Inspireded by the other thread. If we don’t use the gold or silver standard, why do we keep fort knox? What good does it serve us? Wouldn’t the government do better paying off some debt, or perhaps filling fort knox with SP500 shares?
You do realize, don’t you, that Fort Knox is more than just the Bullion Depository? It is also home to the Armor School, U.S. Army Recruiting Command, and the 2nd Region ROTC and Readiness Group Knox.
As for keeping some gold handy…why should we sell it? There is no good reason to, and it can always be sold off later to “adjust” a market fluctuation.
The national gold reserve is used to pay off international nation-level transactions from time to time. (Somebody with a good knowledge of what exactly goes on in this would be better at explaining the idea than I.)
Loosely, if the State Department and the Russian Foreign Ministry agree that X amount of gold should be transferred from one country to the other, in exchange for something else, the Fort Knox Boullion Depository is where we keep the gold to use when the transaction is us giving them gold, and where we keep the gold they give us as a nation.
Of course, things aren’t so simple, because the gold never actually moves…just the ownership is transfered.
Yeah, but why don’t they just sell all the gold (all that belongs to the US, anyway) while it’s still worth something, and then pay off the Russians in good old dollars? If the Russians insist on gold rather than dollars for some reason, you could just buy the gold back.
While it’s still worth something? When has the price of gold gone down substantially (excepting the Hunt brothers-inspired run)?
Without the gold, the dollars are worth nothing. The paper money you have in your wallet is a representation of what you’re entitled to out of Fort Knox (and any other reserves).
Of course, the sums don’t add up. There’s a lot more paper out there than the US governement owns. Which brings us to the concept of ‘national debt’. In ludicrously simplistic terms, the national debt is what we (it’s not unique to America by any means) are owed by the government, that they could not pay us should we all cash it in at once. The principle logic is that we won’t do that. But it’s a bit like nuclear power - there’s the miniscule potential for catastrophic failure.
No it absolutely is not, and hasn’t been in quite some time. Dollars are worth precisely what people are willing to exchange for them, nothing more, nothing less.
National debt is what the country owes its creditors, most of whom are its own citizens and banks. I think you’re confusing the idea of debt with a fractional reserve, where a bank only keeps a fraction of its deposits on premises in actual cash. The bank couldn’t pay everyone if everyone rushed to withdraw at once, but that rarely happens.
I thought the whole premise of this thread was that the dollar’s worth is not dependent on gold reserves.
I’m no economist, but I was under the impression that the dollar was worth a dollar because the U.S. Government said so.
In short, it’s basically a promissory note of sorts.
I would assume the gold repository still exists because of the possible necessity of paying a humungous debt at some point; it’s there as a backstop, in case of disaster potent enough to shake the world’s confidence in the U.S. government’s promises that it will honor its dollars.
Either that, or they just keep it so that politicians can go out there occasionally and stare at it all and giggle like bastards…
My third post today about the value of gold!
Anyway, the US going off the gold standard actually took place in two steps: before the 1930s, all US dollars were redeemable for so much weight in gold. In response to the economic crisis of the 1930s, the US government ended the practice of US dollars being redeemable in gold (silver certificates stayed around for a while). However there was little public faith in legal tender and the value of the Federal Reserve notes would have collapsed if the government hadn’t retained a quasi-gold standard. So what it did was turn the relationship of dollars to gold on it’s head: instead of dollars being worth so much gold, it declared that one troy ounce of gold was worth exactly forty dollars*, and artificially maintained this price by banning the private ownership of gold bullion. Fort Knox helped maintain the illusion that the value of the dollar was guaranteed by the government’s gold reserve.
*probably wrong amount; can’t find a cite
The second step took place IIRC, in the early 1970s when the US abandoned the artificial linkage between dollars and gold, and let the dollar “float” relative to other world currencies. Ownership of gold was reallowed, and gold become a commodity, it’s price fluctuating with the market.
The only situation that would cause that would be the US Government ceasing to exist. Obvioulsy, that seems a crazy concept to us now (perhaps it’s an unthinkable concept, but that’s another thread )… but it’s true that Western governments could not pay out everything they owe. In that respect, they’re no better than third world countries who owe fortunes in loans, only they get to permanently defer payment.
The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery). The Bretton Woods System, enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce.
But otherwise, Lumpy, an excellent summation.
Nonsense. A dollar is worth a dollar because you think it is and I agree.
