No subject related to gold is more debated than the possibility that gold may again be confiscated by the US Government during times of economic crisis. The very mention of this topic to the die hard "gold-bugs" causes them to panic, lose sleep, overload their blood pressure monitor and question the wisdom of their gold investments. Prophets and pundits of every ilk have written endless elaborate essays at both extremes suggesting "they will never do it" or "it's a slam-dunk guarantee that they will". As you can imagine, this issue may be the single largest deterrent to purchasing physical gold coins as protection against economic catastrophe in the wake of a US dollar collapse. We will examine the arguments in detail in this section. We will present both sides of the issue in all their bombastic glory without bias and help you decide for yourself. But, unlike a good mystery novel, we will tell you the ending now:
Absolutely no one knows what the US Government will do during times of complete economic and civil chaos. If the worst-case financial scenario unfolds (a complete collapse and repudiation of the US Dollar by our foreign creditors), every previous court ruling, law or custom can be changed by a single stroke of an ink-pen at the bottom of a Presidential Executive Order (PEO). We pray that this does not occur. Since any intelligent and sober-minded financial advisor will admit this, they have to frame their advice along the lines of probability and relative risk. With a cloudy crystal ball, we proceed...
First, A Little History
Notice we said in the first line of this section above "...may again be confiscated..." What? Again? When did they do it? Why? Not many of us were alive in the early 1930's. Unless we are familiar with the history of the issue, we would know little about it. Dozens of books have been written about the causes of the stock crash and ensuing worldwide depression. While it is well beyond the scope of our study but very much related, we will try to provide enough background information to frame our discussion.
During the absolute bottom of the gut-wrenching depression which followed the collapse of the US stock market on 24 October, 1929 ("Black Thursday"), President Franklin D. Roosevelt was elected. He called Congress into an emergency session on March 5, 1933, less than 1 day after his inauguration. The House and Senate quickly passed the rather noble sounding law titled:
"An Act To Provide Relief In The Existing National Emergency In Banking, And For Other Purposes"
How lovely at first glance. If you didn't know what it really meant (as most of the US public certainly did not), it sounded like magnificent medicine for the current sickness of the depression. Everyone agreed that there was a national emergency. So some new rule or law to provide "emergency relief for the banks", has to be a good thing, right? Citizens always look to their government for help in times of distress. Even when their own government was much more a part of the problem than the solution in the first place.
This paved the way for sweeping, unparalleled confiscation of private property from law abiding citizens in the history of the United States . President Roosevelt wasted no time in flexing his new muscles. He signed Executive Order 6102 on April 5th, 1933 and Executive Order 6260 on August 28th, 1933. Order 6260 revoked and superceded 6102. These laws in short order made it illegal (a federal crime with outrageous penalties of a $10,000 fine and/or 10 years imprisonment) for any law-abiding US citizen seeking to protect his wealth by simply possessing physical gold coins or bullion which were lawfully, abundantly and freely in circulation! Can you imagine that? Our Government made it illegal to do one of the only things that would have guaranteed economic survival for American citizens wise enough to save a portion of their wealth in gold during one of the darkest economic chapters in our history. Keeping gold would have immediately almost doubled their purchasing power at a time when they would have needed it most. Franklin Roosevelt blew out the only candle available to ordinary citizens struggling woefully in the dark days of the depression. Amazing. U.S. citizens, if they had been allowed to own gold, would have automatically almost doubled their money a few months later. How? Well, Just 8 months later, new Federal legislation known as the Gold Reserve Act of 1934 enacted on 30 January, 1934 revalued gold versus the dollar. The official price was raised from $20.67 USD per ounce to $35.00 USD per ounce. Actually, we all know that gold is the immutable standard. The dollar was devalued. A 20 dollar gold coin could have theoretically been exchanged for 35 paper dollars. This would have helped the unemployed and financially ruined citizens of this nation far more than the confiscation of their only possible source of legitimate, honest wealth. I have little doubt that FDR truly "believed" that his innumerable PEO's, edicts, sweeping changes in the banking industry, public works projects and such were just what America needed. It is also painfully clear that he did not understand free-markets, or the ultimate implications of his price control policies. Use "Google" to research and read his "9 Excerpts From His January 15th, 1934 Press Conference". Also research the excellent archives of the University Of California at Santa Barbara collectively known as "The American Presidency Project". Then you will quickly realize that he must have simply signed PEO's almost carte-blanche; PEO's that were crafted carefully behind the scenes by the true "kingmakers" who, unlike FDR, knew exactly what they were doing.
