Mr. anderson is Executive Secretary and Director of Seminars at the Foundation for Economic Education.
Today, as was true 42 years ago, the American people once again have freedom to own as much gold as they choose. Devotees of the free market have viewed this development with pleasure, for they have had little cause to rejoice during these many years of steady erosion of individual liberty. Socialistic governmental intervention has steadily expanded since the denial of our right to own gold.
The restoration of legal gold ownership by individuals is certainly a reversal of this ominous trend of government omnipotence. It has been heralded as a sign of change in the course of statism. Upon closer scrutiny, however, such optimism may be questioned, for there is a marked distinction between conditions then and now.
What has been restored, and what was lost 42 years ago, are not the same. Prior to April 5, 1933, gold was money. Individuals used gold daily as their medium of exchange for goods or services at the rate of $20.67 an ounce of gold. It is true that the payment was rarely made in gold bullion, but the gold certificates or gold coins in use represented bullion. Gold was legal tender, along with the coins and currency of the Treasury and Federal Reserve Banks. Upon demand, anyone could surrender his paper money and receive gold bullion.
The legalization of gold ownership has not restored it as our medium of exchange — money. The statist legal tender laws (in conjunction with Gresham’s Law) continue to force the fiat paper money of government upon us. The use of gold as money is still forbidden. Any attempt to use or demand gold payment for goods or services remains illegal. The absolute governmental monopoly of fiat money continues to be protected by law against competition from gold.
Calling in the Gold
The evolution of this government monopoly of money began with a Proclamation of President Roosevelt on April 5, 1933; under enabling legislation passed a month earlier, the destruction of gold as money commenced:
All persons are hereby required to deliver on or before May 1, 1933… all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933…. Until otherwise ordered any person becoming the owner of any gold coin, gold bullion, or gold certificates after April 28, 1933, shall, within three days after receipt thereof, deliver the same… upon receipt of gold coin, gold bullion, or gold certificates delivered to it…. The Federal Reserve Bank or member bank will pay therefore an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States.
This order called for the surrender of private gold holdings. Individuals, many believing it was merely a temporary action arising out of the "national emergency" of the great depression, obediently exchanged their gold for paper money.
The surrender of gold coins for paper money is understandable, inasmuch as gold could no longer be used as a medium of exchange. Individuals needed money to transact their exchanges. Since the exchange value of money at the time was greater than the commodity value of the gold content in the coins, people generally did not resist exchanging their gold for the remaining medium of exchange —paper money.
But the government wanted to make sure of its money monopoly position. It wanted all the gold, and in furtherance of that end, President Roosevelt issued another Proclamation on August 28, 1933:
After 30 days from the date of this order no person shall hold in his possession or retain any interest, legal or equitable, in any gold coin, gold bullion, or gold certificates situated in the United States and owned by any person subject to the jurisdiction of the United States, except under license therefor issued pursuant to this Executive order….
While nominal holdings of gold were exempted from these edicts, any subsequent use of or holding of gold was under the direct control of government. Gold owner‑ship was now illegal except under Treasury license and scrutiny.
It only remained to establish penalties for any violation to these edicts. This came in short order as a part of the Gold Reserve Act, January 30, 1934:
Any gold withheld, acquired, transported, melted or treated, imported, exported, or earmarked or held in custody, in violation of this Act… shall be forfeited to the United States… and in addition any person failing to comply with the provisions of this Act or of any such regulations or licenses, shall be subject to a penalty equal to twice the value of the gold in respect of which such failure occurred.
To all intent and purpose, the medium of exchange was now an irredeemable paper currency. Certain legal relationships prevailed between gold and money, but convertibility by United States citizens was ended. The only remaining convertibility was with foreign holders of our dollars. In time, even these provisions would disappear.
The Gold Reserve Act of 1934 transferred all the gold in the United States into the hands of the Treasury. The Federal Reserve Banks were issued "gold certificates" by the Treasury in exchange for their gold. It was cynically observed that "These are not certificates that you can get gold. These are certificates that gold has been taken away from you."1
Gold Repriced at $35
The abandonment of the gold exchange standard was now complete. With the bulk of the nation’s gold stock in the possession of government, and its monopoly over our money supply established, it didn’t take long for the government to exploit its position. The very day after the passage of this legislation, January 31, 1934, President Roosevelt reduced the gold content of the dollar by 40.94 per cent. The new price of gold was established at $35.00 per ounce in place of the old price of $20.67 per ounce.
