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Dr. Edwin Vieira’s Amazing Crystal Ball, 2006

Posted by Larry Doyle on March 24, 2009 9:52 PM |

I will admit that I am not a student of the Great Depression, but I have started reviewing that period. Obviously I, like every American, hope our economy stabilizes and we regain our footing and return to prosperity. While the pragmatic optimist in me believes that can happen, the trader and risk manager in me tells me to review the Depression, understand the dynamics, assess the risks of our current period, and prepare accordingly.

I hope and believe people who have been reading my work for a while appreciate that I am not an alarmist.  Whether working on Wall Street as a trader and salesman or now writing for Sense on Cents, a measured, analytical approach has always generated the best results. In that vein, I discount speculators and salesmen who attempt to make a buck from heightened levels of anxiety. That said, the elevated levels of risk in our economy, markets, and global finance require an equally elevated sense of risk analysis and historical analysis.

Given some of the economic saber rattling emanating from China and the lessened fiscal support emanating from Europe, the threats of global protectionism are clearly growing. That scenario also occurred during the Depression.  

I plan to continue reviewing The Great Depression in the days and weeks ahead. As with any analysis, I am always leery of the source of information. To that end, I read material today from Dr. Edwin Vieira. Here is his bio:

Edwin Vieira, Jr., holds four degrees from Harvard: A.B. (Harvard College), A.M. and Ph.D. (Harvard Graduate School of Arts and Sciences), and J.D. (Harvard Law School).

For more than thirty years he has practiced law, with emphasis on constitutional issues. In the Supreme Court of the United States he successfully argued or briefed the cases leading to the landmark decisions Abood v. Detroit Board of Education, Chicago Teachers Union v. Hudson, and Communications Workers of America v. Beck, which established constitutional and statutory limitations on the uses to which labor unions, in both the private and the public sectors, may apply fees extracted from nonunion workers as a condition of their employment.

I will not blindly accept his bio, but he strikes me as a very credible source. In reading separate research today, I became aware that our government under FDR seized gold and silver holdings of the American populace during The Great Depression. I will admit that I was totally unaware of that phenomena. It has caused me to ponder if a similar situation could possibly occur in our current scenario.  

I’ll admit that I am startled by the depth and prescient nature of Vieira’s message and the timing of it. Vieira’s piece, A New Gold Seizure: Possibility or Paranoia was written on March 2, 2006. Here is an excerpt:

In short, a new gold and silver seizure would be conducted on the scale and with the ferocity of a veritable war of financial terror directed against every common American. For, indeed, the life or death of the bankers and their political puppets would be at stake as they never really were in the 1930s. After all, under the economic conditions of the 1930s the Federal Reserve System could probably have survived a relatively short-term “suspension of specie payments” without a gold seizure, if Roosevelt had not imposed the crackpot economic nostrums of his New Deal upon the country, prolonging the Depression until World War II. In a future crisis, however, unless the bankers and their political cronies could quickly “stabilize” the System by creating a new currency with some genuine economic and especially political credibility, the whole rotten pyramid of banking-cum-political power might collapse overnight from its elephantiasis of public and private debt, with disastrous consequences for the Establishment.

In keeping with its true nature, any future seizure of gold and silver would undoubtedly be labelled a “war measure” (albeit, of course, without identifying the American people as the politicians’ and bankers’ real enemies). To ape the precedent of the 1930s, and to lend the seizure a contemporary legal veneer, such a characterization would be necessary. In 1933, Roosevelt began the sequence of events that culminated in the original gold seizure by “freezing” all gold in the banks, under color of the Trading with the Enemy Act–a “war measure” from World War I quite inapplicable in peacetime, but which Congress immediately amended to whitewash Roosevelt’s usurpation of power. Today, the applicable statute provides that

[d]uring the time of war, the President may * * * investigate, regulate, or prohibit, any transactions in foreign exchange, transfers of credit or payments between, by, through, or to any banking institution, and the importing, exporting, hoarding, melting, or earmarking of gold or silver coin or bullion, currency or securities * * *.

Title 12, United States Code, section 95a(1)(A). That the President may exercise these powers only “[d]uring the time of war” also applied under the Trading with the Enemy Act; but that meant nothing to Roosevelt, who successfully pretended to employ that Act in time of peace. And it would probably not deter any future President, either, from twisting the present statute to his malign purposes whenever the Establishment demanded it.

Moreover, the limitation would not be hard to finesse, rhetorically at least, inasmuch as all too many Americans have become used to being told–and apparently to believing–that their country is at “war,” even without a declaration of “War” that the Constitution requires under Article I, Section 8, Clause 11. So, what the Establishment obviously intends to be a never-ending “war on terror” would surely be held to qualify as “[d]uring the time of war,” especially if a monetary and banking crisis arose coincidentally with a widespread use of gold and silver by Muslims as their media of exchange.

Yet, if a seizure of gold and silver could–and in a dire financial crisis probably would–be undertaken to save the Establishment’s bacon, with what likelihood would it succeed, even to the limited degree that Roosevelt’s gold seizure succeeded in the 1930s?

 

Unfortunately, the likelihood is not insignificant. The occasion for a seizure would be a monetary and banking crisis so severe that it threatened the continued existence of the Federal Reserve System, the solvency of the Treasury, and even the functioning of the entire domestic economy. In such a situation, a nationwide financial panic would ensue, probably worse than anything experienced during the 1930s. Unlike the 1930s, though, when millions of Americans possessed gold or silver coins and were familiar with the sound money that regularly passed from hand to hand as wages and salaries, and in the consumer economy, today relatively few Americans hold monetary gold or silver in any form, or understand anything at all about money and banking. So without personal experience, knowing nothing relevant to the problem facing them, and unable to evaluate the situation critically, in a severe crisis many Americans would likely believe anything they were told by public officials and the big media–especially if these sources of propaganda, misinformation, and disinformation emphasized that their prescriptions were the only way to restore the economic stability masses of people desperately desired.

