History Archives - Antique Sage

How the International Gold Standard Ended in the 1930s

How the 1930s Global Gold Standard Ended

Photo Credit: LBMA

This Art Deco inspired French 100 franc gold coin was struck in 1936 - the year the international gold standard finally went bust.

I've been fascinated by the 1930s collapse of the international gold standard for some time. Over the course of the 20th century we somehow went from circulating gold coinage being considered normal and "right" by mainstream economists, to a wacky world of perpetually depreciating fiat currencies where even the mention of the word gold gets you labeled a monetary crackpot.

Although a lot of ink has been spilled about how the United States abandoned the gold standard in 1933, there is precious little commentary on how the gold standard fell apart in other countries. Franklin Delano Roosevelt's decision to devalue the dollar undoubtedly played a big part in the end of the international gold standard, but it wasn't the only important event.

I hope to fill in the historical gaps with this article.

Our story begins at the dawn of the 20th century, before the outbreak of World War I. At this time, almost every nation - or at least every nation that mattered commercially - had adopted what was known as the classical gold standard. Under the classical gold standard a nation's monetary unit was defined as a specific weight of fine gold. For example, the British pound was defined as being 7.3218 grams of pure gold. Each French franc was fixed at 0.2904 grams of gold. And the German mark was pegged at 0.3584 grams of gold.

The classical gold standard stipulated that the national central bank had to hold gold coin or bullion in sufficient quantities to back outstanding bank deposits and circulating paper currency. But no country maintained a 100% coverage ratio. Instead, most central banks were bound by law to maintain lower coverage ratios that generally ranged between 30% and 60%. This was done on the (sometimes false) premise that not everyone would want to exchange their paper money for gold simultaneously.

Another tenet of the classical gold standard was that the national currency had to be freely convertible into gold at the stated rate upon demand. Anyone - citizen or non-citizen - could present a banknote at a bank window and walk out with a gold coin of the appropriate value. In addition, there could be no capital controls - laws impeding or forbidding the import or export of gold coin or bullion between nations.

For many decades this system worked remarkably well. Between 1871 and 1914 Europe experienced a commercial and cultural golden age, driven in no small part by the economic stability that the classical gold standard provided.

Then disaster struck in 1914: World War I.

The expenses associated with this global conflict were immense. It was easily an order of magnitude more expensive than any previous conflict in human history. Every belligerent nation was forced to suspend gold convertibility once it became clear the war would not end quickly. The warring countries also ran up massive sovereign debts in an effort to finance wartime expenditures.

But the classical gold standard was such a powerful idea that most countries involved in World War I sought to reestablish convertibility as soon as practicably possible in the aftermath of the conflict. It is just that in most circumstances these new gold pegs had to be established significantly below pre-war parity. In other words, the countries spent so much on the conflict that they were forced to devalue their currencies - sometimes by a considerable amount.

Photo Credit: papercut4u

Here is a rare U.S. 1882 $100 Gold Certificate. Notice the prominent statement on it that reads "gold coin repayable to the bearer on demand".

Great Britain was a notable exception to this rule. Before the Great War, London had been the undisputed center of global finance. The British attributed this - at least in part - to the stability of the pound sterling under the classical gold standard. Every pound had been exchangeable for 0.2354 troy ounces of pure gold since Sir Isaac Newton set the exchange rate back in 1717. The only interruption in convertibility occurred during the Napoleonic wars of the early 19th century.

The non-convertibility of the pound during World War I was merely seen as another such inconvenience by the British monetary authorities of the time. Much like in the aftermath of the Napoleonic wars, they strove to reestablish the pound's pre-war parity to gold and then regain their position at the center of the financial universe. Winston Churchill - in his capacity as the Chancellor of the Exchequer - did indeed re-peg the pound to its pre-war gold parity in 1925, but London never did manage to regain its throne as the preeminent global capital market.

Instead, a bizarre three-way system formed with New York, Paris and London sharing monetary hegemony in the inter-war period. The U.S. dollar, British pound and French franc all became internationally important gold-backed currencies in the new post World War I financial landscape.

Although the international gold standard had been largely restored by the latter half of the 1920s, it was not the classical gold standard of the pre-war years. Most nations chose to "economize" on the use of gold by adopting what was called the "gold exchange standard". In this scenario, a nation held its reserves in the form of both gold and foreign currencies exchangeable for gold. In most cases, this meant U.S. dollars or British pounds. The French franc was only re-pegged to gold in June 1928 at about 1/5th of its pre-1914 parity.

Another development was that gold coins were struck less frequently by gold standard nations in the inter-war period. In most places, gold coins no longer circulated in day-to-day commerce as they had before 1914. These trends towards sovereign mints striking fewer gold coins and those coins circulating less frequently only accelerated once the Great Depression began.

In tandem with this, some countries embraced a modified "gold bullion standard" in which the smallest allowable gold/currency swap typically involved 400 troy ounce London Good Delivery bars. Great Britain was the leading example of a gold bullion standard in the inter-war years. In order to exchange your pounds for gold post-1925, you needed to present around £1,700 at the Bank of England. This represented several years' salary for a skilled white-collar worker of the time - a small fortune.

In contrast, the classical gold standard used by the U.K. before World War I was much friendlier to the average man on the street. Before 1914, a mere £1 note was convertible into a gold sovereign coin.

Even though the international gold standard appeared healthy in the late 1920s, in reality intractable problems lay just beneath its glittering façade. World War I had been characterized by gigantic sovereign debt issuance and accompanying inflation. Most belligerent nations (with the notable exceptions of Great Britain and the U.S.) chose to devalue their currencies before re-pegging to gold again in the 1920s. Despite these near universal devaluations, there was still too little gold in the global monetary system to support the mountain of credit and currency that had accumulated.

