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Executive Order 6102: Learning From History

7 March 2011 - News - Editor

Back in 1933, on the 5th of April, US President Franklin D Roosevelt took an unprecedented step in order to prevent the Federal Reserve's gold holdings from being depleted. The order called for the confiscation, with due compensation, of gold that was owned by private US citizens, in effect forbidding the ownership, or 'hoarding' of gold coins, gold bullion and gold certificates. This move was prompted by the bank panics between late 1930 and into March 1933. At the time deposits formed up to 92 percent of the money in circulation, and with the failure of 10,000 banks across the United States, around $2 billion in deposits was lost. The failure of authorities to act quickly to prevent these bank failures is considered to have been a major factor behind the Great Depression.

Federal Reserve Chairman Ben Bernanke has expressed his belief that if the Federal Reserve at that time had provided large banks with additional funds and bought up US securities, the banks may have survived the turmoil of the time. With the insecure economic climate in the US at present, Bernanke has been given the opportunity to put this to the test, and in addition to providing bail-out funds to the banks and buying treasuries, the Fed as cut the prime interest rate charged to commercial banks. With this provision of liquidity and increasing the money supply through the implementation of strategies such as quantitative easing (QE2), it would seem that the economy has been set on the road to recovery – albeit a slow process.

A major difference between now and the tumultuous times of the 1920s/1930s is that US currency is no longer tied to gold, these ties having been cut in 1971. Back in the early 1900s the Federal Reserve Act called for 40 percent gold to back money issued by the Federal Reserve. This meant that for every $10 in circulation, $4 worth of gold was being stored at Fort Knox or other Federal Reserve strongholds. So, in order to print and mint more money, the Fed needed more gold to be kept in storage. The quickest way to do this was to create Executive Order 6102 which called for US citizens to deliver, with some specified exceptions, their gold bullion, gold coins and gold certificated to the Federal Reserve on or before May 1, 1933. Compensation was paid at $20.67 per troy ounce. The exceptions noted in Executive Order 6102 included allowing any individual to own up to $100 in gold coins, and provisions for jewelers, dentists, artists and sign makers. An exception was also made to collectors of rare and unusual coins, thereby preventing the seizure of some priceless collections. Part of the funds raised by the Fed at the time were used to establish the Exchange Stabilization Fund in 1934 which remains in effect today as an emergency reserve fund under the jurisdiction of the US Treasury Department, being used for foreign exchange intervention. With gold no longer being a target for government confiscation, it is regaining its stature as a serious investment option.

 


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