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Things are looking good for the gold bugs these days. September
and early October saw the (long awaited) break above $1,000. This past
week saw the technical pull back to the breakout point, and Thursday was the
turnaround day. Friday saw some very bullish candlestick signals in
many of the gold stocks.
But one thing has been
bothering many gold bugs. In 1933, the U.S. Government confiscated the
people’s gold. The Government even went into safety deposit boxes
(in private banks) and took the gold out of them. This was done
once. Perhaps it could be done again.
Actually, I find this
fear to be alarmist. There were special circumstances which led to the
confiscation of gold in 1933, a special legal situation unique to American
history and which made the confiscation necessary if the New Dealers were to
achieve their objective of taking us off the gold standard.
First, let us go back
to a key event in American history. For those of you outside of the USA,
this is still useful information because America
was (and still is) the most wealthy country in the
world, and its gold/silver standard played an important role in that
accomplishment. As Senator Daniel Webster wrote early in America’s
history:
“Most unquestionably there is no legal tender
and there can be no legal tender in this country, under the authority of this
government or any other, but gold and silver….” [as quoted
by Chief Justice Salmon P. Chase, “Supreme Court Reports,” Legal
Tender Cases, 12 Wall 586, Opinion of the Minority.]
The U. S.
went on the gold/silver standard with the adoption of The Constitution
in 1788. This was compromised on a few occasions but basically led to a
stable currency for the period 1788-1933. This was the fastest growing
economy in the history of the world.
The first compromise
occurred during the War of 1812. The Federal Government did not abandon
hard money, but the private banks outside of New England
suspended payment of gold and silver and were allowed to get away with
it. Essentially only New England
remained on the gold standard for the duration of the war. In relation
to this, it is only the New England militia who refused to invade Canada
in 1812, and it was this fact which led to the American defeat.
The second compromise
of hard money occurred during the Civil War. Lincoln
was afraid that financing the war with a tax increase would make the war
unpopular in the North. So he printed money to pay war expenses.
This doubled the U.S.
money supply between 1861 and 1865. The railroads were enabled to pay
their debts (which had been contracted in gold) in paper money
(greenbacks). For example, a $1,000 railroad bond, which had cost its
owner 50 oz. of gold in 1860, could be paid off in 1865 for $1,000 in
greenbacks, which were worth 25 oz. of gold. They borrowed 50 oz. and
paid back 25 oz. It was stealing pure and simple, and the American
railroads loved it. They tried to persuade the country to remain off
the gold standard after the end of the war.
This was defeated when
President Grant vetoed the pro-railroad legislation and Congress voted
resumption (of gold) effective 1879. This shifted the battle to the
legal arena. Many holders of railroad bonds brought suit arguing that
the greenbacks were unconstitutional and that the railroads had to keep their
obligation to pay in gold.
The Court which had
to decide this matter should have been a Republican
Court. Lincoln
had had the opportunity to appoint 4 of the 8 new justices (one of them
Salmon P. Chase, his former Secretary of the Treasury, who had issued the
greenbacks). All he (or the Republicans who wanted to uphold his
memory) needed was one vote from the old judges.
They didn’t get
it.
Not only didn’t
they get it but Chase regretted his action in issuing the greenbacks.
He decided that it had been done in a war hysteria
and that this precedent could not be allowed to stand. He broke with
the Republicans and in Hepburn vs. Griswald
(1870) joined the Democrats to uphold the gold standard by a vote of
5-3. (Congress had switched from using two metals, gold and silver, to
just gold in 1873.) This set the precedent that the country had to be
on the gold standard.
The Republicans,
however, were the dominant political party, and they were determined to
uphold Lincoln’s
memory. Forget what you learned in Civics class. The
Supreme Court does not follow The Constitution. Neither does it
follow precedent. Here it followed the big money of the railroad
interests and their desire to cheat their creditors. One of the 5
judges of the pro-gold majority of Hepburn retired from old age, and
Congress increased the size of the Court from 8 to 9. This gave
President Grant 2 appointees, and he appointed two men known to be
anti-gold. The new Court disregarded precedent and overturned Hepburn
in The Legal Tender Cases (decided in 1871) by a vote of 5-4.
The New York World, commenting on this decision, stated:
“The decision provokes the indignant contempt
of thinking men. It is generally regarded not as the solemn
adjudication of an upright and impartial tribunal; but as a base compliance
with executive instructions by creatures of the President placed upon the
bench to carry out his instructions.” [As quoted by Sidney Ratner, “Was the Supreme Court Packed by President
Grant?” Political Science Quarterly, Sept. 1935, pp. 343-58.]
