Gold at $42.22 and "One of the Great Mysteries" | Phillip Magness

In 1933, if you were an American holding gold as money, you were ordered to hand it in with limited exemptions. The price paid was $20.67 an ounce. Less than 10 months later, Congress passed the Gold Reserve Act. The next day, Roosevelt fixed the official price of gold at $35. The Treasury booked a gain of roughly $2.8 billion on the difference. In 1934 money, $2 billion of that went into a new fund built so that the Treasury could operate in the currency markets. That fund still exists today, and just this morning, currency intervention is back in the headlines. The United States has joined Japan in buying the yen, the first American intervention to strengthen the Japanese currency since 1998. So different currency, different crisis, but the same enduring question. How far should a government go to manage what money is worth? And so today, we're following the line from surrendered gold in 1933 to the currency tools governments are still using now. And there's a second number from all of this sitting on the federal books right now, and I'm holding it back until the back half, because when you hear it, you'll think I've misread it. So rather than asking a strategist, let's ask an economic historian, Phil of Magnus, up next. All right. Welcome back. I'm Jeremy Safran. Phil of Magnus is an economic historian and the David Theroux Chair in Political Economy at the Interbennium Institute. Hey, Phil, thanks for joining us over here on Kitco. Absolutely. Happy to be here. I want to kind of start with some context for the audience, because we're going to paint an interesting kind of picture today and bring it back to the current markets. But first, take me back to, you know, April 1933. What was actually required of people? Well, basically, FDR, through executive order, ordered people to surrender private holdings of gold. And this was part of a multiple months of discussion. But when FDR came into office, no one really knew quite what he had settled on as his plan for, you know, answering the Great Depression. And he takes a very interventionist course, and one of those is to break the conventional gold standard that had existed since basically the founding of the Republic. This is the notion that coinage, it's written in the Constitution, is set by Congress, and Congress did so with precious metals, gold being the dominant among them. And then FDR, by a stroke of a pen, he basically says, well, gold no longer has its monetary value and no longer is the officially recognized unit of exchange. Instead, we are switching over to Federal Reserve notes. And part of this order was that everyone had to turn in private holdings of gold with some very minor exemptions, I think, for jewelry and numismatic collections and things like that. But otherwise, if you had large holdings of gold, you had to turn it in to the Federal and got bank notes in exchange, all simultaneous to what you mentioned, an effective devaluation of the dollar from about $20 an ounce of gold, they bumped it all the way up to $35 an ounce of gold, just almost overnight. And we've basically been living with that consequence and further devaluations ever since. Yeah, well said. And I got to ask you, I mean, because we talked a little bit about some exemptions there, but what kind of problem was Roosevelt administration trying to solve? And was this presented as a temporary crisis measure or kind of a lasting change in what citizens were permitted to own? It was certainly a crisis measure, let's put it that way, as were many of the things in Roosevelt's early administration. And one of the things you see from studying the economic texts is he entered into office not really knowing what to do, and it was kind of like throwing things at the wall to see what stuck. And one of those is severing the gold linked to the currency. And, you know, ostensibly part of this has to do with the Federal Reserve itself. For many years prior to the depression and into the depression, mismanaged monetary policy. They inadvertently kind of stumbled backward into a contractionary monetary policy, which tightened up credit availability. Then a depression hits, a stock market crisis hits, it spirals out of control through a whole bunch of other bad policy decisions in the Hoover administration. No need to recount every single one of them, but part of it is he continued the course with an excessively tight monetary policy at the Fed. He imposed tariffs on the entire U.S. economy, the Smoot-Hawley Act of 1930, and he put in a contractionary fiscal policy in 1932 with a giant income tax hike. These are just one, two, three steps of how to make a recession into a Great Depression. And that's essentially what arrived on Roosevelt's plate when he defeated Hoover in the 1932 election. So he gets into office really not knowing what to do to disentangle this mess, and is listening to all sorts of advisors that are coming up with schemes ranging from sensible to very crazy. And he migrates between several of them, one of which he settles upon as very suddenly to break the gold standard. And the idea here is he wanted to free up credit, but it also unchained the U.S. federal government from a gold-backed dollar that also allows you to effectively revalue the dollar to engage in kind of a backdoor inflationary scheme and use that to sustain all sorts of government spending, which becomes the next major priority of the Roosevelt administration for the rest of his term in office. It's experimenting with all these government social programs, new things like Social Security, price controls, all sorts of