Old U.S. Gold Certificates For Sale on eBay

After a sharp, but brief, post-war recession that ricocheted through the global economy from 1919 to 1922, the Roaring 1920s began. This decade-long non-stop party was fueled by alcohol, gambling and debt - with debt being the worst of the three vices by far. Banks happily gave out loans for the purchase of real estate, stocks and even consumer goods like cars, vacuum cleaners and refrigerators. If you could fog a mirror, you could get a loan. And although the Roaring 20s is primarily associated with the U.S., the accompanying credit explosion happened in other developed markets like Western Europe and Japan, too.

The newly established U.S. Federal Reserve made a bad situation worse by recklessly encouraging credit expansion in the face of obvious securities market bubbles. In July 1927, the then head of the Federal Reserve Bank of New York, Benjamin Strong, gave the already-inflated U.S. stock market a "coup de whiskey" by cutting the Fed's discount rate. The artificially low discount rate then spurred additional speculative borrowing in an economy already saturated with debt.

In many ways, this maneuver was no different than the modern-day insanity of the Fed pegging short-term interest rates at 0% in an attempt to get the last sucker to buy an overvalued house in Southern California.

But the reason that Strong pursued this unwise policy is the really astonishing part; he did it as a personal favor to the Bank of England, which wanted lower U.S. interest rates in order to make investing in London at higher rates more favorable! In other words, the British pound was overextended and the Bank of England had insufficient gold reserves (due to their aggressive 1925 peg to pre-war parity). By lowering U.S. interest rates, the Fed could drive money (in the form of gold or dollars, either one would work) into the U.K. where they would pad out the pound's gold coverage ratio.

Benjamin Strong apparently never seriously considered that his actions would lead to even greater speculation in the U.S. stock market, thus ultimately leading to the Crash of 1929 and the Great Depression!

But things were falling apart in the global economy even before the infamous 1929 stock market implosion. After frenetic price increases during World War I and into the early 1920s, many commodity prices gradually fell for the rest of the decade. This was due to rampant over-investment and consequent over-production. Commodities as diverse as sugar, oil, copper, rubber and beef either fell or stagnated in price during the mid-to-late 1920s.

Emerging market countries that relied primarily on commodity exports to power their economies felt the pinch first.

Argentina, a major agricultural producer, abandoned the gold standard in December 1929. Venezuela, a leading oil exporter, devalued its currency in September 1930. Commodity export powerhouse Canada didn't formally break its peg to gold until 1933, but it did put severe restrictions on gold exports starting in 1928.

Although the U.S. stock market crash of October 1929 is widely viewed as the beginning of the Great Depression, the world didn't experience its worst effects until 1931. It was only after the major Austrian bank Creditanstalt unexpectedly failed in May 1931 that the economic crisis really intensified.

Photo Credit: Portable Antiquities Scheme

$20 double eagle gold coins (pictured above) were a primary form of bank reserves in the United States when the country was still on the gold standard.

The collapse of this Austrian bank put pressure on German banks, which also began to fail en masse. In July 1931 Germany nationalized its largest banks, suspended the gold convertibility of the Reichsmark, imposed capital controls and ceased payments on its World War I reparations. It then capped off this financial disaster by defaulting on its sovereign debt.

The reverberations of this economic catastrophe were felt around the world, but Great Britain was perhaps the hardest hit.

Up until the summer of 1931, most countries made a determined effort to maintain the international gold standard. It was widely believed by mainstream economists of the time that the gold standard was the monetary cornerstone of global prosperity and had to be retained at all costs.

The Bank of England, in particular, secured multiple rounds of gold loans from the Federal Reserve, the Banque de France and private banking consortiums in an effort to maintain its faltering gold coverage ratio in the wake of the German implosion. But the pressure on the British pound was unrelenting. Nervous businessmen, shrewd currency speculators and wary citizens all exchanged pounds for gold (or good-as-gold U.S. dollars and French francs) as quickly as they could.

As summer turned to early fall, the monetary pressures on the British pound became unbearable. The Bank of England's gold coverage ratio fell below the critical 25% threshold. The government was in crisis as it attempted to impose draconian budget cuts in the midst of rising unemployment and widespread economic distress.

The end came suddenly.

On September 16, 1931, - an otherwise nondescript Wednesday - £5 million in gold and foreign exchange reserves exited the U.K. On Thursday that amount rose to £10 million. On Friday it was £18 million. On Saturday - a day when the banks closed early - more than £10 million fled the country looking for safer shores. On Sunday, September 20th, the Bank of England recommended that the British government break the pound's peg to gold, which Parliament officially did the very next day.

Great Britain's devaluation sent shockwaves through the international gold standard community. The British Empire, with London at its heart, was one of the world's most important financial centers. Sterling had maintained a more or less constant link to gold for more than two centuries. The pound no longer being backed by gold was nearly unthinkable.

1920s & 1930s Foreign (Non-U.S.) Gold Coins for Sale on eBay

And yet once it happened, the dam burst.

In the weeks after the British devaluation, country after country followed suit. India, a British colony at the time, de-pegged from gold at the same time as Britain. Australia, a former British colony, devalued its pound simultaneously. So did Ireland. The Nordic countries - Sweden, Denmark, Norway and Finland - all abandoned the gold standard between September and October 1931. Nations as diverse as Portugal, Columbia and Hungary also suspended the convertibility of their banknotes into gold in the fall of 1931. Even Japan discarded the gold standard in December 1931.

Despite the exodus of so many countries from the international gold standard in late 1931, some nations stayed the course. The United States and France - two of the three great money centers of the time - continued to adhere to the gold standard despite the worsening economic outlook.

But the situation for gold as money was looking increasingly bleak.

All the countries that had debased their currencies along with the U.K. in 1931 now found that their exports were suddenly more competitive in the global markets. Conversely, nations that continued to embrace gold found their own exports to be artificially expensive.

This financial asymmetry put ever increasing, unrelenting economic pressure on any nation that chose to stick to the international gold standard.

Outside of Europe's financial center of gravity, only a handful of non-European countries maintained their peg to gold after 1931. The United States was the most important of these countries. But South Africa, a major gold producer thanks to its vast Witwatersrand deposits, also stubbornly kept its gold-backed pound intact.