Having lost his main battle, Chase (the good guy) retreated to seeing
what he could salvage. He had understood that the railroads merely
wanted to cheat their creditors. Beyond this, they were not interested
in ideological points. Chase was, and he did everything he could to
shore up the legal foundation for the gold standard knowing that the new
majority would not bother to overturn it.
Chase’s most
important decision in this regard was Bronson vs. Rodes,
7 Wall 229, decided in 1870. And this is the decision which played a
crucial role in the gold confiscation of 1933. In Bronson v. Rodes (1870), the plaintiff had a written gold clause
in his contract requiring payment in gold. Since very few people had
such contracts in 1870, the railroads did not care if they lost that
one. The Chase Court ruled:
“It recognizes the fact, accepted by all men
throughout the world, that value is inherent in the precious metals; that
gold and silver are in themselves values, and being such, and being in other
respects best adapted to the purpose, are the only proper measures of values;
that these values are determined by weight and purity…A contract to pay
a certain number of dollars in gold or silver coins is, therefore, in legal
import, nothing else than an agreement to deliver a certain weight of
standard gold…the tender must be according to the terms of the
contract.” [U.S. Supreme Court, Opinion of the Majority, Bronson
v. Rodes, 7 Wall 229
at 249, 250, 252.]
This was
an extremely important opinion. It meant that future creditors could
protect themselves from another depreciation of the currency by insisting on
a gold clause in their contracts. If they had a gold clause, they were
effectively on the gold standard, no matter what happened to the rest of the
country. Lawyers went over these two Supreme Court decisions (Bronson
v. Rodes and Legal Tender Cases) after
1871, and recommended gold clauses to their clients. Gradually gold
clauses became very widespread in American business.
So when the New Deal
took over in 1933, they faced the fact that, even if they abolished the gold
standard, it would not work because now, unlike 1870, most everyone had a
gold clause. It is for this reason that the New Deal anti-gold measures
included a ban on the ownership of gold coins, a ban on gold clause contracts
and the invasion of bank safety deposit boxes.
Quite frankly, it is
unlikely that a modern government would do the same thing for the simple
reason that they do not need to. We are already off the gold
standard. Remember that paper money is theft. There is always a
group (the paper aristocracy) who wants to steal wealth from the people by
arranging things so that they are the beneficiaries of the printing of
money. Now the paper money system is well established and firmly in
place. There is no need for measures which will alarm the general
public. At the present time, it is only the gold bugs who realize the
evil of paper money and who are acting to protect themselves. But we
gold bugs are only a small minority. (Notice that the one time that
both prices and pro-gold sentiment were increasing sharply, 1979, the
establishment turned off the money spigot and suffered through a period of
tight money and credit (1979-81) in order to prevent the gold bugs from
becoming more popular.)
So you do not need to
worry about the Government stealing your gold. They don’t need
to. They already steal the wealth of the naïve (anti-gold)
majority. This majority believes their lie that the Government is
robbing from the rich to give to them. They keep getting poorer and
poorer, and they can’t figure out why. And they keep re-electing
the politicians who victimize them.
However, this does
bring up an interesting speculation. Both gold ownership and gold
clauses have been legalized in the U.S. (in the 1970s). This raises the
question as to whether gold clause contracts could be made, as in the 19th
century, on the precedent of Bronson v. Rodes.
One problem that such a project would face is that the old American double
eagle coins (approximately one ounce) now have a numismatic value and thus
are not suitable for using as currency. To solve this problem,
Congressman Ron Paul championed the (new) American eagle gold coins (exactly
one ounce) in 1986. It was passed in the Senate by unanimous vote and
in the House with a very small dissenting minority. A further advantage
of the new Eagle coin is that language accompanying the bill states
specifically that the coin is intended to be used as money, is legal tender
and is not merely an item for collectors.
For example, suppose
you buy some real estate and intend to hold it for 10 years. You have
the choice to pay either 200,000 dollars for the property or 200 ounces of
gold (in American Eagle coins). At the end of the 10 years, the value of
the U.S. dollar has fallen in half. All real estate, quoted in dollars,
has doubled. But the price of your property in gold is still 200 ounces.
