We remember executive orders and government acts that demolished gold from being the backbone of the US currency. The question we now have is what if BRICS countries decide to turn back to gold, what happens?
Good morning I’m Austerity Jones and I am here with C Thomas Printer who is ready to talk about the atomic number 79, gold.
C Thomas: Good morning Austerity. Yes I am. It has been long overdue, but it seems like every week something else jumped the line, but this week will do just fine. Before I begin, I want to point and thank Democratic Ohio nominee Tim Ryan for conceding like an adult in his race versus JD Vance. It was refreshing to see how American adults should behave when things don’t go their way. Thank you, and best of luck to you in the future.
But today, I want to talk about gold and my story begins with executive order 6102 signed in April 1933, which made it illegal to hold gold coins or certificates meaning you had to turn them into the government under penalty of fines and prison.
Austerity: Why was this executive order 89 years ago important, C Thomas?
C Thomas: Executive order 6102 was when Franklin Delano Roosevelt, aka FDR, our beloved crippled hero of a president, confiscated gold from the American people and screwed them over. You might not believe me, but listen to this scam. FDR bought gold at $20.67 and then revalued 8 months later at $35 for an annualized profit for the government of over 100% at the expense of the US citizens. Let me walk you through how this happened.
The Federal Reserve was established in 1913 and the Federal Reserve Act of 1913 required 40% gold backing the Federal Reserve notes aka the Fed credit that was being used. Since these notes could be redeemed for gold when the stock market crashed in 1929, some people chose to hold gold and that forced reductions in credit to maintain balance at 40%. Surprise surprise: by the end of the roaring 20s, the Fed was about to be out of credit, meaning there was limited gold and they were going to be forced to stop spending.
Austerity: Being forced to stop spending, hmm, this sounds out of character for a government… And, before you move on, how did the roaring 20s become so roaring?
C Thomas: Well, since you asked, the Federal Reserve began purchasing US government securities in 1924 and 1927 when the economy was starting to slip into recessions? Sound familiar? The Fed began easing credit conditions and allowed excess credit to stay in the system. That’s how you got the roaring 20s: easy money which led to speculation.
This interference in the free markets by the government created a bubble and when the bubble popped the government didn’t have any credit with which to step in and help the economy when it needed it. Governments wasted their rainy day fund when America didn’t need it and therefore had no ability to help the country when they did need it. Sound Familiar? The government, which always wants to spend money, even 89 years ago, said this must be remedied. So, under the guise of the Emergency Banking Act (it always has to be under an emergency, Covid or otherwise, for these executive orders to have legal enforceability) FDR started buying up the gold of Americans at $20.67 an ounce. Good law abiding citizens (the mask wearers of the day) stood in line and waited to get their $20 an oz and this went on for 8 months. Anyone caught hoarding gold was prosecuted. Then, in January 1934, the Gold Reserve Act was passed. This made those Federal Reserve notes not be redeemable for gold. It didn’t allow the US Treasury to exchange dollar bills for gold (even on a gold standard). It also created the Exchange Stabilization Fund which was capitalized by, wait for it, the profits from revaluing the dollar from $20 to $35 by presidential decree aka by Mr. Wonderful FDR. Let’s say the Fed has $1m backed by 40% gold, in this case, $400k and the Fed needed another $1m. Here is how they did it: Make the same amount of gold worth $800k, and voila! Now the government can spend up to $2m ($800k is now 40% of $2M). They have created another $1m in credit to spend!
With a higher gold price, global miners and foreigners took their gold and shipped it to the US. This allowed the government to stockpile more gold and concurrently to print more money to fund FDR’s New Deal vision of work programs, infrastructure spending etc. FDR devalued the dollar, and he made a fool of every American that turned in their gold and watched it become worth 69% less just 8 months later. That is a 104% return on investment for the government and it had the ability to print more money. When people say that America has never defaulted on its obligations, tell them to look at the redeemability of its currency in the 30s or again in 1971 when again the government couldn’t be restrained in appending and we went off the gold standard once and for all. Our promise that our currency was redeemable for gold was false twice! And both times, it was caused by uncontrolled government spending and intervention.
