The Blanchard Economic Research Unit
In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt, under Executive Order No. 6102, confiscated all privately owned gold in the United States. Could it happen again?
With the dollar growing weaker and the price of gold skyrocketing, could we see a repeat of the 1933 gold confiscation?
The eventual result of the Bailouts will be inflationary and will further weaken the dollar. The flip side to a weak dollar is a rising gold price. All other things being equal, gold will continue to climb higher as the dollar moves lower. Today, just as in 1973 when gold began its last, big bull market, gold and the dollar are competitors, riding opposite ends of an economic seesaw.
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.
The problem is that the very circumstances that would make your gold so valuable could also result in its being taken from you. In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt, under Executive Order No. 6102, confiscated all privately owned gold in the United States. Could it happen again? No two currency crises are exactly alike. However, it may be important to consider the reason why confiscation or expropriation is even relevant: the fact that, if it eventually became necessary for the U.S. to bolster a collapsing dollar with gold, we no longer have enough gold to do so in any meaningful way. As our debt and deficits have soared over the years, and as more and more dollars have been created, U.S. gold reserves have disappeared. In 1950, the United States Department of the Treasury owned 68.2 percent of the world's total gold reserves. Today, the Treasury owns less than 28 percent.
Gold Confiscation: What Happened in 1933?
People who scoff at the suggestion that the government might restrict private gold ownership should remember that many other countries have restrictions on (or absolute prohibitions against) private gold ownership. They should also remember that, in 1933, Franklin Delano Roosevelt dealt with a monetary and banking crisis by confiscating all privately owned gold; paying for the gold at $20.67 per ounce; immediately devaluing the dollar by 40 percent; and setting the price of gold at $35.00 per ounce. At a single stroke, Roosevelt increased the government's gold assets, stabilized the monetary system and increased wholesale prices by more than 33 percent. However, he also inflicted losses of 40 percent on gold owners and stripped them of the gold that they saved to insure their financial futures.
Franklin Delano Roosevelt was inaugurated during the depths of The Great Depression. Anxious Americans, demanding gold, had reduced the Federal Reserve's gold supply almost to the legal minimum, creating additional fears of an impending monetary crisis.
At the time, the United States still adhered to the gold standard, which provided for fixed exchange rates between currencies and gold and made gold an alternative form of currency. The international gold standard had been one of the first casualties of World War I, but enjoyed a brief revival after the War. It disappeared for good in the legislative circus that served as the coming-out party for the Roosevelt administration.
On March 6 of 1933, the President set in motion a chain of events that ended the international gold standard once and for all. First, he closed the nation's banks and prohibited them from paying out or exporting gold coins and bullion, using emergency powers granted by the Trading with the Enemy Act that had been enacted during World War I. When it was called to the President's attention that there was no legislative justification for either the executive or the legislative branch of government to close privately owned banking institutions, he prepared legislation to confirm what he had already done.
Three days later, he sent to the 73rd Congress the Emergency Banking Relief Act, which sought to amend the Trading with the Enemy Act and specifically those provisions which authorize the President in times of war to "investigate, regulate, or prohibit... the importing, exporting, hoarding, melting or earmarking of gold... " The change made by the Emergency Banking Act was to provide the President with authority to act "during any other period of national emergency declared by the President," thus expanding his authority beyond the limitation of actual war. The Act also vested the Secretary of the Treasury with the discretion to compel holders of gold to surrender it.
The very next day, acting under the authority of the Emergency Banking Relief Act, President Roosevelt issued Executive Order No. 6073. In addition to authorizing the Secretary of the Treasury to decide which of the nations' banks could open, the Order prohibited owners of gold from exporting or otherwise removing it from the United States. Shortly thereafter, also under the authority of the Emergency Banking Act, the President issued Executive Order No. 6102, which provided that all privately owned gold in the United States was to be confiscated by the government. As compensation, the owners would receive paper money.
The President's gold confiscation order specifically exempted "gold coins having a recognized special value to collectors of rare and unusual coins." The reason for the exception had nothing to do with sympathy for owners of numismatic gold coins, but rather with the provisions of the Constitution's Eminent Domain Clause. Twelve words provide the protective barrier: "nor shall private property be taken for public use, without just compensation." Since the confiscation of rare coins would be a taking of private property, just compensation would have to be paid.
