It is well known that in 1933, President Roosevelt confiscated the gold of U.S. citizens and made possession of gold illegal. He gave gold owners about $20 an ounce and when he was done, he raised the gold price to $35. The common telling of this story portrays it as a simple case of robbery. It makes people wonder if 1933 is a precedent, if the government might confiscate gold in the not-too-distant future.
I don’t think it was so simple.
Let’s look at how the monetary system worked prior to 1933. The U.S. had a central bank, but it did not have the unlimited and arbitrary power that the Fed wields today. Gold performed a vital function in the economy, regulating credit and interest.
At that time, there was not what we think of today as a gold “price”. Loans and other credit were made in the form of gold, and repayment or redemption was in gold (even if most of the people did not demand redemption). Credit, including dollar bills, was redeemed at the rate of one ounce for about $20. The dollar at the time was closer to a weight of gold, than to a separate money in its own right.
What does it mean to say that credit is redeemable? One way to look at credit redemption is that it extinguishes debt. If a debt is paid in gold, the debtor gets out of debt. But, also the debt itself goes out of existence. Credit contracts, as it should. In the gold standard, even in the centrally planned, centrally banked adulterated gold standard that existed until 1933, credit could contract as well as expand. This is not what the government wanted then (or now). Let’s look at one mechanism of credit contraction.
A depositor with a demand deposit account could demand his gold from a bank. If the bank were scrupulous about duration matching, it would own only gold and Real Bills to back it. Redeeming the deposit would cause no harm. However, one factor in the boom of the 1920’s was duration mismatch (i.e. borrowing short to lend long). Much can be said about this practice but for now, let’s focus on the fact that the bank has extended credit that the owners of the capital—the depositors—did not intend to extend. Depositor withdrawals of gold forced credit to contract, and this contraction caused problems for the bank. A forcible contraction of credit is how I define deflation.
When the depositor demands his gold, it pulls precious liquidity out of the bank. In 1933, there were runs on the banks and many banks defaulted when they could not honor their deposit agreements. Redemption also forces the bank to sell bonds. Selling bonds causes the price to drop. Since the interest rate is the inverse of the bond price, interest rises.
Someone, somewhere in the economy is suddenly starved for credit, perhaps in the middle of a long-term project. We call him the “marginal entrepreneur”. He must liquidate assets. He must also lay off workers, because his reduced capital base cannot support the same workforce.
President Roosevelt had a brilliant (if evil) advisor, John Maynard Keynes. Keynes would certainly have grasped the nature of this mechanism as I describe it above. Roosevelt presided over a wholesale conversion of the economy from free markets, to central planning under regulations, taxes, diktats, price minimums, price caps, control boards, duties, fees, and tariffs. Central planners regard the market as irrational, chaotic, and self-destructive. They see no reason to let the market prevail. It is so easy to order things, as they “ought” to be ordered.
In 1933, they wanted to stop runs on banks and to push down the rate of interest. A secondary goal was to begin the slow process of altering the public’s perception of gold as money. President Roosevelt’s Executive Order 6102 accomplished all of these goals (at least runs due to a lack of gold liquidity—he had no power to stop runs due to other causes).
Today, by contrast, the dollar is irredeemable. The dollar is a debt obligation of our central bank. When you pay a debt with another form of debt, you are personally out of the debt loop, but the debt does not go away. It is merely shifted to the Fed. There is no extinguisher of debt. There is no way for debt to be paid and go out of existence, and no way for a depositor to redeem his deposit in gold. This is a fatal structural problem with our monetary system.
This also means that the saver cannot force credit contraction or the rate of interest to rise. Instead, the interest rate is putty in the hands of the central bank (well, not quite, as I am arguing in my ongoing series on the theory of interest and prices). The saver is totally disenfranchised.
And how about the public perception of gold and money? Even the gold bugs today think of the value of gold in terms of how many dollars it is “worth” per ounce. But for the lonely warriors in the 1970’s and 1980’s who kept the memory of gold alive through the dark years, and but for more recent gold advocates, and now the Gold Standard Institute, the victory of the central planners would have been complete.
Could the US government grab the gold as they did in 1933? Anything is possible. I make no political predictions. One thing is certain. If they grab gold today it will not be for the reasons they did it in 1933. Those reasons are no longer applicable.
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