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Roosevelt’s number
February 20, 2004

Last week we established a starting point for the next few columns: that we are confident gold was accurately priced in 1933, at $20.67 an ounce. During the next few weeks we will calculate gold’s value at several intervals, until we arrive at its current value.

Between 1934 and 1971 thirty-five dollars were convertible into one ounce of gold, at least for foreigners: Roosevelt made private gold ownership illegal in the United States in 1933. Even though the gold price was fixed during those thirty-eight years, the activity in the gold market during that time has a bearing on its price today.

Since gold was worth $20.67 an ounce in 1933, what made it worth $35 an ounce in 1934? Nothing. If Roosevelt had a reason for valuing gold at $35 an ounce, I don’t know what it is.

By 1928 gold coins had virtually disappeared from circulation. Gold was still money, but most of it was held as reserve assets by government treasuries, reserve banks and commercial banks. When Roosevelt devalued the dollar, he began a massive relocation of those gold reserves. As long as gold was worth less than its decreed price of $35 an ounce, foreigners were able to buy gold in their domestic markets for the equivalent of about $20.67 an ounce, ship that gold to the United States, sell it to the Treasury for $35 an ounce, convert their dollars back into local currency and make a handsome 69% profit, less insurance and freight. The really neat thing about this trade is that they could do it again, and again, and again… until either the US ran out of dollars (unlikely), the rest of the world ran out of gold (it almost happened), the gold price outside the United States increased, or the dollar depreciated sufficiently to make the arbitrage disappear.

In 1935 the US Treasury had 8,998 tonnes of gold. The arbitrage I just described was so lucrative, that in just five years, by 1940, US gold reserves had increased by 117%, to 19,543 tonnes. By that time the United States owned approximately one third of all the gold in the world and two thirds of official gold reserves.

US gold reserves did not increase much after 1940. In fact, they declined moderately to 17,848 tonnes in 1945 and then increased again to peak at 20,663 tonnes in 1952. Overall the US Treasury’s gold reserves remained relatively constant at around 20,000 tonnes from 1940 to 1957.

The abrupt end of the flow of gold into the United States in 1940 probably had more to do with the breakout of war in Europe in 1939 than with anything else. But the fact that the flow of gold into the US did not resume after the end of the war indicates that either gold was too hard to come by or, more likely, that the profit potential had evaporated. It was no longer profitable to ship gold to the United States, either because the gold price in Europe had increased, or because the exchange rate between the US dollar and the European currencies had changed, or both.

By the closing stages of World War II, the United States had most of the world’s gold. In part due to its large gold reserves, the US dollar was chosen as the international reserve currency in Bretton Woods, in 1944. The Bretton Woods Accord established that the US dollar would be used as the world’s reserve currency and that it would be convertible into gold, upon demand, at $35 an ounce. At that time the United States was probably the only country in the world that had enough gold to ‘back’ its currency with metal.

Here again I ask myself the same question. If gold was $20.67 in 1933, what made it worth $35 in 1934? And if it was not worth $35 an ounce in 1934, when was it? Was gold worth $35 an ounce in 1944 when the Bretton Woods Accord was signed? Perhaps a more pertinent question would be: were thirty-five dollars worth an ounce of gold in 1944?

To answer these questions we need to know by how much the supply of dollars had increased relative to the supply of gold.

When the amount of dollars increases (inflation), the dollar loses buying power and that typically shows up as an increase in the prices of goods and services. It stands to reason that as the dollar is inflated, the price of gold in dollars also increases, even though gold’s inherent worth (buying power) is not affected.

Similarly, as the amount of gold increases, its value will decrease. Due to its physical properties, almost all of the gold ever mined is still around in one form or another (one of the reasons why gold is so suitable to be money in the first place). The amount of gold mined on an annual basis is nothing other than gold inflation. The inflation rate of gold is thus new mine production as a percentage of above ground gold stock, which in turn is equal to the total amount of gold mined since The Beginning.

Consequently, the change in the gold price over time, in dollars, will be proportional to the inflation of the dollar and inversely proportional to the inflation of gold.

Historical gold production data is available. Figuring out the increase in the supply of dollars is trickier.

Currently the broadest measure of money supply in the United States is M3, which is what I prefer to use to calculate dollar inflation. But M3 data is only available from 1959 onward, and we are interested in going back to 1933. I resorted, therefore, to using an index I really don’t like: the Consumer Price Index.

Current hedonic (this is actually the correct term) manipulation of the Consumer Price Index renders it completely worthless, but fortunately in the time frame that we are interested in, 1933 to 1971, hedonics had not yet been invented.

If we look at Consumer Price Index data (Reserve Bank of Minneapolis) we can see that $20.67 in 1933 would have had the same purchasing power as $35 in 1947. As much as I dislike using the CPI for this kind of calculation, it is probably giving us the correct answer to within a few years: somewhere between 1944 and 1950, gold was actually worth $35 an ounce.

Looking at the flow of gold into the US Treasury that started in 1934 when the gold price was arbitrarily raised to $35 an ounce and essentially ceased in 1940 (probably due to WWII), but remained relatively constant until 1957, when it started falling again, we can conclude that $35 an ounce should have been the correct gold price somewhere between 1940 and 1957. After that there was no longer any incentive to sell gold to the United States for dollars. 1947, as indicated by the change in the CPI, is in the middle of that period.

We now have an idea of when gold was actually worth $35 an ounce, not just that its price was $35 an ounce from 1934 to 1971. Next week we’ll look at what the gold price should have been in 1971, on our way to 2004.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


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