measures to intervene into the economy. And it's a lot easier to do that when you aren't bound to the gold standard, when you actually have some policy tools that you can use to manipulate the value of money itself. Now, Phil, I want to talk a little bit about those policy rules. Before we do, I mean, one detail I kind of want to draw out, going back to that 33, is because it matters to this audience, is kind of the order covered, as you mentioned, coins and bars, also covered gold certificates, paper claims on gold. I mean, was there any kind of practical difference on how these two were treated? I'm just wondering if there was anything on the record to kind of say anything useful about holding the metal itself versus holding a claim on it. Right. You know, there were some court challenges to it from people that basically had their assets held. A lot of the asset holdings at that time, you know, they were actually deposited in banks because this is an era when, you know, if you kept large volumes of gold sitting in your house underneath your bed or something, it could be stolen. So they were already inside of financial institutions, and part of the enforcement comes about by the government ordering those financial institutions to hand over the gold and convert the assets. There were probably anecdotal cases of people, you know, pulling their gold out of financial institutions and hoarding it or keeping it. Because if we really go through most of the 20th century, it's not really into the Reagan administration in the 1980s that they effectively formally re-legalized the holding of gold. I guess there were a few intermediate steps that happened after Nixon finally severs the international gold window in the early 1970s. But just over the course of several successive events, the Roosevelt administration basically makes this impractical, and you can face severe legal penalties if you are caught violating it, whether you're a financial institution holding somebody else's gold for them, or you are in the private sector and you're holding onto that gold yourself. And on the re-evaluation, I mean, January 1934, the Gold Reserve Act, the official price goes from $20.67 to $35. I mean, you know, obviously the Treasury recorded a revaluation gain of roughly $2.8 billion. Where did that gain come from, if the government hadn't mined or sold any additional gold? Right, right. Well, you know, so first off, anytime you engage in this type of behavior, it's going to be inflationary. So you're eroding the value of the dollar. One event that's not talked about as much, but I think is also important to remember, is Europe is starting to fall to pieces politically in this whole era. The Nazi government that's come into power in Germany, and really one of the things that kind of obscures the U.S.'s position of why they're able to get away with all of this, as many of the European powers, as the rise of Nazism is occurring, they actually start, there's a capital transfer across the Atlantic that takes place. Gold holdings, both official and unofficial, gold holdings in private and public institutions from Europe, make their way into the United States as a safe storage place. There are several European governments in exile that put their gold reserves into Fort Knox during World War II, after Hitler has basically invaded. But what this does, it actually has economic effects on the United States. It creates a buffer of an influx of this precious metal into the United States' official reserve holdings, as well as holdings of gold for other countries, and this kind of buffers the credit position of the United States as an international player, as a government. All of this stuff is happening in the domestic market that is basically setting the stage for price erosion. And then this all comes to a head at the very tail end of World War II. The Western Allied powers convene a meeting in Bretton Woods, New Hampshire in 1944, and it's basically the question, what does the economic system of the world look like after we've won the war, after we're back to peacetime? And they're concerned with several issues, one of which is monetary exchanges, another is international trade, and of course these things are intimately interrelated. And early on, some of the discussion said, well, should we try to get back onto an international gold standard? Should we right the ship? So this is the one moment when they possibly could have done something to bring back the pre-Depression mechanisms that existed with a gold-backed dollar and other gold-backed currencies abroad. But instead they settle on a fixed exchange rate system where the United States still has a dollar that's formally anchored to gold, that $35 an ounce exchange window, but the only people that can exercise that actual exchange are foreign governments, foreign central banks. In other words, if you're Belgium or you're the Netherlands or you're the UK, you're part of the Bretton Woods system and you can exchange your holdings in U.S. dollars with the United States for gold at that $35 an ounce, but you're also expected as part of the Bretton Woods system to maintain your currency at a pegged level to the U.S. dollar for international stability and trade purposes and all sorts of things. And that's where all these mechanisms come up of exchanges in official reserves between central banks under the Bretton Woods system to prop up or alter or change the value of each other's currencies in relation to each other to all maintain that target. You know, you bring up a good point because, I mean, 100 ounces handed in during that summer of 33 brought, what, about $2,000. By