Gyroscopic Investing

Ok, so we all know that FDR took us off the gold standard and fixed prices during the depression.  Many here are against a gold standard, some are for it, and we seem to have plenty of opinions in between, and while I'm definitely against a currency peg, these are a couple of the things that seem completely asinine to me.

1) Gold confiscation

2) Legal tender laws - Not only does a business have to accept dollars, but contracts in the US appear that they CAN'T be written in another currency... further, you can't index contracts to gold. 

To all those that don't favor a gold standard (like me), does anyone here have any legitimate defense of these acts/laws?  Shouldn't the dollar simply freely exist and if free Americans want to use another currency they can?  Though, I agree the US should collect taxes in dollars based on the FMV of traded services, otherwise we lose our grip on our own currency and it's subject to systemic risk.

To others that are in favor of a gold standard, simply starting a thread on FDR is likely to get you angry... I'm trying to concentrate on gold confiscation and legal tender laws here... so if we could leave out Japanese internment, price fixing, social security and WWII that'd be great.

moda, is it to do with the fact that the banks are backstopped by the Fed?  US bank deposits are safe because a bank can always get USD from the Fed via the discount window  if needs must. If people were using euros or whatever, then the Fed would not be able to step in and ensure liquidity. I guess this is like the pickle the european banks have been in with USD and why the Fed stepped in yesterday to provide them with USD. I suppose you could say that it would just be everyones own silly fault if they used gold or euros or whatever and were defaulted on as a consequence. But the whole reason why the Fed was started in response to the panic of 1907 or whatever was so as to avoid panics.
Personally I wonder whether it might not be better to not have a credit money creation banking system but if we are to have such a banking system, I think it does need to have a bank deposit guarentee and that requires just the nations own fiat currency to be used I guess.

moda0306 wrote: Ok, so we all know that FDR took us off the gold standard and fixed prices during the depression.  Many here are against a gold standard, some are for it, and we seem to have plenty of opinions in between, and while I'm definitely against a currency peg, these are a couple of the things that seem completely asinine to me.

1) Gold confiscation

To me, the government is well within its rights to re-issue currency if that's what it wants to do.  Thus, there wasn't necessarily a problem with the government confiscating coins--i.e., the government could confiscate the gold coinage in circulation under its power to issue currencies if it wanted to change the nature of the coinage in circulation.

The problem, to me, is when you not only confiscate gold coinage in circulation, but ALSO outlaw ownership of the material of which the coins are made.  That seems like a crazy thing to do.  I think you have to understand, though, that FDR did a LOT of things that weren't thought through fully and which may have just been something that occurred to him while sitting in his bathtub that he thought might be fun to try.

2) Legal tender laws - Not only does a business have to accept dollars, but contracts in the US appear that they CAN'T be written in another currency... further, you can't index contracts to gold. 

To all those that don't favor a gold standard (like me), does anyone here have any legitimate defense of these acts/laws?  Shouldn't the dollar simply freely exist and if free Americans want to use another currency they can?  Though, I agree the US should collect taxes in dollars based on the FMV of traded services, otherwise we lose our grip on our own currency and it's subject to systemic risk.

If you were arguing whether such a rule was constitutional I suppose that such an act of Congress could be defended under the Commerce Clause.  It is certainly true that requiring contracts that rely upon the court system for enforcement to be denominated in terms that a court can interpret in terms of domestic law isn't a crazy thing to do.  In other words, if I am a federal judge and I get a breach of contract case I am going to have a much easier time deciding the merits of the case if the terms of payment are easily understood, as opposed to requiring me to resort to the currency laws of another jurisdiction as part of the judicial review of the case. 

Let's say, for example, that the payment terms of a U.S. contract is denominated in Russian rubles.  The parties to the contract are free to enter into such an agreement, but the parties should be on notice that a U.S. court will not assume the responsibility for providing a legally enforceable resolution of the contract in the event of a breach because one of the key terms of the contract--i.e., the form of payment--is in a form whose value is outside the jusridiction of the U.S. legal system.

I don't think it has to be the way I am describing above, but I can understand the basic rationale for it. 

