All that glitters must be sold: a look at debt, cash and the economy

James Martin, a dentist who has dedicated his career to helping dentists understand and improve their financial literacy, describes how and why Franklin D Roosevelt stole America’s gold, and what lessons we can take from this in today’s economy.

James Martin, a dentist who has dedicated his career to helping dentists understand and improve their financial literacy, describes how and why Franklin D Roosevelt stole America’s gold, and what lessons we can take from this in today’s economy.

Did you ever wonder how America elevated itself and the world out of the Great Depression? In 1929, America (and by association the world) fell into a huge economic depression. This occurred because debt levels became so high that the individuals and organisations within society could not afford to effectively repay what they owed and the interest it accrued.

Think about it: if you owe so much money that you are unable to repay it out of your earnings, you may need to sell some of your assets to obtain the cash required.

What about when a lot of people owe a lot of money all at once? When people start to sell their assets on a macro scale, the prices of these assets tank. If everyone tried to sell their house/stocks/ gold at once, imagine how much they would go down in value.

While the value of these assets depreciates more, more needs to be sold in order to cover debt repayments. Hence, this process becomes a runaway train. This means that the stock market crashes, and everyone becomes poorer and poorer. This is known as a deflationary spiral.

Now, how does one make the price of something go up? Well, the laws of supply and demand state that normally when there is competition to purchase something, the price goes up. In order to purchase something, someone must have cash, but what happens when no one has any cash? It must be created.

Creating cash

The issue was that around this time, the value of the dollar was pegged to gold. For every ounce of gold in the reserves of the central bank, $20.67 could be created. Cash could not be created arbitrarily as it can now. It could only be made when enough gold was possessed for it to be issued against.

America’s central bank, the Federal Reserve needed cash. In order to obtain it, gold was required. It was down to the president, Franklin D Roosevelt (FDR), to solve this. As part of FDR’s New Deal to fix the economy, he issued a proclamation. He made it illegal for American citizens to hold gold privately.

To legitimise this, he cited concerns against hoarding. He ordered that every American citizen in possession of gold was to sell it to the American government at market price ($20.67). The authorities in America thus began the process of forcibly ensuring people sold their gold to the government.

Now, here’s the kicker: once the American government had obtained a great deal of gold from this policy, it changed the rules! The government proclaimed that gold was now worth $35 an ounce. This meant the government effectively doubled its money by simply changing the rules to suit its needs.

Of course, the government then injected the money into the economy, which meant that asset prices began to rise. People suddenly had wealth once more and were able to manage their debts. This eventually lifted America out of the Great Depression.

A worrying precedent

Did the end justify the means? People have debated this to this very day. Certainly, the one thing we can agree on is that it set a worrying precedent as to what lengths a government will go to in order to survive.

Are our assets truly safe? This article is by no means intended to scare – only to make you think. It’s truly mind-blowing that this happened within living memory.

Interestingly, avoiding this possibility is part of the philosophy behind crypto. This makes it an interesting proposition as part of a balanced portfolio.


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