Oldtent Archives 2007 - 2008

1933 Gold Confiscation

Franklin Delano Roosevelt was inaugurated during the depths of The Great Depression. Most commercial banks in the United States had closed by Inauguration Day, March 4, 1933. Anxious Americans, demanding gold, had reduced the Federal Reserve’s gold supply almost to the legal minimum, creating additional fears of an impending monetary crisis.

At the time, the United States still adhered to the gold standard, which provided for fixed exchange rates between currencies and gold and made gold an alternative form of currency. The international gold standard had been one of the first casualties of World War I, but enjoyed a brief revival after the war. It disappeared for good in the legislative circus that served as the coming-out party for the Roosevelt administration.

On March 6, the President set in motion a chain of events that ended the international gold standard once and for all. First, he closed the nation’s banks and prohibited them from paying out or exporting gold coin and bullion, using emergency powers granted by the Trading with the Enemy Act that had been enacted during World War I. When it was called to the President’s attention that there was no legislative justification for either the executive or the legislative branch of government to close privately owned banking institutions, he prepared legislation to confirm what he had already done.

Three days later, he sent to the 73rd Congress the Emergency Banking Relief Act, which sought to amend the Trading with the Enemy Act and specifically those provisions which authorize the President in times of war to “investigate, regulate, or prohibit… the importing, exporting, hoarding, melting or earmarking of gold…” The change made by the Emergency Banking Relief Act was to provide the President with authority to act “during any other period of national emergency declared by the President”, thus expanding his authority beyond the limitation of actual war. The Act also vested the Secretary of the Treasury with the discretion to compel holders of gold to surrender it.

In introducing the bill, House Majority Leader Joseph W. Burns asked that it be considered immediately and that debate be limited to forty minutes. Despite the fact that most of the Representatives knew nothing of its contents, the Emergency Banking Relief Act passed in the House and Senate that same day, at which point it was signed into law by the President. The legislation was passed with such haste that one Congressman stated for the record that the House had approved “a bill that Members never read and never saw, a bill whose author is unknown.” That bill still has legal effect today.

The very next day, acting under the authority of the Emergency Banking Relief Act, President Roosevelt issued Executive Order No. 6073. In addition to authorizing the Secretary of the Treasury to decide which of the nations’ banks could open, the Order prohibited owners of gold from exporting or otherwise removing it from the United States. Shortly thereafter, also under the authority of the Emergency Banking Relief Act, the President issued Executive Order No. 6102, which provided that all privately owned gold in the United States was to be confiscated by the government. As compensation, the owners would receive paper money.

The ultimate result of this legislative blitz was to knock the United States off of the gold standard. However, the fact that this was the President’s ultimate objective was not made clear to Congress, and certainly not to the public. At a press conference on March 8, 1933, Roosevelt joked, “As long as nobody asks me whether we are off the gold standard… that is alright, because nobody knows what the… gold standard really is…”. Nor was the confusion confined only to elected public servants. In April of 1933, Roosevelt told Henry Morgenthau, Jr., the Secretary of the Treasury, that he had taken the country off the gold standard, to which the Secretary replied, “What? Again?”

“With the debate today about Inflation, deflation and Depression comparing back to 1929 We need to remember that the dollar was still backed by Gold until 1933 so also the Dow was basically valued in gold dollars as it collapsed from 1929 to 1933.  What the implications are of that I really havn’t thought them through yet but would welcome anyones Ideas.”

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If you look at the chart of the long-term Dow I posted in this latest editorial…..

http://www.gold-eagle.com/editorials_08/goldrunner031208.html

….I think it means the difference between total panic and crash like in 1929 and a similar chart pattern to the 1970s where the Dow, like in 2007, went to new highs; then dropped into lower lows for the time period.  Here is the chart I am talking about in the editorial………

The reason for this has a lot to do with what you mentioned.  In a time of deflation there is a loss of confidence in paper with a resultant panic that caused investors to sell everything in an attempt to survive financially.   But in that 1929’s deflation the dollar was backed by Gold so the Dollar did not drop dramatically like it did in the 1970’s or today.  In the 1970’s and today, the dollar dropped dramatically in value, and since the Dow is actually the Dow denominated in US Dollars or the Dow divided by Dollars……….the falling Dollar makes the Dow look higher than it would if the Dollar was constant like back in 1929.  Thus, the falling Dollar combined with the “bounce” in the Dow allowed the Dow to bounce back to new highs in the 1970’s and in 2007.

If you chart the $Dow:$Gold, you basically are dividing the Dow/USD by Gold/ USD  so the USD is factored out and leaves you with a true Dow/ Gold fraction.  Thus, if you look at a chart of the Dow (Dow divided by USD) you see that the Dow is higher now than at the 2000 top, but if you look at a chart of the $Dow:$Gold, you will see that the Dow has at the same time dropped about 73% since the 2000 top against  more constant Real Money Gold.

This is the “effect” of the falling value of the USD in the 1970’s and today, IMO…….the effect of US Dollar inflation on the dramatic drop in the Dow.  The real crash in the Dow is against inflation > against Real Money Gold that is stable………….thus in the 1970’s and now the Dow to Gold ratio reverts back toward 1:1, just like in the 1929 deflation, even though the Dow will not drop nearly so badly as in 1929……….as it will “mimic” the 1970’s environment as the Dow “price” is again supported mightily by the falling value of the US Dollar.  Thus, we might see the Dow and Gold meet around the 8,000 level, or something like that.

