Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Stock Market Major 4 or Primary IV Wave - 31st Jan 15
Gold And Silver Price Probability for A Lower Low Has Increased - 31st Jan 15
U.S. Bond Market Has Reached Tulip Bubble Proportions - 31st Jan 15
The 3 Big Reasons My Apple Stock Price Prediction Is Still Coming True - 31st Jan 15
199 Days of Hell - Unintended consequences: Oil and the Worst Battle in History - 31st Jan 15
Kaminak Yukon Gold - 30th Jan 15
U.S. Asset Price Deflation Coming Up? Food Prices Drop? CPI Negative? Credit Deflation? - 30th Jan 15
An Often Overlooked Predator: State Governments and Income Taxes - 30th Jan 15
Bullard Says Rates at Zero Interest Rates Not Right for U.S. Economy - 30th Jan 15
Why the European Central Bank's Massive Economic Experiment Will Fail - 30th Jan 15
Gold Price Short-Term Bottom Due, Higher into February - 30th Jan 15
Silver and Other Precious Metals To Manipulate - 30th Jan 15
Socialism Is Like a Nude Beach - Sounds Like a Great Idea Until You Get There - 30th Jan 15
To Create Unlimited Market Liquidity or Not; That Is the Question - 30th Jan 15
Seen the Energy Downturn Movie Before, and Not Worried - 30th Jan 15
It’s Not Time to Sell Everything – Yet - 30th Jan 15
13 Investment Themes for 2015 - 29th Jan 15
The Raging Currency Wars Across Europe - 29th Jan 15
The End of Currency 'Safe-Havens' - 29th Jan 15
Ron Paul on U.S. Fed, Central Bankers Monetary Psychopaths - 29th Jan 15
Why Microsoft Stock Will Provide Major Investing Returns - 29th Jan 15
Exploring the Clash Within Civilizations - Mind the Gap - 29th Jan 15
Saudi Arabia Changes Kings, But Not its Oil Policy - 29th Jan 15
Crude Oil Price Bulls vs. Resistance Zone - 28th Jan 15
Acceleration Of Events With Rising Chaos – US Dollar Death Foretold - 28th Jan 15
The Fed and ECB Take the West back to when the Rich Owned Everything - 28th Jan 15
Washington's War on Russia - 28th Jan 15
Cyber War Poses Risks To Banks and Deposits - 28th Jan 15
Lies And Deception In Ukraine's Energy Sector - 28th Jan 15
EUR, AUD, GBP USD – Invalidation of Breakdown - 28th Jan 15
“Backup-Camera Envy” Is Driving This Unstoppaple Investment Trend - 28th Jan 15
The Great "inflated" Expectations for Gold, Oil, Commodities -- and Now Stocks - 28th Jan 15
How to Find the Best Offshore Banks - 28th Jan 15
There’s More to the Gold Price Rally Than European Market Fears - 28th Jan 15
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Learn to Trade

Why U.S. Gov't Confiscated Gold in 1933. Can it Happen Again?

Commodities / Gold and Silver 2012 Feb 29, 2012 - 10:54 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleMore and more investors are asking this question. Many observers and commentators have ridiculed this idea as archaic with the conditions that led to the confiscation being so different as to leave such a possibility as remote as the return of the dinosaurs.


In this the first part of a series on the subject we look at the picture that led to the confiscation and look at factors that caused the confiscation to see if there are reasons why it can happen again, today!

Gold Confiscation Order 1933

At the left, you will see the actual executive order in which U.S. citizens lost the right to own gold. From May 1st 1933 until 1974, U.S. citizens could no longer hold gold as a protection against paper money, which also lost its gold backing at the same time.

Foreign central banks could continue to exchange the U.S. dollars that came into their possession -known as Eurodollars for decades--for gold and did so particularly when the U.S. dollar was devalued and then floated against the gold price in 1971.

Why?

The "why" is critical to our understanding of the current, global monetary system! There were two distinct phases to the process that began in 1933.

  1. The U.S. monetary and banking system contributed to a large extent to the depression. As Mr. Ben Bernanke has aptly demonstrated by his Quantitative Easing, a reduction in the money supply shrinks economic activity significantly and breeds deflation. After four years of such shrinkage, it was realized that a huge increase in the money supply was needed to invigorate the U.S. economy and make assets preferable to cash. The monetary system was based on the Gold Standard, a system that set the gold price at a fixed level against the dollar and other currencies across the developed world.