For a little more than a year, the international gold standard struggled on. But the Great Depression only deepened.

South Africa finally abandoned the gold standard in December 1932. The United States was not far behind.

I won't linger on the drama surrounding the United State's departure from the gold standard in March of 1933. That has been well-documented elsewhere. However, I will give a short excerpt from an article I previously wrote about pre-1933 U.S. gold coins:

"Prior to the Great Depression of the 1930s, the United States was on the gold standard. Under this arrangement, dollars were exchangeable for gold at a fixed rate - $20.67 for every troy ounce of gold. But the financial dislocations created by the Great Depression put incredible strain on this convertibility scheme. As bank after bank collapsed, average people began withdrawing their money from the financial system fearing that their bank would be next.

Compounding the problem was the fact that there was no insurance for bank deposits; the FDIC did not exist at this point in time. As a result, the wise move was to remove your funds from any questionable bank rather than risk losing your hard-earned money when it failed.

The financial crisis came to a head in January-February 1933 when two Michigan banks - the First National Bank of Detroit and the Guardian National Bank of Commerce - effectively became insolvent. The Governor of Michigan was forced to declare a bank holiday in order to avoid a general banking collapse. This action frightened people in neighboring states who believed their governors may be forced to follow suit.

The crisis quickly spiraled out of control.

One day after his inauguration on March 4, 1933, newly elected president Franklin Delano Roosevelt declared a national bank holiday. One month later on April 5, 1933, FDR issued his infamous Executive Order #6102 which suspended domestic gold convertibility of the dollar. In addition, citizens were required by law to surrender their gold coins, bullion and gold certificates to the government."

Interestingly, Canada only formally suspended the convertibility of its paper money into gold on April 10, 1933 - a full month after the U.S. had left the gold standard! Of course, Canada had already prohibited the export of gold overseas for years beforehand. But it is still notable that Canadian citizens could exchange their banknotes domestically for a hodgepodge of gold bullion, British gold sovereigns, Canadian gold coins or U.S. gold coins (the type of gold was at the discretion of the bank) for longer than U.S. citizens could.

By the early summer of 1933, the situation for the remaining gold standard countries was getting desperate.

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Hoping to reach an international agreement to end the Great Depression, the world's major economic powers held a conference in London from June 12th to July 27th, 1933. The lifting of tariffs, debt forgiveness and the stabilization of exchange rates were on the agenda, but no agreement was forthcoming.

As the London Economic Conference wound down, a core group of European nations publicly announced that they intended to remain committed to the international gold standard. These so called "Gold Bloc" nations were the Netherlands, Switzerland, France, Italy, Poland and Belgium, along with the micro-states of Luxembourg and Danzig.

It is interesting to note that two of the Gold Bloc countries - Switzerland and the Netherlands - were using the same gold parity that they had before World War I. In other words, these countries (which had been neutral during the Great War) did not devalue their currencies after 1914. They were the last nations on earth to maintain their gold pegs unchanged since the 19th century. Incidentally, the Swiss Franc and Dutch Guilder were also the world's strongest currencies during the 20th century.

By the autumn of 1933, the Gold Bloc members - all located in Europe - were nearly the only countries in the world still on the gold standard. The last of the monetary traditionalists had circled the wagons, hoping their solidarity would be enough to fend off the rising economic storm.

But it was not to be.

As the Great Depression progressed and country after country left the gold standard, the pressure on those who remained wedded to gold only increased. Reserves of all types - primarily gold, but also foreign currency and bonds - steadily flowed out of those nations still pegged to gold.

Even France, which had fixed the franc to gold at an artificially low rate in 1928, began to have problems. This was notable because during the early part of the Great Depression, gold had flowed into the Banque de France due to the undervalued franc.

But during the latter part of the Great Depression, this situation completely reversed. The once undervalued franc, still pegged to gold, now became overvalued compared to the dollar and the pound. As a result, gold and other foreign reserves began to flow out of Paris in quantity.

Despite all official pronouncements and new policies, the plight of the Gold Bloc steadily worsened.

By 1935 the Gold Bloc shrank as Belgium, Luxembourg and the Free City of Danzig all devalued their currencies in May of that year. Now only five lonely countries remained in the Gold Bloc: Switzerland, the Netherlands, France, Italy and Poland.

The beginning of the end for the international gold standard was, curiously enough, geopolitical in nature. In March 1936, Hitler marched his Nazi armies into the demilitarized Rhineland in clear violation of the Treaty of Versailles. No one opposed him. No country in Europe felt it had the military might to do so.

This was a wakeup call to all of Europe. Peace would not last. The World War I peace dividend had been squandered during the 1920s and early 1930s. It was now imperative for all European nations to rebuild their militaries as quickly as possible.

And building armies is not cheap.

The financial markets instantly realized what this meant. The budgetary fiscal discipline that the Gold Bloc countries had shown up to this point was instantly destroyed. Everyone knew they would be forced into massive deficit spending in order to reequip their armies against possible German aggression.

Poland was the first to go, breaking its peg with gold in April 1936. The remaining countries of Switzerland, the Netherlands, France and Italy - the core of the core - all stayed linked to gold during the summer of 1936, desperately looking for a way out of their monetary dilemma.

But there was no solution.

After suffering massive gold outflows all summer, France finally capitulated. On September 26, 1936 - a Saturday - the convertibility of the French franc was suspended. It took less than 48 hours for the Netherlands and Switzerland to follow suit. Italy's gold peg collapsed about a week later in early October 1936 (although it should be noted that Italy had already placed restrictions on the export of gold way back in 1934).

The Gold Bloc - and with it the international gold standard - had ceased to exist.

However, there was still one nation that purportedly stayed on the gold standard right up until World War II - tiny Albania, situated on Europe's Adriatic coast. I say purportedly because information about century-old monetary policies in obscure countries is nearly impossible to verify. Nonetheless, Albania supposedly maintained a circulating gold currency (the Lek) right up until it was invaded by Mussolini's Italy in April 1939.

