But within the space of about nine months, exercising that claim became a federal crime punishable by ten years in prison. It’s hard to overstate how much of a massive change this was.
To understand how America got to that point, we have to examine what happened when the Roaring 20’s came to a fiery end.
As a reminder, the stock market boom of the 1920’s came about largely because Benjamin Strong at the New York Fed held interest rates artificially low throughout the decade. He did this as a favor to his friend Montagu Norman at the Bank of England. That helped prop up the British pound, enabling Britain to return to the classical gold standard at the prewar parity.
Strong’s “cheap money” policies created a frenzy on Wall Street as Americans rushed into the booming stock market – many using margin loans to generate leverage. Those speculators who were early to the boom did quite well. But those who didn’t get out in time experienced massive losses when the market collapsed on October 28, 1929.
It was a quintessential boom-bust cycle. In hindsight, the crash was the predictable result of the Federal Reserve holding interest rates at artificially low levels.
And here’s the irony of it...
Remember how the Federal Reserve was sold to the American public in 1913?
America had suffered through a series of banking panics in 1873, 1893, and 1907. These were episodes where banks failed, depositors lost everything, and credit simply vanished.
The architects of the Federal Reserve (the Fed) promised that a European-style central bank with an “elastic currency” would make financial crises a thing of the past. That was how the Fed was sold to America.
But instead of working for Americans, the Fed went right to work propping up the British pound by cutting interest rates in New York. That fueled a massive bubble in the US stock market... which ultimately led to a major crash that wiped out nearly 90% of the stock market’s value. The Dow Jones Industrial Average would not fully recover for 25 years.
And then came the Great Depression.
Between 1929 and 1933, the American money supply contracted by roughly one third... and 9,000 banks failed. Depositors — people who had done nothing more speculative than keep their savings at a local bank — were wiped out by the thousands.
We should note what that means...
In the 1920s, when the American economy was humming, the Fed cut interest rates and enabled credit to pour into Wall Street. But in the early 1930s, when ordinary depositors were lined up on sidewalks trying to get their savings out of failing institutions, the Fed’s elastic currency seemed to dry up.
There's a reason for that, and we’ve hit on it several times throughout this series.
The Fed’s creation activated the Cantillon Effect... because its elastic currency flowed freely to people with close ties to Wall Street. That’s easy to see.
As classical economist Richard Cantillon described, whenever you have a financial system that’s capable of creating money and credit at will, that new money does not distribute itself evenly throughout the economy. Instead, it tends to flow to those most connected to the engines of financial power.
The people who receive the new money first get to spend it before prices adjust to account for the extra money in circulation. Then that new money trickles down into the economy after prices have risen. Thus, regular folks have their purchasing power systematically stolen from them whenever such a system is in play.
This is why the Federal Reserve is an instrument of extraction. It enables those connected to the halls of power to effectively transfer value from the unsuspecting public to themselves. Then they can use that wealth transfer to finance virtually anything they want.
As we’ve noted, Alexander Hamilton seemed to understand that dynamic when he insisted America’s money be tied to specie (gold and silver). He also advocated the principle of productive credit – the idea that bank credit should primarily fuel productive economic activity.
The stock market boom of the Roaring 20’s demonstrates exactly why that principle has merit. Hamilton wanted an economy based on real money where credit was backed by real savings and funneled towards production.
The Federal Reserve was based on Paul Warburg's design... and it had no such principle. Upon opening its doors in 1914, the Fed’s “elastic currency” went wherever the men nearest the spigot pointed it.
So the historical record shows that the period following Black Monday in 1929 was the first major financial crisis the Federal Reserve faced... and it failed catastrophically.
Here was an institution created in secret and sold to the public as something that would prevent financial panics, and it failed at the specific task it was created to perform.
One might think that would be cause to reassess the institution and perhaps wind it down. After all, if it can’t do what it’s supposed to do, what’s the point?
But as we’ve seen throughout modern history, the Fed’s failure became the justification for handing Washington powers it could never have obtained any other way.
Enemy Powers, Turned Inward
By early 1933, the American banking system was in open collapse.
Throughout February and the first days of March, the public pulled roughly $1.8 billion in gold and currency out of the banks. Nearly two-thirds of those withdrawals came in the single week ending Friday, March 3.
Americans were not dumb. They had watched thousands of banks fail, so they rushed to take possession of their savings.
In response, 25 states had declared bank holidays or restricted withdrawals by March 3, 1933. The system was seizing up, state by state.
President Franklin Roosevelt was inaugurated on Saturday, March 4, 1933. At one o'clock in the morning on Monday, March 6, he proclaimed a national bank holiday and suspended banking transactions across the entire country.
Three days later, on March 9, Congress passed the Emergency Banking Act. FDR signed off on the legislation the very same day. This confirmed and expanded the president’s emergency powers over the banking system in a number of ways.
For starters, it retroactively approved the national bank holiday and the other actions FDR had already taken. It also gave the president broad authority to regulate banking transactions, foreign exchange, and the “hoarding” or export of gold and silver.
In addition, the Act permitted the Federal Reserve to issue additional emergency currency (Federal Reserve Notes) backed by the assets of commercial banks rather than solely by gold.
What’s more, the legislation amended the Trading with the Enemy Act of 1917. This was especially cunning.
The Trading with the Enemy Act of 1917 was a wartime statute that let the US government control transactions with enemy nations during World War I. The 1933 amendment added five words that changed the scope of the statute entirely: "or during any other period of national emergency declared by the President".
With that phrase inserted, the president gained authority to investigate, regulate, or prohibit the hoarding, melting, earmarking, or export of gold by any person in the United States.
So a statute designed to curtail enemy agents was turned on the American people. The penalty attached to that power was a fine of up to $10,000, up to ten years in prison, or both.
That is the legal instrument that took Frederick Barber Campbell's gold... an emergency amendment to a wartime statute that was passed in one day, at the height of a panic the Federal Reserve had helped create.
And guess what?
That statute is still in place today. Emergency powers, once taken, are almost never returned.
The Confiscation
With those moves in place, President Roosevelt signed Executive Order 6102 on April 5, 1933. That order forbade the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.
No comments:
Post a Comment