Sky Blue Monthly (June 2000)
All Rights Reserved, 2000
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June 1, 2000
We were watching Discovery Channel and the show was the production process (and stamping) of Canadian Maple Leaf Gold Coins. It was quite interesting. However, we are not going to talk about that -- we are going to talk about the possibility of the seizure of the people's gold by our own government. Don't tell us that the probability is zero. It happened on April 5, 1933 right here in America.
Gold is always a political metal because gold has been used as a monetary metal throughout human history. Historically, nations have anchored their currencies to precious metals (gold and silver) or to another currency that was fixed on precious metals. The most important currencies in human history have been either gold coins or fully backed by gold. (As good as gold!) There was no exception (until AD 1971): Babylonian Shekel, Persian Daric, Greek Tetradrachma, Macedonian Stater, Roman Denarius, Islamic Dinar, Italian Ducat, Spanish Doubloon, French Livre, British Pounds Sterling and US Dollar. Since the collapse of Bretton Woods system in August 1971, US Dollar and other currencies in the world have not been backed by gold. Under Bretton Woods system (1947-1971), the USA was to maintain the price of gold fixed at US$35 per ounce and be ready to exchange on demand US Dollars for gold at that price, without restrictions or limitations. Other nations were to fix the price of their currencies in terms of US Dollars (and thus implicitly in terms of gold) and intervene in foreign exchange markets to keep the exchange rate from moving by more than 1% above or below the par value. Therefore, Bretton Woods system was a gold-exchange standard. In those old days, US government, for example, dared not over-print paper money, because anyone who had US$35 in his pocket could exchange US$35 for one ounce of gold, theoretically. Federal Reserve notes were indeed IOUs -- I Owe You gold. Nowadays, the only thing left is "In God We Trust". (Thank God it is not "In Gov't We Trust"!)
Notice that a note (paper money) is an IOU backed by collateral. It was backed by gold. That was then. Now, there is nothing behind Federal Reserve notes (i.e. US Dollar bills, a paper money). Because of this fact, John Exter, a former official at Federal Reserve Bank of New York, called them "IOU Nothings"! America is a democracy. In a democracy, people get what they deserve. People are not complaining about US Dollar bills being "IOU Nothings" so we guess it is all right. Nevertheless, US government is no longer afraid of over-issuing paper money because of it. As a result, the supply of "money" can be very unstable nowadays. (We use the USA as an example. The same can be said for each nation on this planet. )
We are on paper standard, not gold standard. Gold standard had its long tradition, but paper standard is the current reality in our world. Paper money is a type of fiat money. What is fiat money? Well, more history… In the ancient time, people used many durable commodities as money, provided the chosen commodity was generally desirable and acceptable to virtually anyone in an intermediate exchange. The ideal money had to be durable, divisible and portable. People first chose sea shells and then precious metals (gold & silver). In Chinese writing system, almost all Chinese characters that have anything to do with money and credit contain the symbols "shell" or "gold". Modern society uses fiat money, a type of money that has little intrinsic value; it is neither backed by nor convertible to a commodity of value. Ask yourself: how much does a ton of paper worth? Not much. Remember that a dollar bill is just a piece of paper. Then, why is paper money (one type of fiat money) valuable? Mainly because people know paper money can be used to purchase goods and services. It is the law. The government has designated paper money "legal tender". Therefore, the confidence of people is essential for a fiat money to function properly.
We do not oppose paper money. Say, if you want to give us some US Dollar bills, sure. The more, the better. However, remember one thing that we have just said: The confidence of people is essential for a fiat money to function properly. When will people lose confidence on paper money? After a financial or economic collapse, usually. If and when the current equity bubble in the USA bursts, the possibility of people losing confidence on paper money cannot be ruled out. (Have I just ended a sentence with a preposition?) At the beginning of this Issue, we wrote that the seizure of the people's gold by our own government happened on April 5, 1933 right here in America. 1933 was at (or near) the abyss of depression. Well, if this equity bubble blows up, we will most likely get another depression. After an economic collapse, governments almost always have a very strong urge to try to inflate us out of trouble. There are 2 choices: (1) lower interest rates by the central bank (e.g. Japan 1990); (2) increase money supply on the scale that overwhelms any human's imagination (e.g. Brazil 1982). Choice (1) is a better one because Choice (2) will cause hyperinflation. Brazil did that in 1980's and hyperinflation ruined the whole country. Nevertheless, governments and central banks often take Choice (2).
