Bail-Outs, Bail-Ins and Confiscations
Article by Jon Clarke and Corey McDowell
As investors continue to stock up on their gold holdings, we have been asked with increasing frequency, about the possibilities of gold confiscation. This is an understandable concern as restrictions on gold have been put in place in the past, although these were not necessarily confiscatory. There are, however, other concerns that can affect a person’s stored wealth.
This article is a work in progress, so do feel free to check back when we add more information onto it!
Confiscation (asset forfeiture) is the seizure of private assets by a government or lawful authority, usually without compensation paid to the asset holder. Remarks such as ‘It has never been illegal to own gold in the UK’ or ‘U.S. President Franklin D. Roosevelt passed legislation outlawing private ownership of gold’ only tell part of the story and only serve to confuse matters.
This is not a question of whether governments banned ownership of gold, but rather what restrictions governments placed on bullion possession by private individuals. It should also be pointed out that individuals who surrendered their gold were compensated in Western countries.
The outbreak of World War I caused a major budget problem as to how the war effort was to be financed. Many people had already converted their bank notes into gold meaning that bank reserves fell by more than half during only a number of days. Subsequently, certain restrictions were placed on gold such as sending it abroad, and companies began using newly issued banknotes, which had replaced the sovereign and half-sovereign, in order to meet workers’ payroll requirements. The British government appealed to the public not to change their notes into gold, saying to do so, would be unpatriotic. Many duly agreed, and this led to the end of the sovereign in general circulation. The gold was therefore removed with no formal restrictions required.
The Exchange Control Act of 1947 intended to stem a possible run on the pound sterling after the British government’s finances, were again, in dire straits after World War II. The act ‘required all United Kingdom residents to offer for sale any gold coins or bullion they owned’. It’s difficult to ascertain whether gold holders would have actually done this or just kept quiet. Further restrictions were enacted in 1966 when limits on gold ownership were introduced except without a collector’s licence. The amendment caused some controversy as some believed that the failure of the government to stabilise the costs of living and reduce inflation had led to the hoarding of gold.
The US had enacted similar restrictions between 1933 and 1975, of which more information can be found here.
Is Gold Confiscation Likely?
It is very easy to hype up this issue. Currently, precious metals only take up a small percentage of investment portfolios (1-2% in some cases according to an industry source), it hardly seems worthwhile for governments to introduce confiscatory rules, let alone enforce them.
Enacting such laws today might prove to be politically and economically toxic, in that it would be an unofficial admission that fiat currencies could be failing. Besides, the practicality of enforcing such laws would be incredibly difficult, and canny investors could just find other items to invest in, such as fine art, gemstones, jewellery and diamonds.
Dealerships, particularly in the United States, have been known to present misleading angles on 'gold confiscation' in order to scare potential investors into paying rip-off prices for gold bullion. Most honest bullion dealers now regard the 1930s episode as an irrelevance to today’s situation. Holding gold bullion was never made illegal in Britain or the United States, and there is nothing to suggest that global elites are planning to enact laws requiring the surrender of all gold bullion; indeed most modern policymakers and investors regard gold as a 'commodity'.
Governments will always find a way to steal wealth from the public, but gold confiscation may be the most difficult as previous 'attempts' haven’t entirely been effective. There are arguably much easier methods for them to use, such as through inflation, bail-outs, bail-ins or taxation. It’s always the same people, same reason, different pocket.
New Methods - The Bail-In
History shows that governments have always had ways of 'confiscating' wealth. Inflation and money creation being the most obvious, and bailing out banks being a close second.
The taxpayer-funded bank bailouts after the 2007-08 financial crisis were not entirely surprising. Government-backed inflation and rock-bottom interest rates incentivised individuals to spend, and as such the avenues for saving became diminished. Today, the economic effects of lockdown are affecting so many and it would not be surprising if another bank bail-out, or even a bank bail-in, was on the cards.
An experiment emerged in the European Sovereign Debt Crisis in the early 2010s. A new strategy was tried in the Cyprus Crisis of 2013, where banks were 'bailed-in'. Essentially, creditor seniority was restructured and bank liabilities were rapidly turned into bank capital. Hence the Cypriot banks were 'bailed-in' - ordinary depositors found out the hard way that their money was locked into these banks and they couldn't access their funds. Through no fault of their own, ordinary Cypriot savers paid with their own wealth for the recapitalisation of these banks, and paid for the mistakes made by others.
Still Worried About Confiscation?
If you are still worried about your bullion being ‘confiscated’, and we have little reason to believe that it would be in future, it would be an idea to keep it out of the banking system and in secure independent storage. The biggest losers of the 1930s restrictions on gold possession in the US were those who held their precious metal bullion in banks. Indeed, in previous eras of restriction private gold holdings may not have been publicly known, and many more individuals could have easily chosen to keep their gold holdings concealed.
Remember that previous restrictions referred to individual possession. A family of five could theoretically have owned 20 gold coins legally in Britain between 1966-71, likewise an American family of five could have owned $500 worth of gold legally after 1933. Exemptions were made for coins ‘having a recognized special value to collectors’, so it would be wise to consider purchasing gold coins over gold bars.
Clever investors may note the jewellery exemption, or the ‘Elizabeth Taylor’ solution. The queen of the silver screen loved flaunting her jewellery, and as a frequent traveller was often seen waltzing through aeroport customs without filling in forms or declaring any assets. Did she have a reason behind this? In many nations, gold jewellery is not classed as a financial asset. Could this be the reason why some sovereigns were mounted on jewellery? Interestingly, most gold possessed by individuals in India, China and Thailand exists in jewellery form.
Gold Is The Best Way To Protect Wealth
Of course, reading through these historical perspectives can raise questions as to why anyone would buy gold. However, when one weighs up all the facts behind the scenes, gold remains the ultimate way to preserve wealth.
The best thing about possessing physical gold bullion is you can hold what you own in your hand, there is no counter-party risk to worry about and you can easily liquidate it. This is backed up by over 4,000 years of history. As John Pierpont Morgan stated before Congress in 1907:
“Money is gold, and nothing else”
Physical gold isn't the only only way of owning the yellow precious metal. Digital gold is a way of purchasing gold online, but without the added hassles of home storage, or additional fees that come with private security and insurance premiums. Other benefits of digital metals include it being available 24 hours a day, 7 days a week so you don’t have to wait until the markets open to make your purchase. This option may suit those who are looking to own precious metals on an offshore basis.
Our interpretation of US Executive Order 6102, signed by Franklin Roosevelt, can be found here.
The British equivalent is the Exchange Control Act.
Have a look at the story of 1933 Gold Double Eagles, possibly the most sought-after rare coin.
You may be interested in reading through our Coin Collecting Guide.
You may be interested in reading through our precious metal and coin news section.
Your can learn more about our vaulted storage here.