When gold bullion was confiscated, the government had no difficulty asserting that payment in paper currency at the official gold price was just compensation. What had occurred was arguably a mere exchange of component parts of the monetary system, i.e. bullion for currency. But just compensation for rare gold coins — manifestly not part of the monetary system — would have been a very different situation. The government would have been forced to determine compensation on a coin-by-coin basis, an impossible administrative and logistical burden.
Gold and the Dollar
From 1933 forward, private possession and ownership of gold was illegal for U.S. citizens. During the period following the Second World War, American dollars were backed in international commerce by gold reserves exceeding 60 percent of the world's total gold stock. By the 1960s, however, U.S. balance of payment problems and international inflation began to cause a severe outflow of U.S. gold reserves.
In an attempt to halt the outflow of gold, in 1961, President Eisenhower restricted the holding of gold overseas by U.S. citizens. In 1962, President Kennedy prohibited American citizens from owning gold bullion overseas and required those who already held gold abroad to sell it.
However, since foreign central banks had the ability to redeem dollars for gold, the continued decline in the value of the dollar was bound to produce more and more requests for conversion from dollars to gold. As the U.S gold holdings dwindled, foreign central bankers' urge to exchange dollars for gold grew more pressing. By 1971, the gold reserves of the United States could cover only about one-third of the dollars then held by foreign central banks. Faced with the threat that those foreign central banks would all demand that their dollars be converted into gold, President Nixon announced on August 15, 1971, that the United States would no longer redeem U.S. dollars in gold.
At the end of 1971, the dollar was devalued by 8 percent. It now took $38 dollars to buy one ounce of gold. On February 12, 1973, the dollar was devalued again, this time by 11 percent. It now took $42.22 to buy one ounce of gold. By March the price of gold on private markets was almost $90.00 per ounce. On March 12, 1973, all links between the dollar and gold were officially abandoned.
Also in 1973, Congress passed legislation giving the President the discretionary authority to legalize the private ownership of gold, provided that legalization would not "adversely affect the United States' international monetary position." President Nixon chose not to exercise the authority given to him by Congress. The following year, Congress enacted new legislation legalizing private ownership of gold, which was finally passed into law by President Ford on August 15, 1974. With his signature, President Ford ended the forty-year ban on private gold ownership. Gold immediately increased in value.
Gold Confiscation: Gold Regulations
Nothing in the legislation that ended the forty-year ban changed the fact that Congress continued to treat the private ownership of gold as a privilege to be enjoyed at its discretion.
"The private ownership of gold is a privilege, not a right. Congress revoked the privilege of private ownership in 1933 and restored it in 1974. Congress could easily revoke the privilege again. In fact, at no time during this century has the U.S. government recognized the right of private gold ownership. The Trading with the Enemy Act, which President Roosevelt invoked in 1933 to restrict private gold transactions, remains law. The government could reactivate the machinery, which the Trading with the Enemy Act established, to implement gold confiscation." - 5 Boston College International and Comparative Law Review 297,320 (1982)
The Treasury Department's 1954 amendment to the Gold Regulations continued the exemption of rare coins from the gold confiscation provisions and expanded the definition of "coins with a recognized special value to collectors of rare and unusual coins" to include "gold coins made prior to April 5, 1933." However, the repeal of the Gold Regulations in the 1970s resulted in the elimination of the relevant Treasury Regulations, leaving only the original definition: that of "coins with a recognized special value to collectors of rare and unusual coins," in place.
Several recent articles have suggested that the definition of rare coins for purposes of the exemption from confiscation was further expanded in 1984 to include gold coins the "gross proceeds from the sale of which exceed by more than 15 percent the value of the underlying... property." However, that definition was included in a proposed Treasury Regulation, which was introduced in 1984 and which has consistently been on the Semi-Annual Agenda of Regulatory Actions, but none of the relevant provisions of the proposed regulation have been adopted as law.
