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Learning from America’s Forgotten Default

​President Franklin D. Roosevelt​ signs the Gold Bill (also known as the Dollar Devaluation Bill) ​Bettmann/Getty Images

Learning from America’s Forgotten Default

One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. There’s just one problem: it’s not true, and while few people remember the “gold clause cases” of the 1930s, that episode holds valuable lessons for leaders today.

LOS ANGELES – One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. Every time the debt ceiling is debated in Congress, politicians and journalists dust off a common trope: the US doesn’t stiff its creditors.

There’s just one problem: it’s not true. There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively. And, while few people remember this critical period in economic history, it holds valuable lessons for leaders today.

In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar. But this would not be as easy as FDR calculated. Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.” These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge.

For FDR, however, the gold clause was an obstacle to devaluation. If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt.

To solve this problem, Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts.

…click on the above link to read the rest of the article…

The US Two-Tier Monetary System that Ended in 1971

QUESTION: You said the US had a two-tier monetary system under Bretton Woods. Can you explain that one, please?

DHJ

ANSWER: When Roosevelt confiscated gold, he created, in reality, a two-tier monetary system quite frankly as the medieval city of Florence. The Great Financial Panic of 1344 was when the value of silver rose dramatically blowing out the silver/gold ratio. Silver was used locally for the normal people. Their wages were paid in silver. The gold florin was used for international trade and companies had to keep actually two sets of books with accounting in each separate currency.

When Roosevelt confiscated gold, he devalued the dollar from $20.67 per ounce of gold to $35. Gold remained the unit of account for INTERNATIONAL transactions. While the last silver dollar was at first still minted, it was decided to end that production as well. Therefore, the last U.S. silver dollar to be struck was that of 1935. Nonetheless, the government then maintained silver as a backing for the currency domestically and issued Silver Certificates until 1963.

When the price of silver was rising with just about all other commodities during the early 1960s, the pressure was mounting on the financial system. President Kennedy authorized the abandonment of silver as a backing for the currency. He allowed the silver certificates to be redeemed for silver bullion. However, the minimum lot accepted for redemption was 5,000 for this was the size of the silver bars.

Therefore, in 1963 is when we see the beginning of the end in the two-tier monetary system. Between 1964 and 1971, the gold standard remained intact until President Nixon was forced to close the gold window ending the convertibility of dollars to gold internationally.

…click on the above link to read the rest of the article…

Will They Confiscate Gold Again?

US$20Gold-pile

QUESTION: Hello Marty, Is it your belief that they will (again) try to confiscate gold bullion coins when the going gets rough? If so, is there an alternative that you would recommend?

Many thanks for you great work.

k

ANSWER:I do not believe they will confiscate gold for there is no intention to return to a gold standard as Roosevelt did in 1934. He confiscated the gold FIRST to profit from the dollar devaluation in 1934. He also wanted to stop people from hoarding cash outside the banks, which is the same problem we have today that they are addressing by moving electronic and cancelling high denominations. However, what they will do is confiscate gold if you tried to leave the country with it or you travel with it domestically using the civil asset forfeiture laws. That would be the same as if it were cash.

It does appear that old pre-1965 silver coins may be best for small commerce. However, keep in mind that the government may declare any transaction in gold or silver to be illegal and they then get to confiscate all assets involved. They can easily just pass a law and declare anyone dealing in some off-currency exchange to be “money laundering” to hide from taxes. These people will do whatever they can to retain power.

Keep in mind that as they become more and more desperate for money, all legal forms used today will vanish at the order of any judge. Any “trust” or corporation will have no validity to prevent government on the hunt for money. Piercing the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders.

…click on the above link to read the rest of the article…

India’s Failing Gold Monetization Scheme: Seizure Imminent?

India’s Failing Gold Monetization Scheme: Seizure Imminent?

India’s newest gold monetization scheme has been a colossal failure. After one month, it has netted only one kilogram (2.2 pounds avoirdupois) out of an estimated 20,000 tonnes (44 million pounds avdp) of privately-held gold. Why is that? Well, let’s look at how the program works.
  1. Gold-holders turn their gold over to a bank. The banks melt the metal down and provide it to the central bank to loan to jewellers.
  2. In exchange, the central bank provides gold accounts to the banks on behalf of the gold depositors and pays interest on those deposits.
  3. The interest rate on those deposits is a little over 2%, while the inflation rate in India right now is over 5%.
  4. The deposits are time deposits, meaning that depositors receive their principal repaid at the end of the term; short-term depositors receive gold or rupees back, while medium- and long-term depositors receive only rupees.

So you give up all your gold, get at most a -3% rate of return on your investment, and might get both your interest payments and principal paid in rupees that the government has historically devalued at up to 15% per year. And the government wonders why gold-holders aren’t flocking to offload their gold?

But not to worry, the government will make sure this scheme works:

“A finance ministry official said if banks fail to win over temples, the government could intervene directly as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control.”