When the international gold standard collapsed, most economists of the time naively believed the break with gold would be temporary. There was a widespread assumption that once the Great Depression ended and prosperity returned, most nations would happily reestablish their currency's link to gold. In fact, nearly all countries that abandoned the gold standard in the mid 1930s still officially defined their currency in terms of gold according to law (just less gold than before devaluing, obviously).

But World War II destroyed any desire, or even ability, to return to the gold standard. Europe had been the beating heart of gold convertible currencies, but World War II ripped that heart out. While World War I may have begun the destruction of the international gold standard, World War II definitively killed it. Our money has never been the same since.

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A History of the End of Circulating U.S. 90% Silver Coinage

With the central banks of the world embracing negative interest rates and endless balance sheet expansion, currency debasement is an issue that is especially relevant to today's investors and savers. So I wanted to write a brief historical review of how the United States removed 90% silver coinage from circulation in the 1960s. Read on to find out more!

From the 1930s through the 1950s, the U.S. Treasury was a net buyer of silver on a truly gargantuan scale. During this time, the government acquired several billion ounces of silver via open market purchases which were mandated by the Silver Purchase Acts of 1934 and 1946. The intent of these laws was to put a floor beneath the price of silver in order to help the Western mining industry, while also providing ample monetary silver for the growing economy.

At this time, each silver dollar or $1 silver certificate was equivalent to 0.77344 troy ounces of fine silver. Subsidiary coinage (dimes, quarters and half dollars) contained slightly less silver per $1 face value - 0.7234 troy ounces. These traditional ratios established two vitally important silver price points: $1.293 and $1.382. $1.293 was the level at which the bullion content of a silver dollar equaled its face value, while $1.382 was the corresponding price level for 90% silver dimes, quarters and halves.

As long as the silver market stayed below these price points, 90% silver coinage would freely circulate in the United States. But if the price of silver ever rose above these levels, then silver coins would be hoarded by the public. This would create tremendous economic problems; a loss of faith in the currency combined with a dearth of small change might choke-off commerce.

All remained well until the 1960s dawned. It was then that the U.S. Treasury suddenly realized it had a major problem on its hands. In spite of a brief and shallow recession from April 1960 to February 1961, the U.S. economy was booming. This was generally a good thing. But it did create an unforeseen side effect - a massive shortage of silver coins in circulation.

The first culprit in this silver shortage was dramatically expanding industrial demand for the precious white metal. The burgeoning manufacturing-based U.S. economy of the mid-20th century needed huge and ever increasing quantities of silver for photography, electrical contacts, brazing and soldering alloys, mirrors and chemical catalysts. This was in addition to more traditional sources of silver demand from increasingly wealthy American households, such as jewelry and sterling silverware.

The industrially-driven scarcity of the lunar-themed metal was further compounded by an absolute explosion of newly-installed, coin-eating vending machines. Between the early 1950s and the early 1960s it was estimated that vending machines sales - including parking meters, phone booths and snack and drink dispensers - tripled to $3.5 billion annually. All of these vending machines sequestered enormous quantities of silver coins (primarily dimes and quarters) for extended periods of time.

The final component of the crisis was a boom in coin collecting, which increased from an estimated 2 million participants in the early 1950s to perhaps 8 million collectors by the early 1960s. Although many of these new collectors were children looking to fill out their coin albums with pennies, nickels or dimes pulled from circulation, others were adults who specialized in speculating in rolls or bags of modern (i.e. 1950s and 1960s) coinage. While the drain on the nation's silver coins from young collectors was probably modest, the hoarding of millions of bags and rolls of silver coins by numismatic speculators was undoubtedly a significant factor behind the silver coin shortage of the time.

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All of this meant that the global supply of silver was increasing at a much slower rate than silver demand. By the late 1950s, silver production was expanding at about 1.5% per annum versus consumption growth of 4.0% annually. The monetary status quo in the United States was quickly becoming untenable.

As early as 1961, the Kennedy Administration determined that the only logical recourse was to cease striking 90% silver coinage. On November 28, 1961, President JFK wrote to the sitting Treasury Secretary that: "[I have] reached the decision that silver metal should gradually be withdrawn from our monetary reserves.”

The iconic U.S. silver dollar was the first casualty of the 1960s silver demonetization trend. At the beginning of 1963, the U.S. Treasury held a seemingly robust 94 million silver dollars as reserves against outstanding silver certificates. By the start of 1964, that number had precipitously dropped to 28 million coins. As the weeks passed, a run on silver dollars quickly developed. By March 1964, a mere 3 million of the silver cartwheels were left in government vaults, prompting the U.S. Treasury to abruptly suspend silver dollar redemptions on March 25, 1964.

But the silver dollar wasn't the only U.S. 90% silver coinage experiencing supply problems. After JFK's assassination in 1963, there was widespread public support for honoring the fallen president in some way. Congress reacted by authorizing a change to the design of the half dollar. The old Franklin half dollar would be retired after 1963, to be replaced with the new Kennedy half dollar in 1964.

An old saying comes to mind here: "The road to hell is paved with good intentions."

The public immediately hoarded the hotly-anticipated Kennedy half dollars as they hit circulation, sequestering the coins in sock drawers, closets and safe deposit boxes across the land. People were eager to have a memento of the slain president and the freshly redesigned half dollar seemed like the perfect keepsake. Speculators also did their part by hoarding freshly minted rolls of the new half dollar with the intention of re-selling them for higher prices later on. Despite the fact that over 429 million of the new coins dated 1964 were struck, Kennedy halves simply did not circulate.

In fact, it would not be a stretch to say that the ill-timed release of the Kennedy half dollar killed the 50 cent denomination as a regularly circulating coin in the United States. Before 1964, half dollars had passed right alongside dimes and quarters in everyday transactions in most parts of the country. But after 1964, they were rarely found in circulation.

