mick silver
7th April 2011, 12:02 PM
http://blogs.forbes.com/richardsalsman/2011/04/06/the-bank-runs-of-the-early-1930s-and-fdrs-ban-on-gold/ ... The gold price reached a record of $1464/ounce this week, fittingly on the 78th year anniversary of FDR’s ban on private gold ownership in 1933. Gold has increased by 30% over the past year, 145% in the past five years and 465% in the past decade; by contrast, the S&P 500 today is only 12% higher vs. a decade ago.
Although FDR’s Executive Order #6102 eventually expired, other measures were enacted to perpetuate the government’s ban on private gold holding. The prohibition wasn’t lifted until early 1975, in a bill signed by President Gerald Ford, but by then President Richard Nixon had jettisoned the Bretton Woods gold-exchange standard (in August 1971).
Thereafter the U.S. dollar “floated,” which in truth meant that over the long-term it only sunk in value versus gold. Thus a four-decade ban on private gold ownership (1933-1974) has been followed by a four-decade “ban” on any gold-based dollar (1971-2011), and thus fiat-paper dollars not unlike those issued to inflationary excess during the Revolutionary War (the “continental”) and the Civil War (the “greenback”).
In retrospect it seems astounding — and brazenly unconstitutional — that in 1933 a U.S. president could wield such power and by a mere pen stroke criminalize the private ownership of any asset, let alone an asset so crucial to one’s life and the nation’s economic prosperity as sound money. The U.S. dollar had been on the classical gold-coin standard for decades until World War I, when (in 1917) Washington compelled the commercial banks (for “patriotic reasons”) to transfer their clients’ vault gold to the Fed, in turn for mere gold “certificates.” This was a crucial step in politically distancing Americans from their long-valued money.
In April 1933 FDR and his allies at the Fed and Treasury attributed widespread bank runs and failures to private “gold hoarding.” Using the “Trading With the Enemy Act” (1917) as a precedent – an act that gave the president wide latitude to restrict exchanges and seize assets during “emergencies” – FDR declared that private gold should be seized and given over to the Fed, in return for irredeemable Federal Reserve Notes, to stem an emergency in the banking system. This was sanctified in the Gold Reserve Act (January 1934), which required that any gold held contrary to U. S. law must be forfeited to the U. S. government. Key parts of the “Trading With the Enemy Act” pertaining to gold seizures persist in the U.S. Code even today.
FDR’s gold confiscations in April 1933 and thereafter carried with it severe fines and jail terms for the non-compliant. The political assault on “hoarding” criminalized an innocent and efficient means of holding one’s wholly legitimate possessions. It’s true that hoarding typically occurs amid fears of potential seizure or other political mistreatment; see for example today’s huge cash hoards and the reluctance to lend or invest.
Such fears were understandable and justifiable in the five-month period between the election of November 1932 and inauguration day in March 1933, for FDR had hinted publicly, on more than a few occasions, both before and after his election, that he might abandon the gold standard and devalue the dollar. Everyone knew what that policy could mean, since the Bank of England had taken the pound off the gold standard in September 1931: the government would seize gold and the dollar-price of gold would rise precipitously. Both happened – so FDR’s Treasury, not private gold owners, profited from the 60% gold-price jump.
During those crucial months (November 1932–March 1933), with Herbert Hoover still in the Oval Office but FDR waiting in the wings, the run on banks intensified, not because the banks were fundamentally unsound but because depositors sought dollars to convert into gold before FDR could act as he ultimately did. It was a run on the U.S. dollar, a vote of no confidence in FDR himself, but the private banks and depositors were made to suffer by it, and unfairly shouldered the blame.
The banking panic of 1932-1933 and collapse of the gold standard was a government failure, not a “market failure” — a tragic sequence that’s been documented definitively in such classics as Prelude to Panic (1936) by Lawrence Sullivan and The Crash and Its Aftermath (1985) by Barry Wigmore. At root it wasn’t adherence to the gold standard that caused so much trouble in the 1930s – as is claimed by Paul Krugman, Barry Eichengreen, Peter Temin and a long line of Keynesians – but a genuine (and prescient) fear, in markets, that Washington would fail to adhere to it.
In 1933 a Manhattan lawyer with still un-surrendered gold holdings defied FDR’s confiscation order and launched a test case, but in the end Federal Judge John Woolsey declared him guilty, said the U.S. was justified in compelling hoarders to report or surrender their gold, and declared “the right of the government to take private property of any kind when it is deemed necessary by the appropriate authority for the public good.” In 1935 the U.S. Supreme Court endorsed this same rights-violating dictum when it declared valid an explicit debt default by the U.S. Treasury, which in 1933-34 began to renege on its pledge to repay in gold.
To some investors this history might seem irrelevant, but in fact, from the standpoint not only of property rights but also of protecting oneself against state-sponsored monetary debasement – it was crucial that the private ownership of gold was finally legalized in early 1975. This restored liberty has enabled citizens to hedge against the near-perpetual dollar debasement Washington has inflicted on the economy since Nixon jettisoned the last vestiges of gold convertibility (for foreign central banks only) in 1971. Since private gold holding was legalized, the gold price has increased by nearly eight-fold, from $185/ounce to $1464/ounce, and precisely because the U.S. dollar, officially unhinged from gold, has declined in basic purchasing power.
Sadly, the awful and arbitrary power to seize or restrict the holding and trading of gold – or of other assets deemed essential to the “public good” during emergencies (war, financial crises) – still resides in Washington and in judicial precedents. Under a similar guise of “consumer protection,” last fall Congressmen Anthony Weiner and Henry Waxman interrogated certain firms that innocently promote and sell gold to eager and willing buyers. Thus twin political risks surround gold: one entails the usual risk of dollar debasement, which invariably propels the gold price to ever-higher levels, but the other entails the risk that instead of looking inward and fixing its paper-based money regime, Washington instead assails and scapegoats gold owners.
