 A Myth Concerning
Gold Confiscation
Roland Watson
May 29, 2009
Recently I have seen a few
articles speculating whether President Obama would decree the
confiscation of private gold holdings from US citizens. This
is seen as a counter against the perceived inflation surge that
many believe will wash over America and the world in years to
come as a result of the huge debt load that the credit crunch
has instigated. In fact, I have even seen speculations about
mining companies being nationalized - even silver mining companies!
Gold confiscation is a subject
that divides gold investors. Some say it won't happen again and
others say it will happen again. The one thing they tend to agree
on is that they don't want it to happen again. I wrote on this
subject three years and I just want to reiterate one myth about
the previous Roosevelt confiscation that needs to be buried lest
anyone think a government seizure would leave you bereft of gold.
Roosevelt issued executive
order 6102 in April 1933 ordering in all gold coin, bullion and
certificates. One contention is that most people did not bother
obeying such a directive. In my opinion, the following statement
by the Roosevelt government was not bluster but largely true:
"White House Statement
on Returning Gold to Federal Reserve Banks. April 5, 1933
"In the past
weeks the country has given a remarkable demonstration of confidence.
With the reopening of a majority of the banks of the country,
currency in excess of $1,200,000,000, of which more than $600,000,000
was in the form of gold and gold certificates, has been returned
to the Federal Reserve Banks.
"Many persons throughout
the United States have hastened to turn in gold in their possession
as an expression of their faith in the Government and as a result
of their desire to be helpful in the emergency. There are others,
however, who have waited for the Government to issue a formal
order for the return of gold in their possession. Such an order
is being issued today."
The anti-confiscation contention
is that the people who were waiting for the government to issue
a formal order were not for turning their gold in. As can be
seen from the above release, $600m or roughly the equivalent
of 30 million ounces of gold in coin and certificate had been
returned to the banks prior to the executive order.
Now it can be conceded that
the people waiting for an official order may have ultimately
held on to their gold, but a reading of the order suggests
that illegally held gold was probably not going to happen in
any great measure. The reason for this is the following section
of Executive Order 6102:
"All persons are hereby
required to deliver on or before May 1, 1933, to a Federal Reserve
bank or a branch or agency thereof or to any member bank of the
Federal Reserve System all gold coin, gold bullion, and gold
certificates now owned by them or coming into their ownership
on or before April 28, 1933, except the following:
"(b) Gold coin and
gold certificates in an amount not exceeding in the aggregate
$100.00 belonging to any one person; and gold coins having recognized
special value to collectors of rare and unusual coins."
Now section (b) is the text
of interest. Many have focussed on the numismatical portion,
but I have rarely seen much said about the $100 exemption clause.
At that time gold was valued at $20 per ounce. The $20 double
eagle coin in circulation contained just under an ounce of gold
and five of them made up $100.
What is this exemption clause
in executive order 6102 saying? It is saying that each person
could keep up to nearly five ounces of gold coin in their possession
without fear of prosecution! At that time, the adult population
of America was about 90 million. In theory, the population could
have held onto 450 million ounces of gold if they had the means
and will to do it (in practise, this much gold was never minted
into coin).
Now was there widespread illegal
hoarding of gold? Milton Friedman and Anna Schwartz in their
book, "A Monetary History of the United States, 1867-1960"
give statistics which suggest that 13.9 million ounces of gold
were still in circulation in January 1934 and that only about
21.9% of the gold in circulation had been handed in.
The trouble with that statement
is that it does not seem to take this 5-ounce exemption clause
into account. Although we do not believe that 90 million people
actually held about 5 ounces each, it would only take each adult
in America to legally hold 0.15oz of gold to account for this
"missing" 13.9 million ounces. Indeed, even if an attempt
was made to take this 5oz exemption into account, I would consider
it nigh impossible to differentiate legally-held coin from illegally-held
coin.
How much of these 13.9 million
ounces was legally held? Of course, we cannot say definitely,
but it seems clear to me that even during the Great Depression,
holding five ounces of gold was not an onerous task for many.
How much was the average wage in America in 1933? I found a few
answers by searching the Internet, but they averaged out at about
$1400 per annum. That means that $100 was less than a month's
wage and although the savings rate in 1933 was one of the lowest
in recent American history, we suspect many households held more
than $100 in savings.
Indeed, it would only take
2.8 million adults or 3% of the adult population to hold 5oz
and account for the entire 13.9 million ounces of gold. When
we also consider how many probably redistributed their excess
gold coins to wives, sons, daughters, parents and so on to avoid
confiscation, I think we can safely conclude that illegal hoarding
was not a major activity.
Now one may say that if Roosevelt
had not included this 5oz exemption then illegal hoarding would
have happened. Perhaps it would have but in this exemption we
see Roosevelt the Socialist in action. For you see, democratic
socialism has this thing about progressive taxation and I suggest
the same for confiscation. Just as people will not start paying
tax on their income until they have crossed their personal 'allowance,'
so it was with this gold exemption clause. How do you get the
majority of average income voters on your side on this matter?
You simply let them keep a portion of their gold and then give
them the added bonus of a 57% windfall when gold is revalued
to $35! How many sold their five eagle allowance at $35 instead
of $20? Nobody knows for sure but that is how reflation works,
you create extra dollars for people to spend.
So how would this arrested
form of confiscation work if it was imposed today? If President
Obama seized the gold ETFs but allowed citizens to keep five
ounces per head how would that pan out? Quite easily I suspect.
As it happens, five ounces of gold currently costs about $4800.
If the average American wage is $40000 today, then this 5oz would
form 12% of annual income. In 1933, it would have been 7% at
$20 an ounce and 12% at $35 an ounce so not much of a difference
even after 76 years (herein we see gold's ability to preserve
wealth across the decades).
Of course, a modern confiscation
may be for different reasons to a 1930s one. The point I am trying
to make is that Roosevelt signed off executive order 6102 not
to prohibit ownership per se but to prohibit hoarding
which is a completely different matter. The relevant portion
of the executive order is:
"I, Franklin D. Roosevelt,
President of the United States of America, do declare that said
national emergency still continues to exist and pursuant to said
section to do hereby prohibit the hoarding of gold coin,
gold bullion, and gold certificates within the continental United
States by individuals, partnerships, associations and corporations
..."
Possessing five gold double
eagles is not hoarding, gold ownership was not prohibited,
gold hoarding was. Thanks to the gold standard, people
were cashing in paper for gold and depleting the Treasury. But
when the gold standard began to prove inconvenient to a government
that wanted to reflate the economy, it had to go. So much for
the gold standard holding the government accountable,
they just discard it when it gets in the way!
Today we have a similar situation
in terms of form but not magnitude. The government wants to reflate
but gold is not in the way this time. Back in 1933 you increased
the money supply by 50% by revaluing gold to $35 an ounce. Today,
you just devalue the dollar by debt auctions and quantitative
easing. Is gold confiscation coming? I doubt it and even if it
did, the exemption clauses of order 6102 may set a precedence
for many families to hold sizeable portions of gold.
Further analysis
of silver can be had by going to our silver blog at http://silveranalyst.blogspot.com where readers can
obtain a free issue of The Silver Analyst and learn about subscription
details. Comments and questions are also invited via email to
silveranalysis@yahoo.co.uk.
Roland Watson
email: silveranalysis@yahoo.co.uk.
321gold Ltd
|
