Executive Order 6102, issued by the US Government on April 5th 1933, should send a shiver down the spine of today’s diversified investor. It demanded, with few exceptions, that “all persons are required to deliver all gold, gold bullion and gold certificates now owned by them to a Federal Reserve Bank”. Criminal penalties for violation included a “$10,000 fine or 10 years imprisonment or both”.
The legal notice was pinned up around the country. It looked rather like a “wanted dead or alive” poster. Except that the target was law abiding citizens, whose property rights had suddenly changed.
Order 6102 is a note-worthy precedent in today’s economic and political climate. Wealthy people were hoarding gold. They had lost confidence in paper money. They liked the safety of a tangible, valuable and relatively scarce commodity; something they could store away or trade privately in domestic and international markets. At the time, as in 2011, it seemed like a win-win strategy as the market value of their holdings shot up.
The Order referred to the “national economic emergency” and made clear what it thought of those with gold holdings. “The continued private hoarding of gold and silver by subjects of the United States poses a grave threat to the peace, equal justice, and well-being of the United States…appropriate measures must be taken immediately to protect the interests of our people”.
Banks were collapsing. There were serious deflationary pressures. Key parts of the economy (especially farmers) desperately needed more money. Unlike today, the dollar was backed by a gold standard. It was expensive for the Federal Reserve Bank to print more money.
President Roosevelt gave banks the power to purchase gold at a fixed, discounted price, in return for dollars. In various forms, the Order stayed in force until 1971.
Order 6102 was part of a broader debate about national debt and monetary policy. Similar to President Obama’s regime, the debate was driven by a mix of economic doctrine, political lobbying and uncertainty. Roosevelt wanted a new deal for the economy controlled by central government, not private business, and he didn’t like private “speculators”. Strong-minded players at the time, including John Maynard Keynes, continued to cast a long shadow over economic and political debates.
In 2011, governments/central banks can print money at will to cope with liquidity, credit and currency issues. Billions of taxpayers money is spent on market interventions, sometimes successfully, sometimes not.
Printing money is relatively simple in an electronic age. It’s even argued that most of the new money never ends up in the real economy, where it could create a hyper-inflationary nightmare. It is targeted at banking and sovereign debt. It flows around computers, financial instruments and balance sheets. It only reaches the real economy (for example) to pay public sector pay cheques, public investment, military expenditure and pensions. Politicians justify these payments on grounds of national security and the avoidance of another Great Depression.
However, someone has to pay for all this. The trillion-dollar question remains. How will politicians deal with the escalating debts they are creating for future generations? Who will pay? Family offices need to keep a very close watch on the likely impact of different scenarios on their strategic asset allocations, currency exposure and property rights.
There are a number of potential scenarios. One scenario is that national and international tensions will spiral out of control into financial and military wars, shortages in vital commodities and so on. If you believe this – and some people do – then your best bet is to move to a proverbial desert island with guns and provisions.
A more positive scenario is that countries can grow their real economies and cut the deficits. This scenario requires strong political and business leadership. There will be winners and losers, swings from capitalism to socialism and back, and perhaps even a return to a modified gold standard or reference point. We may see periods of hyper-inflation, good in theory for writing-down debt, but a serious problem for ordinary people, and a real challenge for wealthy investors.
Another group of scenarios involves managed default. Countries have defaulted in the past, and could do again. The problem is that the world commerce is so inter-dependent that governments generally prefer to bail out individual countries and strategically important companies, rather than let them fail.
Nevertheless, bail-outs cannot continue indefinitely. Some analysts believe that the best solution is to abandon individual currencies and write off/down debt, based on a co-ordinated global solution. A kind of European Union/Euro approach applied to the whole world.
Would it work? Does the EU/Euro work? What would the impact be on investors? The British found it too hard to abandon the pound. Would Americans abandon the dollar? Time will tell. There is, as they say, a tipping point for almost everything.