Although the U.S. Government was at least partially culpable for the early 1960s silver coin shortage, it reacted to the emergency in a predictably self-serving way - it blamed the little guy. Coin collectors and speculators were repeatedly singled out by government officials as the chief culprits behind the rising price of silver bullion. Meanwhile, the U.S. Treasury conveniently ignored the far larger contribution to the crisis from the out-of-control vending machine industry and commercial silver users. This was undoubtedly because the moneyed interests behind these groups could afford to buy the silence of the political establishment.

But all this finger pointing did nothing to solve the underlying problem. By early 1963 the price of silver was only being held at the magic $1.293 rate by the U.S. Treasury freely selling silver to all bidders from the government's rapidly depleting stockpiles. It was a situation that could not persist for long.

As 1964 progressed and the crisis deepened, President Lyndon B. Johnson signed legislation on September 8th that permitted the U.S. Mint to implement a date freeze. As a result, all U.S. 90% silver coinage struck after 1964 continued to bear the frozen 1964 date. This was intended to dissuade collectors and speculators from hoarding these coins.

Of course, numismatic speculation, although problematic, was a relatively minor issue in the grand scheme of things. This meant that the date freeze wasn't terribly effective in relieving the coin shortage by itself. The primary issue was really the inexorably rising price of silver and the fact that too many silver certificates had been issued against the government's reserves. The only reasonable way to resolve this problem was to remove silver from the nation's circulating coinage - in other words to devalue the U.S. dollar.

Enter the Coinage Act of 1965, which LBJ signed into law on July 23, 1965. This legislation authorized the U.S. Mint to begin striking dimes and quarters in a cupro-nickel clad alloy with a pure copper core. Half dollars were to be minted from a debased, 40% silver composition. The law also prohibited the use of mintmarks on freshly-struck coins for the next several years - another largely senseless jab at coin collectors.

The first of these debased cupro-nickel coins (quarters) was not struck until August of 1965, with a subsequent release date in November 1965. Cupro-nickel dimes and 40% silver halves were first struck in December 1965 and only released into circulation in early 1966. Contrary to popular wisdom, practically all higher denomination coins in circulation throughout the entirety of 1965 were 90% silver.

All of the debased, cupro-nickel coins were dated 1965 (or later), which allows modern-day silver stackers to easily distinguish them from 1964-and-earlier dated 90% silver coinage. In addition, a quick look at the edge of a questionable coin will quickly reveal its composition as well. Cupro-nickel coins readily show a telltale copper sandwich (sometimes derisively called a "Johnson sandwich" after President LBJ) when viewed along their edge, an effect not visible on 90% silver coinage.

The last of the United State's circulating 90% silver coinage was struck in early 1966. The country's final 90% silver quarters rolled off the line in January 1966, while the last 90% silver dimes plunked into fresh mint bags in February of that same year. The end for the 1964 dated 90% silver Kennedy half dollars came just a little bit later, in April 1966.

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During this changeover period in late 1965 to mid 1966, the U.S. Treasury and President LBJ both publicly avowed that the old 90% silver coinage would continue to circulate side-by-side with the new cupro-nickel slugs for many decades to come. This was, of course, a great lie. Gresham's Law - which states that bad, debased money drives out good money - ensured that any desirable silver coins would quickly be pulled from circulation.

In addition, government officials knew that the Treasury's rapidly dwindling silver reserves would soon shrink to the point where they would no longer be capable of suppressing the market price below the critical $1.293 threshold, where silver dollars would start being profitable to hoard. The next important price point wasn't much higher, at $1.382. This was the level where 90% silver dimes, quarters and halves would be sequestered en masse by the public.

After their hurried introduction in 1965, the U.S. Mint took great pains to produce absolutely massive quantities of its new cupro-nickel coins. From 1965 to 1967 the U.S. Mint struck over 4.1 billion Washington quarters and more than 5.2 billion Roosevelt dimes. By June 14th, 1967, the U.S. Treasury felt that enough of the new debased coins were in circulation for it to stop holding down the price of silver.

After this seminal event, the price of silver quickly rose above the all-important $1.293 barrier. Indeed, by the end of 1967, silver was over $2.00 per troy ounce. This meant that all 1964 and earlier U.S. 90% silver coins - dimes, quarters, half dollars and silver dollars - were quickly hoarded by the American public for their intrinsic value.

Once the U.S. Treasury let silver prices run in mid 1967, the age of circulating silver coinage in the United States came to a shockingly definitive end. Silver only very briefly dipped below the pivotal $1.382 level once for a handful of months in late 1971, where 90% silver subsidiary coinage could theoretically circulate. It never again touched the $1.293 price point that would have made silver dollars uneconomic to hoard.

The only loose end left now was the remaining silver certificates in circulation. Even though the U.S. Treasury had stopped paying out silver dollars to holders of these certificates back in March of 1964, it was still obligated by law to redeem them for the appropriate legal weight (0.77344 troy ounces per $1) of silver granules (for smaller sums) or silver bars (for larger sums) at the New York and San Francisco Assay Offices. However, this final contractual link between the U.S. dollar and silver was set to expire on June 24, 1968, per Congressional decree. After that time, the U.S. Treasury would no longer honor its obligation to redeem silver certificates for bullion (although the notes would continue to be legal tender).

In the months leading up to the historic date, enterprising entrepreneurs widely advertised their willingness to buy silver certificates for anywhere from 10% to 60% over face value in newspapers and magazines. They would then travel to New York or San Francisco to redeem these accumulated notes at the Assay Offices for bullion worth even more than they had paid.

In the few weeks before the final June 24th redemption date, people desperate to redeem their silver certificates mobbed the New York and San Francisco Assay Offices nearly every business day. On the morning of the deadline itself, hundreds of people lined up around the block at both Assay Offices for their last chance to exchange their paper silver certificates for silver bullion.

In the aftermath, silver was well on its way to being completely demonetized in the United States. By the late 1960s, silver dollars simply couldn't be found anywhere in circulation. And subsidiary 90% silver coinage was rapidly being pulled from the banking system by both an enthusiastic public and a disingenuous Federal Reserve (which shamelessly "mined" the remaining silver coins in circulation in order to reap a profit for the Treasury).

