Gold's Tanned Herd
In 1927, in response to a mild contraction, the newly created Federal Reserve created paper reserves to shore up the banking system. During the same year, there was a massive balance of payments issue between Great Britain and the US which caused the flow of gold westward across the Atlantic. Rather than Britain addressing this by raising interest rates, the US Federal Reserve printed reserves to lower interest rates to match the level in the UK which largely succeeded at its first order goal at stemming the flow of gold between the countries. The excesses in the banking system wound up in the stock market since the newly created liquidity had to flow somewhere and, just like in recent times, it resulted in asset price inflation. Recognizing this too late, the Fed tried to curtail the excess liquidity and in 1929, we had the stock market crash which was the earthquake which sent financial markets and economies reeling and set into motion events which ultimately led to a second world war. [1]
Among the aftershocks of the earthquakes of the late 1920s was economic crisis in Britain which resulted in their depegging sterling from gold in 1931. Eventually confidence in the US dollar also eroded and there were widespread regional banking failures starting in 1929 and into 1931. By March 1933, there was a wholesale run on all US banks. That same month was the transition between the Hoover and Roosevelt presidencies. The state level response to the banking crisis had been uneven until FDR declared a banking holiday during the first week of March. [2] [3] On March 9th, FDR signed the Emergency Banking Act which took the US dollar off the gold standard by allowing the Federal Reserve to issue currency backed by any asset [4]. And on March 12th, FDR held his first fireside chat where he explained the very consequential actions of the rushed legislation (which most legislators passed without having had the benefit of reading) [5]. I encourage you to listen to the whole thirteen minute broadcast. Nowhere in it does he talk about depegging the dollar effected by the already passed legislation or his plan to demand Americans to turn over their gold by executive order, less than one month later.
On April 5th, 1933, FDR issued Executive Order 6102 which would make it illegal for Americans to own gold coins or bullion. By May 1st, all US citizens were required to turn in all their gold in exchange for dollars at the rate of 20.67 per troy ounce. Ownership of gold by US citizens would remain illegal for forty years until January 1st, 1975 when President Ford repealed the prohibition. [6]
On January 30th, 1934, less than one year later, the Gold Reserve Act would devalue the US dollar by 59% in gold terms, moving the statutory rate from $20.67 to $35 per troy ounce. The combined actions of this Act and EO6102 amounted to a one-time 59% tax on the capital of the American people. [7]
The proceeds of this tax were allocated to the Exchange Stabilization Fund which was then and still is controlled by the Executive Branch through the Secretary of the Treasury. It has become a kind of slush fund controlled by the president and has been used to paper over various emergencies since then such as the CARES act during the COVID-19 pandemic response. [8]
Fast forward ninety years to today, there is an ongoing run on US regional banks, most notably, Silicon Valley Bank in California. In response, the US Treasury created the Bank Term Funding Program which controversially lends to any bank that asks against Treasury debt or other federally guaranteed debt at the full face value of the debt regardless of its current market value. What spending authority and what funding is being consulted for this purpose? It may come as no surprise to you that the Exchange Stabilization Fund is the funding source for the BTFP. [9]
Congressman Howard Buffett, (R) NE, father of the more famous son, Warren, believed that human freedom requires gold redeemable money [10], citing ominously that "one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold," In his estimation, the convertability of money into commodity gold is the last word in democracy whereby the producers of an economy can put the brakes on government excess by demanding bullion for their notes. Shockingly, given his later actions, the young (well, he was 40) Alan Greenspan, would have agreed,
the opposition to the gold standard in any form -- from a growing number of welfare-state advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).
Greenspan goes further,
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods.
...
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.
Correctly predicting our current inflation and presciently warning future owners of digital ducats (as the veteran wordsmith, Jim Grant, delightfully calls them. Caveat cryptor.)
The world hasn't had any form of convertible money for more than a generation and since the Nixon Shock [11] all of the world's currencies which were ostensibly convertible to gold through the dollar lost their final connection. We are in uncharted waters historically. Commodity backed money is the norm; fiat money is the abberation. Will we return to democratic control of the national purse through the vehicle of sound money as Buffett exhorts? It's difficult to see a path toward that laudible goal. I’ll leave the last word to Congressman Buffett, a congressman who declined a salary increase during his first term citing that "he had been elected at the lower salary." (Imagine your favorite congressperson saying something like that.) Emphasis added:
I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course. But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife. That was the way out for the paper-money economy of Hitler and others.
1.
http://www.thefinancialpanner.com/wp-content/uploads/2009/11/AlanGreenspan-GoldEconomicFreedom.pdf
3.
https://www.federalreservehistory.org/essays/banking-panics-1931-33
4.
https://www.federalreservehistory.org/essays/emergency-banking-act-of-1933
5.
6.
7. https://en.wikipedia.org/wiki/Gold_Reserve_Act
8. https://en.wikipedia.org/wiki/Exchange_Stabilization_Fund
9.
https://en.wikipedia.org/wiki/March_2023_United_States_bank_failures#Bank_Term_Funding_Program
10.
https://www.fgmr.com/wp-content/uploads/2017/02/Howard-Buffett-explains-sound-money-4-May-1948.pdf
I think we have to stop trusting government with control over inflation. In an ideal world the government would specify a purity and content requirement for gold in a monetary unit. They could then setup required specifications for "money". Than any company who can meet that specification can mint money. The government would insure that company's product continues to comply with specification. I think things like the Goldback are a good solution about fungibility of gold as a "money". Also I think you could easily have a crypto GoldBack, things like PAXG exist. And coins and bars will remain as a source of bulk physical transfer.
Coin 🪙 clipping is a centuries old trick. Unfortunately, today’s governments have found far more numerous and efficient tools to do this at scale and to blur the view of the wood from the trees. Great article Ken - interesting to learn about Congressman Buffett.