What was the deal with gold, anyway?

FDR made private ownership of gold illegal. Without any debates on the gold-standard-right-or-wrong, what was the grand idea to make private ownership (with some small exceptions) illegal, and keep it so for four decades?

Although the true gold standard had been ended, we still had
a gold-denominated currency, in that (after 1933), the dollar was defined as 1/35th of an ounce of gold. My understanding is that foreign governments and business were allowed to redeem dollars in gold at that rate. But since all outstanding dollars weren’t going to be redeemed at once, it wasn’t necessary to have each and every outstanding dollar backed by a gold reserve; instead they used a fractional reserve system, much like bank Federal Reserve deposits today.

So if you sold your gold to the government at $35/ounce, they could turn around and print several times that amount based on whatever the fractional reserve requirement was. If you kept your gold you were preventing the government from doing that and increasing the money supply, by which it was hoped that they could get the wheels of commerce turning again.

Although the true gold standard had been ended, we still had
a gold-denominated currency, in that (after 1933), the dollar was defined as 1/35th of an ounce of gold. My understanding is that foreign governments and business were allowed to redeem dollars in gold at that rate. But since all outstanding dollars weren’t going to be redeemed at once, it wasn’t necessary to have each and every outstanding dollar backed by a gold reserve; instead they used a fractional reserve system, much like bank Federal Reserve deposits today.

So if you sold your gold to the government at $35/ounce, they could turn around and print several times that amount based on whatever the fractional reserve requirement was. This would have increased the money supply and, FDR hoped, get the wheels of commerce rolling again. If you kept your gold you were preventing the government from doing that, so it became illegal to do so.

Milton Friedman, the very bright economist, wrote a book(the name of which I can’t recall at this point) which contained a section about Roosevelt taking us off the gold standard.

I read it in conjunction with a question on either this board or the snopes board last year.

My memory is that Roosevelt and the government deliberately planned on taking the bulk of all gold off the market and immediately revaluing it to a world price of $35 per ounce. For the previous century, gold was valued at about US $20/ounce. Because the government would own all the gold at that point, they would pick up rather a large increase in net worth.

Foreign governments would be allowed to redeem dollars for gold at the new rate.

Aside from the fact that the government could repay its debts at a lower rate, the idea that any monetary system could be tied inflexibly to a gold standard had finally been discovered to be probably untrue. That is, you can set up a monetary system backed by gold, but its inelasticity would ultimately doom it to catastrophic highs and lows, and ultimately, failure.

Another question might be: Why is gold so valuable to humans? You can’t eat it, you don’t build things with it (usually), so how did it become so valuable to us in the first place? If you were on a desert island with only gold, you would not survive!

When our money was directly backed by gold, it didn’t matter who had how much of it, a dollar was a dollar in gold (except for comparitively rare exceptions, like the issuance of greenbacks during the civil war).

What FDR and company did was to institute a quasi-gold standard in which the value of the dollar was artificially set by declaring that although Federal Reserve notes were no longer redeemable, the dollar was still supposedly 1/35 an ounce of gold. Confiscation of private gold ownership was the only way to enforce this declaration, because otherwise Federal Reserve notes would have rapidly devalued, leading to the hyperinflation that ruined Germany among others. When this system was abandoned in the 1970s and replaced by having the dollar be defined relative to other world currencies, the need to restrict private ownership was no longer needed.

One interesting side effect: formerly, gold was money, meaning that you could usually buy or sell gold for what it was worth in dollars. But now gold is simply another commodity, meaning that you usually pay a big markup similar to a retail price over what the quoted price per ounce is.

Lumpy said

To try to keep this factual, and out of GD, you can currently buy and sell gold for what it is worth in dollars, contrary to your statement. You do not have to pay a big markup over the quoted price per ounce.

Example: I buy and sell gold for a living. spot gold closed today at US $263/ ounce. WE currently pay customers $268 each for any American Gold 1-ounce Eagles they wish to sell. We resell them for $283 each.

For big markups see anything sold in a mall.

Humans have always valued beautiful things. The luster of gold and silver meant that they would be among the things valued simply for their beauty, like gems, etc. Other things in gold’s favor:

  1. Non-perishable. Even silver tarnishes, but gold is effectively permanent, meaning that it will not degrade in value. Requires no feeding, upkeep, or any other expense beyond acquiring it.

  2. Mallable. Gold is extremely easy to form, enhancing it’s beauty value by making it easy to make object out of. Contrast hard, brittle iron sulfide (“fool’s gold”). Pieces of gold are interchangable, not unique objects like jewels, and can be divided limitlessly.

