Blanchard Online asks could gold confiscation happen again?
(emphasis mine) [my comment]
Gold Confiscation: Could it Happen Again?
With the dollar growing weaker and the price of gold skyrocketing, could we see a repeat of the 1933 gold confiscation?
The eventual result of the Bailouts will be inflationary and will further weaken the dollar. The flip side to a weak dollar is a rising gold price. All other things being equal, gold will continue to climb higher as the dollar moves lower. Today, just as in 1973 when gold began its last, big bull market, gold and the dollar are competitors, riding opposite ends of an economic seesaw.
In the 1980s and 1990s, gold languished and was replaced by the dollar as the standard against which all things financial are measured. In the coming years, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Gold's value, relative to most national currencies, will soar.
However, the monetary crisis that will make your gold extraordinarily valuable will also create the very situation in which the government could return to some version of the gold standard, which would require that central banks enlarge their stocks of gold, increasing the gold price.
The problem is that the very circumstances that would make your gold so valuable could also result in its being taken from you. In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt, under Executive Order No. 6102, confiscated all privately owned gold in the United States. Could it happen again? No two currency crises are exactly alike. However, it may be important to consider the reason why confiscation or expropriation is even relevant: the fact that, if it eventually became necessary for the U.S. to bolster a collapsing dollar with gold, we no longer have enough gold to do so in any meaningful way. As our debt and deficits have soared over the years, and as more and more dollars have been created, U.S. gold reserves have disappeared. In 1950, the United States Department of the Treasury owned 68.2 percent of the world's total gold reserves. Today, the Treasury owns less than 28 percent [Incorrect. The US has leased out this remaining gold and is net short gold via its big commercial banks].
My reaction: I don't believe we will see another confiscation of "all privately owned gold". There are many key differences between 1933 and now:
1) FDR's gold confiscation was small, only 110 tons of gold. By contrast, the US would need to accumulate at least several thousand tons today, something that will likely be much more fiercely opposed.
2) In 1933, the dollar was on the gold standard backed by 5800 tons of gold in US vaults, so those turning in gold for dollars only experienced a 69% loss. Today, any gold confiscation would result in 99.9% losses and would be seen as blatant theft.
3) Finally, the biggest reason a gold confiscation is unlikely is dual citizenship.
Dual citizenship would make it a nightmare for trying to confiscate gold. For example, I have dual citizenship (American/French). If the US announced a gold confiscation, I would leave the country using my French passport to go store my gold someplace safer. Faced with this scenario, the US would have two choices:
A) Confiscate the gold of non-US citizens as they leave the country. This would not go over well with the rest of the world. In fact, the US would probably face crippling sanctions and/or an oil embargo if it tries to steal the gold of non-US citizens.
B) Allow only non-US citizens to leave the country with gold. This solution would be incredibly unjust to those without dual citizenship, and American voters will object.
Dual citizenship also creates a host of other issues. A gold confiscation would result in wealthy Americans living abroad giving up their US citizenship rather than giving up their gold. This would decrease US tax revenues. Foreign governments could require dual citizens to turn gold over to them instead of US. Etc...
Finally, when it comes right down to it, the US is in no position to confiscate gold. The US owes gold to Europe (gold swap and gold leases to US banks), is addicted on foreign oil, and is dependent Asia's cheap consumer goods. The world is unlike to tolerate any gold confiscation which extends to dual citizens, and the American voters are unlikely to tolerate any gold confiscation which excludes dual citizens. Hence, no gold confiscation.
UPDATE: March 10, 2009
In response to the comments below, I am expanding this entry.
First, I want to stress how different the US is today compared to back then. In the past, the US was far more xenophobic than most people realize. To give you an example of how bad it was, consider this: In 1858, Calif ornia passed an outright ban on all people of "Mongolian" (Chinese) descent, except in cases of shipwreck or accident.
(emphasis mine) [my comment] (note: the article has an xenophobic bias)
Some states took immigration policy into their own hands. In 1855, California levied a fine of $55 per person on Chinese immigrants. Three years later, when it was clear the fine had not stopped the flow, the state passed an outright ban on all people of "Mongolian" descent, except in cases of shipwreck or accident. Survivors were expelled as soon as they recovered. The city of San Francisco passed its own laws, taxing Chinese laundries and door-to-door vegetable peddlers. Perhaps most imaginative was a "queue" ordinance, which required a mandatory haircut for anyone convicted of a crime. This was aimed at Chinese, for whom it was a great disgrace to lose the pigtail.
From 1854 to 1874, Chinese could not testify against whites in California courts. The legislature declared that Chinese "have never adapted themselves to our habits, modes of dress, or our educational system ... Impregnable to all the influences of our Anglo-Saxon life, they remain the same stolid Asiatics that have floated on the rivers and slaved in the fields of China for thirty centuries of time."
In 1875 the US Supreme Court declared immigration a federal, not a state responsibility, but the US government picked up where California and other states left off. Beginning in 1882, it passed a series of laws barring Asians. The first Chinese exclusion act, in force for 10 years, was renewed in 1892 and 1902. In 1904 Congress made the ban permanent, and it was in effect until 1943, when China was our ally in the war against Japan, and a total ban seemed unfriendly [No kidding].