Overnight the face value of the gold held by the Treasury and Federal Reserve Banks increased by almost three billion dollars. This devaluation directly repudiated forty per cent of the dollar claims to gold held by foreigners. The government wasted no time in getting started its engine of inflation. The American people were about to learn that only the discretion of the government money monopolists remained to limit the inflation of our money supply.
It is a matter of historical record that not much discretion ever existed. The money supply has increased more than seventeen fold since our abandonment of the gold exchange standard. The magnitude of this monetary expansion has reduced the purchasing power of today’s paper dollar to about one quarter of its value in 1933.
During this era of continued inflation the government was severing any remaining legal ties to gold. The final tie was cut on August 15, 1971, when the "gold window" was closed to foreigners. After that date, not even foreign central banks could convert their dollar holdings to gold. The American dollar was nothing but irredeemable fiat money.
Still a Money Monopoly
The legalization of gold ownership today does not restore gold as a medium of exchange. As a matter of fact, the willingness of the state to once again permit gold ownership is precisely because the state no longer views gold as a threat to its money monopoly.
Gold can now be owned as a nonmonetary commodity. Any effort, however, by private citizens to re-introduce gold money as a medium of exchange will be promptly challenged by the government as illegal competition against its monopoly of paper money. Gold ownership was not legalized in order to restore a sound money, but instead, because government no longer considers gold important.
Overconfidence, however, even by a monopolist, can lead to a miscalculation. So, any relaxation of power by the State, any restoration of freedom to the citizenry, should be acclaimed with joy and fully exploited.
The restoration of the legal right to own gold is the action of an overconfident money monopolist. While the use of gold as a medium of exchange is still prohibited, the fact that we may own gold provides a means to protect our wealth from the ravages of inflation.
A Measure of Stability
If the State continues on its inflationary path, cash holdings in paper money will be reduced, or even eliminated in some cases. Holding gold will be more advantageous. The expansion of the quantity of the government’s paper money, which erodes its purchasing power, cannot touch gold. On the contrary, the price of gold may be expected to rise in direct reflection of the declining purchasing power of the paper dollar.
This development will become more and more visible. The advantage of holding gold rather than paper money will become obvious to all. Conversion from gold to paper money, in order to complete an exchange, and then converting back to gold from paper will become commonplace.
While the process introduces an additional complication in our exchanges, buyers and sellers in the market will readily discover that this additional "complication" is a small burden to pay in order to offset the inflationary impact of government money.
This trading practice is widespread in those countries throughout the world that permit private ownership of gold while still suffering from chronic inflation. With lengthy histories of paper inflation as their lesson, people in foreign lands hold gold, not paper, in their secret hiding places. Gold’s immunity from government generated inflation has made it a prized possession in these inflationary times.
Our exchange economy does not have to follow such dismal examples. Though not intended as such, the first step toward a return to sound money has been taken. As individuals begin to register their preference for gold over paper in the market, the next major step by our government must be considered: permitting gold as a medium of exchange.2
Leave It to the Market
Past intrusion by government into monetary affairs has only led to monetary destruction. While the law can guard money from fraud, it cannot create money. Money evolves from the market and the need for a means to facilitate our exchanges.
If individuals are to have their full freedom to make exchanges, they must also be free to determine the media in which their exchanges shall be made. Throughout history, gold has been the commodity chosen by free men to accomplish this end.
The legalization of gold ownership will allow the market to demonstrate that gold is the preferred media for making trades. Once again it will be seen that sound money can only originate within the market.
The final restoration of a sound money will require a major shift in political thinking. The futility of continued inflation must first be recognized. As the failure of "political money" becomes increasingly obvious to voters, government hopefully will abandon its monopoly power over the money system. In response to the public clamor for a sound money, gold will finally prevail.
The soundness of gold in contrast to the deterioration of paper money will be clear to all who care to see it. All that is required by government hereafter is the removal of legal barriers to free use of gold in trade. The competitive forces of the market will shortly re-establish it as the "market’s money."
So, from the now restored right to own gold, we may hope eventually to reassert our right to use it as money. The welfare of all of us is dependent on such a result. The survival of a free market is dependent on the preservation of a sound money. If sound money is to be restored and our freedom preserved, government must surrender its monopoly over money and allow gold to once again serve buyers and sellers in the market as our medium of exchange.
Gold is legal, but it is not yet money.
1 B. M. Anderson, Economics and the Public Welfare (Princeton, N. J.: D. Van Nostrand Company, Inc., 1959), pp. 348-49.
2See Hans F. Sennholz, Inflation, or Gold Standard?, "Return to the Gold Standard" (Lansing, Mich.: Bramble Minibooks, 1973).