(This might bear some expanding, but it really is that simple. The value of the US dollar is decided on the open market, not only on Monex trading floors but every time you and I make a purchase. The days of a dollar valued by fiat are over.)
Nonsense. The total amount of currency in existence is minsicule compared to the actual amount of money in circulation.
This is a bit more like sense. If we all decided to get all of the paper money we were theoretically entitled to by our bank accounts, the banking system would fail and the economy would seriously falter. But we wouldn’t do this, because it would be incredibly stupid: paper doesn’t accrue interest. That is, we would lose, collectively, billions of dollars by taking money out of banks and CDs and other such instruments and stashing it in our mattresses. Most people understand this, so our economy is safe from that threat.
However, the national debt is something different. It can be measured by the amount of US bonds that have been bought, mainly by US citizens. A bond, after all, is nothing but debt: Buying a bond is giving a loan to the issuer of the bond with the expectation of being repaid with interest at a specified date. The US Government is able to sell US bonds because the US Government is a safe bet: It would take nothing less than World War III to get Uncle Sam to renege on his debts. Therefore, US bonds are a safe, if low-yield, investment.
The only way we could `cash in’ our bonds would be by selling them all at once, driving their price through the floor and making the US Government look like a bad risk. But, for all of the aforementioned reasons, this is practically unthinkable.
(I don’t know the complete story of how much the US Government owes, or to whom. I do know that at least a portion of it is owed to people who bought US bonds over the decades.)
Whenever the economy does well, gold does badly. In the seventeen year growth period from 1983 to 2000, gold prices remained stagnant or slipped slightly. Because of inflation, this meant that gold became worth less and less. Sitting on a pile of gold during growth years is an extremely poor investment strategy. Quite simply put, we’d end up with more money if we sold off the gold and invested the money intelligently in the stock market, then bought back gold when necessary.
You’ve never heard of devaluation? Or negative interest? (As I said above, it seems unthinkable*)
You’ve given no reasons that this couldn’t happen at some point.
I’m not claiming it’s happening tomorrow, or this decade, or in our lifetime…but ultimately, it’ll happen.
This is true. Paper currency isn’t connected in any meaningful way to the amount of money in people’s bank accounts, 401Ks, IRAs, etc. If everyone in the country wanted to convert their holdings into cash, there would be no way of doing so.
When you deposit your paycheck into the bank, they loan it out to someone else, multiplying the amount of the money supply. That money is on the books in your account, and also as whatever the loan was used for. The money supply is only slightly related to the amount of currency, the amount of currency isn’t really an important value in macro economics.
What, you think the government goes to the expense of printing paper whenever someone’s bank account accrues a dollar’s worth of interest? Most money exists only in legerbooks. Physical currency is only printed up when the economy demonstrates a need for it.
To be fair, it has happened a few times, most recently in 1929. But ever since the laws enacted since 1929, runs on banks have become much less common. In fact, I can’t think of a single incident in the past half-century.
Eventually, the Sun will become a red giant and engulf Mercury, Earth and Venus having moved to more distant orbits due to the star’s decreasing mass. That might be a bad day to be holding US bonds.
I still don’t see what you’re saying. Even the coins we use today are mere representations of a value
Ummmm…Japan, deflation, …?
Hyperbole is always fun.
Getting back to the OP. One use of having some government gold reserves is to “tweak” a currency in terms of international exchange rates. By buying and selling gold, a country can weaken/strengthen its currency. (Note that weakening is a valid strategy in some cases. Japan has been doing just that lately to the Yen against the US dollar in order to improve it’s trade balance sheet.) But note this has limited long terms effects. Once your gold is gone, you can’t sell it anymore. And there’s certainly upper limits on how much you can buy.
Note that reliable currencies like the US $ are also used as reserves by other countries for the same purpose. The US does stockpile Yens and Euros in order use them to stabilize some international monetary levels. But you can’t rely on them too much. The Yen might be at the limits of what the Japanese government can maintain and the Euro is so new and can be ruined by any of several different countries going monetarily stupid. The rest of the worlds currencies are mainly either highly unstable or not large enough in volume to be as useful as gold reserves. (And forget the PRC. The Yuan is highly restricted. It’s banking system is run by dips and is close to collapse. Inside of two years it’s going thru bubble popping mode in textbook fashion. It’s also the largest foreign buyer of US Tbills. That’s going to get a little too interesting.)