The Ghost of 1933 Lives-But How Do You Blame Something That Is No Longer Important?

In light of the bearish news affecting financial markets recently and the calls to pile into gold — which is generally considered a countercyclical asset and inflation hedge — a reader recently asked when the other shoe might drop. He meant if gold prices started rising too quickly, wouldn’t the government just outlaw gold and precious metal ownership, as it did in 1933?:

“Although I have not seen it discussed, I would say the possibility does exist for legislation as in 1933, requiring all to turn in their gold to the government for market value at that time. Such legislation could be enacted as a patriotic duty, etc., and would be popular with the vast majority of people, the gold holders being very few. No one seems to want to come to grips with the possibility that history may just repeat itself. No one has suggested that criminalizing the holding of gold would not be a wise course for [the government].”
Inquiring Reader

Criminalization…confiscation… Same difference. That kind of stuff can’t happen in this day and age, can it?!

True, we are not talking about just any commodity.

The welfare statists and banking elite have a peculiar hatred for the metal, and today, they are joined by the environmentalists.

Heck, all socialists hate the doggone thing.

But they are the minority. Unlike 1933, the “vast majority of people” are indifferent to it, as they are to the long story of the fight for liberty and the progress of civilization seen through the precious metals as their circulation progressively widened its course through history. Indeed, this story, some thousands of years old, had abruptly ended only a few short decades ago.


If one could readily read this history in a gold bar, scarcely a whimper would exist past 1933, and 1971 would be the “end of history” as we knew it. Money is now paper, based on the full faith and credit of government, and only the winners get to write history – thus, gold has no utility and exacts a large social cost. In fact, reckon the winners, the only reason that central banks have not sold all of their gold reserves yet is to prevent harm from coming to those backward countries still dependent on gold mining. Thus, gold’s value is artificially buoyed by the central bank gold agreement, they say.

Not surprisingly, most people would decry gold’s monetary value while at the same time complaining about the general rise in prices and the many other side effects of an unhinged monetary system — which are typically attributed to the mysterious workings of the capitalist system instead.

Yet those basic positions, unenlightened as they may be, happen to form the views of most politicians and central bankers, as well as the “vast majority of people.” And they alone constitute reason enough not to worry about confiscation, not at these prices.

Still, the question should be considered before investing in gold.

The News

On Monday, March 5, 1933, investors woke up to this headline on the front page of The New York Times:


The Lies (Underlined)

There were many words of praise from bankers and politicians and denials that the State was abandoning the gold standard…These were but temporary exemptions, insisted the Treasury!

Summarizing the president’s proclamation, the article read, basically: Due to unwarranted withdrawals of gold and currency” reserves from the banking system for the “purpose of hoarding” — and due to “severe drains on the nation’s stock of gold” caused by “increasingly extensive” foreign exchange speculation abroad — it is in the best interest of all bank depositors “that a period of respite be provided with a view to preventing further hoarding of coin, bullion, or…” etc. From that point forward until 1975, anyone owning gold or silver coin or bullion in the U.S. could be fined up to $10,000 (in 1933 currency) and up to 10 years in prison, or both!

Since it was unconstitutional to tell Americans they couldn’t own something, especially money, FDR had to resort to a wartime emergency measure — the Trading With the Enemy Act — to check Congress.

Why They Did It

“You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
— William Jennings Bryan, 1896 Democratic National Convention

Gold was an integral part of the monetary system back in the day. It was money.

It did, in fact, prevent the central bank from providing liquidity to the markets at a critical moment for the inflation-induced boom, thanks to that greedy Wall Street minority hoarding it, apparently making life difficult for millions of paupers. It interfered with the supposed need for a lender of last resort. Since reserves were gold, not paper, and could not be created out of thin air as today, the destruction of confidence in the banking system led to a credit crunch that proceeded to wipe out most of the stock market’s wealth in that era. That is, the gold standard prevented the central bank from doing its job!

Conventional wisdom blames the gold standard for “dramatic fall[s] in aggregate demand” leading to a “series of long depressions,” though, apparently, not a slowdown in actual production.

This reasoning relies on the then-popular Keynesian explanation for the business cycle, rooted in the consumption paradigm, which assumes that consumption drives as well as delimits growth.

The gold standard allegedly kept interest rates artificially high to begin with, but an overheating in final demand would force prices and interest rates up too much, resulting in a contraction in demand.

As a matter of fact, for those who felt the rate of interest itself was ethically immoral, this provided them with their objection to the gold standard on high-minded grounds. The gold standard was also blamed for forcing wages and prices generally lower, especially in some sectors, like agriculture.

None of these contradictory objections hold water today.