I think it's also important to understand that there is a HUGE number of government contracts, and the government needs to be able to control the currency in which the payments under the government contracts are made.  Since there were presumably a huge number of contracts at the time of FDR's executive order that had references to payment in terms of gold (I am assuming this was the case, I don't know), it may have just been the government unilaterally re-writing all of its existing contracts to reduce the payment terms by the amount of the dollar devaluation.

If any businesses complained about getting less than they were promised under a government contract due to the devaluation, I can picture an FDR bureaucrat saying "Be happy you are getting anything.  If this had been the Soviet Union we would have simply taken over your business rather than merely paying you 40% less than we contracted to pay you."

stone,

I am not saying that contracts in large amounts should/would start being written in another currency, but simply that free people should be able to exchange different forms of value.  It may make it more difficult for the fed/FDIC to protect everyone, but I would also say that these free people should simply bare the risk of using a currency without FDIC protection... if they even keep it in banks at all.

Further, I absolutely think contracts should be able to be pegged to anything the parties wish.  This still leaves you dealing in the currency but at least allows some accountability to inflation (though I would think contracts can be indexed to CPI).

MT,

Great observations.  It's probably a lot more gray than I thought.  I would say that individual gold ownership is the "gold standard of choice," IMO, and outlawing its ownership seems extremely heavy-handed.

I would say that I believe it's not simply that contracts won't be enforced, but that it is on its face illegal to do business in another currency, domestically... though I could be wrong.

Plus, contracts can be VERY complicated... you can't tell me that if the contract is in another currency or there is some peg to gold that it's all that difficult to figure out compared to the other myriad of terms and clauses.

moda0306 wrote: stone,

I am not saying that contracts in large amounts should/would start being written in another currency, but simply that free people should be able to exchange different forms of value.  It may make it more difficult for the fed/FDIC to protect everyone, but I would also say that these free people should simply bare the risk of using a currency without FDIC protection... if they even keep it in banks at all.

Further, I absolutely think contracts should be able to be pegged to anything the parties wish.  This still leaves you dealing in the currency but at least allows some accountability to inflation (though I would think contracts can be indexed to CPI).

But moda, aren't we just saying that the U.S. court system won't enforce such contracts?  We're not saying that parties are prohibited from entering into such agreements, right?

There is a difference between a contract that is unenforceable and a contract that is illegal.

A contract to deliver a load of unicorn steaks is uneforceable, while a contract to deliver a load of certain types of contraband is illegal.  In one case, the courts simply won't enforce it, while in the other case the authorities will arrest you and throw you in jail for merely entering into the contract.

moda I think it is very hard to grasp just how hard it is to pay back debt pegged to gold. People are amply stupid enough to enter into such agreements and that is why in previous times there were anti-usury laws. I guess the requirement to use USD is the current equivalent of anti-usury laws.

MT,

That's where I'm not sure what the facts are, but was under the impression that it is in fact illegal, not simply unenforceable, to enter these contracts... and should it even be either if a different currency or a peg is easier to calculate than the rest of the contract is to interpret?

stone,

I think that gold-pegged contracts between banks and people could fit into usery law, but does usery law apply to person-to-person or corporation-to-corporation contracts?  What about pegging something to CPI?  Aren't a lot of contracts entered into like that (often with the gov't)?

I guess in the end our ability to own gold and other currencies gives us at least a backstop to the evils (if there are any) to legal tender laws... I just don't like the fact that it appears that the gov't makes it extremely difficult to enter into a transaction with these moneys.

moda0306 wrote: MT,

That's where I'm not sure what the facts are, but was under the impression that it is in fact illegal, not simply unenforceable, to enter these contracts... and should it even be either if a different currency or a peg is easier to calculate than the rest of the contract is to interpret?

Below is a discussion from the von Mises site regarding this issue.

It looks like you can trade a gold coin for a used car without going to jail, so long as all the taxes are paid on the transaction (including capital gains on the value of the gold, if any).

http://mises.org/Community/forums/p/25390/428869.aspx

Moda,

In case this adds a bit of clarity, here is the short passage from Jorg Guido Hulsmann's The Ethics of Money Production that I first shared in this post from our gold standard discussion back in July when the topic of legal tender came up briefly:

A legal tender is money or a money certificate that may be used to make payments against the will of one of the exchange partners. Thus the law overrides private contract and provides that the legal tender shall be accepted as payment, rather than the money (or money certificate) promised to the seller or creditor.