the following January, then all of a sudden that same 100 ounces was 3,500. I mean, so we could put it in this way. The official gold price rose roughly 69 percent measured against gold. The dollar's value officially fell roughly 41 percent, right? I mean, there- You see, it's precipitous. From that moment, 1934 onward, you start seeing an erosion of the value of the dollar. That's taken place across the entire 20th century and accelerates into the 21st century. You know, 1971 is probably our next big milestone date, and that's when Nixon severs that international gold window under the Bretton Woods system. And what's interesting here, it was designed to relieve pressure on U.S. gold reserves from international exchange maneuvers that were being taken by foreign central banks. In other words, foreign central banks were holding their dollars that they had received basically from the spending extravaganza that the United States government starts to go into in the 1960s in particular. So there are all sorts of foreign dollar holdings abroad. They start redeeming them for gold. This puts pressure, an actual depletion pressure, on the holdings of the United States government's official reserves. So that's eroding the value back behind the scenes, even though it's still fixed at $35 an ounce. Well, what does Nixon do? He severs that link, but then he revalues the dollar versus gold just through another executive decree that comes in the immediate wake of the 1971 Nixon shock. So now suddenly gold jumps up. It's, I think it was $43 an ounce, effectively, where they settled that. And all these other foreign countries that were part of the Bretton Woods system, they said, wait a minute, you're changing the deal on us now. It's no longer $35 an ounce. You've revalued gold's relationship to the dollar by weakening the dollar. And then the whole system collapses in the aftermath. So, I mean, we're going to talk about that, that kind of old idea sitting underneath of all of this. And it kind of goes in some way to explaining why gold had that hold on governments. I mean, for centuries, obviously, that one kind of powerful school of economic thought treated selling more abroad than a country bought. Stockpiling evidence of kind of national strength, as you know. But mercantilists, you know, they weren't irrational. I mean, gold was liquid. It was accepted across borders and it could finance imports in war. So where did they cross the line from recognizing gold as a powerful reserve asset to confusing it with wealth itself? Right. So this really comes about almost by accident after the discovery of the new world. You know, as you mentioned, gold is a very valuable medium because you can take it almost anywhere in the world. And as long as you know the weight of it, you roughly know the value of it. This is why back to antiquity, you know, they stamp pieces of gold when they put a stamp across it. That's saying this contains X number of ounces or whatever unit they happen to be doing. And it doesn't matter where in the world you have that in your pocket. The weight is basically the same. And as long as it's recognized in exchange, it facilitates trade. So, yeah, there's a great asset there in it. But what countries start to discover after Columbus and the discovery of the new world, so there's an influx of precious metals from across the Atlantic, from North and South America, South America in particular. The Spanish Empire sets up all these mines in Central and South America. They find gold deposits. They find silver deposits. And the idea here is they want to bring the money back to Spain. They think, aha, well, this will fund wealth and extravagance. And it does. It's a huge influx of wealth. But they didn't realize quite exactly what was going on. If you suddenly have a bunch of precious metals showing up on ships, on treasure galleons from across the ocean, and it enters into your economy. But you also have laws in place that are designed to prop up holdings of gold. It means you can't spend that money abroad. Well, what does it do internal to that economy? It starts to inflate the currency. It starts to devalue the gold itself. You're basically engaged in manipulation and holding. And over the course of several decades, they start to discover this alters what used to be very stable practices of lending, now what we would call interest rates, suddenly have change incorporated into them. Because you don't know if you're going to have an influx of currency in precious metal that you can no longer spend abroad because mercantilist policies prohibit it. And one of the great insights, this comes from David Hume and Adam Smith, is break down those barriers to the use of precious metal outside of your borders. This resumes the old antiquity practice of using gold to facilitate trade. Yeah, so you basically got to it there. So a country can receive enormous quantities of the asset everyone recognizes as money without necessarily becoming more productive or more prosperous. Yeah, it's like Scrooge McDuck in the giant vault full of gold coins. But if you can't use it for anything, what's the purpose here? You're kind of mistaking the physical holding of the instrument itself for what is its economic utility. The economic utility is it's accepted as a widely available medium of exchange and trade abroad. It's accepted as a means to pay for things. And if you are not engaging in commerce, commerce being mutually beneficial, you're missing the whole picture. You're just hoarding the gold in a vault, and it may be pretty to look at. It may signify wealth externally. But if you can't use it for anything, what's