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The final act in this sad drama played out in 1969. At this point, the only circulating U.S. coin that still contained any silver was the 40% Kennedy half dollar. But the perpetually rising price of the white metal made it apparent that this token coin would soon have to be sacrificed at the altar of fiat currency as well.

The end for 40% silver Kennedy halves came not with a bang, but with a whimper. In 1969, its last year of commercial production, nearly 130 million pieces were struck. But in 1970 the 40% Kennedy half was restricted to mint and proof sets; none were released for general circulation. Only 2.1 million specimens were struck in this final year, making it one of the key dates in the series. When commercial Kennedy half dollar production finally resumed in 1971, they were struck from the same miserable cupro-nickel alloy already found in the dime and quarter.

And with that the glorious 178 year history of circulating U.S. silver coinage came to a pathetic close. Although 90% silver coinage could still sometimes be found in circulation in the late 1960s, by the early 1970s the monetary system had effectively been picked clean of these high value coins. Even the debased 40% Kennedy halves didn't last much longer, as their silver content exceeded their face value by January 1974.

From that point on, only dedicated coin roll hunters picking through the dustiest, most undisturbed corners of bank vaults could hope to find the occasional silver treasure. The age of circulating U.S. 90% silver coinage was over.

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Escaping our Rotten Banking System

Photo Credit: Tim Green

The global banking system is sick. In fact, it is so sick that it wouldn't be a stretch to say that many of our financial institutions are terminally ill. This phenomenon has largely been driven by absurdly low interest rates - perhaps the lowest across 5,000 years of recorded human history according to some financial commentators.

And it doesn't look like the decline in yields is done quite yet.

Global bond yields plunged again in August 2019. The yields on German, French and Japanese 10-year notes plowed into negative territory during this time, while Swiss yields went even more negative than they had already been. The United States, that last bastion of positive return in a yield-starved world, saw its 10-year bond yields decline a stunning 100 basis points over the course of just a few months - from over 2.5% to an anemic 1.5%.

In Denmark right now one bank is offering negative-yielding mortgages, meaning that the bank will pay you to take out a loan!

This is crazy stuff.

So crazy, in fact, that the global banking system can't survive in this environment long-term. And it isn't just banks that are suffering, but also insurance companies and pension funds. All of these firms rely on significantly positive-yielding assets in order to survive. If negative yields persist for too many years, the financial industry will simply bleed capital until a crisis comes and knocks the entire rotten edifice over.

This alarming situation has created a desperate search for yield across the world.

But this reach for yield has prompted some banks to originate questionable commercial real estate loans (among others). The world only needs so many dollar-stores, fast food eateries and quaint cafes - a point we passed long ago. The only problem is that the yield-starved banking system didn't quite get the message. Just like a shark has got to swim to stay alive, a bank has got to lend to keep its doors open - even it if means piling bad loans onto an already problematic balance sheet.

The situation in Europe isn't any better. The newest global regulatory framework for banks (Basel III) gives financial firms wide latitude to determine the risk weighting applied to sovereign debt. The practical consequence of this loose regulatory regime is that most southern European banks have loaded up on their home country's government bonds. This is an issue because the Portuguese, Spanish and Italian governments, while not currently in explicit default, are more or less insolvent. But banks located in those countries are stuffed to the gills with their national debt all the same.

It is an accident waiting to happen on an almost unimaginably grand scale.

In order to understand how the banking system came to such dire straits, a quick history lesson is in order. I will concentrate my historical financial analysis on the United States, which is also a reasonable proxy for the rest of the developed world in most cases. Although little known, the U.S. has actually experienced four distinct monetary regimes since the beginning of the 20th century.

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The Classical Gold Standard Era (before 1934): Under this financial regime the U.S. dollar was explicitly linked to gold, with $20.67 exchangeable for 1 troy ounce of the precious metal. The currency's required gold-backing kept the dollar strong and stable. Foreign exchange rates were largely fixed because most nations had their currencies pegged in terms of gold. Interest rates were relatively low in absolute terms, but because inflation was so low, real (inflation-adjusted) yields were solidly positive. Governments typically ran small surpluses during this period (except during times of war).

The Bretton Woods Era (1934 to 1971): During the Bretton Woods period the U.S. dollar was still linked to gold, albeit at a reduced rate ($35 equaled 1 troy ounce). This precious metal link restrained money issuance and, by extension, inflation. U.S. citizens could not own gold or exchange their dollars for gold, however. Instead, only foreign governments and central banks could redeem dollars for gold. Global exchange rates were typically fixed against the U.S. dollar, providing stability in international trade and investment. Most governments ran balanced budgets outside of wartime and savers were consistently rewarded with positive real interest rates.

The Bretton Woods II Era (1971 - 2008): From the early 1970s until the 2000s, the world operated under a floating currency regime that was sometimes known as Bretton Woods II. The U.S. dollar was no longer pegged to gold or exchangeable for it. But both nominal and real interest rates were often quite high in order to instill confidence in this untested, pure fiat system. Governments were able to run increasingly large budget deficits, which was acceptable if the interest rate on the national debt was lower than the nominal growth rate of the economy. Central banks adamantly refused to monetize (print money to buy) government debt.

The Central Bank Era (2008 - present): Our newest currency regime is a pure fiat monetary system characterized by floating foreign exchange rates and non-convertibility, just like the Bretton Woods II era. However, real interest rates are almost always negative today, with nominal interest rates sometimes being negative as well (most notably in Europe and Japan). This is incredibly punishing for not only savers, but ultimately the banking system too. Governments run persistently massive budget deficits, leading to ballooning national debt loads. Central banks happily monetize government debt in size, raising the specter of future currency devaluations or hyperinflations. Outrageous securities market bubbles are embraced as a desirable growth transmission mechanism by increasingly desperate central banks.

