The Gold Confiscation Reality - Remembering 1933

With the dollar growing weaker and the price of gold skyrocketing, could we see a repeat of the 1933 gold confiscation?  Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both. Most citizens who owned large amounts of gold had it transferred to countries such as Switzerland.

Order 6102 specifically exempted “customary use in industry, profession or art”—a provision that covered artists, jewelers, dentists, and sign makers among others. The order further permitted any person to own up to $100 in gold coins ($1,677 if adjusted for inflation as of 2010; a face value equivalent to 5 troy ounces (160 g) of Gold valued at about $6200 as of 2010). The same paragraph also exempted “gold coins having recognized special value to collectors of rare and unusual coins.” This protected gold coin collections from legal seizure and likely melting. The price of gold from the Treasury for international transactions was thereafter raised to $35 an ounce ($587 in 2010 dollars). The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.

In the 1980s and 1990s, gold languished and was replaced by the dollar as the standard against which all things financial are measured. In the coming years, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Gold’s value, relative to most national currencies, will soar. However, the monetary crisis that will make your gold extraordinarily valuable will also create the very situation in which the government could return to some version of the gold standard, which would require that central banks enlarge their stocks of gold, increasing the gold price.

2011 is not 1933. Back then, the money supply was constrained by the gold standard. As Roosevelt concocted the New Deal, he ran smack up against that wall. He needed more money than he had, couldn’t raise taxes in a depression, and couldn’t print dollars that weren’t gold-backed. His solution may have been reprehensible, but it was elegant. First, make the private possession of gold illegal, paying those who surrender their metal the official price, $20.67 per ounce. Then revalue gold to $35 per ounce. Voilà: Instant inflation, lots of new money, problem solved. And the New Deal was off and running.
 

But we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation.  However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash. Given this kind of clout, what does he need gold for? An argument can be made that the yellow metal is still useful. It runs like this: Creating money out of thin air is inflationary, and a large stash of gold, even if it doesn’t officially back anything, serves as a sort of counterweight. People around the world will have greater confidence in your currency knowing that, as a last resort, you can pay your bills in gold. And the more gold you have, the better.

Furthermore, confiscating gold and assigning it a fixed dollar value would also prevent the kind of runaway gold price that the coming massive inflation is bound to trigger. As those who argue that the gold price is already suppressed correctly point out, the government has decided to sacrifice the dollar in order to avert deflation. Thus a lower-than-free-market gold price helps obscure the damage that’s been done to the currency. People feel richer with more, albeit inflated, dollars in their pockets; a rapidly escalating gold price shows them that they’re not.

Although the U.S. dollar is constantly under pressure, the U.S. government continues to stockpile debt, and impossible-to-fulfill entitlement commitments loom on the horizon, the idea that the U.S. government would try to confiscate citizens’ gold today or anytime in the foreseeable future certainly seems spurious at best. After all, the government did so in the past in order to recalibrate the gold standard, which we have not been on since 1972. However, our government has become increasingly bold in its refusal to be restrained by the Constitution, and following the return to limited government (at least in rhetoric) by the Reagan administration in the eighties, the Constitution has been all but ignored by subsequent administrations and congresses.

The government might want to reenact gold confiscation, and most congressmen would feel no moral compunction about doing so, but logistically, it would seem virtually… Read More

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