Along comes the
Internal Revenue Service and says, “Sir, you have made a handsome
profit on your real estate. You bought it for 200,000 dollars and sold
it for 400,000 dollars. Here is your tax bill. You, however,
reply, “I did not buy the property for dollars. I bought it for
ounces. I paid 200 ounces, and I sold it for 200 ounces. I made
no profit at all. My house did not go up; your dollar went down.
But since I did not use your dollars, what does that have to do with me?
Or take the following
case: A man buys a life insurance policy on himself
for his wife to provide security for her should he die. Since this
purchase was made back in the old days when the dollar was still connected to
gold and had some value, the insurance was in the amount of $100,000.
Today, however, if his wife puts $100,000 in the bank, it will earn $125 per
year (1/8% interest). And that is not the kind of protection he had in
mind. What he needed to do was to buy insurance denominated in gold
ounces. As the paper currency depreciated, the gold currency held its
value.
A possible difficulty
with the use of the Eagle coin in this way is that Congressman Frank Annunzio, Chairman of the House Banking Committee,
illegally slipped a dollar denomination onto the coin (although both House
and Senate versions of the bill specified only an ounce denomination).
This muddies the waters and raises a question as to how some future judge
would rule.
What is wrong with
the economic establishment today is that it raises its capital by having the
central bank create money out of nothing. In effect, our governments
are robbing us and giving to them. It makes money, not by creating
wealth, but by going into debt. The more debt the more they make.
This was the cause of the enormous profits made by Wall Street in the early
years of this century. The problem with this system is that conditions
change. Their high-risk strategies which make lots of money in the
early part of the cycle cause them to go belly up in the late part of the
cycle. The last time this happened the Government admitted that its function
was to rob from the common people and give wealth to these powerful
interests. It argued that they were “too big to
fail.” Well, they got so big because the Government stole wealth
from us and gave it to them. They never produced any wealth. And
the whole purpose of Bernanke’s ultra-easy credit policy of 2008 was to
steal more from us and give it to them.
The system cannot
continue as it is going. The stealing must either progress to the point
that it destroys our society or it must stop. In 4th century
A.D. Rome, they chose the former path. People stopped using money; the
society reverted to barter, and the economy of western Europe
collapsed. The barbarians swept across the Empire, and millions of
people died of war, plague and famine.
Howard Katz
The Gold
Speculator
Also by Howard Katz
Howard S. Katz
was one of the early gold bugs of the late ‘60s and ‘70s, turning
bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from
$3/share in 1970 to $39/share in 1980 (sold at $31).
He turned
increasingly skeptical about gold as it mounted its final rise in 1979, and
he called the top after the close on Jan. 21, 1980 (with gold at
$825.50/oz.). Katz traded gold in and out during the ‘80s and
‘90s and once again turned long term bullish in Dec. 2002.
His thoughts on
commodities, stocks, bonds and real estate are available in The One-handed
Economist that is published every two weeks giving specific advice on trades
in stocks and futures. He went to Harvard, but rather than turn left, he
refused to take courses from the Harvard Economics Department and studied
economics on his own, concentrating on the classical economists and the
Austrian school.
He has published
several letters, to include The Speculator (1964- 1972), The Gold Bug
(1973-1986) and The One- handed Economist (1996-present). He is the author of
3 (published) books on money: The Paper Aristocracy (1976), The Warmongers
(1979) and Honest Money – Now! (1979).
He was the head
of the Committee to Establish the Gold Standard and worked with Congressman
Ron Paul for the passage of the American eagle gold coin bill of 1986. He is
at present an advisor for Kenneth J Gerbino &
Company, a Beverly Hills money manager.
Subscribe to the
Gold Speculator (the One Handed Economist)
You can subscribe to Howard Katz’s thoughts on commodities,
stocks, bonds and real estate are available in a letter entitled The
One-handed Economist and published every two weeks giving specific advice on
trades in stocks and futures. This letter is available (both electronic and
paper copy) for $300/year with a 3-month trial for $100. Send to: The
One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.(Include both electronic and mailing address.)
Information contained herein is obtained from sources believed to be
reliable, but its accuracy cannot be guaranteed. It is not intended to
constitute individual investment advice and is not designed to meet your
personal financial situation. The opinions expressed herein are those of the
author and are subject to change without notice. The information herein may
become outdated and there is no obligation to update any such information.
The author, 24hGold, entities in which they have an interest, family and associates
may from time to time have positions in the securities or commodities
discussed. No part of this publication can be reproduced without the written
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