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As you can plainly see, our current monetary regime (the Central Bank Era) is incredibly unstable. It is not a question of if it will fail, but simply a question of when and how it fails.

This is why I believe it is imperative for everyone to move some money out of the banking system. A financial disaster of some description is on its way and when it finally arrives it will be ugly beyond belief. It could take the form of a stock market crash, a bank bail-in or capital controls - no one really knows. But we do know that conventional financial products like stocks, bonds, CDs and savings accounts will not offer the protection that they might have in the past.

Instead we need to look to unconventional tangible assets like bullion, antiques, gemstones and fine art to help protect our net worth. And honestly, prices for hard assets are so low right now that you can buy practically anything in that list and expect to do well from a future return perspective. This means you can indulge your passion for antique samurai sword fittings or medieval European woodcut prints, safe in the knowledge you're accumulating valuable financial assets that are completely independent from our teetering banking system.

Of course, if you'd like to pursue a more conservative course by purchasing gold and silver bullion, I can wholeheartedly recommend that as well. I've recently written an article on how to stack vintage JM & Engelhard silver bars in your retirement account.

I don't really think it matters which specific strategy you choose, just as long as it involves getting some of your precious dollars (or euros, or pounds) out of our necrotic banking system and into something tangible. It is far better to be prudent today, rather than sorry tomorrow.

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Pondering Gold Confiscation in the 2020s

Photo Credit: Wikipedia

The possibility of gold confiscation is every precious metal investor's worst nightmare. And this fear is solidly based in historic fact. During the depths of the Great Depression, President FDR issued Executive Order #6102 on April 5, 1933. This questionable law required all U.S. citizens to surrender their gold coins, gold bullion and gold certificates to the Federal Government.

This blatant gold confiscation was tantamount to outright theft. People were given less than a month to comply with the order. If their gold was not promptly delivered to a Federal Reserve Bank, branch or agency thereof, they could face stiff penalties. Failure to obey this draconian law carried the threat of a $10,000 fine (a massive amount of money back in the 1930s) along with 10 years imprisonment. The only realistic exemptions were for gold coins with numismatic value or non-numismatic coins in amounts not exceeding $100 face value (about 4.8 troy ounces).

The Federal authorities even moved to confiscate silver in addition to gold. On August 9, 1934 FDR promulgated Executive Order #6814, which mandated that all silver bullion be delivered into the coffers of the U.S. Federal Government. Happily, circulating U.S. silver coins (dimes, quarters, half dollars and silver dollars) were specifically exempted from this executive order to minimize its the disruptive effect on the public.

In practice, very little silver bullion was seized under Executive Order #6814. Instead, the government passed the Silver Purchase Act of 1934, which included a 50% windfall profit tax on the sale of silver bullion payable via revenue stamps. This silver bullion tax, which wasn't repealed until 1963, effectively blunted any speculative impulses towards the noble metal for several decades.

So asking whether gold confiscation (or even silver confiscation) can happen again is something that understandably preoccupies many of today's precious metal investors. And the United State's steadily deteriorating fiscal condition certainly suggests it could be a possibility sometime before the end of the 2020s.

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Right now U.S. Federal debt is a mind-blowing $23 trillion, well on its way to $40-something trillion by 2030. State and local debt, although smaller in absolute terms, is still precariously inflated. We could see those municipal debts double from today's $3 trillion to perhaps $6 by 2030.

Federal entitlement spending (primarily Social Security and Medicare) is perhaps the worst debt bomb of all, with an estimated unfunded liability somewhere between $47 and $210 trillion, depending on who you want to believe. And the political will to reform entitlement programs simply does not exist in Washington at the current time. This means that meaningful change will only realistically come via a financial crisis of some description.

And don't even get me started on the stock market, which is currently experiencing the largest bubble in all of human history. Being priced to perfection, the equities markets are incredibly vulnerable to a synchronized crash that would devastate Federal tax revenue.

So as the 2020s progress, it is obvious that some sort of financial calamity, or series of financial calamities, will almost certainly occur. Under these circumstances, it is not so far-fetched to believe that the U.S. government could once again seek to solve its financial problems via gold confiscation. After all, relatively few households own significant quantities of gold, silver or platinum at the moment (although that might change as average people realize just how bleak our national fiscal situation is). So seizing precious metals would have the political advantage of filling government coffers while only directly impacting a minority of the populace.

Having said that, I think there will be a specific order to any gold confiscation, if it were to occur. Our current crop of sleazy politicians may be corrupt narcissists, but they aren't chumps. They understand that some forms of precious metal seizure will play better in the public arena than other types. Keeping this in mind, I've constructed a list of gold confiscation targets in the probable order they would occur:

1) Precious Metal ETFs

Precious metals held by ETFs (Exchange Traded Funds) are the logical first step in any gold confiscation scenario. ETFs are stock-like vehicles held in brokerage accounts by speculators, traders and investors. But almost everyone buying gold ETFs is interested in paper profits, not actual physical ownership of gold.

This is just as well, because it is an open question as to just how much physical gold these ETFs actually hold. A large portion of their purported precious metal holdings may simply be paper futures contracts or other incorporeal gold derivatives.

Regardless, when the time comes it will be easy for politicians to mandate the seizure of any ETF-linked physical precious metal holdings. As long as any seized gold is immediately replaced with piles of freshly printed fiat money, everything will remain copacetic. Most people who own these ETFs won't complain, provided they realize a paper profit.

2) Commodity Exchange Warehouses

The U.S. commodity exchanges, like the COMEX, CBOT and NYMEX, all have warehoused silver, gold and platinum that they use to back futures contracts traded on their platforms. The ostensible purpose of these commodities marketplaces is to allow miners, recyclers and industrial consumers to hedge their precious metal exposure in a convenient paper contract.

But in reality, the futures market is a cesspool of speculators, gamblers and manipulators, with very few legitimate users. In addition, only a tiny fraction of futures contracts are physically settled; up to 98% of contracts settle with cash instead. This is fortuitous in a perverse way because the physical precious metal holdings stored in the commodity exchange warehouses represent a miniscule percentage of the outstanding paper contracts at any given point in time. In other words, there are far more gold future contracts than there are gold bars to delivery into them - yet another prime example of modern day institutionalized financial fraud.

