Gold's Historical Role with Coinage|
February 24, 2011
Not too long ago, gold was down for the count and some financial analysts discounted its future. Gold’s amazing climb stumbled around Aug. 1, 2008 as the precious metal dropped below $800 an ounce for the first time that year, completing a slide that had begun five months earlier on March 17, 2008, when the London daily fix topped out at $1,023.50, silver weighed in at $20.92, and platinum was at exactly $2,000 an ounce.
The London Fix, since 1919, has governed worldwide gold transactions. Current members of the Fix are: The Bank of Nova Scotia - Scotia Mocatta; HSBC (formerly Hong Kong Shanghai Bank Corp.); Deutsche Bank AG London; Societe Generale Corporate & Investment Banking; and Barclays Capital.
The procedure followed by the five member firms is designed to fix a price for settling contracts between members of the London bullion market. The fix takes place twice a day, and is now done by telephone at 10:30 a.m. and 3 p.m. local (London) Greenwich mean time.
First fix took place on Sept. 12, 1919, among the five principal gold bullion traders and refiners of the day: N.M. Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was £4 18s 9p, (four pounds 18 shillings and ninepence (GBP 4.9375) ) per troy ounce or about $24 an ounce. The official price was still $20.67 an ounce.
Today, gold prices are fixed in United States dollars, pound sterling and European euros. Originally, the offices of N.M . Rothschild & Sons in St. Swithin’s Lane were used for a table side meeting of five competitors; but since May 5, 2004, it has been done by phone. In April, 2004, Rothschild withdrew from gold trading and Barclays Bank took its place.
At the Rothschild board room, participants could raise a small Union flag on their desk to pause proceedings. With the telephone fixing system, participants can sill register a pause by saying the word “flag.” A rotating chair ends the meeting with the phrase, “There are no flags, and we’re fixed.”
Gold’s price history probably should be divided into three parts. First, is the period prior to 1933, when President Franklin Roosevelt effectively nationalized gold and prohibited private gold ownership. Second, is the period from 1934 to Dec.31, 1974, when U.S citizens lost the right to own gold, except for “rare and unusual” gold coins – numismatic items. Third, is the period from Jan. 1, 1975, to the present, when Americans fully participated in the gold market. A fourth period may be in the future when the Chinese are able to fully participate in a developed gold market, opening up 300 million middle-class purchasers to this exciting field.
Gold’s price history has been remarkably stable over the past century and a half. The accompanying chart shows this stability from 1837 until 1933, with various spikes characteristic of a free market, but aware nonetheless of a giant overhang of bullion held by the world’s central banks. The U.S. stockpile is at Fort Knox and the Federal Reserve Bank vaults on Liberty Street in lower Manhattan, not far from the former World Trade Center site.
The U.S. gold reserve is a tough cookie to measure, in part because it does not value the gold at market, but instead at the “official” price set by Congress at $42.22 in 1973. That changed the value from $38 an ounce and effectively devalued the dollar since that was the unit the most banks used to define net worth.
Most gold is in long term storage – over 258 million ounces – a huge overhang that has led some to suspect price manipulation by the Treasury, which values this at $10.9 billion (about $258.3 billion at current prices). The Treasury denies this, going so far as to say on a government Web site that “We would like to emphasize that the Treasury Department does not seek to manipulate the price of gold or any other metal by intervening in or otherwise interfering with the market.”
The year 2000 started with $282 an ounce gold, about the same as the prior year ($278). The average for 2001 was $278,70. In 2002, gold’s price went to $346.70. The next year closed at $414.80. By 2004, the price was at $438.10, then rapidly rose to $517.20 in 2005, $636.30 in 2006 and $833.20 in 2007.
And it kept climbing, reaching $901 in 2008, $1,090 in 2009 and hitting $1,247.60 on May 13, 2010, before beginning a slow slide.
America’s history with gold is an uneven one. Gold at the nation’s beginning did not have its role of today as an asset of last resort but rather it was a primary asset of wealth. When the United States was founded as a nation, the Constitution was leery of the colonial experience with currency “not worth a Continental.”
