Last Updated on November 23, 2021 by Constitutional Militia
Anyone who studies America’s present monetary and banking systems is aware of their inherent instability. They are crises waiting—and in the long run certain—to happen. The question is: What will the Establishment do when the chickens of financial collapse come home to roost? Many people fear that one of the Establishment’s responses will be to confiscate whatever gold average Americans possess. To what extent might these concerns reflect a real possibility, rather than mere paranoia?
Precedent provides some support to those who predict a new gold grab. In 1933 and 1934, President Franklin D. Roosevelt and his New Deal Congress—with assistance from the Supreme Court—seized gold coins, gold bullion, and United States gold certificates from common Americans; terminated the domestic redemption of all currency in gold; and outlawed and repudiated all private and public contracts and other debts requiring payment in gold (so-called “gold-clause contracts”). But the applicability of this, as of any other, precedent to the future requires careful consideration of its facts.
The gold seizure of the 1930s began as a “suspension of specie payments” throughout the banking system. At that time, Americans could redeem Federal Reserve Notes (“FRNs”) in gold or so-called “lawful money” at Federal Reserve Banks, and in gold at the United States Treasury. And Federal Reserve Banks were required to maintain a 40% reserve of gold on their issues of FRNs. The problem, of course, was that even a 40% reserve was woefully inadequate in the face of the near-complete collapse of credit and public confidence in the banking system. The Federal Reserve’s merely fractional reserves could not redeem and cash out all the paper currency and bank accounts that noteholders and depositors sought to liquidate in gold. Therefore, to remain in operation, the banks needed to terminate redemption of FRNs in gold.
Such a one-sided “suspension”—whereby the banks continued to collect from their debtors, but refused to pay their creditors—had occurred many times before in American history. Typically, these “suspensions of specie payments” had been of short duration. Soon, the banking system (minus the least solvent banks, which had collapsed utterly) had returned to normal business—unfortunately, however, always on the unsound fractional-reserve principle, thus inevitably setting the stage for further crises. The irony is that, even though it, too, operated on the pyramid-scheme of fractional reserves, the Federal Reserve System was nonetheless sold to gullible Americans in 1913 as a means to provide “scientific management” of currency and credit, so that a major financial collapse would never again occur. Yet the System failed so thoroughly in the early 1930s that the bankers sought, not only a temporary “suspension of specie payments” as had proven sufficient in the past, but also an unprecedented permanent departure from the domestic “gold standard,” by making paper currency altogether irredeemable in gold for common Americans forever.
In addition, Roosevelt’s New Deal Congress declared judicially unenforceable all “gold clauses” (that is, provisions requiring payment in gold) in public and private debts. “Gold clauses” had become popular after the United States emitted the first irredeemable legal-tender paper currency in 1862, as a consequence of and response to that form of unsound money and any other forms the future might hold. For the clauses provided an effective means to protect creditors against depreciation of paper currency, either by banks or by the government. Unfortunately, Roosevelt’s New Deal monetary policy aimed at “reflation” of a collapsed economy and reduction in the real burden of debts through inflation of currency and credit, and therefore extensive depreciation of a “dollar’s” purchasing power. Such a policy would have been largely thwarted, though, if creditors could have demanded payment of the huge numbers of outstanding “gold clauses” and the incorporation of such clauses routinely in new contracts. Moreover, many of the debtors then most exposed to “gold clauses” in outstanding bonds and other securities were government treasuries and politically influential big businesses desperate to unload the burden of debt bearing down on them.
So, Roosevelt and his cronies engineered a massive, politically mediated breach of contracts as to both paper currency and debts: terminating the domestic redemption of all currency in gold (which helped the banks and the Treasury); and outlawing and repudiating all private and public contracts and other debts that required payment in gold (which helped all big, politically connected debtors). In and of itself, this was the largest one-time political rip off in American history.
Roosevelt went further, however, to the outright theft of personal property, through seizure of common Americans’ gold coin, gold bullion, and United States gold certificates. (On paper, the Administration claimed the authority to seize silver coin and bullion, too, but never made a move to do so.) This step must have been carefully premeditated for its own sake, inasmuch as seizure of We the People’s gold coin, gold bullion, and gold certificates was not necessary in order either to terminate redemption of paper currency in gold or to declare “gold-clause contracts” judicially unenforceable as to payment in gold. In both instances, the specially privileged debtors could have been immunized from having to deliver gold to their creditors, whether or not those creditors, or any other Americans, continued to receive or simply to possess gold derived from other sources. In addition, once having repudiated redemption of FRNs in gold, and declared “gold clauses” unenforceable, Roosevelt and his allies among the bankers could have ballooned the supplies of paper currency and credit, without seizing even a grain of gold from a single American. During the last twenty years, for instance, the Federal Reserve System has extensively expanded the supplies of its currency and especially credit, notwithstanding that all Americans have been able both to own gold in any form and to enter into “gold-clause contracts,” and even though the Treasury itself has been emitting American Eagle gold coins in quantities sufficient to meet public demand.
Roosevelt’s main rationalization for the gold seizure was the supposed need to centralize gold in the Treasury, as “backing” for FRNs internationally—because until 1971 FRNs remained redeemable in gold for foreign banks. Also, Roosevelt aimed at using the Treasury’s near-monopoly on the legal ownership of gold to depreciate FRNs in terms of that metal (or, as the then-current euphemism had it, “to raise the price of gold”), so as to jack up the prices of all goods and services and thereby bootstrap the economy out of depression. As with Roosevelt’s other economic nostrums, this monetary scheme proved to be snake oil, too.
Its ill effects aside, in the early 1930s a nationwide gold seizure was a not impractical operation: For much of We the People’s gold found itself already inside the banks or the Treasury—owed to individuals outside, but simply never paid out, after Roosevelt’s initial surprise decree froze it there. Roosevelt also ordered that individuals turn in to the banks for delivery to the Treasury all gold coin, gold bullion, and gold certificates in their possession. Yet, notwithstanding savage penalties for noncompliance—ten years’ imprisonment and a $10,000 fine—only about 22% of the gold coin and 55% of the gold certificates in private hands were surrendered. And although a few well-publicized examples were made of individuals who refused to turn in their gold, Roosevelt shrank from launching a campaign of widespread house-to-house searches, or other police-state measures, in an attempt to rake in the rest.
Proving once again the impotence or fraudulence of “judicial review” when the Establishment’s most importance interests are at stake, the Supreme Court never adjudicated—but instead intentionally evaded—the question of the unconstitutionality of the gold seizure (although most every law professor who has ever heard of, but no doubt never carefully studied, the Gold Clause Cases will probably say otherwise).
Moreover, no political repercussions ever embarrassed either Roosevelt or his puppet Congressmen. No movement to impeach him for laying waste the monetary system and further empowering the banks was launched. And the gold seizure never became an issue that threatened his serial re-election.
But what might happen if a new gold seizure were attempted today? For part 2 click below.