Although FDR’s Executive Order #6102 eventually expired, other measures were enacted to perpetuate the government’s ban on private gold holding. The prohibition wasn’t lifted until early 1975, in a bill signed by President Gerald Ford, but by then President Richard Nixon had jettisoned the Bretton Woods gold-exchange standard (in August 1971).
Thereafter the U.S. dollar “floated,” which in truth meant that over the long-term it only sunk in value versus gold. Thus a four-decade ban on private gold ownership (1933-1974) has been followed by a four-decade “ban” on any gold-based dollar (1971-2011), and thus fiat-paper dollars not unlike those issued to inflationary excess during the Revolutionary War (the “continental”) and the Civil War (the “greenback”).
In retrospect it seems astounding — and brazenly unconstitutional — that in 1933 a U.S. president could wield such power and by a mere pen stroke criminalize the private ownership of any asset, let alone an asset so crucial to one’s life and the nation’s economic prosperity as sound money. The U.S. dollar had been on the classical gold-coin standard for decades until World War I, when (in 1917) Washington compelled the commercial banks (for “patriotic reasons”) to transfer their clients’ vault gold to the Fed, in turn for mere gold “certificates.” This was a crucial step in politically distancing Americans from their long-valued money.
In April 1933 FDR and his allies at the Fed and Treasury attributed widespread bank runs and failures to private “gold hoarding.” Using the “Trading With the Enemy Act” (1917) as a precedent – an act that gave the president wide latitude to restrict exchanges and seize assets during “emergencies” – FDR declared that private gold should be seized and given over to the Fed, in return for irredeemable Federal Reserve Notes, to stem an emergency in the banking system. This was sanctified in the Gold Reserve Act (January 1934), which required that any gold held contrary to U. S. law must be forfeited to the U. S. government. Key parts of the “Trading With the Enemy Act” pertaining to gold seizures persist in the U.S. Code even today.
FDR’s gold confiscations in April 1933 and thereafter carried with it severe fines and jail terms for the non-compliant. The political assault on “hoarding” criminalized an innocent and efficient means of holding one’s wholly legitimate possessions. It’s true that hoarding typically occurs amid fears of potential seizure or other political mistreatment; see for example today’s huge cash hoards and the reluctance to lend or invest.
Such fears were understandable and justifiable in the five-month period between the election of November 1932 and inauguration day in March 1933, for FDR had hinted publicly, on more than a few occasions, both before and after his election, that he might abandon the gold standard and devalue the dollar. Everyone knew what that policy could mean, since the Bank of England had taken the pound off the gold standard in September 1931: the government would seize gold and the dollar-price of gold would rise precipitously. Both happened – so FDR’s Treasury, not private gold owners, profited from the 60% gold-price jump.
During those crucial months (November 1932–March 1933), with Herbert Hoover still in the Oval Office but FDR waiting in the wings, the run on banks intensified, not because the banks were fundamentally unsound but because depositors sought dollars to convert into gold before FDR could act as he ultimately did. It was a run on the U.S. dollar, a vote of no confidence in FDR himself, but the private banks and depositors were made to suffer by it, and unfairly shouldered the blame.
The banking panic of 1932-1933 and collapse of the gold standard was a government failure, not a “market failure” — a tragic sequence that’s been documented definitively in such classics as Prelude to Panic (1936) by Lawrence Sullivan and The Crash and Its Aftermath (1985) by Barry Wigmore. At root it wasn’t adherence to the gold standard that caused so much trouble in the 1930s – as is claimed by Paul Krugman, Barry Eichengreen, Peter Temin and a long line of Keynesians – but a genuine (and prescient) fear, in markets, that Washington would fail to adhere to it.
In 1933 a Manhattan lawyer with still un-surrendered gold holdings defied FDR’s confiscation order and launched a test case, but in the end Federal Judge John Woolsey declared him guilty, said the U.S. was justified in compelling hoarders to report or surrender their gold, and declared “the right of the government to take private property of any kind when it is deemed necessary by the appropriate authority for the public good.” In 1935 the U.S. Supreme Court endorsed this same rights-violating dictum when it declared valid an explicit debt default by the U.S. Treasury, which in 1933-34 began to renege on its pledge to repay in gold.
To some investors this history might seem irrelevant, but in fact, from the standpoint not only of property rights but also of protecting oneself against state-sponsored monetary debasement – it was crucial that the private ownership of gold was finally legalized in early 1975. This restored liberty has enabled citizens to hedge against the near-perpetual dollar debasement Washington has inflicted on the economy since Nixon jettisoned the last vestiges of gold convertibility (for foreign central banks only) in 1971. Since private gold holding was legalized, the gold price has increased by nearly eight-fold, from $185/ounce to $1464/ounce, and precisely because the U.S. dollar, officially unhinged from gold, has declined in basic purchasing power.
Sadly, the awful and arbitrary power to seize or restrict the holding and trading of gold – or of other assets deemed essential to the “public good” during emergencies (war, financial crises) – still resides in Washington and in judicial precedents. Under a similar guise of “consumer protection,” last fall Congressmen Anthony Weiner and Henry Waxman interrogated certain firms that innocently promote and sell gold to eager and willing buyers. Thus twin political risks surround gold: one entails the usual risk of dollar debasement, which invariably propels the gold price to ever-higher levels, but the other entails the risk that instead of looking inward and fixing its paper-based money regime, Washington instead assails and scapegoats gold owners.