One gets the wrong perspective if you look at the gold price as having been subsequently raised as opposed to the reality that it was the U.S. dollar that was devalued. In an instant, the money supply of the U.S. was increased by 75% in 1935 when the gold price was raised from $20 per ounce to $35 per ounce. This was a devaluation of the dollar. It brought a tsunami of liquidity to the banking system that saw deposits leave the banks and flow into industry again. We stress that this was not a gold event, but a money event -gold being money at the time. As you can see on these dollar notes where gold was an integral part of the money system then.

$50 Gold Certificate

  1. The second phase of the confiscation of gold was to place gold under the control of government out of the hands of private holders, as storm clouds gathered over Europe. Government was then in a position to control the recovery and direct funds to where government felt they would be best put to use. Despite the proliferation of dollars in the system, confidence in it remained high as it remained linked to gold. The belief that, somehow, this restrained the issue of money also remained inexplicably strong. So long as confidence remained in currencies the value of the dollar remained solid.

Had gold been left in the hands of individuals and private institutions, such an issue of money may well have led to it being sold for foreign-held gold. This would have defeated the government's purpose in devaluing the dollar. The U.S. government had to confiscate the gold of its citizens to ensure the focused success of the increase in the money supply.

The success of dollar devaluation and the "governmentization" of gold was successful as it fueled a recovery that was also invigorated by export demand for U.S. goods ahead of the Second World War.

Fixed Exchange Rates, then "Floating"

An ingredient that is often overlooked today is that the world back then was a world of fixed exchange rates only. That's why it took one government decree to change the quantity of money. That hasn't changed! Today, Quantitative Easing does the same.

Chairman Ben Bernanke is a scholar on those times. He used his knowledge of those days to forge the policy he follows today to avoid either deflation or depression. So far it has worked to the extent that the U.S. economy has entered neither. It's clear though that he needs the vigorous support of a very focused U.S. government and the U.S. citizens to turn positive, before he can see his policies produce a convincing recovery. He has neither!

But something fundamental has also happened that will allow for the confiscation of gold, but not for the purpose of a simple devaluation of the dollar and increase in the money supply. We now live in a global world of supposedly floating exchange rates. Exchange rates are driven by market forces to reflect their value against other currencies. Central Bank intervention does happen on a wide front, either directly through exchange rate management or the supply of currencies between governments to 'manage' exchange rates, almost behind the scenes. After all, it would be far too expensive an exercise to let currencies find a free market level in the global, competitive world we now live in. But there is a point where market forces are strong enough to defy government wishes, through falling confidence. Such falls in confidence can and will affect the exchange rate of a currency in the face of the best efforts of central banks to counteract such "management" of currencies. This is when it needs the support of its gold and foreign exchange reserves. The argument that gold cannot be used because ot would have a deflationary impact on the monetary system, ignores the ingenuity of monetary authorities.

We feel that, contrary to nearly all the work we have seen on gold's role in the monetary system, a floating gold price would have the flexibility to prevent its price from having a deflationary impact!

The U.S. Dollar Controls Money

The U.S. dollar is the least vulnerable to a proper reflection of its true value in major exchange rate changes and small nation's currencies, the most vulnerable to them. With the currency world having the shape of a tree, with the U.S. dollar as its trunk, it will take far more than falling confidence in the U.S. economy to make the dollar tumble. We've seen that confidence in the U.S. dollar fall heavily over the last few years but remains as the pivot point for the world of currencies. As the only oil currency of note (only a small part of the oil market prices itself in other currencies) the U.S. is in a position to ensure its use and the need for it in the global currency system.

US 100,000 Gold Certificate

There's a point where this'll change radically. We're seeing this change now. With Asia up and coming, and sucking the wealth of the West into itself through direct competition, it's only a matter of time before the U.S. pivotal position in the monetary system changes.

One of the first signs of this will be China taking a significant role in the I.M.F. while the voting power of the U.S. reduced to below the point at which it has a controlling vote. (Currently, the U.S. has 16.8% of the votes and the I.M.F. needs an 85% majority to pass any resolution.)

The next sign will be when China prices its goods in the Yuan and not in the USD. Then the USD will slip back to the role of any other leading currency, where its value reflects its Balance of Payments.

To prevent a massive drop in the U.S. dollar exchange rate, the U.S. economy will need to restructure, exporting more than it imports on the trade front, while attracting foreign surpluses through the value foreigners will get from their dollar holdings. This is far from the case now!

(We are informed that there is now an entity that whose objective is to counter any attempt to confiscate citizen's gold that is soon to launch. We will be informing Subscribers about this. Enquiries to gold-authenticmoney@iafrica.com for more information)

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014