We can have the market solve the "Which is better gold or paper?" argument very quickly. Simply legalize gold and silver coinage again on equal ground. Meaning eliminate all taxes on gold and silver so it can compete as currency against dollars. This will prove once and for all what people trust more in business transactions. It also will help holders of paper dollars because the Fed could simply no longer do what they will with the currency because people will have a competitive choice.

As for FDR, I think he was a horrible president and did a lot of damage to the country. During the 1930s communism and associated theories were very much en vogue and it was the closest the US ever came to a complete communist takeover of the economy. The worst policies implemented during the New Deal mimicked many aspects of centrally managed economies with predictably bad results (gold confiscation included).

craigr, in the UK, Sovereign and Brittania gold coins are tax free. As far as I know they are entirely able to compete as currency. Their use seems to be limited to Mr-T style jewellery (as Sovereign rings)  and as a holding for investment eccentrics such as us but that is merely public choice not government design as far as I can see. What has put me off gold coins is exposure to theft. My mother had some silver bric a brac until it was stolen a few years ago. If the PP is about peace of mind then, to me, having something that can be physically stolen might erode that peace somewhat.

This thread prompted me to do some googling on gold confiscation and I read that contrary to popular belief there were actually no strong arm tactics by the government to confiscate gold. Personally, I consider a law threatening fines and imprisonment to be a strong arm tactic so I would disagree with that but nevertheless the government was not beating down doors and confiscating gold. It was considered unrealistic to enforce the law this way so instead they portrayed it as an act of patriotism and sacrifice for one's country prompting people to voluntary deliver all but five ounces of their gold to the nearest federal reserve facility. (And if you are familiar with the Biblical story of Ananias and Sapphira I wonder how many of those people would have been struck dead for lying to the Holy Ghost about the five ounces).

There is no way of knowing but my guess is that history would not be able to repeat itself today. I don't think people are as trusting of government today as they were back then and gold confiscation would be much less successful.

The other component is that the paper in circulation allowed for the redemption in gold or silver from the Treasury. Since it was easier to carry paper, and nobody had much thought about the government defaulting on their promise printed on each bill, many people simply didn't hold much in the way of physical metal. So when the shoe fell much of the gold in circulation was already under govt. control. They simply defaulted on their promise to redeem the bills into gold/silver and that was that.

But there were pressure tactics put on gold "hoarders" back then and threats of criminal actions if they didn't comply (how come the government can "store" gold but people that wanted to do that were "hoarders"?). I had a collection of news articles about it at one time but can't find them now. However a lot of wealthier Americans did ship gold overseas at this time as well.

Re: UK sovereigns.

I think if the US Treasury brought back gold and silver notes as before 1933 to make a true precious metal convertible currency you'd see some interesting pressure put back on the Federal Reserve Notes as competition. In the US after the Civil War we went back to the gold standard fully after Lincoln printed a raft of money to fund the war causing bad inflation. By the time the US Govt. converted fully back to honor their commitments most people had confidence to continue using the paper gold convertible money and didn't ask for the specie. The power of a convertible currency (not one just "backed" by gold) is that when people become distrusting of the government they can exchange the paper for the specie. As long as they are confident they can do that, I suspect most people would rather do so than carry around a bunch of metal in their pockets. IMO.

Check out the (alleged - need to verify myself this being the Internet) front page of the NYT back then and the level of fear people were living under. They'd have turned over their first born if asked:

http://www.knology.net/~bilrum/gold_hoa ... s_1933.jpg

I love this bit from the front page there:

"Secretary of the Treasury William H. Woodin declared tonight emphatically that the United States had not gone off the gold standard on account of the proclamation of the President. He was supported in this view by other high officials of the administration, both in the executive and legislative branches. Among them Senator Key Pittman, chairman of the Committee on Foreign Relations. Secretary Woodin said: 'It is ridiculous and misleading to say that we have gone off the gold standard, any more than we have gone off the currency standard. We are definitely on the gold standard. Gold merely cannot be obtained for several days."

What a liar!