Question of Gold Seizure Hits Radar Screen By David L. Ganz, Numismatic
News
October 02, 2008
With
a $700 billion mortgage bailout package on the table, Wall
Street investment bank Lehman Brothers in bankruptcy, brokerage
giant Merrill Lynch sold and the appearance of economic chaos
on at least three continents - North America, Europe and Asia
- gold has moved to the forefront and with it issues that
parallel 1933-1934, the time of the Great Depression.
The question fairly rises as to whether or
not the U.S. government is moving to consolidate its economic
power by an outright gold seizure or whether they are prepared
to allow the free gold market to speak about the dollar bill
and a gaggle of other foreign currencies. Some wonder if they
are willing to let the dollar's purchasing power slip away
entirely.
Cause of the initial crisis: bad bank loans.
RealtyTrac® (realtytrac.com), a leading online marketplace
for foreclosure properties, released its second quarter 2008
U.S. Foreclosure Market Report", which shows foreclosure
filings were reported on 739,714 U.S. properties during the
second quarter. The report also shows that one in every 171
U.S. households received a foreclosure filing during the quarter.
If the typical home owner has a $300,000 mortgage,
the rescue package Congress will be asked to look at and approve
virtually at the same time - unprecedented since the banking
crisis of 1933 - would cover 2.1 million homes.
From March 14-18, 2008, gold topped $1,000
an ounce; then it began a slow settled decline into the $700s
- still high by contemporary standards. As the evolving national
financial crisis began around Sept. 11, 2008 - the seventh
anniversary of the attack that took down the twin towers of
the World Trade Center in New York gold started at $740,
went to $750, then to $775, $779 and it was off to the races.
The change from Sept. 12 ($750) to Sept. 19
($869) the rate of change was 15.8 percent - in just a week.
Meanwhile, Lehman Brothers stock, which was $67 a year ago,
was trading at 18.99 cents a share. Five thousand shares,
which a year earlier had a value of $335,000 could be purchased
for a mere $1,000.
Prior to 1933, "gold seizure" in
the New York Times historical data base, yields six news stories
all of which are parts of wars in South Africa and elsewhere.
The story is different by early 1934 when President Franklin
D. Roosevelt used executive orders - without congressional
approval - to claim the nation's gold stock, including its
coinage. (There were some exceptions).
The Jan. 13, 1934, New York Times had a series
of articles whose headlines and sub-heads that tell the central
points of the dispute. "Roosevelt Claims Power to Capture
Reserve Bank Gold," the first headline began. The sub-point:
"Believes He Has Ample Authority, but Does Not Disclose
His Intentions."
How was this accomplished: with the connivance
of the attorney general. Again the Times headlines: "Cummings
Gives Ruling But Definite Word on the Attorney General's Conclusions
Is Withheld." There is more to the headlines: "No
Central Bank Plan," followed by "Roosevelt Declares
That Such Reports of Aims Are Only Very Bad Guesses"
and goes on to make the summary point: "President Claims
He Can Seize Gold".
Over the next few weeks, there is more drama,
more headlines: "Gold Bill Constitutional, Cummings Tells
Senate; Early Passage Expected" is one thought. But there
are those who claim that the seizure contemplated is unconstitutional
- which headlines address, too.
"Committee Gets Ruling Eminent Domain
Applies to Bank Gold, Says the Attorney General." Still,
there was opposition. Sen. Carter Glass of Virginia was opposed,
as the headlines of the day disclose. Says the Times: "Held
for 'Public Service' Glass Is Not Convinced While Reserve
Board Is Inclined to Give Up Profit Only. House Group Scores
Point Beats Rival Committee to Floor with Bill - Stabilization
Reports Persist. Reports Gold Bill Is Constitutional"
Carter Glass, Woodrow Wilson's Secretary of
the Treasury, and also FDR's choice (he declined) had been
U.S. senator from Virginia since 1920 when he did battle with
FDR over gold seizure. Again, the Times summarizes in its
headlines the problems of the day: "Glass Denounces Aims
of Gold Bill; Silver Men Rally."
Glass's principal objection was taking gold
from the Federal Reserve. He charged that Britain and Germany
did not cripple their central banks when they went off the
gold standard. That would be changed in the final executive
order and the eventual custodian, which was the Fed.
Citizens once had the right to deposit silver
or gold bullion with the Mint and receive, in return, a full
measure of precious metal coinage, less the cost of coining.
(The specifics are found in the original Mint Act of April
2, 1792, sections 14-15) The government and the population
could thus control currency supplies.
The right to deposit these metals was called
"free coinage," though this was hardly so since
there was a modest charge by the Mint for the service. Free
coinage of silver ended with passage of the Coinage Act of
1873; general circulation gold coinage itself was halted in
1933, when FDR acted on his announcement discussed above and
created the first modern government regulatory function: controlling
those numismatic coins that were exempted from an otherwise
nation-wide recall of gold coins.
The Trading with the Enemy Act of 1917 authorized
the President to regulate, investigate and prohibit "under
such rules and regulations as he may prescribe ... any transactions
in foreign exchange, export or earmarkings of gold or silver
coin or bullion or currency ... by any person within the United
States ..."
