The Gold Confiscation Act

The Gold Confiscation Act

The Great Depression stands out as a time of incredible adversity for Americans. During the Roaring Twenties, all appeared well and good as U.S. Stocks were riding high and the GDP was increasing year by year. It seemed that everyone had a great idea and money flowed easily. But, much as with modern times, there was a speculative undercurrent that bolstered the economy. So excessive was the euphoria that many took loans in order to buy more stocks. Brokers were so overconfident that it became routine to loan small investors over two-thirds of a stock’s value. The amounts were staggering for the time, with more money out on loan than the total U.S. currency in circulation.

THE MARKET CRASHES

 

On September 3, 1929, the Dow Jones Industrial Average reached its peak at 381.17, before correcting over the following three weeks. October 24th (Black Thursday) saw a sudden drop in prices as 11% of the stock market was wiped out. On Friday leading Wall Street bankers placed large bids on blue chip stocks, successfully restricting losses to a mere 6.38 points.

News traveled fast over the weekend, however, with orders to sell waiting on the floor on what would become known in history books as Black Monday. By the end of the day 13% of the value of the market had been erased. Black Tuesday saw another 12% of shareholder wealth evaporate, with the DJIA closing at 230.07.

Though a bear market rally was staged beginning in November, the following year would prove tumultuous. Finally, the bear has his way from April, 1931 to July 1932, when the DJIA ended the day at 41.22, the lowest closing day in the 20th century. The reverberations were felt in all major world markets, leading to a worldwide “Great Depression.”

THE BANK RUNS

The economic response to the stock market crash was devastating. Obviously, those who had borrowed in order to buy stocks couldn’t pay back their loans. The worldwide reverberations decreased global demand for U.S. products dramatically, shrinking from $5.2 billion to $1.7 billion by 1933. To make matters worse, the uncanny timing of the Dust Bowl years (The Dirty Thirties) decimated American (and Canadian) crops, causing many farmers to default on loans while removing even more purchasing power from the economy.

Banks were not protected, so began to fold as loans to every sector were resulting in default. As these banks started folding, people grew concerned that their money would not be protected. Panic ensued, resulting in bank runs, which cascaded into more banks folding. Even the banks that survived were crippled.

The result of this money evaporating from circulation caused deflation, striking a serious blow to any attempt at recovery. Increased interest rates designed to lure foreign investment inhibited domestic borrowing. Furthermore, these events took place while the U.S. was still on the gold standard, inhibiting Federal monetary manipulation that takes place today. In hindsight, though it was a very difficult time, if monetary policy had allowed for intervention, it’s likely that such actions would have resulted in a more severe depression and prolonged recovery time.

FISCAL POLICY BY EXECUTIVE ORDER

As citizens pulled their money out of banks and took steps to consolidate their holdings, spending continued to decrease. From a political perspective, this was seen as a threat to the economy. While saving was the good and responsible thing to do on a personal level, it had the effect of further constricting the economy on a national level.

As if these challenges weren’t enough, foreign countries began cashing in their U.S. Dollars in exchange for gold. As a result of this action, coupled with citizens’ holding their gold rather than spending it, U.S. gold reserves were diminishing rapidly.

In a bold move, President Franklin D. Roosevelt attacked these problems through a series of executive orders. The most aggressive of these orders was signed on April 5, 1933, “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States.” Through this action, most gold coins were taken out of circulation in exchange for $20.67. In effect, “hoarding” became a criminal offense under penalty of $10,000 fine or ten years imprisonment or both. Five ounces of gold was the maximum citizens were allowed to retain.

Executive Order_6102

There were certain forms of gold exempted from the order, including those customarily used in industry, profession or art, as well as “gold coins having recognized special value to collectors of rare and unusual coins,” protecting gold coin collections from seizure and possible melting. For the average American citizen, however, following this order left them with five troy ounces, or less. Furthermore, the order attempted to make gold clauses (agreements to receive gold in exchange for goods or services) illegal in business contracts.

The following year the Gold Reserve Act of 1934 rendered the gold clauses unenforceable, but also revalued the dollar in gold to $35 per ounce. Thus, with the stroke of a pen, the government holding of gold was increased in value by almost 75%, while the wealth of all who held dollars was reduced by over 40%.

WILL HISTORY REPEAT?

There are many similarities today. Our economy is in turmoil. Massive money printing is destroying the value of the dollar, with no end in sight. Debt today, both sovereign and private, has reached levels never seen before in the history of mankind. Every sector of our economy seems to be stressed.

Gold is a consistently safe refuge during such times. Furthermore, many experts agree that even if the United States could manage to keep the domestic economy afloat for years to come, the problems in Europe are severe enough to cause major disruptions throughout the world.

Whether or not history will repeat itself is yet to be seen. However, because of the precedent set by Executive Order 6102, many consider collectible, or investment grade, coins to be excluded from future efforts to once again transfer gold held by citizens to the hands of the government.

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