  3. Limited supply. Gold is an element. You cannot make gold from anything else. You can only find gold where you can. And it’s rare enough that obtaining large amounts of it is difficult.

  4. Finally, it may seem paradoxical, but in a sense the fact that gold is “useless” makes it more valuable as money. The medium of exchange a society uses should ideally not itself be subject to market flucuations in it’s own value. If gold had historically had a major use, it’s own value would have fluctuated much more radically depending on demand. Until the 20th century gold was pretty much used for money, jewelry and dental work.

Lumpy said

And, in the 20th Century, it is used for ???

Believe it or not, it used to be used in circuit boards, because it’s the best conductor of electricity out there. For all I know, there may still be someone doing this somewhere for some specialized application, for the same reason.

There’s a scene in one of my favorite movies, The Treasure of the Sierra Madre, where Bogey and the other guy are pouring water from their canteens over some shiny rocks that they think is gold. Walter Huston grins and says,“Fools gold. And why don’t you ask me before you start flashing water around. Water is valuable. Sometimes more valuable than gold.”

But the point is, we don’t live on a desert island. Man does not live by bread alone.

It still is, for some edge-connectors on circuit boards, and for some connectors. Although it is a better conductor than copper, it’s used for it’s non-oxidizing properties, so the connection doesn’t deteriorate over time.

I believe the bond wires on some integrated circuits are made of gold, also (the wires that connect the die of a chip to the pins on the outside of the chip).

Arjuna34

If the supply of goods and services that you can buy with money increases, as it basically has throughout this century, then if the dollar were pegged to gold, which has
not increased very much in supply, then wouldn’that have resulted in massive deflation?

Silver is the best conductor, but it does tarnish.

Yep, gold is still used for some connectors tin is the other?). You don’t want to mix them up. If your chip had tin leads and the socket has gold ones there’s a good chance that a layer of tarnish will appear between the two and screw stuff up.

The abolishment was part of worldwide movement to do so, of which the US was one of the last to do. There are still supporters of the gold standard because it enable a more “free” economy. :shrug: Its all a house of cards any way you slice it IMO. But it does allow for easier governmental control, that can’t be disputed, and that was definitely on the agenda for governments everywhere (black helicopters or no ;)).

It occurred to me last night that I actually own an excellent book on this subject, called “Money of the Mind” by James Grant. Especially recommended to you, arl, 'though I can’t figure out why I would want to give you more fuel for your fire…
Oh well, it’ll make for a few good turns in GD one of these days, I’m sure.
Anyway, a quick summary from this book on the points re gold:

1 - Back when gold backed the dollar, there was a clause in most loan contracts that said that the lender could ask for payment in gold if he so chose.
2 - The controversy over gold flaired constantly during this period, between those who were for “easier” money, and those who were for a “hard” currency.
3 - When Roosevelt made gold ownership by individuals illegal, it was to prevent people from making a run on the dollar, because…
a) prior to his administration, the value of gold was pegged at $20.67. This flowed from the definition of a dollar, which was 25.8 grains of gold, nine-tenths fine. One of the gold traders on this board, of which there are a few, is going to have to explain that one. I’m just quoting the book.
b) to quote from the book: “In January 1934, $35 was made the equivalent of one ounce: the dollar was devalued.” The purpose was to allow debts to be paid off more easily; in other words, “easy” money. Given that anyone with half a brain who had lent money out in dollars would, in adherence to the aforementioned clause, demand payment back in gold, (since this had been revalued upward in relation to the dollar) the only way to prevent this was to make private holding of gold illegal. This of course made that clause null in all of these private contracts. Litigation ensued, needless to say. The Supreme Court sided with the government, and that was that.

Just as an aside, this book, believe it or not, makes a very persuasive case against the FDIC, of all things.

An extremely good article about this question is in the September 2000 issue of Smithsonian. The article is entitle As Good as Gold. It discusses the nature of money, how the gold standard was constraining the economy, and how making gold illegal changed the psychology of how we perceive money.

IMHO, it should be required reading for all GQ regs, and anyone who wants to debate fiduciary matters in GD!

Gold still finds many commercial and industrial uses in this modern era. Some of them are:[list][li]Optical and Reflective Coatings:[/li]Gold is unsurpassed at reflecting heat, especially in the infra-red range. Semiconductor epitaxial reactors use gold coated reflectors to redirect optical heating into bell jars that contain photolytically driven reactions. Many space craft and satellites also use gold to reflect the intense heat of direct sunlight in outer space.