Indeed, the Constitution was thought to ban the issuance of “money” that was not gold and silver. That didn’t mean copper coinage couldn’t be issued for change, and indeed, just three years after the Constitution was adopted, the Mint Act of 1792 called for gold, silver and copper coinage. But copper had a limited legal tender value, where gold did not.
Gold and silver metal, bullion, foreign coin or plate could be deposited with the Mint where, for a small service or convenience fee (half of one percent), the Mint would smelt it down and coin it into national money using prescribed weights and sizes. The value of gold and silver per ounce was determined, the volume of metal legislated, and coinage was ready as soon as the Mint director and chief coiner filed their bonds, which took two years.
Each gold coin had its full weight and measure, that is, a gold eagle had just about $10 worth of gold in it. Silver dollars were similarly regulated, as were subsidiary coinage, but the historic problem is that precious metal prices are generally unstable absent a market-maker who guarantees a fixed price.
The result was that American silver coinage was worth more melted than coined. Deposits all but ceased, coinage flowed abroad to settle debts or for smelting, and by the turn of the 19th century, silver dollar coinage was entirely suspended, not to be restarted until the mid-1830s. Lacking a domestic source of gold until deposits were discovered decades later in the Carolinas and Georgia, there wasn’t much gold coinage either.
Through the early 1800s there was a real need for coinage, and Congress tried to rectify the problem by regulating the value of foreign coins that circulated domestically. For example, the Act of April 29, 1816, regulates the legal tender value of foreign coins from Britain and Portugal.
Another law signed March 3, 1819, continued in force legal tender values of foreign coins. Two years later, the act of March 3, 1821, regulated 5 franc and crown legal tender values; it was renewed on March 3, 1823.
Congress had a hard time getting it right; the bullion market was constantly changing. As a result, on June 28, 1834, the legal tender value of foreign silver coins of Mexico, Peru, “Chili” and Central America were fixed; the same day, another law reduced weight of foreign gold coins per dollar, thus revaluing the U.S. dollar in the process.
In 1837 Congress set the value of gold at $20.67 an ounce, a rate that would hold for nearly a century through the California gold field discoveries, the Civil War, the expansion of America meeting its manifest destiny, and to World War I and beyond. The U.S. double eagle $20 gold piece contained $19.999 worth of gold.
To be sure there were spikes, such as when Jay Gould attempted to corner the gold market (1869), but that overall stability came at a price – the monetary system could not expand easily and the government had difficulty assisting the economy. Once, during the Civil War, the government literally ran out of money and had to print paper substitutes.
This innovation, by Treasury Secretary Salmon P. Chase, saved the Union – only to be declared unconstitutional after the emergency was over by newly appointed Chief Justice of the Supreme Court, Salmon P. Chase; yes, the same one.
Starting around 1867, silver discoveries in Nevada began to impact the marketplace and it became impossible for the government to allow unregulated quantities of metal to be converted into coin, for instead of costing a dollar to mint a silver dollar, the cost with metal was more like 67 cents.
By the time that the Coinage Act of 1873 was passed in April of that year, silver had moved to all-time lows and aside from Trade dollars, which contained the heavier 412.5 grains but were not a legal tender. There was no right to coin silver by depositing metal. The Crime of ‘73 all but demonetized silver, an act made complete with the passage of the Gold Standard Act for 1900.
America’s golden era ceased with the Great Depression of 1929 when the U.S. sneezed and the world economy caught pneumonia. Gold reserves started an outflow, and it simply never stopped. By the time of the 1932 presidential election, the Depression worsened and a political switch to the policies of Franklin Delano Roosevelt lay in the wings.
FDR took office March 4, 1933, and shortly thereafter, the New Deal required millions of dollars worth of gold coinage to be turned in by citizens who held them, acting on a government mandate and under a Presidential Proclamation requiring it.
Only “rare and unusual gold coin” was exempt – enough to allow coin collectors to maintain and keep a collection, assuming that they would be able to do that during the depths of economic despair of 1934. (The exemption had as much to do with the fact that Treasury Secretary William H. Woodin was an experienced coin collector who fully understood the value of coin rarities).
Executive Order 6102 was signed on April 5, 1933, by FDR. It prohibited the “hoarding” of privately held gold coins and bullion in the United States. The order was given under the auspices of the Trading with the Enemy Act of 1917, as recently amended. The government required holders of significant quantities of gold to sell their gold at the prevailing price of $20.67 per ounce.
