On April 5, 1933, President Franklin D. Roosevelt issued Executive Order 6102, requiring all gold coin, gold bullion, and gold certificates to be surrendered to the Federal Reserve Banks or to banks that were members of the Federal Reserve System. With very limited exceptions, it was now illegal for Americans to own gold. This state of affairs lasted until 1975. It was the movement to legalize gold ownership in the United States that influenced a young doctor in Texas to make his first forays into politics. That young doctor is known and beloved by millions today: Dr. Ron Paul. Even out of something as evil as outright gold confiscation, something good came about.
Full text of the Executive Order is below.
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Today we bring you Part VI of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:
Part I – Colonial Money and the Coinage Act of 1792
Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
Part III – Government Begins to Monopolize Currency
Part IV – The Legal Tender Cases and the “Crime of ’73”
Part V – The Rise of the Fed
Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
Part VIII – The 1980s to the Great Recession and on to the Future
The Great Depression
Soup Line During the Great Depression
The Federal Reserve’s monetary inflation throughout the mid- to late-1920s resulted, not surprisingly, in the Great Depression. As with any credit-induced economic boom, the newly created credit caused a distortion in the allocation of resources. Instead of economic growth resulting from increased real savings and investment, the boom of the 1920s was caused by an artificial increase of credit in the banking system by the Federal Reserve.
Whereas savings-induced growth aligns consumers’ present and future preferences, credit-induced growth does not. An artificial increase in credit allows banks to make more loans to businesses, and these increased loans signal to businesses that consumers are saving more in the present in order to consume more in the future. Businesses begin to undertake longer-term, more capital-intensive projects which, once they are finished, they find to be unsustainable because consumers either do not actually want them or cannot afford them because they have not saved enough money to purchase the goods. These resources have been malinvested, or invested badly, into sectors of the economy that do not actually serve the needs and wants of consumers. And it is not just one or two businesses which find themselves in such straits, but a whole slew of businesses, often across many different sectors of the economy.
The way out of a crisis had traditionally been to allow these malinvested resources to liquidate. Bad debts had to be liquidated so that prices could fall in order for markets to clear. In doing so, resources that were malinvested would be shifted to be used productively in other sectors. This was what was done during the Depression of 1920-21, in which President Harding refused to allow any sort of intervention by the federal government to alleviate the crisis. As we have seen, that crisis, although quite sharp, came to a quick end as the economy rebounded and returned to normal.
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October 6, 1917 marks the passage of the Trading With The Enemy Act of 1917, a law that gave very broad and arguably unconstitutional powers to the President to restrict trade with nations with which the United States was at war. What does this have to do with money and banking, you ask? Subsection (b) of Section 5 of the Act gave the President the power to restrict and forbid foreign exchange transactions, export of gold and silver, or transfer of property and credit, not just between United States citizens and citizens of enemy countries, but between United States citizens and citizens of any foreign nation. Full text of that subsection is below.
The importance of this is that subsection 5(b) was the basis for the confiscation of gold ownership in the United States in 1933. Subsection 5(b) was expanded upon in 1933 with the passage of the Emergency Banking Relief Act on March 9, 1933. That act gave broad powers to the President to restrict the “hoarding” of gold and silver coin. And in fact, President Roosevelt cited subsection 5(b) in Presidential Proclamation 2039 and Executive Orders 6102 and 6260. Presidential Proclamation 2039 established a bank holiday and forbade banks from paying out gold and silver coin or bullion. Executive Order 6102 was the famous gold confiscation order. All individuals were required to turn over their gold coins and gold certificates to Federal Reserve Banks or to banks that were members of the Federal Reserve System. E.O. 6012 was replaced by E.O. 6260, which permitted only Federal Reserve Banks to possess gold coins. This was then followed by the Gold Reserve Act of 1934, which forced the Federal Reserve System to turn over all that gold to the US Treasury. And where is all that gold that was seized from the American people? At Fort Knox, never again to be returned to the people from whom it was seized.
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