Shades of 1933 all over again. One would imagine that outright gold confiscation from Hindu temples would result in massive protests and quite a bit of bloodshed. And while most rational people would assume that the government would be smart enough to avoid doing something so drastically stupid, this is the same government that developed the cockamamie gold monetization scheme in the first place. Never underestimate the idiocy of government bureaucrats, especially when those bureaucrats are trying to save face.

…click on the above link to read the rest of the article…

Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation

Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation

One month ago, when reviewing India’s ploy to monetize the thousands of tons of gold held by the broader population through the issuance of “gold-backed bonds” (which would need to offer a rate of interest greater than inflation to be attractive but they won’t), we asked if this is “the start of India’s gold confiscation.

As a reminder, as part of the plan, Indians would be allowed to “deposit their jewelry or bars with banks and earn interest, while the banks will be free to sell the gold to jewelers, thereby boosting supply. The deposits can be for a period of one year to 15 years with the interest on short-term commitments to be decided by the banks and those on long-term deposits by the government in consultation with the central bank.”

The sovereign gold bonds are aimed at people buying the precious metal as an investment. The securities may help shift a part of the estimated 300 metric tons a year investment demand, the government said in a separate statement. The bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment, it said.

When stripped of its pompous rhetoric, what India is offering is simple: a gold-for-paper exchange, which however in a culture where gold has been the definition of money for centuries, would likely be a non-starter from the beginning. One look at the chart below showing Indian gold demands is sufficient to show just how ingrained in the Indian psyche gold hasbecome.

However, as we said a month ago, just because it is doomed from the beginning, at least in its current iteration, does not mean it won’t be tried (see: Abenomics)… or adjusted. Because this proposal was nothing short of the initial shot across the gold confiscation bow. Here is what else we said:

…click on the above link to read the rest of the article…

Is This The Start Of India’s Gold Confiscation

Is This The Start Of India’s Gold Confiscation

On April 5, 1933, FDR signed Executive order 6102 which made illegal “the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States” in the process criminalizing the possession of monetary gold by any individual or corporation.

This was de facto gold confiscation; De jure it wasn’t, because as compensation for the relinquished gold, Americans would receive 20.67 in freshly printed US dollars for every troy ounce. Anybody who objected faced a fine of $10,000 (just under $200,000 in inflation-adjusted dollars) and up to 10 years in prison.

Once the government was confident it has confiscated enough gold, it turned around and raised the official price of a gold ounce to $35 (about $600 in today’s dollars) devaluing the US Dollar by 40% overnight at a time when currencies were still backed by hard assets.

Fast forward 82 years to a time when the barbarous relic continues to be seen as the safest store of value among India’s vast population (roughly 20% of the world’s total), not to mention the main source of financial headaches for local authorities, one of the biggest importers of gold due to its “traditional” values and where relentless Indian demand for offshore purchases of the shiny yellow metal so plagues the government’s current account and capital flow strategy, that the government may be preparing to pull a page right out of the FDR playbook.

Yesterday, Prime Minister Narendra Modi’s cabinet implemented the selling of “gold-backed bonds” when it approved the gold monetization plan and sale of sovereign bonds proposed several months ago by the Reserve Bank of India, the government said in a statement. The plans were first announced by Finance Minister Arun Jaitley in February as measures to woo Indians away from physical gold. As Jaitley explained yesterday, the deposited gold would be auctioned, used to replenish the Reserve Bank of India’s reserves or be lent to jewelers.

…click on the above link to read the rest of the article…

Will Uncle Sam Confiscate Gold Again?

Will Uncle Sam Confiscate Gold Again?

Investors suffered financial losses in recent weeks as stocks globally came under pressure in August and had their worst month in the last three years.

In one of the most volatile trading periods since the global financial crisis, August saw a massive $5.7 trillion erased from the value of stocks worldwide. No major stock market was left unscathed and the risk of financial and economic contagion became evident again. 

There are growing concerns internationally that in the event of another Wall Street or global stock market crash and a new systemic crisis – a Eurozone debt crisis or another  Lehman Brothers collapse – there could be enforced bank closures or extended bank holidays in the EU and U.S. as seen in Greece recently.

The New York Times

In this scenario, deposit boxes and vaults in U.S. banks and financial institutions could be sealed and gold confiscated again.

There is a legal precedent for this. April 5th, 1933 – at the height of the Great Depression – was the day when U.S. President Franklin Delano Roosevelt instructed all American citizens to hand over all their gold coins and bars to the Federal Government.

Every coin, bar and certificate had to be handed in to Roosevelt’s government or else one would face a very large fine of $10,000 or 10 years in jail.  That is whopping fine of $180,000 fine in today’s money.

 

Gold was money at the time as dollars were backed by gold so in effect Roosevelt was confiscating the safest and most valuable form of money that people owned for the benefit of the state. Under the Gold Confiscation Act of 1933 Roosevelt ordered all gold be handed to the authorities. At the time, gold was valued at $20 per ounce. Once the gold was confiscated from the citizens and in the government coffers they revalued gold and devalued the dollar to $35 per ounce.

…click on the above link to read the rest of the article…

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