We should clarify the terms of "confiscation". The US Government did not send armed soldiers house to house to search for and seize gold without compensation. Gold coins that were turned in were exchanged for legal tender Federal Reserve notes (paper money) on a dollar for dollar basis. A $10 gold coin was taken and the presenter given a $10 bill. Gold bullion was evaluated for its purity or fineness and compensated at a rate of $20.67 per ounce of fine gold. This was the official US government figure for what one ounce of gold was "worth" or "priced at" in dollars. Arbitrary? Yes. But it was the gold-dollar exchange rate of the long standing, so-called gold standard. Exchanging gold in other than common coin form was a little trickier because it required assay/testing and some delay between the time the citizen turned it in and payment was made. History is missing on most of the details. However do not forget, with legislation enacted shortly thereafter, all agents of the U.S. Secret Service as well as U. S. Customs Officers were specifically authorized to seize gold for violations of the Gold Reserve Act of 1934. Only the U.S. gold that escaped these ever-growing-longer-arms of the law made it safely to oversea bank vaults.
At any rate, this was a terribly bad trade to the financially knowledgeable, but not really understood by most Americans. They had no clue what had just happened. The law required all citizens to turn in to the government via the banks almost all gold US and foreign coins, bullion (bars, nuggets, dust, etc) and gold certificates within a few weeks after the order was issued. Gold Certificates were a special class of US paper money ("legal tender notes") which could be exchanged for US gold coins upon demand by private citizens at most banks. Only notes clearly marked as gold certificates had to be surrendered. The paper "gold claim" is rather odd; it merely represented a claim on physical gold. The US Government simply could have issued orders to the banking system to refuse to trade the paper for gold coin if presented after the infamous May 1, 1933 date. The paper could have continued to circulate at face value.
There were some exceptions to the rules. Special licenses were available from The Secretary of the Treasury via the Federal Reserve banks for certain professionals who used gold in the normal course of their business such as artisans, jewelers, dentists, etc. They were allowed to have only "reasonable" quantities on hand, i.e. they couldn't hoard large quantities of it either. Each US citizen could legally keep a total of $100.00 face value of US gold coins or US Gold Certificates. A family of four could have kept $400.00 face value of coins and so on. Banks could continue to deal in it with other banks for international settlement with additional controls and regulation, and store it for others. The wealthy financiers could still play with it in most every manner. Gold mining, refining and exporting companies could of course still deal with it. Just plain folk like you and me couldn't, at least not "legally".
There were also exceptions if the coin was considered to have some nominal numismatic or coin-collector type appeal. It was likely exempt if it was rare or unusual and typically was sold/traded for a measurable premium over the net gold value. This was vague and subject to interpretation. Many of the coins which have great coin collector appeal to us today and sell for much more than the value of the gold that is in them were considered too common at that time to qualify for exemption. Many were melted. May their atoms rest in peace.
What is the legal basis for the Presidential Power Manifested In An Executive Order?
A common clause inserted in the text of essentially every PEO is "By virtue of the authority vested in me... " FDR's edict is no exception. He specifically cited the "War Powers Act" of 6 October, 1917 and its revisions which were promulgated in March, 1933. As I recall, a large number of Texas Republicans who believed that even as late as 1994 this Emergency Act was still in effect were nigh unto seceding from the Union at one time. (That issue is a whole other can of worms!). The 1917 law was also Titled "National Emergency In Banking Relief And Trading With The Enemy Act". Fifteen long years after the original national emergency of the time (WWI) was clearly over, the law was still very much alive. Constitutional scholars have many times debated the nature of many such executive orders. When do/did they officially expire? If they were not officially rescinded, what exactly is their legal status and judicial import at any point in time? This was the gist of the Texas Republican Committee complaint in the mid 1990's. I will leave that discussion to the legal experts. Emergencies conveniently always last much longer in the eyes of authorities than they do in the heart and minds of the people under their protection. If you carefully read the text of FDR's gold confiscation PEO you would wonder when it would end. The White House released a public statement on April 5, 1933 that contained the following: "...The order is limited to the period of emergency. The chief purpose of the order is to restore to the country's reserves gold held for hoarding and the withholding of which under existing conditions does not promote the public interest".
It was only many years later that US citizens holding gold coins and bullion would be in the "public interest". These Presidential Executive Orders making it illegal for private citizens to own gold were in effect for 40 years until they were revoked by, you guessed it, another Presidential Executive Order (11825) on 31 December, 1974. What a lovely late Christmas gift from Gerald R. Ford! Americans were free to do whatever they pleased regarding gold coins and bullion again. May it ever be so.