Consequently, it would be fairly simple to decree a gold confiscation edict focused on the commodity exchanges. There would be very little blowback from a public relations perspective and only a relatively small number of real industrial participants would be impacted. But it is an open question just how much physical gold the government could derive from this move.

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3) Mining Companies

I would like to preface this by saying that I believe the seizure of gold mining companies to be rather unlikely.

However, mining companies would be the next rational target for a resource-starved government contemplating gold confiscation. Unlike with ETFs and commodity exchanges, we know for a fact that gold miners actually possess sizable quantities of physical gold, albeit locked in the ground. A gold confiscation applied to gold mining companies could take a number of varied forms, not all of which would be obvious theft.

For example, politicians could mandate that all domestically domiciled miners sell their production exclusively to the government for a predetermined (almost certainly below-market) price. Or the government could demand that miners issue them a "golden share", which would entitle the holder to a significant ownership interest in the underlying company (perhaps 10% to 25%) along with a veto on any undesirable corporate activity (like fleeing offshore). The government could even outright nationalize gold miners, buying out former shareholders with rapidly depreciating fiat currency.

There are a lot of different directions a bankrupt government could take here that would only raise a moderate amount of dissent, making this a reasonably attractive proposition.

4) Private Bullion Dealer Inventories

Now we are beginning to really scrape the bottom of the barrel in terms of gold confiscation. Once the government has raided precious metal ETFs, commodity exchange warehouses and mining companies, it becomes much harder to get more gold without looking like an insatiable, thieving monster.

Nevertheless, a further possibility is the inventories of private bullion dealers. These would be the holdings of retail-facing companies like KITCO (yes, I know they're Canadian, but some of their gold is stored in the U.S.), APMEX, Provident Metals and JM bullion. These companies undoubtedly hold substantial quantities of physical precious metals, so a destitute government might be tempted to seize their inventory.

But the public opinion blowback would be substantial, in my opinion. These are not massive, unethical corporations or unsympathetic, day-trading speculators. These are small-to-mid-sized, privately-held companies that operate on paper-thin margins to provide everyday people reasonably-priced access to gold and silver bullion. Subjecting them to a gold confiscation edict would be like sending up a signal flare letting the public know that the government is (eventually) coming for their personal precious metals stash.

5) Gold IRAs

Now things get downright ugly. If the government has churned through all its other options, it might resort to seizing physical precious metals held in self-directed gold IRAs. On the upside (from the government's perspective), there is actually real gold and silver held in these accounts, not paper contracts. On the downside, there is probably not very much gold or silver in these accounts in aggregate, at least not when compared to some of the juicier gold confiscation options higher up on this list.

But most importantly, the optics of a precious metal nationalization involving gold IRAs would be abysmal. The government would be outright robbing small investors who are trying to save for their retirement. It would be utterly impossible to spin this public relations disaster in any kind of a positive way, so I think it would definitely be a last resort.

Pre-1933 Semi-Numismatic U.S. Gold Coins for Sale on eBay

6) Foreign Central Bank Reserves Held in Custody

Another potential target for gold confiscation would be foreign central bank reserves held in the New York Federal Reserve's high security underground vault in downtown Manhattan. Although the Fed does not disclose exactly how much gold it holds in custody or who owns it, as of 2016 there was an estimated 6,000 metric tons of gold in the New York Fed's vaults.

The largest holders are believed to be the IMF (International Monetary Fund) at around 2,000 tonnes, followed by Germany at 1,347 tonnes, Italy at 1,000 tonnes and the Netherlands at 190 tonnes. Other minor holders are thought to be Sweden, Finland, Greece, Lebanon, Afghanistan, Ghana, the BIS (Bank for International Settlements) and the European Central Bank.

A gold confiscation that seized these holdings would have major international repercussions, which is why I've placed it so low on my list. Having said that, if the U.S. government was desperate enough, they might consider seizing gold held in custody for one or more smaller countries. The aggrieved nations would have no recourse other than to lodge a token diplomatic protest.

Another possibility is the confiscation of IMF and BIS gold holdings if the international trade/monetary system were to utterly implode during a future financial crisis. Under this scenario there would presumably be less of an international outcry as these institutions would have outlived their political usefulness. It's also possible that this form of gold confiscation could actually happen before gold IRAs were seized, depending on geopolitical circumstances.

7) Private Gold Holdings

The surrender of private gold holdings by ordinary citizens is the Big Kahuna - the gold confiscation that precious metal investors everywhere dread the most. This is the type of confiscation that occurred during the 1930s. However, I don't think it is very realistic today.

For one thing, I don't think it would be remotely enforceable. Even back in the 1930s, there were many, many people who simply did not turn in their gold coins. And there was only ever a single Federal prosecution under Executive Order #6102, which resulted in an acquittal (although the gentleman did lose his gold).

Today's average citizen trusts the government far less than the everyman of the 1930s. A mere trickle of gold would make its way into government coffers if a modern-day, blanket gold confiscation law was promulgated. All the gold currently in private hands would simply disappear into basements, closets and safe deposit boxes.

And things would turn ugly in a hurry if the government pressed the issue. A systematic search of safe deposit boxes for gold would turn the public virulently against the entire banking system, undermining the government's already precarious financial situation even further. If an even more heavy-handed gesture were implemented - like Federal agents being sent door-to-door to seize gold - open revolt would undoubtedly spread throughout large swathes of the country.

The outcome of a renewed nationalization of private gold holdings would be so bad that I don't think any government would be stupid enough to try it. Of course, if the U.S. government were flat broke and desperate, no one knows just how dumb they might get. That's one reason why some precious metal investors still buy pre-1933 semi-numismatic U.S. gold coins. These older coins would presumably have a numismatic exemption from any theoretical future gold confiscation.

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