the purpose there? Now, a quick one for those watching here. I mean, does gold have value because of what it is or because of what we keep agreeing that it does? I mean, be sure to tell me in the comments. And listen, I mean, Phil, I promised a number here. I mean, the United States government holds about 261.5 million ounces of gold, somewhere around 8,100 tons. And on the federal books that gold carried at 42.22 an ounce, an accounting price fixed in the lie, I think 1973. So, you know, the government's own accounts put all of America's gold at about 11 billion. At the current market price, it's north of a trillion. Why is it still carried at 42.22? And what is the purpose that accounting treatment serves? Yeah, this is one of the great mysteries that comes out of the Nixon era. It's really another hodgepodge of policies. So Nixon severs the gold link. This is August of 1971 with the shock. But he's still trying to reconstitute and preserve this fixed exchange rate system under Bretton Woods. So he needed a new number to put on the books. And that's effectively what happened. So he signed a couple of international agreements. There was a successor to the Nixon shock called the Smithsonian Accord. And it brought the Western European powers into an agreement that, yes, they'd maintain their exchange rates with the dollar at this new, almost $43 an ounce, revalued accounting statement of gold. But they also discovered that the United States, even under this new situation, was effectively printing money through the Federal Reserve System to pay off, you know, growing deficits, budgetary pressures, all sorts of things like that, back door inflation, effectively, by printing money. Well, what does this do? It maintains a strain on the official accounting number that's on paper of the value of gold versus the dollar. And the answer to that, that basically they stumble backward into, is to complete severance of that link. And part of it comes about. So the European powers start to call Nixon's bluff. They say we're no longer going to participate in this fixed exchange rate system that you're essentially manipulating behind the scenes and aren't even allowing us to exchange dollars for gold at anymore because you closed the window. So it's in around February and March of 1973, the European powers start to balk and they draw out of the Smithsonian Agreement. So there's a period of monetary chaos. It really isn't settled until 1976. There's a formal accord through the International Monetary Fund where they effectively suspend the obligations of the old Bretton Woods system and allow instead currencies to float against each other on the open market. And that's effectively what we've had ever since. The idea here being that the individual central bank decisions of each country affect how much currency it issues into circulation, what type of open market operations it engages with. Whatever that happens to be, that particular currency unit nonetheless floats on an international exchange relative to all other currency units and suddenly starts becoming kind of like its own price onto itself through competitive pressures of a marketplace. And that's what we've been operating under ever since. But as you mentioned, there are still these old relics from the Bretton Woods system back in 1944 of official reserve holdings of the U.S. Central Bank, the Federal Reserve, a foreign country central bank. They hold other countries' currencies and then that's where you start to see actions like what happened this morning with the Japanese yen. Yeah, yeah, good point. They helped capitalize that exchange stabilization fund, as you talked about, and those other kind of monetary missions that they kind of wanted to do. Because there's that question I think everyone watching kind of actually wants answered. I mean, in 1934, the government repriced its gold to $35, but private Americans had already been required to hand theirs over for $20.67. I mean, they didn't get the gay and the government did. And that's exactly it. It's always the private sector that gets... That's what I was going to ask. ...the bad end of it. I mean, if they reprice the gold, is the private... Obviously, it's that person. Or is there a version where the person holding coins participates at all? Not really. But you did start to see... You know, people got really innovative when private gold holdings effectively banned in the United States. They did figure out ways where you could invest internationally in gold in other countries that allowed it. So a lot of people start moving assets to Switzerland, for example, back then. Or countries that are gold mining producing, especially like South African stuff. Substantial gold is being drawn under the ground. Western Australia. There are places around the world where gold is still being produced. And though you couldn't legally own it in the United States, you could legally own it abroad in other countries. And, you know, some of the economic activities that occur on there, if you planned your investments wisely in the 1960s and especially the early 1970s, when the official U.S. policy is rapidly changing, they're further devaluing the dollar, and then eventually severing the link entirely. A wise investor, someone who read the gold market and then noticed what was afoot in the U.S. government and moved some of their assets into physical gold holdings, you know, they made bank on that relative to the dollar. Hey, if the U.S., say, replaced that $42.22 with today's market price on the government's books, would the important effect come from the accounting change itself or from what markets