If the government and central bank decide to increase money supply immensely during a severe recession, inflation or even hyperinflation may occur. Paper money and gold are always rivals. When the confidence of people on paper money evaporates, the value of paper money can collapse overnight. Thus, the government has to step in at this moment to crush the challenge of gold. How? Eliminate the alternative. If the government forbids people from owning gold, people will not have any alternative. If people insist on owning gold, how about a ten-year jail sentence? Then, the government's objective will be reached.
The event of seizing people's gold occurred in 1933, during President Roosevelt (FDR) administration. FDR was one of the most respected presidents in the history of the United States. We wonder what will happen to people's gold in future administrations, which may not have moral standard as high as FDR administration's. In the following historical review on this event, we will use materials from Dr. Benjamin M. Anderson, who appeared in Senate and House Hearings on the matter of banking, currency and gold several times in order to provide expert opinions to the members of the Congress. We want to criticize the seizure of the people's gold, but we don't want to comment on the administration. Therefore, we will quote Dr. Anderson's writings extensively.
The following are from Dr. Benjamin M. Anderson's excellent book "Economics and the Public Welfare", (Indianapolis: LibertyPress, 1979). The events were in 1933: "We can only commend the administration's reopening of the banks. But the banking holiday was made the excuse for a radical change in monetary policy. In the hastily adopted act of Congress of March 9, blanket authority was given the President to do pretty much as he saw fit regarding money and banking, including authority for the seizing of the gold and gold certificates in the hands of the people. The Seizure of the People's Gold. Very speedily (April 5) this authority was invoked and it became unlawful to own or hold gold coins, gold bullion, or gold certificates." (pp. 314) Dr. Anderson went on: "Senator Glass said, as he talked in his office on the day that this amendment was first announced: "It's dishonor, sir. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It's dishonor, sir." To the grand old senator, morality was something written in the heavens, eternal and unchangeable." (pp. 315) Some of Democrats in the Senate also protested. "President Roosevelt did not escape sharp rebuke from distinguished men in his own party who opposed this bad faith. As part and parcel of his policy of debasing the gold dollar, he had introduced into Congress a joint resolution (signed by the President on June 5, 1933) abrogating the gold clause in existing governmental and private obligations. The resolution not only forbade private debtors to keep their gold obligations, but also freed the government itself from its solemn promise. Before the introduction of this resolution, the President conferred with a group of senators regarding it. Among them was Senator Thomas P. Gore, the great blind senator from Oklahoma. When the President asked Senator Gore for his opinion regarding the matter, the senator replied, "Why, that's just plain stealing, isn't it, Mr. President?" " (pp. 317)
The administration also made the Gold Reserve Act become law on January 30, 1934. According to Dr. Anderson, "The measure was a shocking one. It deliberately took away from the Federal Reserve banks the legal title to all their gold and vested the title in the United States Treasury. The act provided that in exchange for this gold the Federal Reserve banks were to be given "gold certificates," but what a gold certificate meant was exceedingly vague and indefinite. No gold was to be specifically segregated against the gold certificates and no specific value in gold was to be assigned to the gold certificates. Following a protest on this point before the Senate committee, the witness was taken aside by one of the administration senators, who grinned and said, "Doctor, you don't understand about these gold certificates. These are not certificates that you can get gold. These are certificates that gold has been taken away from you." " (pp. 345-346)