Back to the source of the authority. We are not constitutional experts, but here is our understanding as good citizens who study our constitution earnestly. The President, under Article II of the Constitution is granted very broad powers, including primarily:
a. Wield Executive Power.
b. Serve as Commander In Chief of all the Armed Forces.
c. Grant Officer Commissions in the Armed Forces.
d. Convene Special Sessions of Congress for reasons he deems fit.
e. Enforce/Ensure as the "Top Cop" that federal laws are obeyed.
f. Receive Foreign Ambassadors.
g. Grant pardons (except for impeachment) and Stays Of Execution to convicted felons.
h. Appoint officials to many, but not all, lower positions, i.e., Cabinet members, etc.
The President must share power with The Senate and House of Representatives in some matters. The Senate must also participate in approval of treaties with foreign governments, appointment of Ambassadors, and selection of higher level court judges. Federal legislation enactment requires Congressional approval. Article II deals with powers of the Executive Branch. Clause 1 of Section 1 clearly states that the President has "Executive Power". Item "a" above was the source for matters like FDR's PEO's. Prior to WWI, executive orders were often used for relatively minor acts of state for often unremarkable matters. After the War Powers Act of 1917, this changed drastically. But the number of PEO's increased as well as the importance of the issues unilaterally enforced via use of the PEO. WWI frighteningly impacted essentially every facet of US trade with the world, international policies, existing treaties/agreements and as a consequence, directly and brutally impacted the US economy. The War Powers Act was very much exactly the right legislation needed for the uncharted territory filled with the horrors of WWI. The huge concentration of power in the hands of the President, while legitimate if carefully wielded, was supposed to be temporary. Much like the sunset clauses in the current Patriot Acts I and II. Yet, long after the guns fell silent and the bombs no longer rained from the sky, the power of the Act rested quietly, ready to strike again on a moment's notice.
What is even more significant is that most Americans are not aware of the following fact: The 1917 War Powers Act contained explicit language that EXCLUDED American citizens from the sharp teeth and effects of the legislation. FDR convened a Special Session of Congress in 1933 to remove that clause. Consequently every law abiding US citizen was subject to its decree. This permitted the President to declare a "national emergency" for just about any reason. In less than 40 minutes, with no debate, this travesty was ratified by the House and the Senate. The gold confiscation edicts were born from the illicit union of Mother Fear and Father Hubris in the midst of the depression.
Well, what happened to the gold?
Many Americans dutifully turned in their meager holdings. But not everyone. Many simply ignored the order, assumed the risks and stashed them away knowing that gold was more valuable than the paper given in exchange. Keeping it literally meant the difference between living ordying for some. There are not significant historical legal records of US citizens being fined or imprisoned for failing to comply. This was the bottom of the depression and average citizens did not have large quantities of gold. Many were jobless, bankrupt and barely surviving; selling pencils and apples on the street corners as so often depicted in the old black and white newsreels from that era. But wealthy businessmen, bankers and society elites did own considerable gold. They obviously did not turn in their gold. How do we know? Most of the US mint made gold coins that were in circulation at the time ($2.50, $5.00, $10.00 and $20.00 denominations, but mostly the 10 and 20 dollar coins) were simply shipped off in bags by the thousands to European banks (primarily in Switzerland and Great Britain) for anonymous safekeeping, far away from the reach of US authorities. They simply sat there in darkness and dust buried at the bottom of bank vaults. When gold ownership was again legalized for US citizens in 1975, tons of the coins appeared back on the US market. Many coins thought long since melted appeared, looking as fresh as the day that they were made. Many coins that were thought to be numismatically rare (meaning that only a few examples have survived and were priced very highly) turned out to exist in quantities of hundreds, even thousands. To this day there are still occasionally large hoards of US and foreign gold coins likely hidden during the 1930's that are available to collectors and investors coming onto the market. But rest assured, as a dealer I tell you in all honesty that most small US and foreign gold coins (about 1/10 ounce up to 1 ounce weight) usually disappear as soon as they come on the market. They slip quietly back into the hands of the wise who prefer to store their excess savings in something other than paper.
