Gold and the Government

 

 Gold and the Government

After this volatile stock market week which put investors on edge, let’s put this in perspective by looking at what happened in the 1930s during the Great Depression.  As a reference point, paper money was suspect prior to that period and no one willingly would choose a government-issued piece of paper over a gold coin.  It took a long time for that apprehension to convert into acceptance in the US Treasury’s paper money, mostly because people were assured that the paper could be converted to gold at any time.  It even said so on the paper money, which is why people had confidence in it.
This whole concept gave birth to the Federal Reserve Bank which started printing the money back in 1913.  It printed so much it created a “boom” known as the “Roaring Twenties” but since it was an artificially-induced stimulus to the economy, it crashed in the fall of 1929, heralding the Great Depression.  Why did it crash?   Remember, all government “money” was backed by the pledge that it could be redeemed for gold at any time.  Well, there wasn’t enough gold in existence to cover all the “paper money guarantees” printed right on their notes and now in circulation as those printing presses kept rolling..
Franklin D. Roosevelt, in a desperate attempt to shore up the Federal Reserve (read bailout), issued Executive Order 6102 – Requiring Gold Coin, Gold Bullion and Gold Certificates to be Delivered to the Government in 1933, effectively confiscating all gold owned by Americans and making it criminal to possess any, in any form.
Americans had to march down to their banks and turn in ALL gold in their possession before April 28, 1933 – those same Americans already living with breadlines, closed and shuttered factories, massive poverty, Hoovervilles (cobbled together housing for homeless families).  It was a time when the hobo life was born for young teens, marriages and births were put on hold, women went to work to help the men, the traditional breadwinner in our culture at that point, try to feed their children and keep a roof over their heads.
Nevertheless, good Americans complied with the new law and turned in their gold in any form, increasing  the gold reserves of the US Treasury and Federal Reserve (NOT a government entity) by a staggering amount.  By 1934, Federal Reserve notes no longer had the gold clause.
In the years between 1930 and 1933, it is estimated 10,000 banks failed.  Once the bank locked it’s doors, no one had access to their money or safety deposit boxes.  It was all gone in a heartbeat – virtually overnight in many cases. It all became the property of the US Treasury.  Can you imagine the desperation in those times?  And THEN, FDR is elected President and issues this Executive Order to protect the Fed.
So what was the point of Executive Order 6102? It was two-fold.
First, in order to make the confiscation legitimate, the US government required the delivery of all gold coin, bullion, and certificates to be concluded by May 1, 1933 in exchange for $20.67/ounce. Several months later, once everyone’s gold was collected,  the new, official gold exchange price (which was merely the government’s bid, as nobody could actually buy gold at this price) became $35.00, which remained until 1971 when the last trace of the dollar’s pseudo convertibility into gold was wiped out by Nixon. In effect, what FDR did was to devalue the USD by 70% overnight.
Secondly, not only did the government remove the possibility for ordinary citizens to hold gold by establishing price and criminal controls over possession, it also changed the rules in the middle of the game allowing it to build up a massive gold hoard of over 8000 tons, which is supposedly maintained at Fort Knox, and is, to the best of our knowledge, unauditable by any mere mortal. (Many Americans believe there actually is NO gold at Fort Knox, having been frittered away long ago). Critically, it made the US government the sole source and monopoly agent of gold purchases, using reserve fiat currency it could print with impunity, beginning in 1933 and continuing through 1974 when the limitation on gold ownership was repealed. President Gerald Ford signed a bill legalizing private ownership of gold coins, bars and certificates by an act of Congress codified in Pub.L. 93-373, which went into effect December 31, 1974. In summary, the US government, which is now the largest official holder of physical gold in the world, had 40 years of uncontested zero cost gold accumulation in which it could build a gold inventory that was second to none.
Many people chose not to play the new game and, surprisingly, only one was prosecuted.  A New York attorney, Frederick Barber Campbell, had over 5,000 troy ounces (160 kg) of gold on deposit at Chase National Bank. When Campbell attempted to withdraw the gold, Chase refused and Campbell sued Chase. A federal prosecutor then indicted Campbell on the following day (September 27, 1933) for failing to surrender his gold. Ultimately, the case failed, but the authority of the federal government to seize gold was upheld, and Campbell’s gold was confiscated anyway.
(Now you should understand why your “foolish” grandparents kept their money buried in the backyard or stuffed in their mattresses or coffee cans.   A true “Ah-ha” moment for many of us . . )
Interestingly, the custodial bank with the 5000 ounces of gold is the bank that became JPMorgan  . . . .  how do ya like THEM apples!
And remember: when in doubt, recall Bernanke’s immortal words: “gold is not money.”  So if you’re accumulating gold in any form these days as a hedge against disaster, be careful where you keep it!
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References:   www.moonlightmint.com/bailout.htm; http://econproph.com/2009/10/26/fdic-managing-the-crisis-the-fdic-and-rtc-experience/; http://www.zerohedge.com/news/2013-04-09/day-government-seized-Americans-gold-april…; http://en.wikipedia.org/wiki/Executive_Order_6102