As you may have expected, the Supreme Court provided last line of defense on the constitutionality of the legislation of June 5, 1933. (See above.) "With respect to the government's own obligation under the gold clauses, all nine of the justices concurred in holding that the legislation of June 5, 1933, was unconstitutional. The gold clauses in the government's own contracts were still binding on the conscience of the government." (pp. 359) FDR probably didn't forget this. "Early in 1937 the President made his demand on the Congress for a bill that would enable him to pack the Supreme Court with new appointees additional to the existing judges. The country was shocked… The country was shocked and the country rallied to the defense of its institutions. Party antagonism disappeared in this great fight, and differences among radicals and liberals and conservatives did not prevent effective cooperation. The Republican Party, very weak in both houses of Congress, refrained from making the matter a party issue lest they should thereby make it possible for the administration to make it a party issue. Instead, the Republicans gladly accepted Democratic leadership in the fight against the President's proposal. The leader in the fight was a brilliant and able left-wing Democrat, Senator Burton K. Wheeler of Montana, who had given enthusiastic support to most of the President's New Deal measures, but who was nonetheless aghast at the proposal to pack the Court and to subordinate the judiciary to the executive. There has probably never been a situation, short of war itself, in which so many men of diverse views, interests and opinions, turned with one purpose to the defense of the country. The President sustained a sweeping defeat. The Court was saved." (pp. 430)
We know more about Yen Carry Trade and Euro Carry Trade. The author of Sky Blue Monthly is a macro economic analyst, not a precious metal analyst. However, we did hear something about Gold Carry Trade. We know about the nature of a Carry Trade. The following are our old writings on a Carry Trade: "The beginning and the end of a Carry Trade are not symmetrical because, at the formation of a Carry Trade, the volume is at a minimum; at the time when a Carry Trade is unwound, the volume is at a maximum. We had better use an analogy here: Imagine that you are at a theatre. Before the show, few are in the theatre and some are just coming in. If fire breaks out, these guys, of course, head toward the exit doors and no one gets hurt. During the show, the theatre is packed. If fire breaks out, the crowd rush to the exits. Because there are so many people trying to escape through a few doors, some are trapped inside the theatre. Hence, tragedy occurs. Same thing happens when a Carry Trade bursts. We believe that every market crash in human history was caused, is caused, and will be caused by liquidation by the holders. The current stock market bubble in the USA (especially NASDAQ) has been fueled by domestic liquidity (money creation and credit expansion) and foreign capital inflow (Yen Carry Trade and Euro Carry Trade). Due to the huge volume, the unwinding of a Carry Trade will be compressed within a very short time frame. The consequence will be catastrophic. Historically, a Carry Trade always ended in disaster. According to FFEE, a Carry Trade won't last forever." A good example on Carry Trade is available at: http://skybluemonthly.freeservers.com/thoughts/thcarry.htm.
Gold Carry Trade, of course, will be no difference. Those who involve in the Gold Carry Trade will most likely be destroyed financially when the carry trade is unwound. We are good at analyzing macroeconomics, not precious metals. We plan to use our economic analytical skills on gold in next issue of Sky Blue Monthly. But we need some help. If you know any good information, articles, links or websites on Gold Carry Trade, please e-mail us at email@example.com. Thank you very much!
If Gold Carry Trade is unwound, the price of gold will rise sharply. Our whole point in this issue of Sky Blue Monthly is: Will you be allowed to own gold by the government at that time? Will your gold coins be seized by the government? If you have learned anything from this issue of Sky Blue Monthly, it is: "History is not on your side".
Important: The structure of Sky Blue Monthly has changed. We launched our e-mail hotline on April 11, 2000. This new e-mail hotline is named Sky Blue Express. To keep up with the latest developments in stock, bond and currency markets, we have to update our analyses as new events unfold; and we use our e-mail hotline (Sky Blue Express) to inform our readers. Therefore, most of our outlooks, forecasts, and analyses are moved from Sky Blue Monthly to Sky Blue Express. Sky Blue Express is written irregularly -- it depends on when and if new economic events occur. To subscribe Sky Blue Express, simply send an e-mail to firstname.lastname@example.org. Sky Blue Express, like Sky Blue Monthly, is free. We have written 2 papers for Sky Blue Express subscribers: (1) "Economic History According to FFEE" and (2) "The Effects of Excessive Money Creation & Credit Expansion". These 2 papers contain a lot of basic economic concepts that will help you understand both Sky Blue Express and Sky Blue Monthly. From now on, Sky Blue Monthly will become a macro economic e-magazine, instead of a market letter.
July 2000 issue of Sky Blue Monthly will be available by July 14, 2000.
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