inferred about the dollar in the future policy? Yeah, I mean, it's almost entirely in the market side because the accounting figure is just a number on paper. And you cannot confuse markets through accounting gimmicks. That's the real issue here. You know, if you put a fixed number on paper, but the market is actually valuing this at something very differently than the fixed number, as soon as the market is allowed to operate, you know, the price will change. It'll move toward that market valuation. But this is also one of the reasons why politicians, you know, today despise the gold standard is it puts an external check on what can be done on the accounting side to manipulate it, to, you know, valuations of currency. In other words, if we moved back onto the gold standard, we'd have a revaluation of the dollar against it to actually reflect, you know, what's going on in international markets right now and gold availability. So yes, that would absolutely occur. But what it does is it also puts a constraint on what the Federal Reserve can do in taking on debt, on issuing new currency and printing money effectively. So Fed and Treasury operations become disrupted entirely by the hard constraint of the precious metal that's in the ground. Yeah, yeah. You know, obviously, I think, you know, Congress is still examining at least this mechanism. I mean, a House bill introduced in May directs Treasury and Commerce to study whether additional Bitcoin could be acquired about new taxes, new borrowing, new deficit spending. I mean, one of the options it specifically names is revaluing the gold certificates held by the Federal Reserve Banks. It does not authorize the re-evaluation, but it does order kind of a study of the idea. I mean, historically, why does re-evaluation keep returning whenever governments want additional financial room without explicitly kind of raising taxes or issuing more debt? This comes out of a sector of economics we refer to as public choice theory. That's the analysis of what governments do in the economic environment, what incentives they respond to. And of course, you know, government's big problem that it always has is how does it fund itself? How does it fund all the things that it wants to do? Every government faces a need for revenue. And there are politicians that have more ideas on what to spend than there is money that's being taken in for regular tax mechanisms. But the other constraint there is taxes are extremely unpopular. A great way to get yourself defeated in the next election is to raise taxes because the public revolts against that with good reason. They don't like their paychecks being taken and appropriated to government policies that they're often not in support of, not in approval of. So one way to work around this though is currency manipulation, is to take on massive amounts of debt, in which, you know, there's another thing we've seen since the 1930s to the present day that I think there are absolutely related. We're right on the verge of $40 trillion is the U.S. national debt. And this is a grown succession of a century or more of bad financial decisions by the federal government outspending what it brings in in tax revenue. And one of the mechanisms to eventually in the long run service that debt comes from the erosion of the value of the dollar itself. And unconstrained by any gold standard, it's a lot easier to do that. There are new political mechanisms that are available to politicians to engage in profligate spending without directly taxing the public by taking on debt that is now unchained from any monetary standard. You know, in 1933 though, I mean, because you were just talking about this a little bit, how much public warning was there? Was there signals that in hindsight, you know, or with hindsight were the tell? That's the great thing, you know, the FDR really played his cards closely on what he was trying to do there. You know, we have a little bit of historic webinars from some of the, there are diarists and members of the administration that wrote about his decision. And he actually sends some mixed signals and multiple directions on what he intended to do right down to the very end. And you get this very sudden order that comes out that's his decision. And then you also get the force of the federal government indicating that they're going to go full-fledged ahead. Again, done by executive order, it's not until 1934 that you actually get some semblance of congressional ratification. And then the Supreme Court kind of retroactively approves some of the actions that FDR had taken. I believe that was in 1936 thereabouts when that case was finally handed down. But the gist of it is it was a very sudden surprise shock. I think people knew that it was in the ether. They knew that there were some considerations about it. They had seen some European powers had already severed their link between their currency and gold. So it was certainly on the table. But when FDR made the decision, it's an executive order. Well, that's what I was gonna say because, I mean, obviously you spent a career testing narratives that don't survive contact with the record, but a lot of people hold physical metal precisely because they believe institutions can change the rules when it suits them, right? It's their evidence. It's not a theory. It happened. What legal kind of monetary and political conditions made 1933 possible that still exist today? So it was a time of crisis, a time of emergency. And we know, I mean, the Constitution of the United States is very clear that Congress has the coinage power. It's unambiguous in there. And yet they used the emergency of