And Now, The Future Through The Cloudy Crystal Ball
(A) Reasons to Resurrect The Demons Of Confiscation:
The US Government has done it before. Legal precedent, no matter how dubious and dishonest, is very powerful. If (when) the US Government is forced to again back the US dollar in a credible fashion this may be the determining factor. This is an even greater possibility if in fact, as GATA proponents claim, that most of the American citizen's gold has been sold or leased to suppress the price for the past 20 years. I am certain that the price has been "officially" suppressed for quite some time. The anecdotal and "weird market behavior" evidence is overwhelmingly aligned with such an assumption. The reasons that the price must be suppressed along with the methods likely used to accomplish such are clearly obvious to all but the most economic and politically naÏve. Why might the dollar be backed again by gold somehow? Will the dreams of the true hard-money patriots be realized? Well, if it's only a dream, I don't want to wake up! Many other extremely knowledgeable experts, including Jim Sinclair, et al., have dealt with the manner in which gold might be restored to her rightful place as the indisputable standard whereby all national currencies are judged. The only squabbles will be just how worthless any given currency is relative to gold and what ratio of paper to reserves will be internationally tolerated. Nations will still be free to debase their currency for any crisis du jour. But gold will raise her lusty voice, point out the return to folly, and quickly determine just how many of those paper impostors you have to trade for an ounce of her. She's doing that now anyway. The likely mechanism used to once again add real flesh to the skeleton of the dollar will be the restoration of the Federal Reserve Gold Certificate Ratio. Uncle Sam will need a great deal of gold to implement a workable solution even if the price of gold soars to levels well in excess of $1,000/ounce because there are trillions of incorrigible little dollars running amok on the planet. Do the math; it will scare the bejeebus out of you. Hopefully, the US government will lawfully acquire the needed gold reserves from the open, unmanaged market to supplement whatever official hoard that she retains. This market includes financially savvy citizens who may be happy to part with their real gold at much higher prices in exchange for paper that might actually be worth something again, at least for a little while. Unfortunately, this can likely only occur after the visceral repudiation and dissolution of the IMF in her present incarnation, notwithstanding the frightening re-emergence of the Islamic Gold Dinar. Do not dismiss this as folly. The Gold Dinar and her little brother the Silver Dirham are coming with a vengeance that will crush those that underestimate its chances for success. The foundation for their success is both already laid and guaranteed; it is the hollowed out core of the once mighty US dollar. Nature abhors a vacuum; gold in some primordial fashion will once again fill that hollow space. (The Dinar is the subject of another long-winded, bloviating research paper which is also in the pipeline-stay tuned).
(B) Reasons To Leave The Demons In Their Graves:
It would be a mistake to repeat the folly of FDR. It's un-American. It's illegal. It's immoral. It's unjust. Citizens can legally hold gold in their IRA. Citizens can buy and hold all the gold they want provided they follow the laws when purchasing and the tax rules when taking profit. Gold ETF's are now available for US investors. It would be the ultimate in hypocrisy for the United States to be constantly bringing democracy and free-trade by force to every nation of the world while at the same time destroying the freedom of her own patriotic, law abiding and peace loving citizens who know full well that gold and silver are the only righteous and lawful money of the US Constitution. And so on, ad infinitum...
Summary
As we mentioned at the outset, so we say again: No one knows what will happen. Not even the Great MOGAMBO! No financial advisor can accurately judge your perception of this risk or to what extent your fear/confidence regarding the outcome of this fundamental issue should have on your portfolio structure. I am NOT your financial advisor. What is right for me may not be right for you. But I know what I believe will occur. I have positioned myself accordingly.
A simple procedure for you would be to decide FIRST just where YOU are on the continuum from "head for the hills" or "everything's gonna be just peachy". If you believe in the "end of the financial world as we know it", just purchase actual gold coins with paid for savings, using no margin or debt. Don't foolishly tap Home Equity credit lines or anything like that. Don't play your own mini-version of the interest rate carry trade; thinking it will be easy to pay back those loans and interest with skyrocketing US dollar gold prices. Foolishness has killed many. Greed has killed everyone.
If you believe that physical gold will once again be taken from citizens but still want to participate in gold's historic price rise, play the risky paper games of buying shares of the new ETF's with uncertain custodial controls on the gold that supposedly backs the shares. Or, chase stock promises of well-run, non-hedged gold explorers and producers. Avoid the miners heavily invested in places where the strength of the national currency relative to the dollar and "resource nationalization" issues are of concern. Talk to your trusted personal advisor, CPA, or accountant about the risks which exist for any type of investment. Maybe dial up your family attorney. Theory, meditation, jaw-boning, and even pounding away all night on the keyboard in gold-bug chat rooms won't solve your problem. Sleep on it. Two nights. Then act.