Keynes has long been discredited. And more satisfactory explanations for the business cycle and the phenomenon of interest have survived. We discovered that cheap money doesn’t eliminate poverty, and that despite eliminating the gold standard, the boom-bust cycle still occurs to this day.

We have also discovered that the Depression was brought on by the effects of monetary expansion, the manipulation of credit and interest, and progressive era government interventions that hampered the economy (capitalism) and lengthened the Depression.

Moreover, to say that withdrawals of gold in the 1929-1933 period by those individuals who had enough foresight to realize that some banks may not be able to cover their deposits was unwarranted in a free market order, where each individual is responsible for his own interests, is totally absurd. In a capitalist society, poor business practices are punished by the market.

Central banks are state-protected legal tender monopolies that rather tend to encourage them. We can see this truth today. By preventing the market from doing its job, capitalism was not spared.

The real reason that the gold standard was abandoned was not because gold hoarders and foreign exchange speculators held the fate of the economy at ransom, or because it technically failed.

The gold standard was done away with because it stood in the way of inflation and big government so we could have the world we have today…easy money, illusory prosperity, boom-bust, war, empire, and welfarism. Today, of course, it is difficult to blame gold for any of these shortcomings.

The financial chicanery produced by central banks lay bare.

Except they still write history…

Can They Do It Again?

Technically, yes. The president today has wider powers than ever.

But circumstances do not favor it, and there are many obstacles.

First, at this precrisis gold price, such an act would simply hasten an actual crisis. It risks suddenly increasing the importance of gold in the public eye, while undermining confidence in the boom.

Moreover, gold investors can probably also rely on the practically universal axiom that governments will always react to a crisis rather than pre-empt it — usually because they are the fundamental cause.

Those few bankers and politicians who do understand and fear a realization of the value of gold are still likely overconfident in their ability to whip gold bugs with simple propaganda.

They probably won’t even raise their eyebrows until gold prices reach far beyond $1,000.

Then there is the question of why the government repealed its restrictions on gold ownership in the mid-’70s, when gold prices had quintupled, and why there was no reconfiscation when gold quadrupled again in the late ’70s, when people lined up at their banks to buy gold each payday?

One answer is precedent.

With the help of history, the world knows what it couldn’t know in 1933 — that it didn’t work anyway, except in one regard: abolishing the gold standard. But no gold standard stands in the way of the central bank’s monetary machinations today. Gold is not an integral part of the monetary system.

Neither is gold money any longer. If it were, you could use it to buy a pair of sneakers at Target.

So why pick on a scapegoat that has already been pushed over the cliff of Azazel?

The only way gold could be blamed today is if it started to rise so fast that it began to unnerve the financial markets and caused yields to rise. You might see headlines such as, “The Ghost of the Gold Standard Haunts Wall Street,” “Gold Hoarding Causes So-and-So,” “Gold Speculators Hold Economy for Ransom,” and so on. Personally, I don’t think they could prove that the increase in gold prices caused anything more than the increase in any commodity price. The key fact is that gold was outlawed in 1933 specifically because it was money and restricted the ability of the Fed to inflate.

It was an obstacle to inflation.

But the idea faces other hurdles, too.

The gold mining industry is still troubled, and the act would incite backlash from developing nations that rely on it, as well as from bleeding-heart liberals lobbying to subsidize those nation-states.

Moreover, it is doubtful that prohibition would be effective, due to technological factors, especially if the abolition of ownership was not a universal policy agreed to by all countries and central banks.

Politically, given the current rift between both political parties in the U.S. that otherwise couldn’t be more similar, some Americans believe that the act would make only fodder for another partisan squaring-off.

Still, despite these hurdles, concerns about gold and wealth confiscation are readily understandable in light of the increased looting of the government for subsidies and handouts today.

Bastiat couldn’t have found a more fitting example of a situation matching his metaphor of a fictional state where everyone is indeed living at the expense of everyone else.

Consequently, the investment reality is that owning anything is “fraught with risk” in this day when politicians move the line between private and public property around like it was a skipping rope.

The prudent course is to diversify.

Own some gold bullion, some coin collectibles (which were not outlawed in 1933, though coins were), and some PM equities, but also own other sound assets that will hold their value better than a Fed Note.

Since gold is no longer an integral part of the monetary system, it would be difficult to single out gold or the precious metals today. It would be as convenient to blame irrational exuberance generally.

The precious metals are chiefly simple inflation hedges today — one class of many — and, historically, not even the best. I am bullish on gold here not because I hope that one day gold will be money again, but because I’m convinced its monetary value will become widely recognized again in future.

Notwithstanding, such a realization of value takes time, and gold would be at much higher prices before it became important enough to outlaw. At least there should be enough time to see it coming.

Ed Bugos

September 12, 2007

The Daily Reckoning