The Bank Runs of the Early 1930s and FDR's Ban On Gold

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The gold price reached a record of $1464/ounce this week, fittingly on the 78th year anniversary of FDR’s ban on private gold ownership in 1933. Gold has increased by 30% over the past year, 145% in the past five years and 465% in the past decade; by contrast, the S&P 500 today is only 12% higher vs. a decade ago.

Although FDR’s Executive Order #6102 eventually expired, other measures were enacted to perpetuate the government’s ban on private gold holding. The prohibition wasn’t lifted until early 1975, in a bill signed by President Gerald Ford, but by then President Richard Nixon had jettisoned the Bretton Woods gold-exchange standard (in August 1971).

Thereafter the U.S. dollar “floated,” which in truth meant that over the long-term it only sunk in value versus gold. Thus a four-decade ban on private gold ownership (1933-1974) has been followed by a four-decade “ban” on any gold-based dollar (1971-2011), and thus fiat-paper dollars not unlike those issued to inflationary excess during the Revolutionary War (the “continental”) and the Civil War (the “greenback”).

In retrospect it seems astounding – and brazenly unconstitutional – that in 1933 a U.S. president could wield such power and by a mere pen stroke criminalize the private ownership of any asset, let alone an asset so crucial to one’s life and the nation’s economic prosperity as sound money. The U.S. dollar had been on the classical gold-coin standard for decades until World War I, when (in 1917) Washington compelled the commercial banks (for “patriotic reasons”) to transfer their clients’ vault gold to the Fed, in turn for mere gold “certificates.” This was a crucial step in politically distancing Americans from their long-valued money.

In April 1933 FDR and his allies at the Fed and Treasury attributed widespread bank runs and failures to private “gold hoarding.” Using the “Trading With the Enemy Act” (1917) as a precedent – an act that gave the president wide latitude to restrict exchanges and seize assets during “emergencies” – FDR declared that private gold should be seized and given over to the Fed, in return for irredeemable Federal Reserve Notes, to stem an emergency in the banking system. This was sanctified in the Gold Reserve Act (January 1934), which required that any gold held contrary to U. S. law must be forfeited to the U. S. government. Key parts of the “Trading With the Enemy Act” pertaining to gold seizures persist in the U.S. Code even today.

FDR’s gold confiscations in April 1933 and thereafter carried with it severe fines and jail terms for the non-compliant. The political assault on “hoarding” criminalized an innocent and efficient means of holding one’s wholly legitimate possessions. It’s true that hoarding typically occurs amid fears of potential seizure or other political mistreatment; see for example today’s huge cash hoards and the reluctance to lend or invest.

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