There was a time when US Dollar was pegged to gold i.e. US government could only print money based on how much gold it had in its reserves.
And gold had a fixed rate of $20.67 per ounce.
Let us say US had 100 ounces, so it could print only $2067??US could actually print 250% of the gold but for the ease of understanding we have taken 100%; so basically it could earlier print $20.67 X 250 (and not $20.67 X 100). unless it increased the amount of gold.
And because gold was difficult to get, the supply of money grew slowly and people didn’t have much to spend.
Low spending meant low demand for products, so businesses had to compromise on prices and, therefore, profits.
Lower profits meant employees had to be fired or there was no new hiring.
As unemployment increased, people spent even less and a bad cycle started, which led to the Great Depression?There were also reasons other than the ones cited. in 1929.
To boost the economy, US needed more money, which it could get only if it had more gold.
So, US government in 1933 made personal possession of gold (coins, bullions and gold certificates) illegal and people had to exchange their gold with government for $20.67 an ounce.
Let us say that US now had 200 ounces of gold; so it could print $20.67 X 200 = $4134.
Also, US increased the price of gold to $35; it could print $35 X 200 = $7000.
This sudden increase in money helped US come out of depression*.
While this saved the US economy, the event impacted the trust people had in the governments’ management of economies.
Imagine you having 2 ounces of gold and the government takes it and pays you $41.34 ($20.67 X 2). You are ok as you can buy it back when the prohibition ends.
But then 1 ounce of gold becomes equal to $35; with your $41.34 you can buy only one ounce.
The gold-ownership prohibition was lifted in 1974.
