Monetary-Credit Powers of the Federal Government

May 6, 1938

Report Outline
Principal Powers of Currency Inflation
Control of Effects of International Movements of Gold
Control of Credit Through Federal Reserve System
Public Debt Management and the Credit Structure
Special Focus

Principal Powers of Currency Inflation

The most conspicuous governmental powers for guidance of the nation's economic life are those financial instruments which aim at regulation of the supply of money and credit, and control of the cost of capital. Within the framework of existing law the government at Washington has great and varied powers to expand the supply of money—including bank deposits—and, conversely, to contract it. If the administration wishes to pursue one course or the other, it is not limited to adjusting the gold content of the dollar. Not one, but many alternatives are at its disposal. The White House may issue an executive order or proclamation, the Treasury may announce a decision, the Federal Reserve Board may act, or various agencies may simultaneously advance toward a given objective. The purpose of this report is to indicate the main existing monetary and credit powers and to show how one may be substituted for another in seeking to effectuate administration policies.

Authority to Revalue the Gold Dollar

By altering the book value of the gold and silver held by the Treasury large profits may be produced out of thin air. Even without such revaluation, important inflationary possibilities attach to the stabilization fund of $2,000,000,000 or more, and the $463,000,000 cost value of silver bullion sterilized in the Treasury. Expenditure of these two funds on the basis of the present monetary (statutory) values of gold and silver would produce over $3,000,000,000. In addition, $3,000,000,000 more in the form of greenbacks may be issued under the authority of the still effective Thomas Amendment of 1933.

Further devaluation of the dollar, authorized under the Gold Reserve Act of 1934, is another highly important inflationary power in the hands of the government. In January, 1934, the gold content of the monetary unit was fixed at approximately 59 per cent of its pre-1934 amount. The President has authority, at his discretion, to reduce the dollar's gold content further to 50 per cent of its former amount. Such a reduction would be equivalent today to an increase of about 18 per cent in the monetary value of gold. Taking the present gold stock as $12,800,000,000, the additional profit which might be realized by “cutting the other 9 cents off the dollar” would be about $2,304,000,000.

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