Shortly after this forced sale, the price of gold from the Treasury for international transactions was raised to $35 an ounce. The U.S. government thereby devalued the dollars (which it had just forced citizens to accept in exchange for their gold) by 41 percent of its former value. The order specifically exempted “customary use in industry, profession or art”– a provision that covered artists, jewelers, dentists, and electricians, among others. The order further permitted any person to own up to $100 in gold coins (equivalent to about $1,800 as of 2010). Section 9 of the order noted the punishment for failure to comply could include a fine of up to $10,000 or up to 10 years in prison. Nevertheless, anecdotal accounts later related that many persons who possessed large amounts of gold simply ignored the order and hid their gold until the order ceased to be in effect. (This is the section that purports to sweep up the 1933 $20 gold pieces).
Gold was frozen in a $35 an ounce realm as the United States slowly pulled out of the Great Depression while simultaneously accumulating a huge supply of the world’s gold. Americans could freely collect coins (“rare and unusual”) but could not own bullion. As a result, the coins developed a premium market all their own.
Americans lost the ability to own gold privately in 1933. Those limitations, however, as well as those of the Gold Reserve Act of 1934 and various executive orders issued pursuant to the Trading with the Enemy Act of 1917, still allowed ownership of gold abroad (subject to their regulation by the country of residence).
It took a separate executive order in the Kennedy administration to prohibit Americans from owning gold abroad ( Executive Order No. 11037, July 20, 1962, by President John F. Kennedy, which prohibits Americans from owning gold outside the continental limits of the United States).
Once the 1933-34 recall was completed, the government re-valued gold to $35 an ounce – effectively devaluing the dollar by about 60 percent. No wonder that the government recalled the old; anyone retaining it got an instant benefit that was meant for the nation as a whole.
From 1933 until Dec.31, 1974, Americans had no ability to own gold other than as numismatic gold coins that sold substantially above the price of bullion. A $20 gold piece, for example, with $33.86 (official price) worth of gold, routinely sold for about $48 to $49 from dealers and the Bank of Nova Scotia, which made a regularly quoted market in the early 1960s.
These were for common-date, typically uncirculated Saints or Liberty heads. The “numismatic premium” was really a penalty for an inability to own gold except in numismatic coin form.
Government officials constantly warned that private gold ownership was only one step away from economic democracy and disaster. They took themselves and their pronouncements seriously, and indeed, rumors could cause gold’s price to spike 50 cents or a dollar. That sounds minuscule, but in those same days, if the Dow Jones average rose or fell 10 points, it made the headlines of many newspapers, not just a small article in the financial section.
Starting in the early 1970s, a group of “gold bugs” began to advocate private gold ownership rights and eventually they found the ear of some congressmen and senators who bought into their fairness theory and the claimed illegality of the gold seizures and recalls of the 1930s.
In a truly bizzare episode, they tacked a resolution allowing for private gold ownership onto the foreign aid package that the Nixon Administration wanted. Presidential vetoes were threatened and an alarmist attitude prevailed at the main Treasury building.
Into the middle of this stepped Mint Director Mary T. Brooks. In office since 1970, in 1973 she was promoting bicentennial coinage. I had an interview with her in which I asked her about the possibility of a gold commemorative coin for the bicentennial, and she was quite positive about it. That was real news.
A couple of hours later, I got a call from her key aide, Roy C. Cahoon, interdicting the entire conversation – unless I was willing to drop the gold coin remark. I did and the Republic was safe. But Mrs. Brooks made the same comment weeks later to Russ Rulau, a competitor, then editor of Numismatic Scrapbook, and he printed it. The Republic was still safe and, for me, a valuable lesson learned; the government didn’t always know what was best.
The foreign aid bill with its non-germane gold ownership clause finally made it to a vote in which truly conservative members such as Rep. Phil Crane, R-Ill., and others voted with liberal Democrats. Crane said to me later it was the only foreign aid bill that he voted for in his long congressional career. His rationale was that it was more important to get private gold ownership than argue the vagarities of a single year’s foreign aid package.