the Great Depression as basically a way to invent presidential powers around the margins effectively. You claim an economic crisis. You need bold action to address that crisis. There were all sorts of liquidity issues working through the private sector and FDR's like, well, I need to actually kind of suspend the rules, the conventional rules in this time of emergency to do what I need to do to get us out of the emergency. Now, the question is, does it actually succeed in getting them out of the emergency? Probably not. FDR prolongs the Great Depression in all likelihood based on the best economic evidence that we have. And very few of the policies he was attempting in that time succeeded at what they were doing. Again, they're masked at absolute best by an influx of precious metals being moved across the Atlantic from Europe when it's facing its own crisis. That's the best case scenario of what's going on here. The worst case scenario is it's actually obscuring some very malicious and intentional policy decisions aimed to facilitate the federal government taking on greater amounts of debt. Yeah, there's a question that this audience asks constantly, and I'd rather put it to a historian than let it sit in the comments. So, I mean, when was the gold last independently audited? And what does a historical kind of record say about how often governments actually have to verify this? Yeah, and I actually don't know the exact final last date of an audit, other than there has not been one in a long time. There was some talk, especially in the early 2010s, right after the financial crisis, some bills in Congress that suggested and tried to nudge the administration into doing an actual audit of what exists in Fort Knox. You know, Senator Rand Paul from Kentucky was a major champion of this, as was his father, Ron Paul, when he was in Congress a decade earlier. They were always going, audit the Federal Reserve, audit Fort Knox, see what we actually hold to see if it's still there. And although I'm not going to buy into conspiracy theories that it's been secretly moved to some other vault or sold off or something over the years, the fact that there's intense political resistance to this, I think is symptomatic of a bigger problem, and that is that the Federal Reserve knows that its books are full of accounting trickery, knows that it's exceeded its legislative mandate in terms of original powers and has engaged in all sorts of market manipulation. And any type of audit would reveal some of the, it's like peeking behind the curtains and you see some really fishy tricks that we didn't really understand or know that our Federal Reserve was doing because it has invented powers for itself over the arc of its history. This is another thing with central banks. So they did this during the 1930s. You know, even though they are part of the reason we fall into the Great Depression in 1929, in the 1930s, the Federal Reserve uses their own self-created emergency to expand their power. They do that again in the 1970s after Nixon severs the gold window. They do it again during the financial crisis in 2008, 2009, taking on new tools that are supposedly designed to help weather a crisis that they in part created. And you know, whatever happens after every time of these crises, it's like a one-way ratchet. The new power claimed by the Federal Reserve never goes away, and they still retain it a decade later and are still engaging in tools that were invented in 2009 as temporary emergency measures. They're now a permanent feature of how the Federal Reserve maintains its balance sheet. Right. And so, I mean, we could talk about central reserve or central bank purchases right now. I mean, they came back to about 289 tons last quarter, up about 62% on a year earlier in a record for a second quarter, according to the World Gold Council. But the first half, I guess, were a little bit weak. But I guess my question is, you know, structural return to gold, or is that ordinary reserve diversification or something in between? Yeah, I mean, I think it's always open on the table as a concept described before. And I was talking with some economist friends about this the other day. Like, is it practical that we could ever get back to a gold standard? And I never want to rule that out. Unfortunately, I think what we have is history shows that there's a lot of political opposition to it because a gold standard would enforce some very hard constraints on central banking that central bankers just do not like, and politicians just do not like, because that takes away another of their tools to engage in propagate spending. Yeah. Hey, bigger frame here, Phil, while I have you. Because it's a question underneath a lot of, you know, why people own this metal. I mean, historically, when a currency has lost its reverse reserve status, how has that actually happened? I mean, is it sudden? Is it over decades? What did holders of hard assets experience while it was happening? Absolutely. You know, we have multiple historical examples. And we've talked about what happens with the Roosevelt administration. We talked about in 1971, after Nixon severs the final steps of the gold window, well, you actually start to see the privately held asset, you see gold itself, its value becomes very strong vis-a-vis a diminishing dollar. This is something that we've noticed all the way back to antiquity. Whenever there are accounting gimmicks or games or attempts to revalue a currency and do so in such a way that maintains a certain face value while diminishing the precious metal content, there are multiple instances of this in like the Roman Empire, where they