Prof. Henry Mark Holzer, in a 1973 article
in the Brooklyn Law Review entitled, "How Americans lost
the right to own gold and became criminals in the process"
wrote, "The war emergency and the President's duty to
fight the war provided Congress with a convenient rationale
for the Act.
The fact is, however, that the Constitution
nowhere empowers Congress to prohibit dealing in gold-much
less authorizes Congress to delegate that power to a coordinate
branch of government."
First came Presidential Proclamation No. 2038
(48 Stat. 1689 (1933)) whose prefatory language sets up the
explanation of national calamity.
"Whereas there have been heavy and unwarranted
withdrawals of gold and currency from our banking institutions
for the purpose of hoarding; and "Whereas continuous
and increasingly extensive speculative activity abroad in
foreign exchange has resulted in severe drains on the Nation's
stocks of gold; and "Whereas these conditions have created
a national emergency; * * * [and a banking holiday would be
in the national interest] ...
"Now, THEREFORE, I, Franklin D. Roosevelt,
President of the United States of America, in view of such
national emergency and by virtue of the authority vested in
me by said Act and in order to prevent the export, hoarding,
or earmarking of gold or silver coin or bullion or currency,
do hereby proclaim, order, direct and declare that from Monday,
the sixth day of March, to Thursday, the ninth day of March,
Nineteen Hundred and Thirty Three, both dates inclusive, there
shall be maintained and observed by all banking institutions
and all branches thereof located in the United States of America,
including the territories and insular possessions, a bank
holiday, and that during said period all banking transactions
shall be suspended."
The order was then specific about coins and
other items: "During such holiday, excepting as hereinafter
provided, no such banking institution or branch shall pay
out, export, earmark, or permit the withdrawal or transfer
in any manner or by any device whatsoever, of any gold or
silver coin or bullion or currency or take any other action
which might facilitate the hoarding thereof; nor shall any
such banking institution or branch pay out deposits, make
loans or discounts, deal in foreign exchange, transfer credits
from the United States to any place abroad, or transact any
other banking business whatsoever."
A generation after World War I and a few months
after the initial shot across-the-bow, FDR issued Executive
Order 6260 of Aug. 28, 1933, which recalled all gold coins,
but exempted "rare and unusual gold coins." What
was rare, or unusual, constituted a regulatory function of
the Treasury Department in succeeding years. Millions of coins
were melted.
With the 1933 gold recall, all but rare and
unusual coins were required by law to be turned in to the
government in exchange for paper currency. Executive Order
6260 provided in pertinent part that "no return ... [is
required of](b) gold coins having a recognized special value
to collectors of rare and unusual coin..."
There were other limitations. Because more
than $1.5 billion in coins were melted, calculated at their
face value, millions of coins were forever destroyed.
Collectors knew, of course, that by virtue
of their status as a collector, they were able to continue
to hold gold coins, even quarter eagles (though no more than
four of each date and mintmark) while other citizens were
forced to surrender their coins. Each of these pieces had
been produced at a time when gold was valued at $20.67, and
a $20 gold piece contained $19.99 worth of gold.
Simultaneous with the recall came a devaluation
of the dollar, which meant that the price of gold was raised
from $20.67 and ounce to $35. Since each $20 gold piece now
contained $33.86 worth of gold, a significant advantage was
attained by those collectors who retained their coins over
those who patriotically turned them in as directed. (Actually,
1934 Proc. No. 2072, Jan. 31, 1934, 48 Stat. 1730 revalued
the dollar to $35 an ounce (15-5/21 grains of .900 fine gold).
There are a host of laws that govern today's
national banking and economic emergencies. Among them: title
12 of the U.S. Code (banking), section 4407 (national emergencies),
which notes as a cross-reference: "The provisions of
this chapter may not be construed to limit the authority of
the President under the Trading With the Enemy Act (50 App.
U.S.C.A. § 1 et seq.) or the International Emergency
Economic Powers Act (50 U.S.C.A. § 1701 et seq.)."
The law lives on today as 50 App. USCA §5
(subsection (b)(1)) which still says that, "During the
time of war, the President may, through any agency that he
may designate, and under such rules and regulations as he
may prescribe, by means of instructions, licenses, or otherwise:
(A) investigate, regulate, or prohibit, any
transactions in foreign exchange, transfers of credit or payments
between, by, through, or to any banking institution, and the
importing, exporting, hoarding, melting, or earmarking of
gold or silver coin or bullion, currency or securities ..."
If this sounds like something forgotten 90
years ago, be aware that the legislative history tells another
tale: it was most recently amended by Congress in 1977, 1988
and 1994. As the headlines play out, and begin to sound eerily
repetitive with the 1930s, it is worthy of remembering that
Americans were able to own gold abroad until the Kennedy Administration
prohibited it - also by executive order.
By Dec. 31, 1974, Americans regained the right
to own gold as Congress repudiated the declaration of national
emergency - but none of that precludes a Presidential finding
of an emergency that is obvious from reading the newspapers
- even if it can be reversed by another executive order or
congressional action. Put differently, gold seizure could
happen again and it could happen to you.