Austerity: So, that was then C Thomas, how does this affect us now?…
C Thomas: Well, Austerity, I am bringing up 90 year old acts of government for two reasons- foreign and domestic. First the domestic- Joe Biden is trying to use the Heroes act to dismiss student loan debt saying that the Covid emergency allows him this power. I’m not an attorney so I don’t know if it will be successful or not, but we have these built in “emergencies” that allow this power to make far reaching proclamations. FDR had the emergency banking act- an act meant to stem the tide of bank runs in America. We have talked about bank runs aka if everyone tried to get their money out of a bank the bank would run out of money, go broke, and leave some depositors empty handed. FDR soothingly spoke to Americans on his fireside chats that he would all make it ok and that the government was here to help them, not revealing that it was the government that had put them in that place in the first place. Today Biden says this is necessary to cancel student debt because the burden has become too big because people are still recovering physically and financially from the Coronavirus. The reason they need to recover financially is that the government again put people there! Closing businesses and printing money was the problem in the 1920s and it turns out in the 2020s. The roaring 20s are back, people! Go spend free money for all, no rent, no college loan payments, no mortgage payments. These policies are exactly why we are facing difficulties.
You can even talk me into the corruption of colleges and universities and their skyrocketing tuition prices that has made college unaffordable. How did that happen? Remember when the government decided to guarantee student loans? I give you runaway tuition prices and teachers driving range rovers instead of wearing tweed jackets and walking to work. This escalating tuition crisis was enabled by government intervention backstopping loans as predicted by former Education Secretary Bill Bennett but I digress. I said at the beginning this was really important and it is. The government first needs an emergency, for now it can be Covid or they will use climate change or something else, then they will spring emergency powers on Americans to confiscate gold, bitcoin, etc etc whatever they need to when they need to as soon as they are unable to continue spending.
Austerity: But, they have a printing press and unlimited spending capabilities.
C Thomas: At the risk of being a cliché, I will say “But this time is different.” We have inflation and debt, and we have lots of both. When the US treasury needs money, it sells bonds for dollars and this is the purse for spending. The problem they are now facing is trillion dollar annual deficits and a world that is less apt to buy bonds from a government that might not be good for it with a debt to GDP at a level comparable with Greece. The Federal Reserve had been buying bonds from the Treasury, but they are now quantitative tightening aka lowering their balance sheet. The Japanese are out as buyers- they are selling treasuries to prop up their currency same with Europe, the Chinese are our new adversaries and have no appetite to buy bonds, and they have real estate problems of their own so who will be the new buyer? This is the $31 trillion dollar question, that’s the size of the US debt and counting with a 4% interest rate attached every year, meaning $1.24 trillion just in debt payments and that jumps to $1.55 trillion at 5% which is where the Federal Reserve is going to take us. This is important because the government is running out of its ability to spend. When they lose that ability, the people get their rights taken away. The promises become broken promises. Be warned.
Austerity: That was the domestic reason. What about the foreign one?
C Thomas: Luke Gromen, one of the best Macro analysts in the game today, paints a picture of what could happen on his platform, the Forest for the Trees, FFTT. He points out that it is America who is in the bad position, and it is China with its manufacturing and export business and Russia with its energy resources and 18% debt to GDP that could become very hostile financial adversaries. They are part of the BRICS countries, I had mentioned in a previous episode, that are trying to form an alternative reserve currency to the US Dollar. They are also very secretive about their gold holdings, China doesn’t export hardly any gold and Russia has been an open buyer for some time, escalating after the sanctions when they went into Crimea. Gromen says “What if they revalue gold?” aka what if they do what FDR did back in 1934? Just like then, gold would zoom from all around the world seeking to arbitrage the price, but not to the US this time, it would rush into Russia or China. Buy Gold for $1700 and sell it for $3k or $5k or even $10,000 US dollars an oz. They then use that accumulation to backstop a new currency that is redeemable for gold versus the word of an octogenarian ice cream eater. That’s a low blow Joe and I’m sorry but the ice cream thing is annoying. Countries around the world are being decimated by the strong US dollar right now but it is backed by a $31 trillion debt balloon and a country that is preoccupied with American Idol and Twitter follows. What would stop a foreign country from conducting business with a currency backed by gold? I can only think of one answer, the US military. I will explain how next week.
Sincerely Yours,
C Thomas Printer
This week’s financial tip
Take your new savings account and make your first withdrawal. I want you to go down to a coin store and buy one ounce of silver, it should cost about $25-$26. Ask the dealer for a .999 silver round that is the lowest that they have over spot (spot meaning the price over the underlying metal price). Don’t worry about condition or age etc. It is a symbol and a reminder of what real money is since silver is the people’s money and gold is the government’s money. This will get you in the habit of looking for the silver and gold price and following the markets. This will be educational, and we must understand money before we can make it work for us.
On this date in history
112 years ago to be exact, the great Russian writer Leo Tolstoy died of pneumonia.
Also born on this date
Bob Einstein, possibly the funniest joke teller of all time as well as a tremendous comic, actor, and writer.