Although private ownership of gold in the United States was legalized on August 15, 1974, the power to confiscate gold remains in the hands of the President. The President still retains the right, under the Emergency Banking Relief Act, to "investigate, regulate or prohibit... the importing, exporting, hoarding, melting or earmarking of gold" in times of a declared national emergency. It is highly unlikely that either the Courts or Congress would successfully argue that confiscatory powers are not implicit in the Emergency Banking Relief Act if a currency crisis or other fiscal emergency prompted the President to, once again, nationalize gold.
Gold Confiscation: How Do You Protect Yourself?
Relevant laws exempt rare coins from the confiscation provisions. Rare coins are private and do not require the filing of information returns with the Internal Revenue Service, as does reportable bullion.
Since the Treasury Department's 1954 amendment has been repealed, and the proposed expansion of the definition of rare coins for purposes of exemption from confiscation has never been enacted into law, an investor's gold holdings should include "gold coins having a recognized special value to collectors of rare and unusual coins." The best approach for such investors is to put together collections of rare coins. Such collections offer a number of advantages, which include exemption from confiscation, aesthetic satisfaction, and significant investment returns.
The time to act is before, not after, a crisis occurs. The political process does not always deliver its best troops at the point of attack, and governments pushed to the brink often ignore the constitutional niceties. In any event, if you wait until gold confiscation, currency exchange controls, or any other emergency measures are taken, it will be too late.
As an investor, what should you do? Put some of your savings in the ultimate crisis hedge — rare gold coins. In the event of a crisis it would be better to own numismatic gold than bullion.
Gold Confiscation:Why Rare Coins?
Investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago. The unwinding of leverage by hedge funds and other institutional investors that has slammed both financial assets and commodities is crushing markets around the world.
Since 2002, we've been telling our clients that the price of gold was going up — a lot. We believe that the current bull market will end only when gold surpasses its 1980 high of $850. In today's dollars, that would mean a price of more than $2000 per ounce! We've still got a long way to go.
However, gold shouldn't be the beginning and the end of your hard-asset portfolio. Just as you diversified your portfolios of financial assets by buying gold, so should you own other tangible assets that increase your opportunity for profit at the same time that they reduce volatility.
Professor Harry Markowitz, a Nobel Prize winner and the father of modern portfolio theory, defined the concept of the Defensive Asset Class. Assets within the class have similar risk/return characteristics, are positively correlated with each other and are traditional inflation hedges that are negatively correlated to stocks — they do well when stocks do poorly. Historically, the principal Defensive Asset has been gold. However, a recent study, which was originally done for the Joint Committee on Taxation of the House and Senate, showed that U.S. rare coins were a better hedge than gold and produced better investment returns.
That study, updated through 2007, provides a comparison of the performance of gold and gold rare coins. Conducted by Raymond E. Lombra, Professor of Economics at Penn State, the study served as the investment basis for legislation that was passed by Congress and which provided for the inclusion of gold in Individual Retirement Accounts. The conclusions over the 28-year period covered by the Lombra Report are amazing:
- Rare coins are a better inflation hedge than gold.
- Rare coins are a better hedge than gold against falling prices for stocks and bonds.
- Rare coins produce significant profits even during periods when the price of gold is falling. For example, from 1988-1990, rare coins went up more than 100%; the price of gold fell from $500 to $360.
- The average annual return on rare coins was more than 200% greater than the return on gold.
- The return on rare coins in their best year was approximately 100% greater than the return on gold in its best year.
- The return on rare coins in their best three years was approximately 100% greater than the return on gold in its best three years.
In 2008, rare coins outperformed the stock market and gold during a year of severe economic turmoil:
Investment studies have shown that rare coins of true quality and rarity, properly priced and selected, can be excellent long-term investments. Rare coins have historically offered the opportunity for both substantial capital appreciation and asset protection during inflationary cycles and periods of economic disruption. For example, some years ago, the Chairman and Chief Executive Officer of Fidelity Investments, was one of the principal investors in a partnership that invested in rare U.S. coins. The partnership was liquidated approximately 4 years later for a profit of more than 500%.
But rare coins offer more than the occasional windfall profit. A study by the Chief Investment Officer for GE Private Asset Management, Inc. concluded that rare coin returns have been highly attractive over the last sixty-two years, and that even a small allocation provides a good diversification for a well-diversified portfolio.