Did you ever wonder how America elevated itself and the world out of the Great Depression?
In 1929 America (and by association the world) fell into a huge economic depression. This occurred because debt levels became so high that the individuals and organizations within society could not afford to effectively repay what they owe and in addition the interest.
Think about it: if you owe so much money that you are unable to repay it out of your earnings you may need to sell some of your assets to obtain the cash required. What about when a lot of people all at once owe a lot of money? When people start to sell their assets on a macro scale this means that the prices of these assets would tank. I.e. if everyone tried to sell their house/stocks/gold at once imagine how much they would go down in value?
Whilst the value of these assets depreciate more and more need to be sold in order to cover debt repayments and hence this process becomes a runaway train. This means that the stock market crashes and everyone becomes poorer and poorer. This is known as a DEFLATIONARY SPIRAL.
Now, how does one make the price of something go up? Well the laws of supply and demand state that normally when there is competition to purchase something the price goes up. In order to purchase something someone must have CASH.
But what happens when no one has any cash? Then it must be created.
The issue was that around this time the value of the dollar was pegged to gold. For every ounce of gold in the reserves of the central bank $20.67 could be created. Cash could not be created arbitrarily as it can now ONLY when enough gold was possessed for it to be issued against.
America’s Central Bank, The Federal Reserve (the FED) needed cash and in order to obtain it GOLD was required. It was down to The President, Franklin D. Roosevelt (FDR) to solve this.
As part of FDR’s New Deal to fix the economy he issued a proclamation. He made it ILLEGAL for American citizens to hold gold privately. To legitimize this he cited concerns against hoarding. He ordered that every American citizen in possession of gold was to sell it to the American Government at market price ($20.67). The authorities in America thus began the process of forcibly ensuring people sold their gold to the government.
Now, here’s the kicker: Once the American government had obtained a great deal of gold from this policy…. They changed the rules! The government then proclaimed that gold was now worth $35 an oz.
This meant the government in effect DOUBLED their money by simply changing the rules to suit their needs.
Of course they then injected the money into the economy which meant that asset prices began to rise. People all of a sudden had wealth once more and were able to manage their debts. This eventually lifted America out of the great depression!
Did the end justify the means? People have debated this to this very day.
Certainly the one thing we can agree on is that it set a worrying precedent as to what lengths a government will go to in order to survive. Are our assets truly safe? This article is by no means intended to scare – only to make you think. It’s truly mind-blowing that this happened within living memory.
Interestingly, avoiding this possibility is part of the philosophy behind crypto. This makes it an interesting proposition as part of a balanced portfolio.
*NOT FINANCIAL ADVICE