Why The U.S. Government Banned Investing In Gold From 1933 Until 1974? And Can This Happen to Bitcoin? (#177 - 12 May 2024)

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This week we’ll look back in time at one of the most significant events in the modern history of money: FDR’s 1933 ban on gold ownership within the United States. 

Can such an event happen again, especially when considering the U.S. national debt problems and macro headwinds? If yes, what would be its impact? And can such a ban take place on Bitcoin?

First, let's look back at how this event took place. 

As families and businesses all over America struggled to climb out of the depths of a rapidly ballooning financial crisis in the wake of the 1929 stock market crash, FDR attempted to increase federal spending to stimulate the economy dramatically.

However, his hands were tied by the Federal Reserve Act of 1913, which mandated that each banknote be backed by 40% of gold held in federal reserves.

So, for every dollar printed, the government would need to hold 40 cents equivalent of gold.

However, foreign and domestic holders of U.S. currency were rapidly losing faith in the U.S. currency and were redeeming dollars at an alarming rate for gold.

To slow the process, FDR declared a "national emergency" and ordered all banks to close over four days in March 1933 to prevent “the export, hoarding, or earmarking of gold or silver coin or bullion or currency.”

The terms of the presidential proclamation specified that “no such banking institution or branch shall pay out, export, earmark, or permit the withdrawal or transfer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any other action which might facilitate the hoarding thereof; nor shall any such banking institution or branch pay out deposits, make loans or discounts, deal in foreign exchange, transfer credits from the United States to any place abroad, or transact any other banking business whatsoever.”

Americans would have no access to banks or banking services for that entire week. They could not withdraw or transfer their money or make deposits.

One month later, an executive order made private gold possession illegal. 

All Americans were required to turn in their gold on or before May 1, 1933, to the Federal Reserve in return for $20.67 of paper money per troy ounce. Violations of this order would be punishable by up to ten years in federal prison and a fine of twice the amount of gold not handed over to the feds.

The order was quickly challenged and made its way to the Supreme Court, where it was upheld...with one notable exception: dentists who could own up to 100 ounces of gold for the purpose of dental procedures!

Interestingly enough, many Great Depression-era photos capturing Americans waiting in long lines at banks were often characterized as people waiting to get their money out. But in many cases, the opposite was true, with people standing in endless lines for hours to hand in their gold possessions.

Ultimately, many argue that outlawing gold ownership was a central pillar that made FDR’s New Deal programs possible. Without the ban, the government would have violated its laws against printing money.

Fast forward to the 1970s, when the U.S. was looking at another crisis in the works.

At the time, foreign governments could trade the dollars they received through international trade back to America for gold at $32 per ounce.

However, with a trade imbalance and a ballooning federal deficit causing gold to drain out of its reserves, President Richard Nixon took the dollar off the Gold Standard, allowing it to float freely against other currencies.

Yet the prohibition against gold continued to stand until 1974.

However, after being swayed by a pro-gold advocate he saw on TV, President Gerald Ford reversed FDR’s executive order and legalized gold ownership.

This piece of history is often discussed in crypto circles, with some commentators mentioning that such a scenario could very well happen again. But could governments ban gold today? Or even ban Bitcoin?

For example, in 2021, former Bridgewater CIO Ray Dalio wrote:

“If history and logic are to be a guide, policymakers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains, so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”

Ray Dalio also mentioned that he believes there is a “good probability” that governments will try to ban Bitcoin.

It’s certainly worth reflecting on whether a government could ban Bitcoin.

In theory, at least, banning Bitcoin could be easier than banning gold.

For instance, unlike gold, which one can physically hide, Bitcoin transactions are traceable, meaning governments could trace it back to their owners using some of the tools available in the market today, along with the quasi-omnipresence of KYC requirements at crypto exchanges.

This is particularly the case when it can be argued that buying Bitcoin in countries like the U.S. is probably easier than buying gold.

In less than 5 minutes, anyone in the U.S. with a credit card can open an account at a crypto exchange or platform and buy Bitcoin. On the other hand, buying gold could be a bit trickier, as it would require someone to open a brokerage account or physically go to a pawn shop or a jewelry store, for example.

Whilst initially it could have been argued that citizens could always have the option to self custody their crypto assets (and thus be able to hide their crypto assets somewhat like hiding a bar of gold under your mattress), the KYC requirements on those wallets, if they are enacted, could also enable governments to trace them.

In addition, many recent regulatory efforts, from the EU to the FATF, have focused on crypto wallets (including self-custody wallets) as well as DeFi and stablecoins.

The reality is that whilst a certain country could decide to ban Bitcoin, the decentralized and digital nature of crypto assets makes it difficult to do so.

For example, whilst crypto trading in China has been banned for a few years now, the reality is that many Chinese users can simply buy and sell crypto peer-to-peer. A lot of crypto trading also takes place on crypto platforms offshore or simply on permissionless DeFi platforms.

In addition, unlike in the 1930s, the world is much more globalized and interconnected today. Even if a large economy like the United States banned Bitcoin, users would have many options to find other venues in other jurisdictions where they could interact with digital assets.

It could be argued that due to these practical difficulties, governments may try instead to tax the asset rather than outright ban it.

As a matter of fact, and as we have covered in previous issues of this newsletter, every American is now asked on their annual tax return whether they have made any crypto investments.

And countries are getting better at taxing Bitcoin and other crypto assets.

For example, a recent survey showed that an increasing number of countries are coming up with tax guidance on crypto.

Many today are not aware that the U.S. government banned gold in the past century. This is a topic worth reflecting on as we think about the future of money and the potential benefits that a decentralized digital asset like Bitcoin provides.

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*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only, and none of its content should be construed as investment or financial advice of any kind. 

Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies. 

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times. 

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules™ social media video series as well as The Future of Money podcast and newsletter.