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Thursday, July 25, 2013

Confiscation: The Coming War On Gold

I was doing some research on the 1933 federal gold confiscation.  I wanted to know why they did it.

I knew they did it.  I knew how they did it.  I even knew what they did after they did it.

But I didn't know why they did it.

Clearly, the government believed that it was to their advantage to control all of the gold, rather than having it out among the little people.  But why?

Lots of opinions on what brought it on.  Most revolved around how the limitations of the gold standard restricted the flow of credit into the economy.  Since anyone could walk into a bank, give them a bank note and get a stack of gold coins, banks had to have real, tangible reserves in their vaults.  If they either made too many loans, or made too many bad ones - thus exhausting their reserves - they failed.

If people lost faith in the dollar, they would also convert their paper into gold (sound familiar, my fellow Gold Bugs?).  If enough people did this, you had a run on the bank, and they failed.

The biggest driver, though, was the federal government.  It, too, was restricted on what it could borrow (and thus spend) based upon the amount of gold it held in reserve.  In emergencies, such as wars, they would unilaterally come off the gold standard, and print up currency to pay their war bills.  When the war was over, they'd voluntarily revert back to the gold standard.

The statists in our government saw this off-the-standard model as the goose that laid the golden egg.  Drop those pesky gold standard, uhm standards, and print up currency as needed.

A series of events happened in 1927 which started this ugly, debt-laden, massive welfare state in which we now find ourselves.  Then, as is true now, the statists understood that you never let a good emergency go to waste.

Remember:  Before the 1913 creation of the Federal Reserve bank, the government could only borrow up to the amount it held in gold reserves.

This snippet is from an essay written in 1966 by (future Federal Reserve Chairman) Alan Greenspan for an Ayn Rand book (click here to read the entire, short essay.... seriously, do it!).  Also note that this was written before 1975, when American citizens could once again own gold bullion -
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
Uhm, what?  Create paper reserves and inject them into banks in the hope that they'll stimulate growth?

Can you say, "Quantitative Easing, 1920's Style"?

So, how did this injection of cash into the economy work out [emphasis mine]?
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
Let me just make sure I'm reading this correctly:  The Fed pumped money into the economy, which artificially pushed down rates.  Since investment dollars had no where else to go, they all jumped into the stock market in hopes of getting ANY kind of investment return.  The Fed stopped their money printing, and the stock market - floating on nothing but cheap money - crashed and burned.

With the exception of the final result - so far - does any of this sound familiar?

So, what do we do?  How do we protect our accumulated personal wealth from these insane federal actions?  Greenspan had some insight into this (remember, this was written prior to Americans once again being permitted to own gold bullion [emphasis mine]) -
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. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. 
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Hmm.  If gold goes against the grain of socialism/big government, why did the government allow Americans to again own gold?

My guess is that someone screwed up.  Perhaps we had enough folks in congress that hadn't been read into the program, and it just slipped by.  It's hard to say.

Regardless, we can buy and hold gold.  Right now, we can do so without registration or reservation.  The only time Uncle Sugar directly becomes aware of your actions is if you want to make a single purchase with $10,000 or more in cash (actual green backs), or if you sell and make a profit (your gain is taxable).

Accept The Challenge

How Modern Gold Confiscation Will Happen

Current law and regulation leaves WAY too many opportunities for individuals to protect their earnings from the government - the statists.

For instance, right now, if you sell your bullion to a coin shop, nothing is reported to the government unless it exceeds certain large volume limits of certain types of bullion.  That means if you make a profit on your sale, no one in the government knows you made that profit unless you choose to self-report.

I'd expect that to change.  I expect that at some point, bullion stores will be required to report all of our purchases from individuals.  Name, address, social security number.

