On March 4, 1933, Roosevelt was inaugurated, and within days he signed
executive proclamations closing all banks for a “bank holiday,” freezing
foreign exchange, and preventing banks from paying out gold coin when
they reopened. A month later he signed an executive order requiring U.S.
citizens to turn over their private property (gold) to the Federal Reserve,
in exchange for Federal Reserve notes.
On April 20, he signed another executive order, ending the right of U.S. citizens to buy, or trade in, foreign currencies, and/or transfer currency to accounts outside the United States. On the same day, the Thomas Amendment was sent to Congress, authorizing the president, at his discretion, to reduce the gold content of the dollar to as low as 50 percent
of its former weight in gold. It was enacted into law on May 12, and then
amended to give Federal Reserve notes the full “lawful money” status.
But there was still one major hurdle to overcome before Roosevelt could devalue the dollar: the infamous gold clause.
During the Civil War, President Abraham Lincoln had to come up
with a way to pay the troops and introduced a second purely fiat currency to the country the greenback dollar. When it first appeared, the greenback
was worth the same amount as gold notes. But by the end of the Civil War
they had fallen to just one third of the value of the gold-backed dollar.
Many people who had made contracts or taken out loans before the war in
gold notes paid them back in depreciated greenback dollars. Of course this
was cheating the creditors and many lawsuits were filed.
After the end of the Civil War most contracts contained a “gold
clause” to protect lenders and others from currency devaluation. The gold
clause required payment in either gold or an amount of currency equal
to the “weight of gold” value when the contract was entered into. The big
problem for Roosevelt was that most government contracts and obligations
also had this clause written into them. So devaluing the dollar would also increase the cost of government obligations by the same amount.
executive proclamations closing all banks for a “bank holiday,” freezing
foreign exchange, and preventing banks from paying out gold coin when
they reopened. A month later he signed an executive order requiring U.S.
citizens to turn over their private property (gold) to the Federal Reserve,
in exchange for Federal Reserve notes.
On April 20, he signed another executive order, ending the right of U.S. citizens to buy, or trade in, foreign currencies, and/or transfer currency to accounts outside the United States. On the same day, the Thomas Amendment was sent to Congress, authorizing the president, at his discretion, to reduce the gold content of the dollar to as low as 50 percent
of its former weight in gold. It was enacted into law on May 12, and then
amended to give Federal Reserve notes the full “lawful money” status.
But there was still one major hurdle to overcome before Roosevelt could devalue the dollar: the infamous gold clause.
During the Civil War, President Abraham Lincoln had to come up
with a way to pay the troops and introduced a second purely fiat currency to the country the greenback dollar. When it first appeared, the greenback
was worth the same amount as gold notes. But by the end of the Civil War
they had fallen to just one third of the value of the gold-backed dollar.
Many people who had made contracts or taken out loans before the war in
gold notes paid them back in depreciated greenback dollars. Of course this
was cheating the creditors and many lawsuits were filed.
After the end of the Civil War most contracts contained a “gold
clause” to protect lenders and others from currency devaluation. The gold
clause required payment in either gold or an amount of currency equal
to the “weight of gold” value when the contract was entered into. The big
problem for Roosevelt was that most government contracts and obligations
also had this clause written into them. So devaluing the dollar would also increase the cost of government obligations by the same amount.