[li]Glass Coloration:[/li]The highest quality red glass still depends upon gold to obtain its rich crimson color.

[li]Electrical Terminations:[/li]In ultra-high speed terminations where radio frequency signals are in the gigahertz region, gold has the conductivity to avoid “skin” effects. Such signals do not travel within the bulk material of the conductor. Instead the majority of the signal travels in the first few mils (thousandths of an inch) of the surface layer. The Cray III supercomputer relied heavily upon gold plated terminations to carry its high speed signals.

[li]Microelectronics:[/li]The silicon chips inside the computer you are staring at contain centimeters of hair fine gold bonding wire. While some applications allow for the use of aluminum bond wire interconnects, gold is still the material of choice for high performance applications.

In bond wire connections the end of a fine gold wire is heated so that it “balls” up. This small ball is ultrasonically “scrubbed” into the metallized surface of the silicon chip using a crystalline feed tip. The other end of the wire is then “stitched” or smeared off onto the interconnect leadframe that has the chip bonded to it. Quite often areas of this leadframe are gold plated for purposes of corrosion resistance or conductivity.

Gold has the ability to alloy with silicon. A small “frit” of gold-silicon alloy is placed on the leadframe where the silicon chip will be attached. The backside of the silicon wafer is also coated with gold prior to being singulated into individual chips. The leadframe that the chip will be attached to is heated to the melt point of the alloyed frit. Once the frit melts (at a significantly lower temperature than the silicon would by itself) the chip is settled into this minute pool of melted material. A slight amount of pressure completes the die bonding process. This is critical to the reliability of the device. If the silicon chip was directly attached or fused to the leadframe carrying it, thermal cycling would literally “pop” the chip off from its mounting point.

Gold wire has numerous properties that make it ideal for bond wire applications. Unlike large household appliance wiring, small diameter conductors are subject to a problem called electromigration. This happens when large power surges or prolonged operation at high current values occur. Atoms of the conducting wire are physically dislocated from their position in the wire and “migrate” downstream in the direction of current flow. Extended operation under these conditions can cause “neck down” of the wire to the point where it thins and breaks.

Due to its high atomic weight, gold (with minute amounts of copper or silicon) is an ideal material for use as a bondwire. The high density of atoms in it allows for greater reliability and an ability to resist the effects of electromigration. For similar reasons gold is also used in microwave circuitry and high reliability microelectronics. The corrosion resistance of gold allows for it to operate in more aggressive environments without failing anywhere near as soon as other materials.

[li]Probes and Electrodes:[/li]Because of gold’s corrosion resistance it is still used for protective coatings on electrochemical probes. It’s ability to withstand even the harshest acids and alkalai environments make it highly desirable for monitoring or measuring chemical reactions.

[li]Scanning Electron Microscopy:[/li]Many samples to be examined in a scanning electron microscope are not electrically conductive. This causes the electron beam of the microscope to accumulate an undesireable charge at the surface being inspected. The charge build-up deflects the beam and decreases the resolution of the image obtained therefrom. An ultra-thin coating of gold (less than 1µ, or one millionth of a meter) deposited on the surface of the sample allows for conduction of the electron beam’s energy away from the location being examined.

[li]Medical Applications:[/li]As with microelectronic bondwire methods gold’s flexibility and corrosion resistance make it useful for internal medical use. It is not attacked by body fluids and does not trigger chemical or immunological responses. In addition its ductile nature make it able to withstand the G-Shocks of human activity.

[li]Vacuum Metallurgy:[/li]Because of its inert quality and high atomic number gold is also useful as an adhesion promotion coating in multi-layer thin film structures. It also finds applications in MEM (micro electromechanical machine) structures. The ability for ultra-small deposited gold conductors to carry actuating signals is very useful.

[li]Biomedical and Genetic Reasearch:[/li]Since gold does not normally occur in large quantities within most organisms it is an ideal substrate for tissue growth. Chemical reactions imposed upon the cell cultures will not transport the inert gold into the final elemental assay.

[li]Bookbinding:[/li]The finest volumes have gilt edged pages. The gilding prevents the intrusion of moisture or fingerprint salts and also serves to prevent insects from attacking the paper as quickly. The additional use of gold leaf for illuminated manuscripts still remains a high art form even today.
There’s probably a few more that I’m forgetting right now, but this will do.

I always chuckle when people argue “You can’t eat gold”

You can’t eat paper, nor electronic bytes, either.

That said, there is absolutely no reason we cannot utilize something other than gold as a monetary standard. “Money” is an abstract concept, especially in the computer age.