When you look at the deflationary headlines, today, and see that the Fed has basicaly just monetized about 200 billion in bad debts gone awry, you are looking at the USD drop vertically.  Thus, you have a Dollar falling aggressively that will support the “price of the Dow” to some extent since the USD is the divisor (bottom of the fraction) in the $Dow, or Dow/ USD.  As the bottom number gets smaller in a fraction the result goes up…………………..

Now, we have to consider one more aspect.  We see what happened to the Dow in the first chart in 1929 when confidence in paper was lost with a stable Dollar that was backed by Gold…………..Deflation….. The Dow crashes.  We see in that chart what happens when confidence is lost in paper while the US Dollar falls in value in the 1970’s……..Stagflation……… The Dow first drops, then rises to new highs, then drops to a lower low- but overall, the Dow only dropped about 40%.  NOW, what happens if we currently have a loss in confidence in paper while the US Dollar falls in value more dramatically than in the 1970’s Stagflation? ……..it can be more flation than stag, or it can go all the way to hyperinflation………….but, the Dow might not even drop as much as 40% against the “real high” in 2000………even though the ratio of Dow:Gold drops to 1:1.  That is possible, IMO, if the value of the US Dollar drops far enough.  Thus, at the same time the Dow appears to be fairly strong historically, the Dow at the same time might drop over 90 or over 95% against (constant) Gold.

This Dow crash is mostly hidden to many Dow investors at this point, and is screwing SOEE out of a high percentage of his Dow puts gains to date, witnessed by the crash of the Dow against Gold while the Dow is “up” compared to the 2000 top.  SOEE would have had to have gone “long calls on $Gold” and “long puts on the Dow” to gain the full effect and make his $50 million this year.

By using Dollar inflation and the drop on the value of the Dollar, the Fed has been able to hide the crash in the US Dollar against inflation/ against constant Gold……..pretty well up until, now.  They also have been able  to avert a panic like 1929.  They also have been able to “save” the interest rate cuts to now to use more aggressively in bigger chunks and to thus far “protect the Bonds.”  These will fail to some extent after the next intermediate term top as we run down into an intermediate deflation scare bottom across the board, and will fail further into 2012……….but as long as the value of the US Dollar is aggressively dropping, the numbers to the average investor will look dramatically better than they would have given a stable Dollar…….will avoid a panic.  Plus, the Dollar Inflation will be used to monetize more debt across the board………………Love those Cayman Islands accounts.

 GR

I would have probably not been 20 year material…Maybe a few years tops……in “lengthy” hindsight…it would have not been a good fit for me…would not have lasted long.  There are a million other things I would rather do than work at a desk or trading terminal for 12+ hours a day…like post on Goldtent!

I can tell you…that the VP’s and Managing Directors of the investment bankers I know….these guys are a dime a dozen - by the way….I seriously doubt any of them own gold.  They are literally the band playing on the Titanic. 

To my surprise…I only know one guy that has been laid off in the past year….and these guys sell ABS and CMBS paper…and they are all still employed. I thought more would be let go after 2007 bonuses were paid… Kind of a mystery why Wall Street is not relieving them of their duties..as transaction volume has decreased by 80 - 90%.  My theory is that they retain them so that they can at least “try” to unload some paper….not sure.

Ive been latley studing crash of 29, and found in a note, that as far as an election goes the stocks seem to do better mid term, whats that about two yrs out after the election and start to rise, then ofcourse as it nears it drops. I wonder if that factor is also figured into Armstrongs charts. Im guessing it is. There is also a corelation between the bottom of 2003 and 2004 and 1936-37. As far as I got cuz it’s not easy finding old news, or charts like that of today.

Didn’t think you’d go for it..       Allright ,we’ll just have a Kaplanesque type wager  

Or was it less gold to buy anything, since no one was buying, never though in terms of gold, we weren’t born unto it as our ancestors.

Guessing means that it took more gold to buy anything. What does that mean today? Don’t know. Except it takes more dollars to buy it, like everything else lol.

I appreciate your discussions tonight.  I tried to do a similar analysis of the dow a week ago

http://arch0708.goldtent.net/2008/03/07/trying-to-organize-my-thoughts-here/

It seems to agree with your analysis of the Wilshire and Nikkei.  Looks like all markets are in lockstep and are going to bounce then take another leg down alltogether.

Good night all!

y2kdon 

O , not too bad, only 22 years behind…hehehe    Dang killjoy IRS   

“But all that yawning earlier has me trapped in a funny fractured fenestrated fibonacci fractal feedback flummox.”

Ye Gads… Seven, count ‘em, SEVEN  “F ” words in a row!  I stand in awe of greatness!  Wanka, did you see that?? 

With the debate today about Inflation, deflation and Depression comparing back to 1929 We need to remember that the dollar was still backed by Gold until 1933 so also the Dow was basically valued in gold dollars as it collapsed from 1929 to 1933.  What the implications are of that I really havn’t thought them through yet but would welcome anyones Ideas.

LOL LOL

LOL! You’re too much, buddy. How you come up with all that stuff so quickly and spontaneosly is beyond me.

Keep it coming.

JBI

Thanks, Fully. Just my way of trying to provoke one of the class acts and masters from our tent in order to learn more from him.

Now, if we can only change grin’s mind, get him feeling better and back on track here at our TENT, huh?

JBI