Doubtlessly, too, politicians, the big media, and other of the Establishment’s mouthpieces would employ their tried and true “divide-and-conquer” strategy, to turn Americans against one another. In the run-up to a seizure of gold and silver, public officials and the media, following in the cloven hoofprints Roosevelt laid down during the 1930s, would broadcast hysterical attacks against “hoarders”–that is, individuals who wanted to retain their own gold and silver as private property. Inasmuch as in a financial crisis those Americans who had shown the foresight to acquire silver and gold would be better off than those who had not, such political defamation would play on envy, greed, and other vicious emotions to divert the attention of the unfortunate many from the people who had actually caused their misfortune to their innocent, but less unfortunate neighbors. Americans who possessed gold and silver would quickly be demonized as “unpatriotic” if they dared to keep their property for themselves, when public officials and bankers needed it to “stabilize” the monetary and banking systems, restore credit, create jobs, et cetera. Suffering the fate typical of unpopular messengers who bring bad news, those holders of gold and silver who had openly criticized the Federal Reserve System, had spoken up for the restoration of constitutional money, or had predicted a monetary and banking crisis as the inevitable consequence of the politicians’ and bankers’ fallacious policies would be branded dangerous “extremists.”

 

I will be looking into this topic further. In the meantime, please share your thoughts and comments.

LD

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  • TeakWoodKite

    I would not call you an alarmist, by any means LD. You consistently call it as you see it. A scarce commodity these days.

    A few points,

    During the Korean War, the government imposed controls of raw materials, production, shipping, credit, wages, and prices. When the wage-price controls created a collective-bargaining impasse in the steel industry, threatening a nationwide strike, President Harry S Truman ordered the Secretary of Commerce on April 8, 1952, to seize and operate most of the country’s steel mills for the ostensible purpose of maintaining production of critical munitions.

    ….fast forward…Bush calling the Constitution “a piece of paper”…one more channel up there is HBO himself.
    There is a seizure of assets by the government by bailout corruption, legal bribery and out right theft.

    One could argue that if the horizontal and vertical is controlled by the federal Government, this is Parrnell to the “the gold standard” of 1930.

    Gallows humor aside, if the professional side of you is seeking knowledge of a time in the not so distant
    past, and a novice like my self see the same monster from different angles, who can say it does not exist?

  • TeakWoodKite
    • http://www.senseoncents.com Larry Doyle

      Teak…thanks for the link and your color. Who would have ever imagined that we would even discuss these possibilities let alone their actual occurrence?

      That said, prudence dictates we do our homework!!

  • bonddadddy

    Don’t know about you LD but i’ve been adding some physical gold continually over the last 10 years . I doubt Obama would try and seize gold today ala 1930’s because gold prices are now instantly known around the world thus seizing gold and trying to set a price on it won’t work today vs the past . In fact , it would amplify gold prices and send USD cratering ( just my opinion )

    As an additional word of caution for folks thinking that buying GLD or some other ETF structure is ‘ being long gold ‘ , you are sadly mistaken . GLD’s positions have some physical gold but equally reliant on being long gold futures and possibly derivative contracts that mimic being long . The problem with this is if physical gold prices soar in the future , you could easily see some major banks and/or gold derivatives players blow up ( ala BSC/LEH) and cause the whole ‘paper gold’ market to crater and GLD could plunge vs soar .

    ETF structures do NOT work to get long gold . They need the liquidity of futures and derivatives contracts to be able to grow/shrink their ETF as demand changes over time .

    THere are some alternatives . GTU and CEF are closed end funds that are 100% invested in bullion . Even better ? Its bullion stored outside USA ( up in the relatively safe banks in Canada beyond reach of US authorities ) . GTU is pure gold while CEF is both gold and silver bullion . Yes , these names trade at premiums to NAV but you don’t get to buy any form of physical gold at NAV . The new gold coins just sold by the US mint had massive premiums to gold futures . Go check out where 1oz gold coins are trading on EBay these days if you don’t believe me .

    One final note ? Leasing rates on physical gold ( much like the repo markets for bonds ) are now negative . Yes , if you will lend your physical gold bullion for cash in return , the cash lender will also pay you interest on those peso dollars they are lending you at same time .

  • Larry Doyle

    Daddy..thanks for the wealth of information.

    I do not disagree that the government would not or more likely could not seize commodities like gold or silver, but the question I would raise is whether the govt would or could seize financial assets (currency, deposits, bonds) that are held in depository institutions. Perhaps a better question is whether they could look to take a percentage (5, 10, 20, 30%) of the assets for the social good.

    Thanks again for your insights!!

  • Tom Joad
    • Larry Doyle

      Tom,

      Great link. Thanks for sharing.

      Wow. There truly are a lot of similarities from the 1873 crisis to today. The last paragraph is very interesting:

      In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess.

      Hope you like the site. Please visit and comment often!

  • lizzy

    If I understood the things I read about FDR seizing gold, much of the reason was that gold was legal tender at that time. A person could demand wages or payments in gold instead of currency. He seized gold to protect the value of the currency. Since value of currency is no longer tied to gold there wouldn’t be as much benefit. Sorry I don’t remember where I saw the reference. I know I think about this situation and think that I should have some gold then I think about paying a thousand bucks an oumnce for it and only being able to sell it for $400. when we’re not so worried.

  • Larry Doyle

    Lizzy,

    I think the concern would be if the government could potentially take a percentage of currency, deposits, bonds held in bank accounts in a very similar way that the govt took the gold back in the 30s.






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