Flash forward a couple of years when Congress began the debate over whether the U.S. should compete with the Krugerrand. Treasury fought it mightily. Hearings were held in the Senate Banking Committee, and some real heavyweights came out to make out the case of why the U.S. government shouldn’t be in the bullion business.
C. Fred Bergsten, a respected international economist and then assistant secretary of the Treasury, testified instead of Secretary W. Michael Blumenthal. He declared, “The [Carter] Administration believes that issuance of gold medallions would be unwise and inappropriate for several reasons,” which he enumerated.
First, he said, “the issuance of these medallions would tend to create the erroneous impression that the U.S. government needs to supply the public with an officially issued gold piece as a hedge against inflation.”
Second, “the production and sale of an American medallion ... could be interpreted as a U.S. government effort to encourage investment in gold. “
Third, issuance of gold medallions “would be inconsistent with U.S. policy of continuing progress toward demonetizing gold.”
He postulated that, horror of horrors, a legal tender version of the medallions might follow – or that the medallions themselves would be monetized.
Dr. Edward M. Bernstein, a respected economist who formerly was a high Treasury Department official, active with the International Monetary Fund, and the Bretton Woods agreements, also spoke out on economic and policy grounds.
An apologist for the official, long-held view that gold ownership should not be allowed privately, and that the metal should be demonetized, Bernstein’s positional history carried a lot of Congressional weight. He was professor of economics at the University of North Carolina, 1935-1940; principal economist for the United States Treasury Department, 1940-1946; assistant to the secretary of the United States Treasury Department, 1946; research director of the International Monetary Fund, 1944-1958; President of EBB (Ltd.) Research Economists, 1958-1981; and guest scholar at the Brookings Institution beginning in 1982.
His advice, on the day that gold topped $198 an ounce in London: “it’s a terrible mistake to offer Americans this extra inducement to buy gold coins.”
His rationale: “It is really not right for the government of the United States to offer an inducement to people to buy gold coins by giving them a nice looking medallion for which they would have to pay 12 percent above the bullion value.” Put differently, “it’s not a good hedge.”
Standing up for the right to own gold and for the medallions was President of the American Numismatic Association Grover C . Criswell Jr. I accompanied him, and wrote his written testimony, in my capacity as ANA legislative counsel.
Criswell’s summary of five reasons why gold medallions were appropriate (it being obvious that Congress was at least several years away from authorizing gold coins): (1) it helps the balance of payments; (2) it provides clear domestic economic beneficial effects from the sale; (3) it denies $600 million in assistance to South Africa; (4) it returns gold to the people who gave it to the government in the first place – the American people; and (5) it raises more money than the government’s auction plans for gold bricks in $80,000 units and above.
As it turned out, Criswell was right. The medallions became collectibles in their own right. Bergsten and Bernstein were right, too. Placing the name and seal of the United States on them gave the medallions an imprimatur around the world. Though many were melted, they are still around today as a popular if short-lived series. Their stats are as follows:
Bernstein contended that “gold is gold. A person who buys a Krugerrand has just the same gold... My objection to the medallion is not that we are selling the gold but that we are putting the symbol of the United States on it which will make it more attractive.” As future events would show, gold is not gold – and U.S. legal tender gold coinage consistently sells for more than the South African counterpart or private bars or medals. (But that doesn’t mean that they are not collected; just that there is a differentiation in value that, perhaps you can use to your advantage).
From August 1978 until January 2010, gold has gone up, down and sideways (see chart page 111), parking temporarily at over $1,100 an ounce. But those who would have bought bullion issued from 1980 to 1984, didn’t do that badly.
The return on investment in gold from 1978 to 2009 is about 3.93 percent compounded annually. It barely outpaced inflation, which averaged 3.3 percent during the same period. The rare coin fund index that Salomon Brothers used to compare measurements – which I extended from 1978-90 to 2010, shows rare coins advanced 8.5 percent during the same period.
Putting this all in some kind of perspective, the last 40 years of private gold ownership has been a bit of a roller coaster ride. But with the ups sand the downs, gold has remained an asset of historic importance and one which is likely to be looked at, collected, and utilized for quite some time to come.
Excerpted from “Rare Coin Investing” by David L. Ganz, published by Krause Publications. Copyright 2010
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