? I understand that the US government made it illegal to hold gold, and in that case, if the government hadn’t confiscated all gold in the economy, what would people have done? Would they have hoarded gold?

I’d be glad if you guys could answer each question in order. Thanks

[Live_Free_Or_Die]

nt

[Live_Free_Or_Die]

I don’t think the dollar denoted a particular weight. I think one of the problems with the dollar was government fixing the dollar to an exchange rate to metal. I just commented more on that point in this thread:

What do you think the price of gold vs dollar will be in the coming future?

I think the question reflects part of the problem. Consider the coinage act of 1792, specifically section 9. http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=001/llsl001.db&recNum=369 Coins were struck in three metals and the value of one metal was affixed to another metal saying this coin shall contain this much metal but this coin shall be worth half of that coin and contain a different metal. Contrast that bimetal approach versus saying we define a dollar as this much metal, a qua…

I think had the government simply defined the dollar as a specific weight and finesse and let the market sort out value, which ironically is what happened anyway when people converted dollars, the dollar would have been much better off.

I would recommend you search old newspaper archives for articles from that March 1933 era. I think you will get a much better idea. I’ll give you an example:

http://delawarecolib.newspaperarchive.com/PdfViewer.aspx?img=94232632&firstvisit=true&src=search&currentResult=1&currentPage=0

“Push Sales” is the article.

Even before FDR declared a bank holiday several states already had bank holidays in effect. FDR just nationalized it. I don’t think the sheep of the 1930’s were any more economically astute with regards to money than the sheep of 2012. I do think people viewed government with more credibility in the 1930’s. If we look at all the trends of expanding government well… government does reflect the will of a people. My simple response is that I believe the effect of federal intervention helped restore confidence in banking because people believed government could solve the problem.

[Prashanth_Perumal]

Do you mean the dollar was never defined as a particular weight of gold, just like how a meter is one hundred centimeters? I thought that was what the classical gold standard was about. Am I mistaken?

[Live_Free_Or_Die]

Try this:

Brief History of the Gold Standard in the United States

http://www.fas.org/sgp/crs/misc/R41887.pdf

The United States began with a bimetallic standard in which the dollar was defined in terms of
both gold or silver at weights and fineness such that gold and silver were set in value to each
other at a ratio of 15 to 1. Because world markets valued them at a 15½ to 1 ratio, much of the
gold left the country and silver was the de facto standard.

In 1834, the gold content of the dollar was reduced to make the ratio 16 to 1. As a result, silver
left the country and gold became the de facto standard. In addition, gold discoveries drove down
the value of gold even more, so that even small silver coins disappeared from circulation. In
1853, the silver content of small coins was reduced below their official face value so that the
public could have the coins needed to make change.

Although much of the monetary debate of the 1870s was about ending the paper money standard
and reestablishing gold convertibility, a relatively minor recodification of law in 1873 turned out
to have enormous implications for the monetary system.26 In defining the dollar and the coins of
the United States, the legislation omitted the 412.5 grain silver dollar. Consequently, it eliminated
silver as anything but fractional currency. What followed was the only period in U.S. history that
can strictly be called a gold standard: 1879-1933.

It’s not that long of a read, covers U.S. history on the subject, and has extensive citations.