In 1933, the U.S. government perpetrated what liberty-minded scholars consider to be the most draconian economic act in its history by confiscating its citizens’ gold. Though it is a subject of much debate, many goldbugs insist the laws allowing the government to do this again are still on the books. Is there anything a precious-metal investor can do to put his or her gold out of the government’s reach?
A Brief History of Confiscation
When Franklin Delano Roosevelt took office in 1933, the country was experiencing the worst economic depression in its history. The prior era, the Roaring Twenties, had been one of inflated assets and an expanding money supply. Eventually, the bubble burst and prices began to drop precipitously. FDR knew what needed to be done — prices needed to be stabilized — but the methods he used to achieve this end were, according to most constitutional scholars, well beyond the legitimate scope of federal power.
FDR’s plan was to depreciate the dollar, which, at that time, was convertible to gold at the rate of $20.67 per ounce. However, this would be impossible to do with millions of $5, $10, and $20 gold coins in circulation. These coins were literally worth their weight in gold, and if the value of the dollar were changed, people would simply melt down the coins or take them out of circulation — either way, this would not help depreciate the dollar and inflate the money supply, as FDR aimed to do.
So, under legally dubious means, FDR and Congress passed a law outlawing the private ownership of gold in excess of $100. Millions of Americans were made to trade in their gold coins for paper dollars — effectively at gunpoint. Then, once all the coins were in the government’s coffers, FDR revalued the dollar from $20.67 per ounce of gold to $35 an ounce — a theft of almost forty-once cents on the dollar.
Gold ownership remained illegal in the United States until 1954. That year, the Treasury Department legalized the ownership of “rare” coins. What was a rare coin? Well, since the government had seized all pre-1934 coins, then by definition, all such coins were deemed “rare.” After all, these coins were so uncommon that those few in circulation were worth much more than their face value or the value of the gold of which they were made — the coins had numismatic value. They effectively were no longer “money,” and thus they didn’t pose a competitive threat to the government’s fiat currency.
Gold, Government, and the Law
In 1969, the federal government further clarified the 1954 ruling and officially exempted “rare coins” from any future government confiscations — but still reserved the “right” for the government to seize its citizens’ gold in the future. “The basic principles governing the administration of the Gold Acts and Orders,” said the Treasury Department in 1969, “are that gold, as a store of value, can be held only by the government and that private citizens and entities in the United States can acquire gold only for legitimate and customary industrial, professional, and artistic purposes.”
Two years later, in 1971, President Nixon “closed the gold window” and took the U.S. dollar off the gold standard — making it a true fiat currency with no asset backing or intrinsic value. Four years after that, President Ford legalized the private ownership of all gold — not just rare coins — and gold has continued to be fully legal for the past thirty-two years. Or has it?
Although laws prohibiting gold ownership have been repealed, the laws allowing the government to confiscate gold have not. Rare coins, however, are the exception. For the government to confiscate citizens’ bullion, all the government has to do is act on long-dormant laws. But for the government to confiscate rare coins, it would have to overturn fifty-plus years of precedent and shatter the legal system’s overarching ideal of jurisprudence. This may not be entirely impossible, but it certainly offers the holders of pre-1934 gold coins more protection than the owners of bullion.
Reinstating the Gold Standard?
But why would the government confiscate gold? Some argue it did so in the past in order to revalue the dollar relative to gold, and since the dollar is no longer on the gold standard, the government would have no reason to confiscate gold. This is a good point, but it also begs the counter-argument: Now that the U.S. dollar is not backed by gold, it’s only a matter of time before the house of fiat-money cards crumbles. When this happens — when the government’s printing presses are incapable of printing money with any real value, then the government will certainly look to do something, and conveniently, laws on the books allow it to confiscate privately owned gold. It’s likely that the government could do this ostensibly to reinstate the gold standard!
In such desperate times, would rare coins be safe? It is impossible to know for sure, but it is certainly true the coins would be safer than bullion or non-rare coins. After all, look no further than to the first Great Confiscation in which many “patriotic” Americans willingly turned over their gold for paper money. Certainly, some Americans would do this again, especially if it were in the name of reinstating the gold standard. The government would probably promise gold redemptions would be
reinstated “in a matter of time.”
And while certainly not all goldbugs would willingly turn over their gold, there would be far less resistance to government confiscation of commodity-valued gold than there would be to the seizure of rare, numismatic coins. The government would not want to be in the business of coin dealing, at least not at first, and it would undoubtedly go after the low-hanging fruit — especially when laws on the books allow it to be legally picked.
Win With or Without ‘Financial Armageddon’
Silver investors should be aware of the potential of another Great Confiscation. But, a diverse portfolio of stocks, bonds, cash, and precious metals has worked the best over the past thirty years, and will probably work the best for the next thirty. And, as part of a hedging strategy, holding some rare gold coins — in addition to bullion — is undoubtedly a wise decision. Just in case.