started stripping the content of precious metals out of their coinage and replace it with something cheaper, like copper or something in there in the mixture. And well, what happens? Well, people start holding the old coins and then the new coins are basically trash. They take the old coins out of circulation because they have a stronger precious metal content on that. And this is the type of pattern that we see every time the private sector expects the government to pull an accounting gimmick with its currency value. What does that do? It means that people hold onto the safer asset. In other words, this is just a roundabout way of saying that the private sector, individual participants in it, are often wiser than the central bank and the politicians that are trying to pull the wool over their eyes. Now, I know you brought up copper there just briefly, but I was reading the news this morning, obviously going through this, and I wanted to bring up kind of that impulse into the present because today's strategic asset seems like it isn't necessarily gold. More than 1 million tons of copper is accumulated in the United States. Roughly 200,000 tons arrived in a single month, the largest inflow on record. Copper now sits underneath, obviously, power grids, defense, data centers, as we've talked about. My ask to you as a historian is, is this a modern version of the mercantilist instinct? Believing national strength depends on controlling the physical material, or is it just simply rational preparation for future demand? I think there's a little bit of an element of both because we have certainly seen in our trading pattern a move back to mercantilist policy. And that's what President Trump's tariff agenda has been the most overt face of that. We've seen very aggressive attempts to put in protectionist policies around the US economy. And quite a few of those do resemble like 16th and 17th century mercantilism because simultaneous to capital controls that are occurring over precious metal, there were also trade controls attempting to direct the course of exchange in physical goods and products. In other words, they were trying to maintain a positive trade balance of more goods being exported from a country than are being brought in. And this is, of course, it's an old zero-sum game economic fallacy because when trade occurs, it's always a two-way street. Something else is given in return, whether that's money or other traded goods. Trade crosses in both directions, otherwise it would not occur. But the mercantilist thinks that, well, if we can direct the course of money vis-a-vis our own exports in an advantageous position, then we've strengthened our economy. So the Trump tariff agenda in particular has all been premised on this claim that we have a trade deficit and we want to reverse that, switch it over into a trade surplus. And they've been trying on this, but we've been under tariffs for about a year. And guess what? We still have a trade deficit. So the policy is not even attaining what it purports to do if even that was a desirable outcome, which I argue it probably is not. But nonetheless, you have a return to mercantile trade mechanisms hand-in-hand with a severed dollar. We go back historically, this occurred in 1971 when President Nixon closed the gold window. He simultaneously, what did he do? He put in a tariff agenda. He put in a temporary tariff that was supposed to buffer the world economy from the shock that was expected of him closing the gold window. President Trump has revived that exact clause, section 122, for a temporary tariff measure after the Supreme Court struck down his last wave of an agenda. And that's been what we've been living under with up until earlier this month, effectively. So, I mean, historically, you can look at this for me. I mean, when countries kind of concentrate strategic commodities like this, does it create resilience or usually produce distortions? Or shortages somewhere else? It's almost always some sort of distortion that occurs because, you know, markets are hard to deceive. People understand where there are legal barriers. And yes, that affects the price. It also creates all sorts of market inefficiencies when you put barriers at the border that are either trying to hoard a certain asset or are trying to inhibit the importation of something that's desired. You know, we're seeing this with steel and aluminum right now because those have heavy tariffs against them. And it sent the entire market into haywire domestically in the United States. Well, you know, it's not as if people are sitting there just accepting this as like the new reality. It alters their business decisions. If you have a raw material need for copper or aluminum or steel, and suddenly the market is distorted by policy impediments, well, what do you do? You as a producer, you change your behavior as a company. That might mean that your bottom line is imperiled and you start taking less and less risk in terms of the products you bring to market. It might mean you delay your production processes. It basically puts us under what I would call for the last year or so, a state of tariff and protectionism-induced uncertainty. I think a lot of people in the private sector that are raw material dependent, asset dependent, that are watching all sorts of things that are playing out in the world economy are doing so knowing that it's probably on a timeline intertwined with how the Supreme Court is hearing, ongoing challenges to some of these policies. There's also another timeline to the election this year, the midterms in 2026, and there's a timeline to 2028 before the next