In the economic crisis of the Great Depression, FDR pursued three parallel strategies to stabilize the banking and financial sector and increase economic activity: reform, regulation, and an expansionist monetary policy.
Much has been written of late about the reforms and regulations of the banking and securities industries that FDR put into place (many of which are still with us to this day); but his use of monetary policy has received far less attention. FDR, in fact, was the first occupant of the White House to establish direct presidential leadership in this area. Prior to 1933, the Federal Reserve tended to concentrate much of its activity on maintaining the international gold standard, which, as often as not, resulted in a restriction of the money supply and in years 1929 to 1933, severe deflation. It also tended to operate more or less independently of the policies of the President or the Treasury.
FDR was determined to change this. By April of 1933, he had come to the conclusion that strict adherence to the gold standard was no longer in the country’s best interest and that he must pursue a policy of monetary expansion. He began this effort through his reform of the banking industry and the introduction of federal deposit insurance, which increased bank deposits and through the resulting expansion of loans, enhanced the nation’s money supply.
FDR also made it clear that he wanted his administration–by which he meant the White House and the Treasury–to assume greater management of monetary policy. Backed by Congressional legislation that gave him the power to reduce the gold content of the dollar by as much as 50 percent; FDR announced his intent in November 1933 to move towards “a managed currency.” In January 1934 the passage of the Gold Reserve Act made the devaluation of the dollar official, fixing the price for buying and selling gold at $35 an ounce (once all domestic gold which was valued at the current rate of $21 per ounce was called in). Thereafter, the domestic circulation of gold was prohibited and the Federal Government would sell gold only for foreign payments.
Thanks to these policies, the amount of gold held in Fort Knox rose dramatically and by 1940 had more than tripled. At the same time, deposits of Federal Reserve notes paid out for gold also shot up, which increased bank reserves, and ultimately, bank loans. The net effect of these policies was a remarkable expansion of the money supply–roughly 11 percent per year over the next four years. With more money in hand, institutions and individuals began to spend again, increasing the demand for goods and services and with them, employment. As a result, between 1933 and 1937 the increase in the gross domestic product (the total value of goods and services) ran at the remarkable rate of roughly 12 percent per year-the best four year period in our history.
Unfortunately, by mid 1937, FDR and his Administration had come to the conclusion that this rapid expansion threatened inflation. As a result, the Federal Reserve undertook a sharp restriction in the supply of money, which was a major factor in the “Roosevelt recession” of 1937-38. Stung by this experience, FDR quickly reversed course, urging the Federal Reserve to resume the purchase of gold.
In carrying out these polices, FDR established a new framework for the relationship between the Federal Reserve and the President. Though still legally independent, the Federal Reserve from this point forward tended to work more in concert with the policies set by the President and the Treasury.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.