Will Gold be Confiscated? By Chris Weber

I get this question from time to time, and I suspect that it is something many people worry about. After all, gold was confiscated back in the 1930s. Why couldn't it happen again?

Well, even though I think there is much to worry about in the coming years, I don't think you should worry about this.

To more fully explain this, we have to go back a few years in order to show how different things are from the confiscation era.

To put it briefly, gold was money back then, and had been money for thousands of years. Governments had the idea that in order to get the economy out of the depression, there had to be massive inflation. However, under a gold standard this was not possible. If the government printed too much money, people would take their paper money to the banks and get gold. This fact put a crimp on the government's ability to inflate. People owned gold coins because that was the way they owned money.

In the US, that practice went back to the US Constitution. The Founders had lived through the ruinous paper money inflation of the American Revolution, and were resolved that the printing of paper money unbacked by gold or silver would never happen again.

Well, they were wrong. During the next big crisis in the US, during the Civil War, the Union issued "greenbacks". This was paper money that could not be exchanged for gold. In 1862 gold payments in exchange for paper money stopped.

President Lincoln did this because he needed money to fight the war. However, he realized that this could only be a temporary measure. As soon as the war looked to be won, he appointed a man named Hugh McCullough to be his Treasury Secretary. This man had already been the first Comptroller of the Currency, and also went on to serve as Treasury Secretary under two later presidents. He was the last surviving member of Lincoln's cabinet, dying at the ripe age of 86 in 1895.

I spend time talking about McCullough because I want to quote from something he said; something which shows you how deeply embedded the idea of gold and silver as money was. "Gold and silver are the only true measure of value. The are the necessary regulators of business. I have myself no more doubt that these metals were prepared by the almighty for this very purpose, than I have that iron and coal were prepared for the purpose in which they are being used."

You can see that there was an almost religious faith in the value of gold and silver as money. And if you realize what happened to the monetary system after Lincoln suspended gold backing for the dollar in 1862, you can see why. Inflation soared. As measured by an ounce of gold, the price of gold on the New York exchange soared from $20.67 in 1862 to over $450 a few years later. In fact, when President Grant, in one of his first Acts (the 1869 Act to Strengthen Public Credit) moved to eliminate the greenbacks and restore the gold standard, the gold price sharply fell to "just" $310 per ounce.

Can you imagine that? According to the Inflation Calculator, $310 back in 1869 would be $4,774 in 2007 dollars. Can you imagine a situation where gold's price plunged to just $4,774 an ounce because people once again were relieved that the dollar would again be backed by gold? And yet, that's just what happened.

Now, fast forward to America's next big crisis, the Great Depression. When it started, the US was still on the gold standard. People could take their paper money to banks and convert them into gold coin or bars at the old price of $20.67 per ounce.

But this put a crimp on the government's ability to inflate. And the new President, Franklin Roosevelt, came into office believing that massive new paper money and credit creation was the way to get the country out of the depression. If paper money was created and put into people's hands, they would spend it and get the economy moving. But the ability of people to take that new paper money and convert it into gold stood in the way of this idea.

So he believed that gold would have to be removed as money. On March 6, 1933, just two days after he came into office, he barred banks from paying gold to depositors. One month later, on April 5, he outlawed what he called "hoarding" of gold. This was an attack on people who held on to their gold in the age-old belief that it was the only money that could be trusted. But now, all gold coins had to be taken to banks and exchanged for paper money, at the price of $20.67 per ounce. There were two exemptions to this: each person was allowed to keep no more than $100 in gold coin, and rare coins were not included, only the coins that had been used and regarded as money.

People followed this order. As one newspaper at the time put it, “They came with little bags, briefcases, paper bundles, boxes or bulging pockets". And this is another point I want to make. Back then, people trusted the government to an extent that seems incredible today. In the UK, the announcement at the same time that the national debt would have to soar caused many Britons to actually write personal checks to the UK Treasury to help pay off the debt.

So now we come to the situation today. Gold is no longer regarded as money in any legal sense. Almost no one has even seen or held a gold coin, or certainly less than 5% of the population. Since 1933, money is whatever paper value either the market says it is or the government says it is. There is no more legal tie to gold.

This is a first in human history. Earlier suspensions of the link between gold and money were short and to be gotten over with as soon as possible (remember that McCullough quote).

But when the world went off the gold standard in the 1930s, it never went back on. Needless to say, inflation has soared since then. The paper dollar has lost over 95% of its value. I don't need to tell you that.

However, what you have to remember is that today, unlike 1933, there is no reason for the government to confiscate gold. Indeed, they are even minting it and selling it. They can't sell it fast enough and there are shortages.

Gold was confiscated in 1933 because everyone thought of gold as money; they used gold as money and this situation made it impossible for the government to inflate.

But now nothing stands in the way of the government's ability to inflate. The central banks have been doing it at historic record rates during the last few weeks in order to avoid deflation.

I think there is a better chance that future inflation will so ravage the value of the US dollar, as it did during the American Revolution and the Civil War that people will demand that once again the dollar be backed by gold.

But, again, this is in the future. The immediate danger continues to be deflation. In order to fight that massive money and credit creation---monetary inflation--is now taking place.

So people who fear confiscation of gold don't realize the background of why gold was confiscated the last time. Thus, they don't see how the situation has changed.

And one more thing, people are much more cynical about the government today than they were back in 1933. If for some crazy reason the government decided to confiscate gold I doubt that many people would comply. The gold would go into hiding and trade in an underground economy, the way illegal drugs do today. Remember, today gold is not money. There is no need to confiscate it in order to allow the government to inflate. But looking to the future, there may well be a need to restore a golden safeguard to prevent the destruction of the paper currencies.

Chris Weber is the author of "Weber Global Opportunities" Newsletter. He has been following global financial trends for over 25 years, the last 8 from his base in Monaco. He is one of the smartest investors I know [Editor]. For information about subscribing to his newsletter, go to http://www.weberglobal.net/join.html