I’m all in favor of a thorough and public audit of the US’s gold reserves. This includes the gold, not only at Fort Knox, but also at the other gold storage facilities at West Point, Denver, and the New York Federal Reserve Bank. Ron Paul was right when, in 2011, he tried to force the federal government to be transparent about its gold holdings.
Virtually everything the US government owns is stolen, whether it’s stolen from Americans or from foreign individuals and institutions. This is certainly true of the federal government’s gold hoard. It’s important to know how much gold the US government owns for the same reason it’s important to know how much of any asset—land, buildings, or cash—the government owns. States can easily convert wealth into power, and it’s good to know how much wealth the regime directly controls. That is, it is important to have a full and accurate account of just how much the US government has stolen. Moreover, we don’t know if the US Treasury or the Federal Reserve is using that gold for secret political transactions it isn’t telling us about. We already know the Fed makes secret loans it obstinately refuses to make public. An audit is very much in order.
All that said, however, let’s not overstate the importance of the US gold reserve. The gold reserve is not a source of untapped wealth that can be used to balance the budget, pay off the federal debt, or fix the US’s current downward spiral into fiscal insolvency. At only $750 billion, the value of the gold reserve is much too small for any such thing.
Moreover, the gold reserve does not provide “backing” for the US dollar, for US Treasurys, or for any other asset one might possess. The value of the US dollar is determined by supply and demand, and the value of the dollar floats freely against other unbacked currencies. The gold in the vaults is of little importance in this respect.
Strangely, however, as the calls for a gold audit have heated up within the Trump administration, one encounters an increasing number of columns and comments inflating the importance of the gold reserve. Not surprisingly, much of this commentary comes from organizations that promote gold as an investment asset, or gold mining as an industry.
In an article at mining.com, for example, the author claims that if the gold hoard proves to be smaller than the official number published by the Treasury Department, the effects could be “profound, triggering market instability, devaluing the US dollar, and causing gold prices to skyrocket.”
It’s hard to see how this would happen in real life. Let’s say that 25 percent of the gold reserve has been stolen. That would mean the value of the gold in the reserves is about $567 billion instead of $757 billion. The US economy totals $30 trillion. If the federal gold hoard dropped 25 percent, the US gold reserve would drop from being the size of 2.5 percent of the US economy to 1.9 percent. Even though the gold isn’t collateral for anything—unless there are secret deals we don’t know about—we’re supposed to believe this would “trigger market instability” and devalue the US dollar? I’m skeptical.
Many other gold-industry-oriented publications make similar claims about the size of the US gold reserves being critical to trust and confidence in the US dollar.
There is good reason to doubt these claims, however. Again: the value of the dollar is not backed by gold or any other government asset. Moreover, it’s important to reject money-crank theories such as those which tell us that fiat currencies are claims, of some sort, on a central bank’s assets. The currencies are not claims on anything, and they’re not backed by anything.
The presence of gold in the US vaults is inconsequential compared to the truly key factors that drive demand for the dollar. The fact US taxes must be paid in dollars is not unimportant, but the dollar is primarily in high demand because the dollar zone is huge, and foreign buyers of US goods need a lot of dollars to buy US goods and services. The Eurodollar economy—which includes the so-called “petrodollar”—extends this demand even further. Moreover, dollars are in high demand because US Treasurys are in high demand. Why are Treasurys in high demand? Because it is known that the US government possesses the power to extract vast amounts of wealth from the taxpayers which makes the default risk of Treasurys very low. Thus, Treasurys are a famously safe asset and have become a key component of the global economy. Buying and selling a lot of Treasurys requires a lot of dollars. Another key component driving the demand for dollars is the fact that foreign central banks continue to devalue their own currencies even faster than the US central bank is devaluing the dollar. When it comes to retaining its value, the US dollar is the “least bad” option among fiat currencies.
Indeed, we even have empirical studies showing there is little convincing evidence that the size of a country’s gold reserves have much to do with that country’s interest rates. In a 2013 study from Dirk Baur and Isaac Miyakawa, the authors look at multiple countries and central banks to examine the effects of gold reserves on “trust” in the form of bond yields and exchange-rate volatility. The results are inconclusive. This is no surprise. It is not at all clear why the size of a gold reserve would dictate any of this in a system characterized by fiat money and which is dominated by strong state institutions, and multiple tax-revenue streams.
If one is concerned about preserving “confidence” in the American state, its institutions, and its money, one would do better to worry about mounting federal deficits, which require flooding the market with ever larger amounts of Treasuries. This puts upward pressure on interest rates and fuels monetary inflation as the US central bank buys up more Treasurys with newly printed money to keep interest rates under control. The fact that the US will add three trillion dollars to its public debt this year—and probably a similar amount next year—poses a far greater risk to dollar values and Treasurys than whether or not someone has been walking off with gold bars from Fort Knox.
