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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
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.)
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