administration. And it all comes down to a question, how long do you think some of these policies are going to be in play? And if you think they're only temporary, and there's some reason to believe that the court continues to strike down tariffs, for example, what do you do? You play it safe and you delay your production decisions until you're beyond the horizon of the settlement of that policy for the long term in the future. Now, listen, Phil, I mean, obviously, we've covered a lot of centuries here from Spain's bullion to 1933, and now currency, strategic metals. Let me kind of bring this down to the person watching at home. I mean, a lot of people own physical gold because they believe governments can kind of change the monetary rules when the circumstances demand it. 1933 is still their evidence. Is that a reasonable lesson from history or kind of the wrong lesson here? I think one of the lessons we've seen, gold has been performing very, very well recently. I mean, it's reached levels that even four or five years ago were not considered plausible by anyone unless they were very, very closely watching the market. It had a similar effect in silver, although it's been kind of up and down, but I think it's a realization of similar principles here. At the end of the day, turning to precious metals as a safe asset in times of perceived or very real threats of inflation, the Biden era inflation crisis itself was like a jolt to many people, and that awakening was, well, you turn to safe assets, one of those precious metals. And I still don't think we're completely out of the jolt of that era In other words, the Federal Reserve is still playing a very cautious course because they recognize a risk of inflation creeping back. And the private sector response to that is, well, you also insulate yourself from inflation. No matter what the central bank does, no matter what decisions they make, if they're good or bad decisions, and oftentimes politicians make bad decisions, you can still decide for yourself. And it's kind of taking your own destiny, taking your own economic future into hand means diversifying your assets and taking on holdings of certain things that are historically recognized as safe, as resilient to, as resistant to government manipulation, and one of those is precious metal. Yeah, well said. And finally, just to wrap up a minute, what was that kind of single most important condition that made 1933 action possible? And does that condition still exist today? Yeah, the sense of emergency. Always be wary when politicians are claiming that there's emergencies afoot. We see this throughout history. The economic emergency of the 1930s and the Great Depression, well, it commands action to fix the emergency. Therefore, both the courts and Congress and the general public becomes much more tolerant of a president bending and stretching the letter of the law well beyond maybe its original statutory intent to claim a power by necessity. This often happens in periods of war. It often happens in periods of deep economic turmoil like depressions and recessions. It happens in pandemics with COVID. Notice that 2020 had a huge determinative policy effects on the way that government spent, and that launched us into the 2022-23 inflationary crisis in very pronounced ways. But again, because government engaged in policies that otherwise probably would not have done had there been no pandemic and we've been in times of peace and prosperity. So it's always areas of emergency. And when you start hearing people say, well, we need to bend the rules of capitalism to save capitalism, what that really means is we're bending the rules now to give ourselves a permanent new entrenched power in the future that will allow us to never give up the emergency condition that we claimed. Yeah. Centuries of governments trying to manage what money is worth. It feels like, well, what should somebody kind of holding the physical metal take from that? Well, the more you can insulate yourself from the whims of politicians, the better. And I'm not going to give anyone personally, individually what their financial advice should be. Everyone knows where they are in life and what their retirement age is and what their long-term planning happens to be. But one of the things you can always be aware of is that if politicians can claim a new power, they generally will if they can find the pretext to do so. And some of the things that are insulated from those pretexts are private holdings of precious metal. I don't think we have a risk right now of going back to another like 1933, 1934 period where the president of the United States declares on a whim that he's going to confiscate gold. Fortunately, I think actually some of the aftermath of the statutes that have been put in place are more of a buffer against that because we have codified and re-legalized gold holdings in the United States. But that's an extreme scenario. It's a warning from history that this has been done before. So be on the lookout. Always be wary of a politician who's claiming an emergency power or claiming to do something for your own good because they're often just seeking to entrench and expand their own position in government. Yeah, yeah. They often, they're hard to take back to it, Phil. Exactly. The ratchet only goes one direction. Yeah, Phil of Magnus of the Independent Institute joining us today. Phil, thanks for this. It was an education. Absolutely. And for everyone who's watching, should the United States value its gold at today's market price at $42.22 on the books? Tell us below. I'm Jeremy Safran. Thanks for watching Kitco News. We'll see you next time.