For centuries, London has been the gold trading capital of the world, with the roots of its hegemonic status dating back to 1300 when the Goldsmiths’ Company was formed, whose purpose was to establish and support trading standards by testing the quality of gold and silver.

Another milestone came in 1671 when gold merchant Moses Mocatta moved from Amsterdam to London and founded what would become the world’s largest metals trading business.

In 1732, the Bank of England opened its Bullion Warehouse vault, leading it to become a hub of European gold trading.

There were many other fascinating historical turns that have granted London this special place in history.

Given London’s eminent status in this regard, it’s all the more surprising that in the late 1960s the government moved to restrict citizens from freely buying, selling, and owning gold.

Because gold is traditionally prized as a refuge from government devaluation of currency, this move can rightly be seen as ‘blocking the exits’ as the pound lost value.

In October 1979, the government of Prime Minister Margaret Thatcher abolished exchange controls. British citizens were free once again to buy and sell gold as they saw fit. This move led to many innovations in ways to buy and sell gold, whether from dealers or from the stock market itself.

Before we revisit the drama of the Gold Coins Order and Thatcher’s victory over exchange controls, it’s helpful to briefly consider why gold is valued and to reflect on recent market events.

Gold as a Safe Haven Asset

For thousands of years, in times of political turmoil and economic uncertainty, investors have sought refuge in gold in order to preserve their wealth.

Gold tends to track with inflation. We experience inflation as a rise in prices, but it’s actually an indicator of the declining value of the fiat currency that we own.

We can see this dynamic today as investors flee to gold in the wake of the coronavirus. This spring, markets plunged as the coronavirus advanced across the world. Governments began ‘printing’ trillions in bailouts and stimulus.

Investors who expect this vast money-printing to debase the currency are seeking shelter in gold.

Consider:

• Private banks controlling some $6 trillion in assets are advising their wealthy clients to put 5-10% of their portfolios into gold, according to Reuters.
• Some well-known hedge fund founders, such as Paul Singer, Crispin Odey, and David Einhorn, are bullish on gold.
• Billionaire Paul Tudor Jones decried the “Great Monetary Inflation” — “an unprecedented expansion of every form of money unlike anything the developed world has ever seen” and acknowledged, in a letter to investors, that “Traditional hedges like gold have done well, and we expect investors to continue to seek refuge in this safe asset.”

Gold is up 26% year-to-date, out-performing all other major commodities except for silver, which has surged from behind to a +40% increase year-to-date.

Historic Restrictions on Owning Gold in the United Kingdom

During World War II, the United Kingdom enacted a series of capital and currency controls known as exchange controls. They were designed to prevent a run on the sterling and outflows of capital to foreign markets. Such measures were issued as emergency orders in 1939 and were formalized in 1947 as the Exchange Control Act.

Though the UK’s exchange controls mostly focused on controlling the ownership of foreign currencies, the act regulated other assets, including gold.

In 1966, Prime Minister Harold Wilson amended the Exchange Control Act to add the following provisions, making it nearly impossible for British citizens to buy and own gold:

• Citizens could own no more than four gold coins and only if the coins were minted after 1837.
• Collectors had to inform the Bank of England and request a license to keep ownership of their collection; the Bank could grant or deny a license based on their assessment.

According to Member of Parliament Terence Higgins, the Chancellor of the Exchequer reported that there was “evidence that the hoarding of gold coins was developing on a substantial scale.”

Higgins observed that the government had failed to halt the rise in the cost of living and that’s why people were buying gold. And he called the Prime Minister’s proposed order dangerous:

It controls the holding of gold coins by private individuals, and we do not know whether we shall later face proposals concerning the holding of too many silver coins. It is a dangerous precedent of which we should beware for it may be extended to other real assets, such as diamonds.

Mr. Percy Grieve argued Wilson’s order had “three vices”:

First, it is totally unnecessary for the defence of the pound, or any purpose for which exchange control could legitimately be used by the Government of the day. How is the currency, the pound, or the protection of the pound, to suffer in any way because collectors have in their possession coins of a date later than 1837?

Margaret Thatcher was opposed to the Order. She remarked afterwards:

The final indignity was the Gold Coins Order, making it an offence for anyone who did not hold sovereigns on 27th April, 1966, to buy as much as one sovereign. What an indictment of the Government. It was a ridiculous Order.

Margaret Thatcher’s Changes and the Results

Upon becoming Prime Minister of the United Kingdom in 1979, one of the first things that Margaret Thatcher did was work to remove the exchange controls, both those enacted in 1939 and formalized in 1947, as well as the changes put in place by Prime Minister Wilson. Her government did so in October of that year.

During the late 1970s, the United Kingdom faced several economic issues, including inflation and low profit on investments in business. British exports were uncompetitive. These factors paved the way for Thatcher to push through her desired repeal.

Furthermore, one of the biggest issues with the exchange controls was the requirement that the government maintain a heavy hand in business. Bureaucrats regulated many aspects of the economy. At one point, 25% of the Bank of England’s administrative staff worked on tasks related to exchange controls alone. The repeal of controls, therefore, shrank the size of government as well as freeing up control of the business sector.

Chancellor of the Exchequer Geoffrey Howe, upon the removal of the controls, said:

They have now outlived their usefulness. The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies. That we shall do. It is right to give an additional degree of freedom to allow the pound to operate in the world unrestricted by restraints of this kind.

Thatcher’s Conservative Party and businesses in general welcomed the abolition of the exchange controls. Chairman of the London Stock Exchange Nicholas Goodison said that the exchange controls had:

Impeded the development of British commerce throughout the world and so distorted our economy. They have done a lot of harm to London as one of the leading financial centres.

The opposition Labour Party criticized the repeal, with Shadow Chancellor Denis Healey warning that there would be dangers caused by an increase in foreign investment that occurs at the expense of British industry.

Freedom to Buy and Sell

We can thank Margaret Thatcher for restoring the rights of British citizens to freely buy and sell gold again, as they had done for centuries.

In so doing, she also removed obstacles for scores of bullion businesses that have flourished since then.

Interestingly, innovations in gold trading have made owning gold more affordable and accessible than ever. Today, one can purchase gold bullion in seconds over the internet for as little as £11.

Whatever the market may bring tomorrow, gold is no longer solely the refuge of the wealthy. Today, any citizen may seek safe harbor there.

When individuals are freed from “permission-slip government”, they become rightful captains of their financial future, free to steer their ship where they wish. When businesses are freed from overregulation, innovation emerges and becomes cumulative, benefiting all.

Picture by Carl Albert Archives – Carl Albert Center, CC BY-SA 4.0. Link. Picture cropped.