The Federal Reserve System, Its History and Function, Part 2

This is the concluding part of a special post on the U.S. Federal Reserve System. It is written in response to the rise of the Occupy Wall Street movement. Part 1 was published on October 30. The next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

Monetary policy under the New Deal

With the rise of Adolf Hitler to power in Germany in 1933, it was clear that a new European war was inevitable within a few years. Therefore, as soon as Roosevelt stabilized the price of gold—or more accurately the gold value of the dollar—in 1934, many wealthy Europeans, fearing that they could lose their gold due to the war and the revolutions that might result from the war, sold their gold hoards to the U.S. Treasury at the new official price of $35 an ounce. They reasoned that their money was much safer in the form of dollar deposits in the U.S. banking system than it was in the form of gold bars or coins in Europe.

Not all the gold that was flowing into the U.S. Treasury came from wealthy Europeans. A lot came out of gold mines as well. The collapse in commodity prices during the Depression and subsequent devaluations meant that, unlike the 1920s, commodity prices, when calculated in terms of gold, were now below their real values. This is shown by the record levels of gold production that occurred in the 1930s.

Therefore, the Roosevelt administration did not finance the New Deal by “running the printing presses.” The considerable expansion in the U.S. money supply reflected the growth in the quantity of gold in the United States, even if this gold was no longer circulated in the form of gold coin but stored instead in the vaults of the U.S. Treasury. Though prices rose in 1933-34 due to the dollar’s devaluation, thereafter prices stabilized at dollar levels that were still below the prices that prevailed during the 1920s.

These prices were even lower when calculated directly in gold. Therefore, despite the government deficit spending and the dire prophecies of right-wingers and Republicans that Roosevelt was bankrupting the United States, the U.S. was in reality awash in cash. This was in sharp contrast to the house of cards credit system that had marked the 1920s. The foundation for the post-World War II prosperity as well as the means to finance the war were being established not by the policies of the New Deal but by the effects of the Depression itself.

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3 Responses to “The Federal Reserve System, Its History and Function, Part 2”

  1. Paul Says:

    Have you considered analyzing the Modern Monetary Theory approach to money from a Marxist perspective? I’m not really qualified to say, but I think the theory derives the value of money from the states sovereign ability exact penalties. If i’m not way off base I would like to know how a Marxist might interpret this theory.

  2. Paul Says:

    Thank you for the amazing work you do here, I’m an avid reader.

  3. No Money System Says:

    No Money System…

    […]The Federal Reserve System, Its History and Function, Part 2 « A Critique of Crisis Theory[…]…

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