I gave you my heart, and I tried to make you happy

But you gave me nothing in return

You know it ain’t so hard to say

Would you please just go away?

            —The Commodores, Sail On


Did you know that at one time it was illegal in this country to own gold?  It’s true.

Up until the early 20th Century, our money in this country was tied directly to gold and silver.  Most of it was literally gold and silver coinage.  Paper “money” really consisted of certificates redeemable at any national bank for a specified amount of gold or silver, and thus a paper “dollar” derived any value it had from its holder’s ability to convert it into gold or silver.  In 1900 the Gold Standard Act pegged the value of the dollar at 25.8 grains of .9 fine gold (23.22 grains of pure gold).

The benefit of such a system is that you know your money is always going to have a relatively stable value because it is (or is backed by) physical gold and silver, which have been accepted as currency basically since the beginning of civilization; i.e., gold and silver have always been real money.  The limitation of this system, however, is that because you had to mint your coins out of gold or silver, or be in a position to redeem any paper certificates presented by exchanging gold or silver for them, your ability to mint or print money was limited to the amount of gold and silver you had on hand.  And this poses more than a little nuisance to progressive politicians who like to spend money without having to worry about where it’s going to come from.

With that background, meet Fred Campbell.

In October 1932 and January 1933, Mr. Campbell bought twenty-seven bars of gold (at the time, about $200,000, or $3.4 million in today’s money) which he deposited at Chase National Bank in New York for safekeeping.  On March 9, 1933—just five days after taking office, and building on restrictions originally enacted by Woodrow Wilson—Franklin Roosevelt signed the Emergency Banking Act, which amended the 1917 Trading With The Enemy Act to grant the executive branch sweeping powers to regulate money, including the power to regulate the hoarding or transfer of gold.  On April 5 FDR issued Executive Order 6102, the first of a series of orders that—with extremely limited exceptions—outlawed private ownership of gold, and required all privately held gold to be turned over to the Federal Reserve in exchange for $20.67 per ounce in paper currency.  When Mr. Campbell later tried to retrieve his gold from Chase, the bank—to no one’s surprise—declined to give it back to him.    Campbell was then indicted for violating the executive orders.

The federal district court that heard the case (Campbell v. Chase Nat’l Bank, et al., 5 F. Supp. 156 (S.D.N.Y. 1933)) began by correctly observing that gold and silver have forever been recognized as the basis of trade—as money.  And thus, whether as legally monetized coin or as commodity bullion, gold and silver are necessarily and inherently tied to the concept of money.

But then the court went off the rails.  Because gold and silver are the basis of money, according to the court, they are affected with “public interest.”  Uh-oh.  And because they are a matter of public interest, they must be within the scope of Congress’ “plenary” (total) power to regulate money.  From this, the court then upheld the government’s action of taking Campbell’s gold—his money—as a valid exercise of the government’s sovereign power of “eminent domain” (the power to seize property):

“The frontiers of necessary action by the federal government are constantly shifting, and, as a result, the methods of using federal governmental powers have to change from time to time, and hitherto unused powers have to be invoked to cope with the varied exigencies encountered . . . The incidence of the right of eminent domain, as will be seen from what is hereinafter said, is not, however, limited to commodities affected with public interest, but involves the right of the government to take private property of any kind when it is deemed necessary, by the appropriate authority, for the public good.”

Notice the dangerous thinking embedded in the court’s expansive language.  The limits of the federal government’s power are not fixed, but are instead infinitely flexible to allow the government to take action in response to the self-declared emergency of the moment.  And thus the government’s sovereign power of eminent domain extends to allow it to take anything from you it deems necessary for the public good.  Even your money.

But Rusty, we see eminent domain used all the time to build roads, and the government always has to pay fair compensation for what it takes.

True enough.  But without getting into the argument over whether people who have their land taken from them ever really receive fair compensation, consider that in this instance we’re not talking about a forced sale of land.  Nor are we talking about a taking for use by the general public.  We’re talking about the government taking your money for itself and replacing it with less money (or with what is arguably not even money at all).

Later in 1933 the government, having confiscated all the gold, took it upon itself to raise the exchange rate for gold to $35 an ounce, conveniently allowing it then to sell that gold internationally and claim for itself the profit it denied to the rightful private owners of that gold.  People who were forced to accept $20.67 in U.S. currency in exchange for their gold in effect took an immediate 70% loss, as illustrated in what became some of the “Gold Clause Cases” decided by the U.S. Supreme Court in 1935.  The plaintiff in Nortz v. United States, 294 U.S. 317 (1935) was denied the difference between the value of his gold on the open market and the dollar face value of the currency he was given in compensation for its confiscation.  In Perry v. United States, 294 U.S. 330 (1935), the plaintiff was denied the difference between the gold value of a U.S. Treasury Bond originally payable on its face in gold and the devalued dollar face value of the bond.

For the next 40 years, private gold ownership was illegal in the United States.  Although U.S. currency was technically backed by gold held by the U.S. Treasury, you couldn’t actually redeem it and collect that gold.  In the mid-1960s the Treasury phased out silver coinage.  In 1971 President Nixon officially ended the gold standard; since then, neither gold nor silver have been considered money in this country.  With no tie to an objective value, U.S. currency became “fiat” money—money that has value solely because the government says so.  And because it’s not subject to being redeemed for gold (or silver), the government can then print as much as it wants, because there’s no risk of a run on inadequate gold reserves to back it up.  Of course, like anything else when you increase supply (in this case, by printing more dollars) you drive down its price; in the case of dollars, that means inflation—the same number of dollars buys less than it used to.

Thus, the government was able to take people’s money in the form of forcibly confiscating their gold in exchange for devalued currency.  Then the government was able to take it again (and again, etc.) by printing fiat dollars resulting in inflation that made the paper money that replaced the gold worth less and less.  This illustrates the problem with an unbridled power of the government to just take what it wants in the name of what it says is the “public interest”: your private property is no longer safe.

George Will wrote yesterday about a disturbing case in Virginia where Old Dominion University has commandeered the City of Norfolk to use its eminent domain power to seize private land, not for public use, but for the University’s use.  And although your ability to own gold was reinstated in 1975, there’s precious little to stop the government—potentially by executive decree of the President—from confiscating it again just as FDR did in 1933; only this time they’ll be compensating you not with devalued gold certificates, but with inflationary fiat currency.  Indeed, what’s to stop the government from then seizing your fiat money accounts themselves and compensating you with 20 year Treasury bonds?  We’ll have gone from gold, to gold certificates, to Monopoly money, to IOUs.

What happens when there’s nothing left to seize?


2 thoughts on “Goldfinger

  1. Pingback: The Root of Money | Chasing Jefferson

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