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There are a number of common
misconceptions about the gold confiscation foisted on the American people by
President Franklin Roosevelt in 1933. Most of these have been offered as
justification for FDR’s nefarious deed, and over time have endured to
become urban legends.
For example, perhaps the biggest
and most enduring myth is that FDR had to confiscate gold because it was
needed to back the dollar, which was still defined as 23.22 grains of fine
gold, i.e., $20.67 per ounce. What the propagators of this popular myth
conveniently ignore is basic math.
In December 1932, the US Gold
Reserve equaled 204.5 million ounces. This weight was slightly more than the
reserve’s average weight of 202.2 million ounces from the October 1929
stock market crash through December 1932, a period that covers the worst of
the depression.
After FDR’s election
victory in November 1932, rumors began circulating that once in office, FDR
would seize the people’s gold. Because of these rumors, which perhaps
originated from tips by White House insiders who knew of the confiscation
scheme, dollars were redeemed for gold, as was possible at the time, and much
of this gold was exported or simply hidden. This point is explained in detail
in Milton Friedman’s The Monetary History of the United States.
As a result of these redemptions
of paper dollars for physical gold, the US Gold Reserve dropped to 193.3
million ounces by FDR’s inauguration in March 1933. With the
confiscation thereafter in place, the outflows stopped, and the reserve began
to grow with the metal collected from the confiscation. The reserve reached
195.1 million ounces in January 1934 when FDR re-defined the dollar as only
13.71 grains. It was a 41% devaluation of the dollar, which meant that it
thereafter took $35 to exchange for one ounce of gold. So here is the math.
At $35, the 195.1 million ounces
in the US Gold Reserve in January 1934 equaled $6.83 billion of gold backing
for the dollar. Gold was now overvalued in dollar terms, as evidenced by the
rapid flow of gold into the US Gold Reserve, which in the first month rose to
212.5 million ounces. But the bonanza for gold holders did not stop there.
People continued to exchange their overvalued gold for dollars, with the
result that the US Gold Reserve reached a new all-time record high of 227.9
million ounces only six months later in August 1934.
From these huge gold-flows into
the reserve, it is clear that valuing the gold reserve at $6.83 billion was
high enough to re-establish confidence in the dollar. Therefore, if we divide
this value by the 193.3 million ounces in the reserve before the
confiscation, we can conclude that a devaluation of the dollar to $35.33 per
ounce would have achieved the same $6.83 billion valuation necessary to
re-establish confidence in the dollar, but it would have done so without any
confiscation.
So clearly, notwithstanding the
enduring myth, FDR really did not need the weight of gold collected from the
confiscation to re-establish confidence in the dollar. Simply devaluing the
dollar by a slightly greater amount would have achieved the same objective.
So why did FDR confiscate gold?
In our book, The Collapse of the Dollar, John Rubino
and I provided an answer, but it wasn’t an explanation that we
developed. Rather, the answer came from Alan Greenspan’s 1966 essay
entitled “Gold and Economic Freedom”.
“The
abandonment of the gold standard made it possible for the welfare statists to
use the banking system as a means to an unlimited expansion of
credit…The financial policy of the welfare state requires that there be
no way for the owners of wealth to protect themselves. This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending is
simply a scheme for the confiscation of wealth. Gold stands in the way of
this insidious process. It stands as a protector of property rights. If one
grasps this, one has no difficulty in understanding the statists' antagonism
toward the gold standard.”
So it seems clear to me that FDR
confiscated American’s gold for the same reason Lenin confiscated it in
Russia and Hitler confiscated it in Germany, namely, to get it out of the
hands of the people. This point is made clear in a wonderful speech given in
1948 by Howard Buffett, the father of Wall Street legend Warren Buffett,
entitled “Human
Freedom Rests on Gold Redeemable Money”. A thorough reading of Buffett’s
thoughtful speech will help clear the myths and explain the reality of gold
confiscation.
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