Japanese and Koreans tried to immigrate later than the Chinese, but got the same treatment. The Japanese and Korean Exclusion League, founded in 1905 in San Francisco, whipped up so much anti-Asian sentiment that Teddy Roosevelt persuaded the Japanese government in 1907 to withhold passports from anyone who wanted to emigrate to America — the so-called Gentleman's Agreement. The Immigration Act of 1917 created an "Asiatic Barred Zone" that virtually eliminated all Asian immigration, and also required literacy tests for European immigrants.
[Check the graph below. Can you see why a gold confiscation today might be slightly more problematic than in 1933?]
Note decline during the First World War, and the success of the restrictions of the 1920's. The spike in 1991-2 is due to IRCA amnesties.
If illegals are included, between 1970 and 1980, the number of foreigners living in the US rose by 47 percent (4.5 million). Between 1980 and 1990, the number rose by another 40 percent (5.7 million), and during the 1990s, increased by a staggering 57 percent (11.3 million, the largest single-decade increase ever). This meant that in 2002, 33.1 million immigrants were living in America — 11.5 percent of the total population [in 2007, 38.1 million foreign born people living in the US, about 12.5 percent of the total population]. Immigration drives US population growth. Since 1965, immigration and the children of immigrants have accounted for 70 percent of the increase, giving the United States population growth rates like those of Third-World countries.
My reaction: The situation surrounding the 1933 gold confiscation was very different than today:
The US's situation during the 1933 gold confiscation
1) Dual citizenship was a non-existent issue, and the clear distinction between Americans and non-Americans made it easy to confiscate gold.
2) An immigrant population making up just over 9 percent of US population.
3) The gold confiscation was small (110 tons).
4) The scale of the gold thief was also small (Americans were forced to sell their gold at a 43 percent discount of the future price of gold).
5) The US was self reliant (no dependence on foreign oil or consumer goods) while the rest of the world owed money to the US. So event if foreign government objected to the gold confiscation, they had no leverage whatsoever to do anything about it.
6) Finally, at the time of the confiscation, the US had one of the strongest currencies in the world: huge gold reserves, trade surplus, low levels of national debt, etc... The dollar's strength in 1933 meant hyperinflation was never an issue.
The US's situation today
1) It's estimated that more than 40 million Americans are eligible for dual citizenship. This dual citizenship is a recent phenomenon, and I think that people are underestimated how big an issue this could be.
Key point about dual citizenship: both countries don't recognize the second citizenship and act as thought it didn't exist. In other words, France recognizes me as a French citizen without acknowledging my US citizenship. Now imagine for a second that France starts demanding that thousands US citizens, including those living in the United States, turn over their gold, with no compensation, to the Banque de France to help the country fund its budget deficit. How do you think the US, struggling with its own budget issues, would react to this blatant theft of American gold? Remember, the US can't acknowledge that those Americans whose gold is being confiscated might also be French.
2) An immigrant population making up nearly 13 percent of US population.
3) A 2009 gold confiscation would have to be massive to be effective (over 1000 tons of gold)
4) Any 2009 gold confiscation would be a total thief (Americans would be forced to sell their gold at a 99.9 percent discount of the future price of gold)
5) The US is dependent on foreign oil, cheap foreign consumer goods, and foreign financing. Even mild sanctions could cripple the US's already weak economy.
Jeff Burton said...
My point goes to Eric's contention that there is going to be some kind of outcry if the gov't tries to confiscate dual citizens' gold. First, there aren't that many of them (I mean dual citizens who are going to have gold). Second, there will be little sympathy for a) people who have gold, b) people who have dual citizenship. I'm sorry if this is unfair, but the world's not fair. If you are in that situation, I would put absolutely zero faith in your fellow citizens rallying to your cause.
First, I would never, ever, expect "fellow citizens rallying to my cause". This isn't about sympathy or fairness, it's about theft and greed.
Governments have no issue taxing their citizens to death (or confiscating their gold), but they absolutely hate it when someone else tries to steal from their citizens. I don't expect France and other foreign nations to come to my defense because it is the right thing to do. I expect them to do so because they want the gold. If someone is going to steal the gold of French Americans, why should it be the US? By confiscating the gold of French Americans, the US would be stealing from France. Since France and countries around the world are having its own economic/financial difficulty, they will react very violently and hostility to the theft of their gold.
If you accept that governments have a right to confiscate their citizen's gold, then foreign nations have claims against the roughly 40 million Americans who are eligible for dual citizenship. They are unlikely to give up these claims without a fight.
Also, there are millions of Americans with dual nationality. Most of these holders of dual nationality come from cultures that value gold far more than Americans do (European, India, Israel, etc...). Third, holders of dual nationality are much more likely to have had experience with currency collapses, whereas many US citizens, because of the depression, are focused on deflation. Finally, international businessmen and other wealthy individuals are disproportionally likely to possess dual nationality. Combined, this means that a large quantity of gold is in the hands of Americans with dual nationality.
Finally, if the US did try to confiscation, families are likely to turn over their gold holdings to trusted family members or friends with dual/foreign citizenship in an effort to protect their gold and get it out of the country. Since nearly every Americans has at least one friend or family member with dual/foreign citizenship, this means for any US confiscation efforts to be successful, the US has to be willing/able to steal the gold of foreign citizens. I would be absolutely amazed if the foreign nations stood by and did nothing while several thousand tons of gold were being stolen from their citizens.