The statists took a shot at this with ObamaCare, where they required all businesses - not just bullion stores - to report any time they paid out more than $600 in a year to an individual.  That meant that if a business paid you $10 for any reason, they had to get all of your information, as there was no guarantee you wouldn't be back later in the year and exceed the $600 aggregate reporting limit.  The uproar from small businesses got that law revoked.

I'd expect to see it reintroduced in the future, but this time, specifically targeting businesses that buy bullion from the general public.  There aren't enough of us in the bullion business to cause any kind of significant uproar, and it will become law.

The government won't need to do a physical confiscation of your bullion.  It will tax it from your possession.

So, if your intent for buying precious metals is to protect your capital from the clutches of the statists, how will you be able to convert your PMs into spendable cash should the need arise?

Hello black market.

An "unregulated secondary market" will emerge for precious metals.  If the statists will be taxing you 20% on your 'profits', the black market will give you a 15% haircut, for instance.  Some sort of free market equilibrium will be created.

As always happens in centrally controlled economies, individuals will emerge who are willing to risk imprisonment because of the opportunity the onerous law provides to make a profit.  The higher the tax, or the greater the scarcity due to government intrusions, the higher the profit potential.

The War On Drugs will be replaced with the War On Gold.  And it will be equally unsuccessful.

Now, it is legal to now buy any sort of mind- or body-altering drug from government authorized sources.  Yet people choose to buy other unapproved drugs from unapproved sources.  The government paints the illicit sources as anti-social, self-focused individuals who care about nothing but their own greed.  They point to the violence associated with these drug sources, but never acknowledge that it is the prohibition created by government that precipitates the violence, not the drugs themselves.  See the US alcohol prohibition if you need further clarification on the concept, and the benefits society gains when the prohibitions are eliminated.

Expect the War On Gold to be similarly waged.  You will be villainized if you choose to operate outside of government authorized channels.

If you own precious metals, expect a future requirement to provide an annual accounting of your holdings, as you must now do with your retirement accounts.  If those balances drop, Uncle Sugar will be there with his hand out for his cut of the profits.

You can still acquire precious metals without leaving a trail:  Smallish purchases with cash.  Use a debit or credit card, personal check, bank wire or cashiers check, and you've been tagged and bagged.  You're in the system.  At the very minimum, an inference can be made as to what was purchased.  Trying to convince an IRS agent that your check for $5000 deposited at a bullion store was for coin collecting books which were subsequently burned up in a tragic backyard bonfire, won't fly.

Assets can't be confiscated if they don't officially exist.  Plan your purchases wisely, with an eye towards future changes in the law.

Copyright 2013 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Unknown said...

Thanks. As a student of economics I really have no problem seeing where QE Infinity will end. What I am ashamed to admit was not knowing we'd done the same thing back in the 1920's. I knew about the boom, about the bust, about the depression, I just never looked back far enough to see the potential cause.

In terms of gold - I think your correct. If/when the government moves to confiscate gold it will with out a doubt result in all the same problems that arise from every other form of prohibition. Black markets, crime, expansion of government, more people in prisons, more Police State, more waste of Wealth.

I also found the statement "The financial policy of the welfare state....." to be very enlightening.

Ryan said...

I do not see gold confiscation coming down the pike, at least for a normal person who owns some (or maybe a lot) of the shiny stuff. The reason is simply that so few people in the US own non jewelry gold. I would ballpark way below 1/10.

Then again who knows. If that happens I would guess some large commercial deposits might get touched but otherwise it would be outlawed for ownership above X amount. Essentially just driving those folks to the black market.

Anonymous said...

Gold ownership HAD to be made illegal, because it afforded an alternative currency - folks recognized that FRN IOU's were just that - redeemable in ANOTHER IOU!

The reason legal ownership was restored - with FRN's as reserve currency it had the same affect as banning transactions worldwide in gold - except for banks of course. Essentially you could have gold, but not use it in interantional trade - or domestic. Nixon closing the gold window was an admission the vault was running dry. And who better to refill it over time than amurkans owning gold, for a time